Trust - TMLT

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Trust - TMLT

“Time cools, timeclarifies; no mood canbe maintained quiteunaltered through thecourse of hours.Mark TwainDENNIS J. FACTOR, MDChairman, Board of Governorschairman’s message”Giving Back to Texas PhysiciansIN 2006 I WILL SERVE MY FINALyear on the TMLT Board ofGovernors. Since the medical liabilityreforms of 2003, I have been honoredto serve as TMLT’s Board chairman forthe past two years. The understandingand appreciation I have gained for whatTMLT and TMA undertake every dayon behalf of physicians is something Iwish every Texas doctor could experience.I encourage you to become activein the TMLT, the TMA, your countyand specialty society. Physician participationand support is vital to the successof these organizations that serve usso well.I first became a TMLT policyholderin 1985. Securing medical liability coveragethrough TMLT was one of thebest business decisions I ever made formy medical career. I have practiced asan ob-gyn in Dallas for 35 years, thepast 21 under the Trust’s medical liabilityprotection. During a time when onein four Texas physicians was beingsued, I delivered babies confident thatTMLT’s tough claims and defense serviceswould protect me if I ever neededthem.Over the years, I have also beenactive on various Texas MedicalAssociation committees, including 9years on the TMA Board of Trustees.It became clear to me that servingphysician members was the number onepriority for both of these strong organizations.By working closely together,could their physician memberships bebetter served? When I was elected tothe TMLT Governing Board, I made itmy personal goal that, before my yearsof TMLT board service were over, Iwould see a strengthening of theTMLT-TMA bond and unparalleled ser-vice to the physician members of theseorganizations.As practicing physicians and membersof the TMLT Board of Governors,we bring first-hand experience and aunique perspective to the managementof TMLT. The 2005 accomplishmentsare a continuation of the Trust’s amazingtale of struggle, recovery, and successsince the crisis years of the early2000s. Because of the positive effectsof tort reform on TMLT claim experience,the Board of Governors approveda strategic plan to “give back” to policyholders.Tom Cotten’s message willprovide the details of this plan, whichwill take effect in 2006. During the previousmedical liability crisis, whenfaced with increasing claims frequencyand severity, we made tough decisionsthat had very real effects on policyholders.Now we are in a position to giveback to our fellow physicians, and wedo so gratefully.In the future, TMLT will continue toexplore other ways to support our policyholdersand the medical communitythat serves them. Some of the mostprominent medical organizations inTexas count on TMLT for support oftheir programs. These organizationsinclude the TMA, the TexasOsteopathic Medical Association,TAPA, and a number of county andspecialty societies. We have workedtogether to reach physicians with riskmanagement initiatives, resident educationalprograms, and to share information.These partnerships have helped usreach our respective objectives, formstrong friendships, and gain a clearerunderstanding of those issues importantto physicians of different specialtieswho practice in different geographic2 TRUST - The Annual Report Magazine


TMLT 2005 BOARD OF GOVERNORSDennis J. Factor, MD, ChairmanOB-GYNDallas, TexasPolicyholder since 1986Dave W. Kittrell, MD, Vice-ChairmanOB-GYNSan Antonio, TexasPolicyholder since 1979Robert I. Parks, MD,Secretary-TreasurerAnesthesiologistDallas, TexasPolicyholder since 1993Alan C. Baum, MDOphthalmologyHouston, TexasPolicyholder since 1984Left to right: Robert I. Parks, MD, Secretary-Treasurer; Richard C. Geis, MD; Dennis J.Factor, MD, Chairman; Stuart McDonald, MD; Daniel A. Chester, MD; Jimmy Strong, MD;Tom Cotten, President and CEO; Dave Kittrell, MD, Vice Chairman; Alan Baum, MD; David G.Joseph, MD.In the future, TMLT willcontinue to exploreother ways to supportour policyholders andthe medical communitythat serves them.locations. I can report that I have seen astronger TMLT and TMA in actiontogether, working on shared goals tobenefit their members.TMLT continues to grow in numberof policyholders and scope of services.As we have expanded our vision forwhat TMLT could become, we keepour core principles in sight. We workfor you, and every employee at TMLTis dedicated to safeguarding the professionalreputations of those practicingmedicine in Texas. On behalf of theTMLT Board of Governors, thank youfor your continued support.Dennis J. Factor, MDChairman, Board of GovernorsDaniel A. Chester, MDOB-GYNMcAllen, TexasPolicyholder since 1980Richard C. Geis, MDThoracic/Cardiovascular SurgeryHouston, TexasPolicyholder since 1980David G. Joseph, MDFamily PracticeAustin, TexasPolicyholder since 1997Stuart D. McDonald, MDPulmonary & Critical CareFt. Worth, TexasPolicyholder since 1993Jimmy L. Strong, MDPediatricianAbilene, TexasPolicyholder since 1990TRUST - The Annual Report Magazine3


“I know the price ofsuccess: dedication,hard work, and anunremitting devotion tothe things you want tosee happen.Frank Lloyd WrightW. THOMAS COTTENPresident and CEO”president’s messagePartners in SuccessTHIS HAS BEEN an outstandingyear for TMLT. I am gratified andproud for you to read of our 2005accomplishments — many of themrecord setting — of our challenges, andof the plans we have for TMLT’sfuture. In preparing this message, I wasreminded that, not very long ago, thefinancial and industry news was not astory I looked forward to sharing withyou. In our 1999 annual report, TMLThad recorded its first bottom line loss inmany years, jury awards were increasingalong with legal costs, and our competitionwas creating turmoil in theindustry through their willingness tosecure new business at a loss. Claimsfrequency and severity were beginningtheir ascent.With hindsight, we know now that1999 was the start of a 6-year strugglefor TMLT. Our industry was unstable,lawsuits and claims were at historichighs, other insurance providers werebailing out of Texas leaving manyphysicians to fend for a new medicalliability carrier. TMLT stayed thecourse in Texas, made some difficultbut necessary decisions to respond tothe medical liability crisis, and continuedworking for physicians and thefuture of the Trust.Three years later, I told you in my2002 annual report message that “It isour hope that proposals made andpassed in the 2003 legislative sessionwill provide some financial relief forour policyholders and for the medicalliability insurance industry, restoringhealthy competition and choice toTexas.” The following year, through theefforts of TMLT, TMA, TAPA andmany others, medical liability reformwas achieved and Proposition 12 waspassed. Two years after this historic tortreform, the Texas Department ofInsurance lists more than 30 carrierslicensed to write medical liability coveragein Texas. Claims are down; competitionhas returned; rates continue todrop; and physicians now have significantchoice in who will protect theirmedical careers.These important achievementsrequired a fierce, coordinated effortamong physicians, organized medicine,the medical liability insurance industry,and the legislature. We must rememberwhat we can accomplish when we worktogether, and we must remain vigilantto retain our hard won victories.Gold Medal PerformanceTMLT broke longstanding companyrecords this year. The positive effects ofmedical liability reform and a Texasmedical liability market that was slowto respond with reduced rates combinedto position TMLT for an outstandingyear in every area. Based on soundactuarial data, we reduced our rates 5%at the beginning of 2005. At the closeof the year, we reduced them another5%, effective January 1, 2006, for acombined total of 22% since the inceptionof medical liability reform in 2003.For the first time in TMLT history, wedeclared a $10 million dollar dividend.This dividend will amount to another5% reduction in premium in 2006 foreach renewing policyholder. As youwill read in the financial pages of thisreport, our surplus is stronger than ithas ever been, ensuring our ability tocover large claims. The Trust had ahealthy growth rate of 8%, adding1,820 new policyholders. Retention ofexisting accounts exceeded 93% for thesecond year. We took more cases totrial than ever before, and won 92 of4 TRUST - The Annual Report Magazine


99. The last week of the year, we wonour 44th case in a row. We reducedindemnity payout by $25.7 million, thebiggest payout reduction in TMLT’s 26years of operation. Our risk managementeducation offerings continued togrow and participation continued toincrease. We announced that our practicereview discount would increase to5% — with no dollar amount limit tothis earned credit — to encourage morepolicyholders to participate in thispatient safety activity. We madechanges to our experience credit programand eliminated the service chargefor policyholders.What Lies AheadWith such a successful year behindus, we now move confidently into 2006,assessing the challenges that lie aheadfor TMLT. We will work all year toprepare for the 2007 legislative sessionand the confrontations that may arisefor achieved medical liability reforms.Our business plan includes adding anew policyholder services departmentcharged with the mission of providingunparalleled customer service to allTMLT, TOMA, and TMIC policyholders.To help us achieve this level of service,our new computer system,Infinity, will be implemented in early2006. Additional customer serviceenhancements will include changes toour web site. More and more physiciansaccess the web site for information,quotations, to apply for coverage, andto take our online CME courses. Weplan to offer a members only section onwww.tmlt.org where you can come andview your account, find out the status ofyour risk management discounts, obtaina certificate of insurance, and more.The litigation preparation DVD producedlast year with the collaboration ofour claims and risk management departmentswill receive broader distributionin 2006. With more competitors now inthe marketplace, we are undertaking astudy on how TMLT is perceived as anorganization by our policyholders, bypotential policyholders, by our agents,and by organized medicine. This typeof study is called a “branding” studyand should help us make the right decisionsabout our products and services aswe move forward in a more competitivemarketplace. We are energized by thesenew initiatives and we will welcomeyour feedback as they are implementedover the course of 2006.W. Thomas CottenPresident and CEO2005 TMLT at a GlanceCLAIM OPERATIONSNumber of claims received: 1,598Number of claims closed: 2,360Claim frequency (including mass litigation) 12.09%Percentage of claims paid without indemnity: 87.67%Number of cases taken to trial: 99Number of trial victories: 92RISK MANAGEMENTNumber of physicians receiving practice reviews: 1,767Problem most frequently encountered during practice reviews: medical recordsNumber of physicians attending TMA-TMLT CME programs: 1,676Number of physicians completing TMLT online CME courses: 1,806Total number of physicians attending TMLT CME programs: 2,510Number of physicians completing Reporter CME: 4,177UNDERWRITINGTotal policyholder count: 13,220Number of policies cancelled due to underwriting action: 32Retention rate: 93.2%Total number of applications received: 2,336SALESNumber of new policies: 1,820Total new written premium: $15,113,364Total quotes made: 4,791Number of personal visits by sales staff: 230Number of medical conferences attended: 22Total number of direct mail campaigns: 75TRUST - The Annual Report Magazine5


ADVERTISEMENTPartners in PreventionWhile good fortune maysmile on you, good preventionpractices are not a matterof luck. At TMLT we provideeducation and onsite practicereviews to our policy holdersfree of charge, because webelieve in giving our doctorstools to prevent a claim beforeit happens. That’s more thangood luck. It’s good health care.TMLT is your partner in trust.TEXAS MEDICAL LIABILITY TRUSTP.O. Box 160140Austin, TX 78716-0140512-425-5800 • 800-580-8658www.tmlt.orgThe only health care liability claim trust created and endorsed by Texas Medical Association6 TRUST - The Annual Report Magazine


TMLT Awards $35,000 in Medical StudentScholarshipsIN 2005, THE TMLT BOARD ofGovernors awarded the first TMLTMemorial Scholarships to seven Texasmedical students.The TMLT Memorial Scholarshipswere created to recognize academicallygifted Texas medical students who areinterested in finding creative ways toenhance patient safety. Applicants wereasked to communicate their ideas in ashort essay. The $5,000 scholarshipswere awarded to one student at eachTexas medical school that participatedin the competition. Scholarship recipientswere chosen based on the student’swritten essay, academic achievement,and financial need. Winning essayswere published on the TMLT web site(www.tmlt.org) and in TMLT’snewsletter, the Reporter.“We were very lucky to receive somany outstanding applications. TheBoard had a difficult time selecting thescholarship recipients because all thecandidates were impressive,” says TomCotten, president and CEO of TMLT.“The essays demonstrated that Texasmedical students have given considerablethought to how they will addresspatient safety when they practice medicine,”says Cotten.The recipients were:Danielle T. Burkett, a third-year medicalstudent at the University of NorthTexas Health Science Center’s TexasCollege of Osteopathic Medicine;Jesse Lee Even, a fourth-year medicalstudent at the University of TexasMedical School at Houston;Jedidiah J. Grisel, a fourth-year medicalstudent at Texas A&M UniversitySystem Health Science Center Collegeof Medicine;Three winners of the 2005 TMLT Memorial Scholarship are pictured with TMLT Board ChairDennis J. Factor, MD. Left to right: Jedidiah J. Grisel, Bradley Lega, Dr. Dennis J. Factor, andRodolfo Jose Oviedo.Bradley Lega, a fourth-year medicalstudent at Baylor College of Medicine;Rodolfo Jose Oviedo, a third-yearmedical student at the University ofTexas Medical School at San Antonio;Erin K. Shiner, a third-year medicalstudent at Texas Tech UniversityHealth Science Center School ofMedicine; andRebecca Wald, a third-year medicalstudent at the University of TexasSouthwestern Medical School.TMLT will award the MemorialScholarships in 2006. Bradley Lega’sscholarship-winning essay is featuredon page 16 of this publication.Residents Trainin MedMal 101TMLT WORKS with many Texas residencyprograms to help educate residentphysicians about medical liability insurance,what to look for in a provider,what risk management can do, where tofind the best programs, and how to keepmedical records that can be defended incourt.Information on these topics is oftennot provided in the residents’ plannedcurriculum. It is important that they areintroduced to the concepts, and thatthey have a resource as they move intotheir medical careers.TMLT presents courses on these topicsat no cost to the residency programs.TRUST - The Annual Report Magazine7


CLAIMS MANAGEMENTSuccessful Trial Yearfor our PhysiciansImproving claim service becamea major focus for the Claim OperationsDepartment in 2005THE CLAIM OPERATIONS DEPARTMENT AT TMLT iscoming out of their best year yet, including a winning streakof 44 cases in a row. Though they had more claims taken to triallast year than any other (99), their win rate was 93%, having lostseven cases and won 92.Out of the 99 cases that went to trial, the total demands byplaintiffs totaled $30 million. For all of these cases, only $1.37million was paid out.2005 was the busiest trial year inTMLT history. Claim staff noted thatphysicians are becoming more reluctantto settle out of court and instead push togo to trial. “Many doctors worry aboutfuture insurability, the possibility of areport to the National PractitionerDatabank, and the potential for investigationby the Texas Medical Board,”says Bob Fields, Executive VicePresident of Claim Operations. TheTMB now has a policy to investigateany physician who has three claimswithin five years. Due to more stringentenforcement by the TMB, the claimdepartment saw an increase in the numberof physicians requesting Medefensereimbursement in 2005.Also in 2005, indemnity paymentsdropped significantly. In 2004, TMLTpaid $76.6 million in indemnity. In2005, that number dropped to $50.9million. The average paid claim in 2004was $219,485; conversely, in 2005, theaverage was $174,643.The department closed 1,695 nonmasslitigation claims and 665 mass litigationclaims in 2005. The percentageof cases closed without indemnity paymentremained high in 2005 at 87.67%.In addition to managing claims, claimstaff worked with underwriting staff torevise and refine the TMLT policies.“The medical liability reforms of 2003made it necessary to rework the policies,”says Fields. “It is a long andcomplicated processes, but it is necessary.”TMLT policyholders will beinformed of the changes to the policy ina letter sent at renewal.The department was also busy testinga new computer system, Infinity. Underthe new system, new protocols arebeing developed that will ultimatelyhelp the department and company betteraccess and process claims.Along with the Risk Management andCommunications and AdvertisingDepartments, Claims helped developthe CME program You’ve Been Suedand contributed to Case Closed.Improving claim service became amajor focus for the Claim OperationsDepartment in 2005, as goals were set“Medical liability reformis working to keep frivolouscases out of thesystem . . .”for supervisors to meet with physiciansat an earlier point in the claim process,prior to mediation and trial. “We wantedsupervisors to personally meet withpolicyholders sooner, so they will get toknow the members of their defenseteam sooner,” says Fields.8 TRUST - The Annual Report Magazine


Case ClosedCase Closed contains 50 closed claim studies based onactual TMLT claims. It was written as a collaboration ofstaff from the Communications & Advertising, Claims,and Risk Management departments, and is available freeof charge.This valuable publication dissects and expands on 50real-life closed claims, allowing you to learn from the experienceof other physicians and to practice safe medicine.The examined claims identify clear management issues,including documentation errors, failure to diagnose, and miscommunication.They demonstrate how judgment errors led to allegations of medicalwrongdoing and where risk management may have prevented grave outcomes orincreased the physician’s defensibility.Additionally, by completing the CME activity included in Case Closed you can earn 4hours of CME, including 1 ethics hour. TMLT policyholders who complete the CMEactivity also receive a 3% premium discount (maximum of $1,000) applied to their nexteligible policy period.To order a free copy of Case Closed, please email claimbook@tmlt.org. Please includeyour name and mailing address.BOB FIELDSExecutive Vice PresidentClaim OperationsOn May 16, 2005, Texas was removed from the American Medical Association’s listof states in medical liability crisis. The AMA cited the medical liability reforms of 2003(House Bill 4 and Proposition 12) as the reason for the improved conditions in Texas.Across the state, malpractice claims are down and physician recruitment and retentionare up. Rate reductions announced by TMLT and other medical liability carriers havesaved Texas physicians millions of dollars.At TMLT, claims intake and frequency are down. Indemnity payments have decreasedconsiderably. Medical liability reform is working to keep frivolous cases out of the system.The caps on noneconomic damages — the cornerstone of the 2003 reforms — mitigatethe unpredictability and subjectivity of awards for pain and suffering. This makes itpossible to evaluate cases more accurately and keep insurance rates at a reasonable level.What has often been lost in the countless stories in the media about medical liabilityreform in Texas is that legitimate malpractice claims are still going to court. In thesecases, economic damages are preserved. Plaintiffs can still collect unlimited damages forpast and future medical bills, lost wages, and custodial care. Pain and suffering damagesare recoverable up to $250,000 or up to $750,00 if institutions are involved. By cappingonly noneconomic damages, Proposition 12 allows insurers to maintain a reasonablerate structure without affecting the rights of plaintiffs to collect economic damages formeritorious claims.The medical liability reforms of 2003 are working as predicted. Texans now havegreater access to the health care they need. According to the Texas Alliance for PatientAccess, 3,000 physicians have come to Texas since reforms were passed. This includesan increase in physicians in high-risk specialties such as obstetrics-gynecology, orthopedicsurgery, and neurosurgery. The Rio Grande Valley has also seen growth in the numberof physicians. Overall, medical liability reform has been good for Texas patientsand Texas physicians.TRUST - The Annual Report Magazine9


RISK MANAGEMENTPatient Safety Enhanced With SoRisk ManagementThe focus of a practice review isdecreasing a physician’s chance ofbeing sued and improving patientsafety in the practiceRISK MANAGEMENT is part of the core philosophy atTMLT. It is always advantageous if a company’s claimdepartment and legal team are top-rate, but if preventiontechniques can be implemented from the start, everyone benefits.During 2005, the Risk ManagementDepartment completed several projectsthat led to a heightened awarenessof patient safety for TMLT’s policyholders.With the help of a production company,Risk Management produced a 40-minute video that was incorporated in a3 hour CME program, You’ve BeenSued: Successfully Navigating theLitigation Process (see page 11). Theprogram was very well received; attendanceat the program was up 68% overour 2004 programs.Additionally, the online CME coursesgained popularity, with participationincreasing 60% over 2004.In order to increase the emphasis onthe medical liability issues, risk staffcompletely revised the practice reviewprocess in 2005. Based on feedbackfrom Board members and TMLT policyholders,the forms and documentsused during a practice review weremodified, including specialty-specificquestionnaires and medical recordsreview forms.Risk staff will continue to haveresources available regarding practicemanagement and regulatory issues, butthe focus of practice review is decreasinga physician’s chance of being sued,as well as improving patient safety inthe practice.During the practice review, a riskmanagement representative identifiesareas specific to a physician’s practicethat make him or her especially vulnerableto possible claims. “This can positivelyaffect the health care environmentresulting in improved communication,reduced systems failures, andhopefully improved patient care,” saysJane Holeman, Vice President of RiskManagement.A practice review may be the onlyface-to-face contact a policyholder haswith a TMLT representative. “Riskmanagement generally has the most frequentcontact with policyholders and isin an excellent position to build relationshipsthat establish trust,” saysHoleman.Both the Risk Management andClaim Departments work closelytogether. “Although it is difficult, if notimpossible, to measure the effectivenessof risk management activities on frequencyand severity of claims, if onlyone claim is averted that had the potentialfor a significant settlement, thenrisk management works, and has madea positive impact on claims and ultimately,TMLT’s bottom line,” saysHoleman.Holeman advises that though somerisk management tenets hold true for allspecialties, such as documentation andcommunication, there is no “one sizefits all” advice. In 2006, RiskManagement will be focusing on specialty-specificneeds and planning additionalstaff education. Additionally, newCME programs will be geared towardcertain specialties, such as radiology,pathology, anesthesia, and hospitalbasedmedicine.10 TRUST - The Annual Report Magazine


undJANE HOLEMANVice PresidentRisk ManagementDuring the practicereview, a risk managementrepresentativeidentifies areas specificto a physician’s practicethat make him orher especially vulnerableto possible claims.A significant amount of time and energy of theentire Risk Management Department was focusedon coordinating, developing, and presenting thefall seminar series, You’ve Been Sued:Successfully Navigating the Litigation Process.We identified a need for educating physicianswho may be involved in a lawsuit, on the importance of taking an activerole in their defense, especially preparing for deposition. We also wanted tofocus on the emotional impact that a claim or lawsuit has on physicians andtheir families. This was a collaborative project between the Claim and RiskManagement Departments with planning meetings beginning in February2005. Defense attorneys drafted scripts from actual depositions and playedthe roles of plaintiff’s attorneys. The deposition scenarios included riskmanagement messages reinforcing the importance of thorough documentation,legible handwriting, informed consent discussions, and avoidance ofrecord alteration. Incorporating basic risk management processes into medicalpractice will assist physicians in their defense in the event they areinvolved in litigation.Throughout the year we spent countless hours working with a productioncompany, resulting in a DVD that depicted various deposition scenarios.This demonstrated physician responses to the oft-times intimidating questionsof a plaintiff’s attorney. Their responses had the potential for ultimatelybeing either helpful or detrimental to a successful defense. We used the“local talent” of our Claim Department supervisors to play the roles of thephysicians. With their experience attending depositions and trials and beingfamiliar with the attitudes and emotions of physicians going through the litigationprocess, they did an excellent job!The DVD, Successfully Navigating Your Deposition, was incorporatedinto a 3-hour live seminar that was presented last fall in six locations acrossthe state. This resulted in a risk management educational activity that wascreative, informative, entertaining, and engaging. The program was atremendous success with approximately 1,000 physicians attending, a 68%increase over attendance at the 2004 fall seminar series. An obstetrician/gynecologist from Ft. Worth wrote in his program evaluation, “I have beento many of these types of courses, but this one was THE BEST ever… thepresentation was outstanding!”“Risk management generally has the most frequentcontact with policyholders and is in an excellentposition to build relationships that establish trust.”TRUST - The Annual Report Magazine11


UNDERWRITINGProtecting and Serving our PolicFor more than 25 years, customer service and the retentionof policyholders have been the top priorities of TMLT’sUnderwriting Services Department.IN 2005, THE UNDERWRITING SERVICES DEPARTMENTwitnessed more competition entering the marketplace. With somany new companies offering medical professional liability coveragein Texas, some physicians made their selection of a carrierbased solely on price. Recent history has shown that this is not awise course of action when one’s professional reputation is at stake.“At TMLT, we strive to keep the costof superior coverage at a level that willassure protection of the policyholderand maintain lasting financial stabilityfor the Trust,” says John Alexander,Vice President of UnderwritingServices. In addition to the rate reductionsand dividends announced in 2005,enhancements were made to availablediscount opportunities. TMLT broadenedthe eligibility criteria for the experiencecredit, increasing the number ofpolicyholders receiving these creditsfrom 6,184 to 7,245. This equaled $8million more in credits awarded byTMLT.Educating policyholders on how toavoid circumstances that could lead toclaims is a valuable benefit of TMLT’srisk management practice review. Tofurther highlight its availability, thepractice review discount was increasedfrom 3% to 5%. This discount remainson the policy for two additional renewalperiods.“Proactive pricing enhancementssuch as these have more long-term sustainabilitythan rate reductions,” saysAlexander. “Since the claims environmentcan change quickly, it is importantto be aware that the premiums collectedtoday will be used to pay claims in thefuture. The integrity of TMLT’s premiumrates is strong and this provides theTrust with strength and stability.”The Underwriting ServicesDepartment works closely with theTMLT Board of Governors whenunderwriting actions — such as nonrenewalor a reduction in limits — mustbe taken. The Underwriting ReviewCommittee is made up of five Boardmembers who provide input on themedical culpability issues of each case.The underwriters then use this informationto set policy renewal terms. In2005, underwriting action was taken onjust 3.1% of TMLT policyholders.In 2005, policyholder retentionremained high at 93% for the secondconsecutive year. Other important servicestandards that the departmenttracks apply to how quickly policies areissued. This year, 91% of new businessapplications were processed within 15days and 90% of renewal policies weremailed 30 days prior to the renewaldate. “This has been accomplishedthrough the dedicated efforts of ourprofessionally licensed staff, consistingof nine underwriters, two underwritingmanagers, and 22 support staff,” saysAlexander.“In 2006, we will take service to thenext level, improving timeliness andresponsiveness,” says Alexander. “Withthe help of our new, custom-designedcomputer system, we will aim to consistentlyretain 90% or more of our currentpolicyholders, as we have in 2004and 2005.”TMLT is the most respected and preferredprovider of medical professionalliability coverage in Texas. TheUnderwriting Services Department,through the use of time-tested standards,makes prudent decisions on theselection and renewal of the Trust’sbusiness. “Although TMLT cannotinsure every Texas physician, weendeavor to make a positive impact on12 TRUST - The Annual Report Magazine


yholderswww.tmlt.orgIf you are unfamiliar with the advantages offered by www.tmlt.org, please visit our website soon for in depth information and helpful updates to our online services.TMLT’s online CME page is undergoing transformation for 2006. Our CME coursesare accredited and can earn you premium discounts. Take the course(s) of your choiceat a time and place convenient for your schedule. The entire process can be handledonline.Have you signed up for your practice review? Policyholders can request this free serviceon the web site. Read what the practice review process requires of you and yourstaff so you can be prepared to participate fully in the process. Successful completioncan earn you additional premium discounts.You can visit www.tmlt.org to request a quote, learn about discounts, or apply forcoverage. You can even pay your premium online with your credit card.Be proactive in preventing claims and lawsuits. Reading the Reporter and other TMLTpublications can help you practice safe medicine.JOHN ALEXANDERVice PresidentUnderwriting Servicesthe quality of health care and provideour policyholders with peace of mind,”says Alexander.““At TMLT, we strive tokeep the cost of superiorcoverage at a level thatwill assure protection ofthe policyholder andmaintain lasting financialstability for theTrust.”Though TMLT led the way in reducing medical liabilitypremiums for Texas doctors once tort reformswere achieved, our policyholders often ask us howthey can further reduce the cost of their medical liabilitycoverage.Our underwriters are frequently asked about liabilitylimits and how to choose the right limits. Our best advice is to talk withyour colleagues, the hospitals where you have privileges, and perhaps yourattorney on this issue. While we do not advise you on which limits to select,we can explain how reduced limits might save on premium. We can also tellyou what limits other physicians in your area and specialty typically carry.We believe that TMLT’s brand promises value to our policyholders, but werecognize that part of that value is in the premium savings you may receiveonce you participate in the many special services we offer.For example, we offer a 3% discount (up to $1,000 per course and you cantake up to two courses per year) for our educational seminars that assist physiciansand office staff in avoiding, reducing, and defending liability claims.This CME discount can also be earned by taking one of our online courses,available at www.tmlt.org. Free, on-site practice reviews also earn 5% premiumsavings. Because medical offices are beginning to embrace the technologyof electronic medical records and electronic prescribing, TMLT now allowsan additional 2.5% discount for an electronic medical assessment when donein conjunction with a practice review.Another way to reduce your rate is through TMLT’s experience credit,which applies to policyholders with favorable claims experience. This creditranges from 3% to 20%, relative to the numbers of years you have been aTMLT policyholder. If this credit is applied, it will be reflected in yourannual premium.TRUST - The Annual Report Magazine13


SALES AND MARKETINGPromoting the TMLTAdvantageMeeting the demands of the market andbetter serving TMLT’s physiciansTHE SALES AND MARKETING DEPARTMENT at TMLThad their hands full in 2005. The emergence of new competitionand the concern that brings kept them en pointe. Yet thedepartment was secure in the knowledge that TMLT sets theindustry standard and provides the best protection for Texasphysicians.With the materialization of new competition,the first response was one ofanticipation; the Sales and Marketingteam asked what they could do to meetthe demands of the market and attractnew policyholders. Although TMLT’smarket share stands at nearly 50%based on TMA membership, there isstill significant opportunity for growthand development.“The threat posed by many of thenew start-ups is muted by under-capitalization,high expense operations, andlack of bundled services, particularlyclaims and risk management,” says DonChow, Senior Vice President of Salesand Marketing.Even so, a few of these firms aggressivelyappeal to “cost-only” buyers, andwill continue to do so. As the youngergeneration of physicians emerge frommedical school and begin their searchfor liability insurance, the low prices ofcompetitors will require TMLT toaggressively educate young physicianson the benefits of selecting an establishedinsurer and not the cut-rate servicesof many start-up carriers. “Havinga long term perspective on the benefitsof a carrier like TMLT is critical to newphysicians understanding the true valueof our organization,” says Chow.However, according to Chow, morelegitimate threats come from carriersthat are well established nationally butdisplay a minor presence in Texas. Dueto medical liability reforms passed in2003, these firms are vying forincreased market share and are anxiousto establish a stronger hold. As thefourth largest market for medical liabilityinsurance countrywide, representingmore than $800 million in availablepremium, Texas is a very attractivestate offering immense opportunity.In response to the wave of new competition,TMLT will continue to focuson the value of its services. It hasbecome apparent other firms cannotcompete with TMLT’s record in bothclaims and risk management. “After 26years in business, we know that whatkeeps policyholders renewing year afteryear isn’t just the price tag, but theentire package,” says Chow.Among the many benefits of being aTMLT policyholder is the ability tohave direct input in controlling the costof the medical liability premium. “Ifphysicians will leverage all the opportunitiesavailable including experiencecredits and risk management programs —CME courses and practice reviews —they can significantly reduce their annualcosts,” according to Chow.Although primarily a direct writer ofinsurance, TMLT has engaged in strategicrelationships with carefully selectedagents that have access to its franchise.“Given TMLT’s growth objectives,partnering with selected agents allowsus to maximize our potential especiallywith physicians in a group,” saysChow.Another strategy that has servedTMLT well is the strong relationshipwith organized medicine. From theTMA to the county and specialty societies,TMLT continues to enjoy exclusiveendorsements from these entities.Responding to the needs of physiciansis a common goal that TMLT shareswith organized medicine and the Salesand Marketing team will continue tocultivate these relationships in the yearsahead.“Although the challenges of a softeningmarket are upon us, we will continueto respond quickly and appropriatelyto retain our leadership position in thestate allowing TMLT to continue togrow its policyholder base profitably,”says Chow.14 TRUST - The Annual Report Magazine


Award-winning Communicationsfor TMLT PhysiciansTHE TMLT COMMUNICATIONS andAdvertising Department received three2005 Bronze Quill awards from theInternational Association of BusinessCommunicators (IABC). Bronze Quillis a communication award and evaluationprogram for those in the communicationsprofession. Judging for Austin'sBronze Quill competition was handledby a panel of distinguished, internationalcommunications professionals,including IABC Vice Chairman WarrenBickford from Canada. IABC is theassociation for communications profes-sionals and has more than 13,000members internationally.TMLT winning communicationsentries were:• 2003 Annual Report – The Journey• What if? Direct mail post cardcampaign• the Reporter newsletterIn addition, the Reporter newsletterwas recognized in 2005 with awardsfrom Publications Management andfrom the Society for TechnicalCommunication.After 26 years in business, we know that what keepspolicyholders renewing year after year isn’t just the“price tag but the entire package.”DON CHOWSenior Vice PresidentSales and MarketingTime is a valuable commodity, especially for busy physicians. Recognizing theimportance of speed and convenience, TMLT is working toward increased use ofthe Internet as a tool to keep connected, share information with our policyholders,and to make TMLT account management more accessible to you.Have you visited www.tmlt.org lately? You will see that in 2005 we improved ourexisting online individual application, making it easier and faster to use. We developeda special group application to make online application available and easier fora group administrator to manage. We have lots of current information to share withyou on risk management tips, closed claim studies, and risk alerts.In 2006 we are planning to expand our web site services for policyholders byadding a members only section. This new section will be available to all currentTMLT policyholders and will be password protected. Like paying a bill online andapplying for coverage, the members only section will allow you to manage andrequest information about your policy at your convenience. For example, you willbe able to view and print a proof of coverage, update your contact information, subscribeto and request TMLT publications, view your policy, view the histories connectedto your policy, and more.This site will also provide contacts to specific people in the Claims, Underwriting,Risk Management, and Sales departments, so you can save time and get the informationyou need regarding your policy quickly and efficiently. If you have any suggestionsabout services you would like to see available in our members only section,please contact us at feedback@tmlt.org.TRUST - The Annual Report Magazine15


Doing What’s Best for thePatient and the PhysicianIn February 2005, TMLT announced the creation of the TMLT MemorialScholarships. (For more information on the TMLT Memorial Scholarship, pleasesee page 7). For the essay portion of the scholarship competition, students wereasked to write 1,000 words answering the question: “What can individual physiciansdo to ensure patient safety and minimize the risk of medical malpractice suits?” Theessays by all seven scholarship winners were published in the Reporter. One ofthese winning essays is published below.“These essays demonstrate that Texas medical students have given considerablethought to how they will address patient safety when they practice medicine andtheir ideas are impressive,” said Tom Cotten, president and CEO of TMLT.Bradley LegaFourth-year medical student atBaylor College of MedicineHUNTER S. THOMPSON, theauthor of Fear and Loathing in LasVegas and Fear and Loathing on theCampaign Trail, recently shot himself.This is a shame for many reasons, butone of them is that he never had thechance to write a book called Fear andLoathing in a White Coat: A Chronicleof Doctors, Lawyers, and Malpractice.Fear and loathing seem like two mostappropriate concepts to describe theaverage physician’s view of malpractice:fear of being sued, loathing for thewolfish lawyers that patrol the flanks ofmedical practice looking for the weakand the old. The fear begins early intraining as professors emphasize pointsabout disease management with phraseslike: “And if you don’t do this, startfinding a lawyer.” The loathing comesfrom many sources, including unendingTV ads for Jim Adler the TexasHammer, an over-exposed malpracticeattorney who evidently takes advicefrom professional wrestlers.After starting clinical rotations, Inoticed that loathing associates itselfwith malpractice in another, more subtleform. Stories of lawsuits become away for residents to express their dislikefor their peers. During my medicinerotation, the team’s intern complainedabout how lazy one of thesurgery residents was, and then added,“He’s already been sued twice.” Thestory is petty, but it shows that physiciansoften think that their less competentand careful peers are the onesbeing sued, that a lawsuit is somethinglike a professional scarlet letter. Theadvice these physicians give about malpracticereflects their attitude — I can’tcount how many times I’ve heard thesentence “If you do what’s best for thepatient, you won’t be sued.”I call this method of malpracticeavoidance the Edwards method, afterthe Puritan preacher whose sermon“Sinners in the Hands of an AngryGod” has some legendary metaphorsabout the consequences of immorality.In the Edwards method, if a physiciandoes what she’s supposed to, she canlive with a clean conscience and withoutfear of legal reprisal. The methodtheoretically ensures infallible patientcare: if a physician always does what’sbest for the patient, then patient safetyshould be one of her prime concerns.But what’s best for the patient? Theconventional term “standard of care” isa fluctuating and nebulous concept,especially for unusual cases. Plus, badthings happen to good people: innocentwomen were drowned as witches, piousFranciscans caught the plague, andgood doctors suffer lawsuits.This last point leads to a secondoften-repeated prescription for avoidingmalpractice: documentation. If a physiciancarefully documents what she doesand her reasoning behind difficult decisions,her defense lawyers will havepowerful weapons to keep the wolves atbay. I call this the Nixon method, sinceNixon’s tapes illustrate how documentationcan cause problems for people16 TRUST - The Annual Report Magazine


who aren’t doing what’s right. TheNixon method’s emphasis on documentationimplies that a physician mustmaintain constant vigilance, thinking ofeach page in the patient’s chart as apiece of evidence of her own defense. Italso contributes to the adversarialnature that pervades too many doctorpatientrelationships, a trend that can’tbe good for patient safety no matterhow artful the argument. Finally, in mylimited experience, mistakes oftenoccur when doctors forget to do thingsthat they normally would do — forgettingto recheck a patient’s potassiumlevel after ordering an ACE inhibitor,for instance. But the Nixon methoddoes nothing for these types of errors,since a physician can’t document somethingshe forgets to do.It appears then that serious flawsweaken both theEdwards method andthe Nixon method,even though they arethe basis for 70% of theadvice that medical studentshear about malpractice.I think an approach that I call theAristotle method solves some of theseproblems and could serve as a modelfor how physicians avoid malpracticeand promote patient safety. TheAristotle method is built around virtue,as is Aristotelian ethics. It stems fromthe observation that physicians-in-traininglearn their habits by emulatingsome of their superiors, especially residents,attendings, and other studentsthat have won the respect of their peers.Co-workers attribute virtues such as“hard-working,” “sharp,” “strong,” and“efficient,” to these role-models, but theAristotle method doesn’t mean thatphysicians can avoid malpractice bybeing stronger and sharper. It meansthat when taking care of patients, studentsshould imagine themselves verbalizingtheir analysis and decisionmakingto one of their professionalheroes. This mental exercise finds potholesin reasoning, and the act of forcingoneself to construct a coherent narrativehelps identify things that thephysician may have initially forgottento do.The Aristotle method is not the samething as asking inane self-questions like“What would Osler do in my position?”It advocates mental recapitulation, notsimple mimicry. We may find that wedisagree with our role models’ imaginedopinion, but we should then beable to offer good reasons for doing so.And if we honestly don’t know what heor she would think, then it might betime to consult the literature. This ideamay initially seem similar to theEdwards model, in which physicianspractice in constant fear of judgmentfor deviating from some standard, but Ithink it’s more positive since most of uswant to win recognition of the peoplewe look up to and we’re willing towork hard for it. And by thinking aboutwhat a specific person’s thoughts orcriticisms might be, it avoids the vaguenessinherent in “standard of care.” Itmay also look similar to the Nixonmodel, since documenting one’s reasoninggenerates the same kind of narrativeas imaginary verbalization. But I thinkit’s less cynical since it creates habitsfrom virtue rather than lawsuit avoidance,and it actively helps preventerrors of omission.As with any good practice, theAristotle method could be instituted ifthe professionals we respect tell us thatit’s a good idea. I think it’s a way thatavoiding lawsuits and promoting patientsafety can converge.TRUST - The Annual Report Magazine17


Case Closed: Bariatric SurgeryComplications not RecognizedThe following is an excerpt from Case Closed:A collection of TMLT closed claim studies,volume 2A primary care physician referred hisCASE 2 Presentationpatient, a 36-year old woman, to a generalsurgeon for consultation about vertical banded gastroplasty.The patient was 5'9" in height and weighed 290 pounds. Thesurgeon discussed the procedure — its risks and benefits — withthe patient, and provided her with a three-page handout.Physician actionSix months later, the surgeon performedthe vertical banded gastroplastyon the patient. The procedure was carriedout without complication, and thepatient did well postoperatively. Fourdays after the surgery, a barium swallowstudy was performed, and itshowed no evidence of extravasation ofcontrast. The patient was discharged.The surgeon next saw the patient eightdays later for removal of her skin clips.The patient’s weight was 268 poundsand she did not report any problems.She was told to return in one month.Seven days after this office visit, thepatient came to the emergency department(ED) with fever and left-sidedpleuritic chest pain. An x-ray showed aleft lower lobe infiltrate and the patientwas diagnosed with communityacquiredpneumonia. She was givenErythromycin and discharged.Three days later, she again came tothe ED with complaints of left-sidedchest pain, fever, chills, nausea, vomiting,weakness, and headache. Thepatient was admitted, and her care wasturned over to a hospitalist who consultedthe surgeon to rule out any complicationsfrom the gastroplasty. On hersecond day in the hospital, the surgeonordered a CT scan, which revealed aleft upper quadrant abdominal abscess.The surgeon performed an exploratorylaparotomy and drained the abscess. Noareas of perforation were noted.One day after the laparotomy, thepatient continued to have fever andinfection. The surgeon started thepatient on prophylactic Heparin for theprevention of deep venous thrombosis.Throughout the patient’s hospital stay,the surgeon ordered early and frequentambulation and TED hose as a prophylacticmeasure. The surgeon ordered abarium swallow study, which showed asmall leak from the stomach. An NGtube was placed, and the surgeon optedto use suction and TPN to avoid furthersurgery.On her 7th day in the hospital, thepatient developed shortness of breathand hypoxia for the first time. The hospitalistconsulted a pulmonologist, andordered a ventilation/perfusion lungscan. The radiologist read the scan andorally reported to the hospitalist that itwas negative for pulmonary embolism.However, the radiologist’s writtenreport indicated “low to indeterminatefor possible pulmonary embolism.”This report was not read by the hospitalistuntil ten days later. In retrospect,the hospitalist indicated that if he hadknown about this finding, he wouldhave started the patient on Heparin orplaced a Greenfield filter.The patient’s conditioned worsened,and she was returned to the OR. The18 TRUST - The Annual Report Magazine


This case was taken totrial and the juryreturned a verdict infavor of the defense.surgeon repositioned the chest tube andrepaired the leak in the stomach. Thepatient did well postoperatively andcontinued to improve until two dayslater when she began to complain ofchest pain. The hospitalist and pulmonologistordered another lung scan andagain, the radiologist read the scan ashaving a low probability for pulmonaryembolism. The next day, the hospitalistreceived a call from the radiologist whowas now changing the report to indicatean “intermediate to high probability ofpulmonary embolism.” The hospitalistand pulmonologist ordered a changefrom prophylactic anticoagulation tofull Heparin anticoagulation.The next day, the surgeon placed aGreenfield filter in the patient’s inferiorvena cava, and performed a total gastroectomy,cholecystectomy and appendectomy.The patient remained in criticalcondition for the next two days. Shebegan to have seizures, suffered anacute brain stem stroke, and becameneurologically unresponsive. Thepatient’s family signed a DNR orderand the patient died.An autopsy was performed and thepathologist determined the cause ofdeath to be submassive pulmonaryemboli with prolonged heart failure andshock leading to acute respiratory distresssyndrome. The findings alsorevealed the presence of chronic gastritissuggesting the possibility of preexistingheliobacter-induced gastritisand peptic perforation following thegastroplasty.AllegationsA lawsuit was filed against the surgeonand the allegations included:• failure to provide prophylacticanticoagulation at the time of theoriginal surgery;• failure to perform a barium swallowstudy before the gastroplasty; and• employing an improper technique torepair the leak in the stomach.Legal implicationsThe plaintiff’s case did not focus onthe initial surgery, but the postoperativecare. The plaintiff’s expert was criticalof the surgeon for not performing a bariumswallow before the second surgery.This would have revealed the leak andwould have allowed it to be repairedearlier. Though the cause of death waspulmonary emboli, it was the opinion ofthe plaintiff’s expert that the patient’sinfection led to the pulmonary emboli.He could not offer any explanation asto how this occurred. The expert statedthat it was not reasonable to rely on apulmonologist who was saying thepatient had a low probability of pulmonaryemboli.Defense consultants were supportiveof the surgeon’s care in this case.Though a leak did occur, the bariumswallow performed four days after thegastroplasty negated the possibility thata tear occurred during the surgery. Theexperts believe the leak occurredbecause of the patient’s pre-existinggastritis.The cause of death was pulmonaryembolism, not infection. Regarding theplaintiff’s claim that the infection led tothe pulmonary emboli, defense expertsindicated this was a “ridiculous statement,”and that there is a “mountain ofliterature” to dispute this. The consultantsurgeons also stated that it was reasonablefor the surgeon to rely on thehospitalist and pulmonologist who werefollowing the patient’s pulmonarystatus.DispositionThis case was taken to trial and thejury returned a verdict in favor of thedefense.Risk managementconsiderationsThe TMLT claim department has identifiedpatient selection, informed consentand postoperative follow up asprevalent issues in lawsuits allegingmalpractice before, during, or after surgicalweight reduction procedures.TRUST - The Annual Report Magazine19


PARTNERS IN TRUSTThe Provider to Physician ConnectionTMLT is not an insurancecompany, but aself-insured trustestablished by TexasInsurance Code Article21.49-4 to provide coverageagainst healthcare liability claims tomembers of the TexasMedical AssociationHISTORY IS FILLED WITH STORIES OF“rugged individuals” coming together to fightfor a common cause. This type of solidarity ledto the creation of our country and later to the great stateof Texas. But while early Texas citizens were workingtogether to create a government, early Texas physiciansstood together to create what would become one of thepremier health systems in the United States. These pioneerscreated the foundation for the Texas health caresystem, which today includes eight medical schools,450 residency programs, and 118 county medicalsocieties.20 TRUST - The Annual Report Magazine


In the 1970s, Texas physicians againstood together — this time to find asolution to the medical liability crisisthat was making malpractice insuranceunaffordable and unavailable. Onegroup of pioneering physicians workedthrough the Texas Medical Associationand eventually to the state capitol tocreate their own insurance provider —Texas Medical Liability Trust.TMLT is not an insurance company,but a self-insured trust established byTexas Insurance Code Article 21.49-4to provide coverage against health careliability claims to members of theTexas Medical Association. The liabilitycrisis of the 1970s and the desire ofphysicians to control their own destinyled to the formation of this unique organization,designed by physicians to benefitphysicians.Committed to the medicalcommunityPhysicians wanted a company that wascommitted to the entire medical communityin Texas, not a company thatwould “red line” certain regions orphysicians. TMLT is currently the onlycarrier that has consistenly coveredphysicians of all specialties who practicein all areas of Texas.Run by physiciansThe founders of TMLT believed thatphysicians could be their own bestadvocates. TMLT is physician-ownedand led by a Board of Governors electedby policyholders. Board membersare practicing physicians who bringfirst-hand experience and a unique perspectiveto the management of TMLT.Our Trust is a uniqueorganization, designedby physicians tobenefit physicians.Not just settle claimsSince our inception, TMLT’s philosophyhas been to defend doctors, not payclaims. Our founders wanted a companythat would allow physicians to setthe tone for their defense. Only byaggressively defending non-meritoriousclaims can we protect a physician’s reputationand keep the number of malpracticesuits filed against all physiciansin check.Based on Texas experienceTMLT offers one line of coverage andoffers it in one state — Texas. Ourentire business focus is on Texas physiciansand how to protect their practices.Our rates are set based on the claimexperience of Texas physicians, unlikesome national carriers who set theirrates based on national claim data.Additionally, our Texas-based claimstaff and defense attorneys understandthe Texas legal system, the venues, andthe judges.StabilityTMLT was founded by physicians whowanted to create a stable source ofmedical liability insurance for thestate’s medical community. Thosephysicians also wanted a company thatwould stick by physicians when marketconditions in Texas worsened. 26 yearslater, TMLT has weathered two medicalliability crises, and has grown tobecome the largest provider in Texas,currently insuring more than 13,000physicians.Consent to settleAgain, wanting to control their owndestiny, Texas physicians wanted aninsurance policy that required a policyholder’sconsent before settling a case.The TMLT professional liability policysays “the Trust shall not settle anyclaim or lawsuit without first obtainingthe consent of the Named Insured.” Notall medical liability companies includesuch a provision in their policies. Someare silent on the issue, while others stipulatethat the carrier retains the powerto settle a claim.No profit motiveFormed as a not-for-profit trust, TMLThas no profit motive. We are not a stockcompany with an obligation to shareholders.TMLT’s founders knew that itwould be impossible to maximizeshareholder returns and defend physiciansregardless of cost. For this reason,we set responsible premiums that allowfor financial stability and that upholdour end of the insurance contract.FlexibilityAs a trust and not an insurance company,TMLT is not subject to regulationby the Texas Department of Insurance.TMLT’s founders recognized theimportance of allowing physicians toregulate their own company. Thisstructure allows us the flexibility to survivein a volatile insurance market likeTexas. When market conditions change,TMLT can respond quickly and efficiently.But while TMLT is not subject toTDI regulation, we do voluntarily complywith reporting requests. We providethe TDI with our audited financialstatements, our rates, our policy forms,and closed claim reports. We also assistthe TDI with their data studies.Responsible investmentphilosophyOur founders wanted TMLT to adopt aconservative policy for the investmentof its assets with the objective ofachieving maximum yield with maximumsafety. Today, we still keep to thisphilosophy. Trust assets are invested ininvestment quality securities to generateincome to meet operating expenses andactuarial assumptions.TRUST - The Annual Report Magazine21


Today, we believe wehave a competitiveadvantage in the marketdue to our size,geographic scope, andname recognition.RAY DEMELSenior Vice President, CFOmessage from the cfoTTMLT’s financial condition continuesto improve as evidenced in theaccompanying audited financial statementsfor 2005 and 2004. Total assetsand surplus are at record high levels.Surplus has grown from $148 Millionat the end of 2004 to $203 Million atthe end of 2005. We continue the goalthat we started after 2001 which was toenhance our financial strength responsibly,keeping the policyholder’s interestfirst and foremost.The accompanying consolidatedfinancial statements have been preparedunder management’s direction in conformitywith accounting principles generallyaccepted in the United States andwhere appropriate, reflect estimatesbased on management’s best judgment.The financial information included inthis annual report is consistent in allmaterial respects with that contained inthe audited financial statements.Management is responsible for theintegrity and objectivity of theCompany’s financial statements.Calhoun & Co., TMLT’s independentpublic accountants have audited management’sfinancial statements and theirreport appears on page 24. Their reportexpresses an informed opinion that theconsolidated financial statements presentsfairly, in all material respects, theconsolidated financial position ofTMLT. As required by auditing standardsgenerally accepted in the UnitedStates, the independent public accountantsobtained a sufficient understandingof the internal controls in place inorder to plan their audit and determinethe nature, timing and extent of othertests to be performed.Management also recognizes itsresponsibility for fostering a strong ethicalclimate so that TMLT’s affairs areconducted according to the higheststandards of personal and corporateconduct.Total assets at the end of 2005 were$589 Million compared to $550 Millionin 2004 or an increase of $39 Million.The largest increase was an increase of$43 Million in total investments (bondsand equities) due to the continued positivecash flow from operations andadditional surplus contributions.Liabilities decreased $17 Million primarilydue to a decrease of $31 Millionin the reserve for unpaid losses andexpenses due to the continued favorableclaims experience. Offsetting thisdecrease is an increase in liabilities of$9 Million for the policy dividenddeclared in 2005 that is payable in2006. Surplus increased $55 Million to$203 Million due primarily to currentyear net earnings of $52 Million.Professional liability written premiumsvary from period to period for anumber of reasons. Some of the morecommon differences result fromchanges to premium rates, the volumeof new business written during the period,the loss of business to competitorsor due to our own underwriting decisions.Total written premium in 2005was $191 Million compared to $189Million in 2004 while net earned premiumincome in 2005 was $165 Millioncompared to $168 Million in 2004.This small change can be attributed to a5% rate reduction that was implementedin 2005 offset by new written business.Net investment income and capital22 TRUST - The Annual Report Magazine


gains increased $2.6 Million to $17.3Million in 2005. The increase in our netinvestment income in 2005 as comparedto 2004 is due to higher averageinvested funds in 2005 and a slightincrease in current interest rates whichslightly increased the yield of our fixedmaturity securities. We also increasedthe proportion of the portfolio that isinvested in tax-exempt securitiesbecause of the higher after-tax yieldsavailable on these securities. Our overallinvestment strategy is to focus onmaximizing current income from ourinvestment portfolio while maintainingsafety, liquidity, duration and portfoliodiversification. Professional third partyasset managers whose results are evaluatedperiodically by management generallymanage the portfolio. The assetmanagers typically have the authority tomake investment decisions, subject toinvestment policies; within the assetclass they are responsible for managing.The passage of tort reform was a majorvictory for TMLT in 2003. We are seeingthe impact of this in our financialstatements Our loss ratio was 45.8% in2005 compared to 72.3% in 2004. Ourcombined ratio in 2005 was 64.2%compared to 83.2% in 2004. Withoutthe dividend declared in 2005, the combinedratio would have been 58.6%. Allof these ratios are lower than the compositeratio of med mal specialty writers.TMLT ended the year 2005 withpre tax net income of $76.8 Millioncompared to $44.3 Million for 2004.We are currently operating in challengingmarket conditions. New carriersare coming into Texas and existingcarriers are lowering rates. From mid-2004 through 2005 small competitorswith limited capital have entered Texas.These smaller companies tend to focuson limited pools of risk or geographicareas, but generally try to gain marketshare through lower premiums or lessstringent underwriting. We have lostsome of our business to the competitors,but our market position has largelyallowed us to attract new customers tooffset their departure. Our strategy isnot to compete on price, but to demonstratethe value in the coverage we provide.We believe that we have a competitiveadvantage in the current marketdue to our size, geographic scope andname recognition, as well as our heritageas a policyholder-founded companywith a long-term commitment to theprofessional liability insurance industry.We have achieved these advantagesthrough our balance sheet strength,claims defense expertise and ability todeliver a high level of service to ourinsureds and agents. At TMLT – thecarrier that stayed in Texas and hasalready lowered rates and initiated aTEXAS MEDICAL LIABILITY TRUST AND SUBSIDIARYdividend program that we hope to continueas long as financial results willsupport it — we have continued tostrengthen our balance sheet to providethe financial stability our policyholdersdeserve. Our premiums are set toprovide insurance coverage at a fairprice — not to maximize profits. TMLTis doctor owned and TMLT’s responsibilityis to provide its policyholderswith a financially sound carrier andinsurance coverage at a fair price.Ray DemelSenior Vice President and CFOConsolidated Financial Statements • Years Ended December 31, 2005 and 2004Independent Auditors’ Report 24Balance Sheets 25-26Statements of Operations 27Statements of Changes in Policyholders’ Surplus 28Statements of Cash Flows 29Summary of Significant Accounting Policies 30-32Notes to Consolidated Financial Statements 33-39TRUST - The Annual Report Magazine23


IndependentAuditor’s ReportBoard of DirectorsTexas Medical Liability Trust and SubsidiaryAustin, TexasWe have audited the accompanying consolidated balance sheets of Texas MedicalLiability Trust and Subsidiary as of December 31, 2005 and 2004, and the relatedconsolidated statements of operations, changes in policyholders' surplus and cashflows for the years then ended. These financial statements are the responsibility ofthe Trust's management. Our responsibility is to express an opinion on these financialstatements based on our audits.We conducted our audits in accordance with auditing standards generally acceptedin the United States of America. Those standards require that we plan and performthe audit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. An audit includes consideration of internal controlover financial reporting as a basis for designing audit procedures that are appropriatein the circumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Company’s internal control over financial reporting.Accordingly, we express no such opinion. An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financial statements,assessing the accounting principles used and significant estimates made by management,as well as evaluating the overall combined financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.In our opinion, the financial statements referred to above present fairly, in all materialrespects, the consolidated financial position of Texas Medical Liability Trust andSubsidiary at December 31, 2005 and 2004, and the consolidated results of theiroperations and their cash flows for the years then ended, in conformity withaccounting principles generally accepted in the United States of America.March 31, 200624 TRUST - The Annual Report Magazine


December 31, 2005 2004(in thousands)AssetsSecurities, available-for-sale, at fair value:Fixed-maturity securities $ 316,764 $ 293,000Common stocks 40,457 21,155Preferred stocks 1,197 1,663Securities, held to maturity – fixed maturity annuities 24,500 24,500Cash and cash equivalents 45,415 39,347Premiums receivable 60,629 60,782Accrued interest receivable 3,632 3,061Surplus contributions receivable 1,025 3,000Reinsurance recoverables:On paid losses 3,655 10,975On unpaid losses and loss adjustment expenses 50,633 53,411Prepaid reinsurance premiums 9,794 10,298Federal income tax recoverable - 4,300Deferred tax asset 16,300 15,600Deposits 4,145 3,906Other 10,560 5,507Balance SheetsTotal assets $ 588,706 $ 550,505TRUST - The Annual Report Magazine25


Balance SheetsDecember 31, 2005 2004(in thousands)Liabilities and Policyholders’ SurplusLiabilitiesReserves:Unpaid losses and loss adjustment expenses $ 240,833 $ 271,559Unearned premiums 90,568 90,308331,401 361,867Revolving line-of-credit 13,518 13,518Premiums received in advance 3,967 5,101Income Tax Payable 1,100 -Dividends Payable 9,000 -Accounts payable and accrued expenses 876 182Reinsurance premiums payable 25,430 22,162Total liabilities 385,292 402,830Commitments and contingencies(Notes 3, 4, 6, 8, 9 and 10)Policyholders’ surplus:Contributed surplus 91,629 83,820Surplus contributions receivable (4,761) (4,833)86,868 78,987Accumulated other comprehensive (loss) income (3,207) 1,184Unassigned surplus 119,753 67,504Total policyholders’ surplus 203,414 147,675Total liabilities and policyholders’ surplus $588,706 $ 550,505See accompanying summary of accounting policies and notes to consolidated financial statements.26 TRUST - The Annual Report Magazine


Years Ended December 31, 2005 2004(in thousands)Premiums earned, net of reinsurance $ 164,656 $ 167,739Investment income, net of investment expenses 16,447 15,446of $694 in 2005 and $445 in 2004Net realized gain (losses) on securities available for sale 891 (746)Other revenue 3,245 2,798Statements ofOperationsTotal revenues 185,239 185,237Losses and expenses:Losses and loss adjustment expenses 73,223 119,005Policyholder dividends 9,000 -Other underwriting expenses 26,129 21,897Total operating expenses 108,352 140,902Net income before income tax expense 76,887 44,335Income tax expense 24,638 3,085Net income $ 52,249 $ 41,250See accompanying summary of accounting policies and notes to consolidated financial statements.TRUST - The Annual Report Magazine27


Statements of Changesin Policyholders’SurplusAccumulatedOther TotalContributed Unassigned Comprehensive Policyholders’Surplus Surplus Income (Loss) SurplusBalance, $67,321 $ 26,254 $366 $ 93,941January 1, 2004Other comprehensive income - - 818 818Net income - 41,250 - 41,250Contributed surplus, net 11,666 - - 11,666Balance, 78,987 67,504 1,184 147,675December 31, 2004Other comprehensive loss - - (4,391) (4,391)Net income - 52,249 - 52,249Contributed surplus, net 7,881 - - 7,881Balance, $ 86,868 $ 119,753 $ (3,207) $ 203,414December 31, 2005See accompanying summary of accounting policies and notes to consolidated financial statements.28 TRUST - The Annual Report Magazine


Years Ended December 31, 2005 2004(in thousands)Operating activities:Net income $ 52,249 $ 41,250Adjustments to reconcile net income to net cashprovided by operating activities:Depreciation 657 510Loss on disposal of fixed assets 11 7Deferred income taxes 1,562 (5,629)Net realized (gains) losses (1,185) 746Amortization of premium / accretion of 1,713 1,209discount in bondsChanges in operating assets and liabilities:Premiums receivable (981) 2,581Reinsurance recoverables 10,098 (10,719)Federal income tax recoverable 4,300 (3,900)Reserves (30,466) (1,009)Reinsurance premium balances 3,772 (9,249)Federal income tax payable 1,100 -Deposits (239) 3,229Policyholder dividends payable 9,000 -Other 211 (1,043)Statements ofCash FlowsNet cash provided by operating activities 51,802 17,983Investing activities:Purchases of securities (143,519) (132,266)Proceeds from disposals and maturities of securities 93,738 101,975Investment in partnership (2,400) -Purchases of fixed assets (3,409) (3,581)Net cash used in investing activities (55,590) (33,872)Financing activities:Surplus contributions 9,856 12,966Net change in cash and cash equivalents 6,068 (2,923)Cash and cash equivalents, beginning of year 39,347 42,270Cash and cash equivalents, end of year $ 45,415 $ 39,347See accompanying summary of accounting policies and notes to consolidated financial statements.TRUST - The Annual Report Magazine29


Summary of SignificantAccounting PoliciesOrganizationTexas Medical Liability Trust (TMLT) was formed in June 1978 to provide professionalliability insurance coverage to eligible physicians who are members of theTexas Medical Association (TMA) and who practice primarily in Texas. TMLT wasorganized under Article 21.49-4 of the Texas Insurance Code under the name“Texas Medical Association Health Care Liability Claim Trust” and began operationsin 1979.TMLT provides professional liability coverage to certain physicians who are non-TMA members and the ancillary staff of TMLT’s policyholders through its whollyownedsubsidiary, Texas Medical Insurance Company (TMIC), which was formedin 1995 as a state-regulated property/casualty insurance company.Basis of PresentationThe consolidated financial statements include the accounts of TMLT and TMIC(collectively the “Trust”) after elimination of all significant intercompany accounts.Use of EstimatesThe preparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect amounts reported in the financial statementsand accompanying notes. Such estimates and assumptions could change in thefuture as more information becomes known which could impact the amounts reportedand disclosed herein.PremiumsPolicies written are generally for a one-year term and premiums are recorded asearned on a pro rata basis over the life of the policy. Policies are written on both anoccurrence and claims-made basis. Unearned premiums represent the portion of premiumswritten which are applicable to the unexpired terms of the policies in forceand are computed on a daily pro-rata basis.Billings for calendar year premiums are rendered in advance of the premium year.Also, surplus deposits are received from physicians applying for coverage inadvance of approval of their application. Premiums and deposits collected inadvance of the period covered are classified as premiums received in advance.Unpaid Losses and Loss Adjustment ExpensesUnpaid losses and loss adjustment expenses represent the estimated liability forclaims reported through year end (case-basis) plus the estimated losses and lossadjustment expenses relating to incidents incurred but not yet reported. Theseamounts have been estimated by management and the Trust’s consulting actuariesbased on available industry data and the Trust’s actual experience and representestimates of the ultimate cost of all losses incurred, but unpaid, through year end.However, the ultimate cost of settling claims may vary significantly from the estimatedliability. The estimates are continually reviewed and adjusted as necessary;such adjustments are included in current operations and are accounted for aschanges in estimates.30 TRUST - The Annual Report Magazine


Unpaid losses and loss adjustment expenses have been discounted using a 6% factoras of December 31, 2005 and 2004. This discount reduces gross unpaid losses andloss adjustment expenses to their present value. The discount amount was approximately$15,800 at December 31, 2005 and 2004.Summary of SignificantAccounting PoliciesThe Trust considers anticipated investment income in determining whether a premiumdeficiency exists on the unexpired terms of the policies in force. No such deficiencyexists as of December 31, 2005 and 2004.ReinsuranceAmounts recoverable from reinsurers for unpaid losses and loss adjustment expensesand the amounts payable to reinsurers for reinsurance premiums are estimated ina manner consistent with the related liabilities associated with the reinsured policies.Consistent with the estimate of the unpaid loss and loss adjustment expenses,the reinsurance balances are discounted at a rate of 4%. Adjustments to the provisionalreinsurance premiums are provided for in the ceded premiums.Amounts paid to reinsurers under prospective, short-duration reinsurance contractsare recorded as prepaid reinsurance premiums which are recognized as the relatedpremiums are earned.InvestmentsStatement of Financial Accounting Standards (“SFAS”) No. 115 requires that certaindebt and equity securities be classified into one of three categories: held-tomaturity,available-for-sale, or trading securities. Investments in debt securities thatthe enterprise has the positive intent and ability to hold to maturity are classified asheld-to-maturity and reported at amortized cost in the statement of financial position.Securities that are bought and held principally for the purpose of selling themin the near term (thus held for only a short period of time) are classified as tradingsecurities and reported at fair value. Trading generally reflects active and frequentbuying and selling, and trading securities are generally used to generate profit onshort-term differences in price. Investments not classified as either held-to-maturityor trading securities are classified as available-for-sale securities and reported at fairvalue.Investments, except investments in certain annuities, are categorized as availablefor-sale.Accordingly, the investment portfolio is carried at fair value. Unrealizedholding gains and losses on securities are reported in accumulated other comprehensiveincome (loss) and are classified as a separate component of policyholders’surplus.Investments in annuities are classified as held to maturity and are carried at amortizedcost. The Trust has the intent and ability to hold these investments to maturity.The cost of fixed-maturity securities is adjusted for amortization of premiums andaccretion of discounts to maturity, or in the case of loan-backed securities, over theestimated life of the security using the effective interest method. Such amortizationand interest earned are included in investment income. Realized gains and losses areincluded in net realized gains on investments. The cost of securities sold is based onthe specific identification method.TRUST - The Annual Report Magazine31


Summary of SignificantAccounting PoliciesIncome TaxesThe Trust uses the liability method of accounting for income taxes. Under thismethod, deferred tax assets and liabilities are determined based on differencesbetween financial reporting and tax bases of assets and liabilities and are measuredusing the enacted tax rates and laws that will be in effect when the differences areexpected to reverse.Acquisition CostsAcquisition costs are expensed as they are incurred; the financial statement effect ofthis method does not differ significantly from the effect of using the deferral method.Cash EquivalentsMoney market funds and commercial paper with initial maturities of less than threemonths are considered to be cash equivalents.ReclassificationsCertain prior year balances have been reclassified to conform to current year presentation.Disclosures about Fair Value of Financial InstrumentsThe fair value of financial instruments, as defined by accounting principles generallyaccepted by the United States of America, approximates the recorded book value ofsuch instruments.32 TRUST - The Annual Report Magazine


1. Comprehensive IncomeIn accordance with SFAS 130, Reporting Comprehensive Income, the Trust presentscomprehensive income within the consolidated statements of changes inpolicyholders’ surplus.Notes to ConsolidatedFinancial StatementsComponents of other comprehensive income consist of the following:Years ended December 31, 2005 2004(in thousands)Changes in unrealized (losses) gains onavailable-for-sale securities $ (6,653) $ 1,238Deferred income tax benefit (expense) 2,262 (420)Other comprehensive (loss) income $ (4,391) $ 818Accumulated other comprehensive income shown on the consolidated statements ofchanges in policyholders’ surplus is solely comprised of unrealized gains (losses)from available-for-sale securities, net of tax of $(2,262) and $420 for the yearsended December 31, 2005 and 2004, respectively.2. SecuritiesThe amortized cost and the fair value of the Trust’s investments in fixed maturitysecurities and annuities for both available for sale and held to maturity aresummarized as follows:December 31, 2005: Gross Gross EstimatedAmortized Unrealized Unrealized FairCost Gains Losses Value(in thousands)U.S. Government andits agencies $ 116,680 $ 83 $ 1,347 $115,416Annuities 24,500 3,101 - 27,601Corporations 62,594 186 1,444 61,336Loan-backed securities 143,352 666 4,006 140,012and collateralizedmortgage obligationsand other$ 347,126 $ 4,036 $6,797 $ 344,365TRUST - The Annual Report Magazine33


Notes to ConsolidatedFinancial StatementsDecember 31, 2004: Gross Gross EstimatedAmortized Unrealized Unrealized FairCost Gains Losses Value(in thousands)U.S. Government andits agencies $ 10,218 $ 283 $ 10 $ 10,491Annuities 29,714 1,391 - 31,105Corporations 95,155 1,738 520 96,373Loan-backed securities 181,803 2,027 2,908 180,922and collateralizedmortgage obligationsand other$ 316,890 $ 5,439 $ 3,438 $ 318,891At December 31, the Trust's investment in common stocks and preferred stocks hada cost basis of $40,651 and $21,635 in 2005 and 2004, respectively. Gross unrealizedgains and gross unrealized losses were $4,925 and $3,922, respectively in 2005 and$3,462 and $2,279, respectively in 2004.The fair values generally represent quoted market value prices for securities traded inthe public marketplace or analytically determined values using bid or closing pricesfor securities not traded in the public marketplace.The amortized cost and estimated fair value of the fixed-maturity securities and annuitiesat December 31, 2005 are summarized, by stated maturities, as follows:Amortized EstimatedCost Fair Value(in thousands)Years to maturity:One or less $ 2,533 $ 2,520After one through five 68,147 66,733After five through ten 53,975 52,122More than ten 119,898 121,910Loan-backed securities and collateralizedmortgage obligations 102,573 101,080$ 347,126 $ 344,365Actual maturities may differ from the contractual maturities in the foregoing tablebecause certain borrowers have the right to call or prepay obligations with or withoutcall or prepayment penalties.Proceeds from the sales of available-for-sale securities were $93,738 in 2005 and$98,480 in 2004. Gross realized gains and gross realized losses on these sales were$1,696 and $912, respectively, during 2005, and $1,463 and $805, respectively,during 2004. For the year ended December 31, 2005, the Trust recognized an otherthan temporary decline in fair market value on securities of $400 and is included innet realized losses on securities available for sale in the consolidated statements ofoperations.34 TRUST - The Annual Report Magazine


3. Unpaid Losses and Loss Adjustment ExpensesThe following table provides a reconciliation of the beginning and ending reservebalances for unpaid losses and loss adjustment expenses (LAE), net of reinsurancerecoverables, for 2005 and 2004:Notes to ConsolidatedFinancial StatementsYears ended December 31, 2005 2004(in thousands)Reserve for unpaid losses and LAE, net of related $ 218,148 $ 270,060reinsurance recoverables at beginning of the yearAdd provision for claims, net of reinsurance,occurring in:Current year 74,192 75,732Prior years (969) 42,273Incurred losses during the current year,net of reinsurance 73,223 119,005Deduct payments for claims, net of reinsurance,occurring in:Current year 4,011 97,160Prior years 7,587 163,330Net claim payments during the year 101,171 170,917Reserve for losses and LAE, net of related reinsurancerecoverables, at end of year 190,200 218,148Reinsurance recoverables on unpaid losses and LAE,at end of year 50,633 53,411Reserve for unpaid losses and LAE, gross of $ 240,833 $ 271,559reinsurance recoverables on unpaid losses,at end of yearThe foregoing reconciliation shows that the Trust’s reserve for unpaid losses andLAE, net of related reinsurance recoverable, at December 31, 2005 decreased byapproximately $969 primarily as a result of favorable reserve development. Thedecrease is a result of ongoing analysis of recent loss development trends. Originalestimates are increased or decreased as additional information becomes knownregarding individual claims. At December 31, 2004, unpaid losses and LAE, net ofreinsurance increased by $43,273 for claims that had occurred on or prior to 2003.During 2004, the Trust increased reserves due to higher than anticipated loss severityand frequency, which resulted in higher reserves for 2004 and prior year’s reportedclaims. This change in management’s estimate of claims resulted from plaintiff’sattorney’s response to 2004 changes in the procedure for filing lawsuits and the timeperiod allowed for discovery in Texas.Medical malpractice claims have a very long development period. Historically, caseshave taken years to be reported and, as a rule, take years to adjust, settle, or litigate.With respect to the Trust’s estimates of reserves for unpaid losses and LAE, there isTRUST - The Annual Report Magazine35


Notes to ConsolidatedFinancial Statementsadditional uncertainty related to the strength of case reserves and the effect ofchanges in the reinsurance of ALAE. Accordingly, should management’s assumptionsas to case reserve redundancies or reinsurance recoverables differ from theactual closure of claims, reserves are likely to develop adversely. Loss and lossadjustment reserve estimates are reviewed regularly and adjusted, as appropriate.4. ReinsuranceThe Trust cedes certain risks to various reinsurers. These reinsurance arrangementsallow management to control exposure to potential losses arising from large risksand provide additional capacity for growth. A significant portion of the reinsuranceis affected under quota-share reinsurance contracts and, in some cases, stop-losscoverage.Ceded premiums are charged to operations as a deduction from premiums written.The effect of reinsurance on premiums written and earned are as follows:2005 Premiums 2004 PremiumsWritten Earned Written Earned(in thousands)Direct $ 190,710 $ 191,466 $ 188,591 $184,184Ceded (23,727) (26,810) (21,869) (16,445)Net premiums $ 166,983 $ 164,656 $ 166,722 $ 167,739The amounts deducted from losses and loss adjustment expenses in the statements ofoperations that related to reinsurance were $8,126 for 2005 and $22,991 for 2004.Reinsurance ceded contracts do not relieve the Trust from its obligations to policyholders.The Trust remains liable to its policyholders for the portion reinsured to theextent that any reinsurer does not meet the obligations assumed under the reinsuranceagreements. To minimize its exposure to significant losses from reinsurer insolvencies,the Trust evaluates the financial condition of its reinsurers and monitorsconcentrations of credit risk arising from similar geographic regions, activities oreconomic characteristics of the reinsurers.5. Federal Income TaxesSignificant components of the provision for income tax expense (benefit) were asfollows:Years ended December 31,2005 2004(in thousands)Current expense $ 25,338 $ 8,293Deferred expense (benefit) (700) (5,208)$ 24,638 $ 3,08536 TRUST - The Annual Report Magazine


Significant components of the Trust's deferred tax assets and liabilities were asfollows:December 31, 2005 2004(in thousands)Notes to ConsolidatedFinancial StatementsDeferred tax assets:Loss reserve discounting $ 9,521 $ 10,981Unearned premium discounting 5,765 5,758Other 1,615 1,825Total deferred tax assets 16,901 18,564Valuation allowance for deferred tax assets - (1,825)Total deferred tax assets, net of allowance 16,901 16,739Deferred tax liabilities:Other (601) (1,139)Net deferred tax asset $ 16,300 $ 15,600Under the provisions of FASB Statement No. 109, the Trust is required to record avaluation allowance on a deferred tax asset, if it is more likely than not that the benefitwill not be realized. Accordingly, the Trust established a valuation allowance of$1,825 as of December 31, 2004. Management believes that it is more likely than notthat the net deferred tax asset recorded at December 31, 2005 will be realized fromexpected future taxable income.The differences between the income tax benefit reported and the income tax benefitthat would result from applying domestic federal statutory rates to pretax income in2005 resulted primarily from the effects of tax-exempt interest and changes in the valuationallowance. Income tax paid during 2005 was $19,938.6. Revolving Line-of-CreditThe Trust entered into an agreement with a commercial lender which provides theTrust with a revolving credit facility of $25,000 ($13,518 outstanding at December31, 2005 and 2004). The funds available under the credit agreement may be used forgeneral corporate purposes. The revolving credit facility expires in January, 2008.Under the revolving credit facility, the Trust granted liens with respect to certainfixed maturity investments owned by the Trust.Interest on borrowings under the credit agreement is determined, at the Trust's option,based on the prime rate minus 2.35% or the LIBOR rate plus a margin of 0.7%.There is a commitment fee of .08% on the unused balance. At December 31, 2005,the prime rate was 7.25%. In January 2005, the Trust entered into an interest rateswap transaction, whereby the transaction effectively hedged its variable rate to afixed rate of 4.02% on $7,500,000. The swap will expire in February 2007. Theeffects of this transaction have been included in the Trust’s earnings.TRUST - The Annual Report Magazine37


Notes to ConsolidatedFinancial Statements7. Policyholders’ SurplusEligible physicians desiring to purchase insurance through the Trust are required topurchase a Surplus Deposit Certificate. The Surplus Deposit Certificates are offeredsolely to provide surplus for the Trust and do not bear interest. Surplus contributionsare refunded to the physician at the discretion of the Trust or when a physician dies,becomes disabled or retires.As of December 31, 2005 and 2004, surplus contributions receivable of $1,000 and$3,000, respectively, represent collections subsequent to year-end but prior to theissuance of the consolidated financial statements. In accordance with EITF 85-1,these amounts were recorded as an asset as opposed to a reduction of policyholders’surplus.8. Commitments and ContingenciesThe Trust leases office facilities and certain equipment through agreements whichexpire through 2011. As of December 31, 2005, the future minimum lease paymentsunder these noncancelable agreements for the years ending December 31 are asfollows:YearAmount(in thousands)2006 $ 1,1352007 1,1352008 1,3872009 1,3872010 and thereafter 2,773Total rent expense was $1,217 for 2005 and $835 for 2004.$ 7,817The Trust is named as a defendant in various legal actions principally from claimsmade under insurance policies. Those actions are considered by the Trust in estimatingthe loss and loss adjustment expense reserves. The Trust's management believesthat the resolution of those actions will not have a material adverse effect on theTrust's financial position or results of operations. In lieu of purchasing surety bondson cases being appealed, the Trust has placed $4,145 in deposits with the courts.9. Concentrations of Credit RiskThe Trust has concentrations of credit risks relating to reinsurance recoverablebalances and cash balances at financial institutions in excess of insured amounts.The Trust believes the risk of incurring material losses related to these credit risksis unlikely.10. Employee Benefit PlanThe Trust sponsors a noncontributory, defined contribution employee benefit plan,which covers all employees who have completed one year of service. The Trustmakes contributions to the Plan equal to 10% of participants' salaries. Such contributionsare reduced by forfeitures of participants who leave the Plan before theybecome fully vested. Plan expense was $1,468 for 2005 and $1,445 for 2004.38 TRUST - The Annual Report Magazine


11. Fair Value of Financial InstrumentsThe following methods and assumptions were used to estimate the fair value of eachclass of financial instruments for which it is practicable to estimate that value:Notes to ConsolidatedFinancial StatementsCash and Cash Equivalents. For those cash equivalents, the carrying value amountis a reasonable estimate of fair value.Investment in Securities. For investments in securities, fair values are based onquoted market prices or dealer quotes, if available. If a quoted market price is notavailable, fair value is estimated using quoted market prices for similar securities.Accounts Payable, Accrued Expenses and Revolving Line-of-Credit. The carryingvalues approximate fair value.The estimated fair values of the Trust’s financial instruments which are not disclosedon the face of the balance sheet or elsewhere in the notes are as follows:2005 2004Carrying Fair Carrying FairAmount Value Amount Value(in thousands)Cash and cash equivalents $ 45,415 $ 45,415 $ 39,347 $39,347Fixed maturity securities 347,126 344,365 317,500 318,89Common stocks 40,457 40,457 21,155 21,155Preferred stocks 1,197 1,197 1,663 1,663Accounts payable and (875) (875) (182) (182)accrued expensesRevolving line-of-credit (13,518) (13,518) (13,518) (13,518)TRUST - The Annual Report Magazine39


“If TMLT is interested in feedback, Ifor one am extremely pleased with thisway of acquiring hours, not to mentionthe valuable info you are providing inyour publications.”— an orthopedic physician in Dallas“Your commitment to quality andexcellence was very apparent throughoutthe trial. As we take pride in providingquality medical care for ourpatients, we could not have asked formore skilled legal counsel…the thoroughnessof the preparation, the tenacityin the depositions, the efforts to narrowand contain the case, and finallythe trial itself, were all exemplary.”— an orthopaedic physician in Dallas,commenting on TMLT defense counsel“TMLT’s risk management departmentprovided useful, good advice toimprove my medical practice.”— an ob-gyn in Corpus Christi“I wish to give my heartfelt thanks toTMLT, my claim supervisor, and mydefense attorney team for their professionalism,skill, and savvy in defendingme from a claim this year. My TMLTclaim supervisor was my first contactwith TMLT when this claim arose, andI could not have asked for a moreknowledgeable, experienced, and kindindividual to work with. My defenseteam led me through the legal mazeexpertly. They made themselves easilyavailable and their obvious talent andexperience was very reassuring.”— a general surgeon in Houston“TMLT’s risk management educationfor physicians is the best I’ve ever seen.It’s interesting, comprehensive and presentedin a fashion that ensures physiciansunderstand what they need to doto minimize their exposure.”— a urologist in Harris County“lettersI would like to takethe opportunity to tellyou how much I appreciateTexas MedicalLiability Trust. FromSales and Underwritingto Claims managementand CounselSelection/Support,everything has beensuperb. This has notbeen an experience thatI would like to repeat,but I rest much betterknowing that you areall there in the eventanother claim rears itsugly head.”— a cardiovascularsurgeon in Central Texas“TMLT’s practice review prompted usto do an in-depth self-examination ofour practice. Suggestions will be implementedand we will improve our practicesand documentation.”— a plastic surgeon in San Antonio“Very thorough and helpful. Will usethe information to decrease medicalliability”— an orthopaedic physician in Irving“I would like to thank you personallyfor doing such an outstanding jobpreparing me and defending my case.When I went into medicine, I did it tomake a difference in peoples lives, andI believe I have hundreds of times. . .Your compassion and concerns willalways make an impression on me as Icontinue to practice medicine to thevery best of my ability.”— an ob-gyn in North Texas,commenting on TMLT defense counsel“I really enjoyed TMLT’s online course‘He’s not my patient—is he?’ It wasreally convenient being able to take itat home and the course content wasinteresting.”— a family physician in El Paso“I’d like to thank TMLT for all of theirhelp. This was an extremely stressfultime for me, and I appreciate all youdid to make the situation better. I hopeto never be in this situation again, but ifI am it will be much less intimidatingknowing I have all of you standingbeside me.”— a radiologist in East Texas“I was very pleased with my claimsupervisor. He was always informedregarding my case, the options, andfacts. My defense attorney was excellent,and I felt very well represented,well prepared, and in competent handsregarding my defense.”— a surgeon in Dallas“Very helpful for my practice to seeareas where we can improve to avoidpotential liability”— an internal medicine physicianin Wichita Falls40 TRUST - The Annual Report Magazine


Partners in ProtectionDoes your medical liabilitycarrier do enough to protectyour reputation and career?TMLT’s philosophy is todefend doctors, not pay nonmeritoriousclaims. Guidedby this philosophy, we haveresolved more than 38,000claims, closing more than 87%with no indemnity payment.The right protection can makeall the difference.TMLT is your partner in trust.TEXAS MEDICAL LIABILITY TRUSTP.O. Box 160140Austin, TX 78716-0140512-425-5800 • 800-580-8658www.tmlt.orgThe only health care liability claim trust created and endorsed by Texas Medical Association

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