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`d~tR. -l9' OI LION) li ?o L~WOFFICES P. OC;, for the 1999 and prior medical malpractice loss and LAE liability. The 2000 medical malpractice loss and LAE reserves were discounted since the Company is still responsible for the payment of the yeaz 2000 liabilities. The discounting of loss and loss adjustment expense reserves introduces additional uncertainty into the estimation of reserves with the addition of interest rate risk and the risk of future loss and loss adjustment expense payment patterns deviating from the assumed payment patterns used in the discounting. The Company has experienced rapid growth over the past several years and has expanded into new jurisdictions, products and distribution sources. Underwriting programs have been updated regufazly and business written by the Company has been re-underwritten during the review period. While the Company believes it has implemented reasonable management controls to monitor its growth, uncertainties associated with the effect of these changes in operation make tEServe estimation particularly difficult. In particular, operational changes in the adjusting and handling of claims has a direct impact on the estimation of reserves. The Company has placed increased reliance on third party claims administrators for new programs and the claim review process has changed to encourage an acceleration in the settlement of claims and an increase incase reserve strengthening. In 2000 the Company undertook a program to re-underwrite and re-price its business. This resulted in the Company reorganizing its business units into a professional liability unit, special program unit and alternative risk unit. Each unit reviewed it customers and implemented a program to non-renew unprofitable business segments. As a result of this change in mix of business, it is possible the 2000 accident/ report year will exhibit the development patterns which are significantly different from prior accident/ report years. The reserves for unpaid loss and loss adjustment expenses were based on the best data available; however, these estimates aze subject to a significant degree of inherent variability. The variability is based on the inherent risks in the lines of business written such as medical malpractice, other liability and surety, and the relative size of the lines of business. The actual settlement amount of a claim is dependent upon a number of factors outside the control or influence of the Company such as new legal precedents, law changes or interpretation of regulations. These estimates are continually reviewed and adjusted as necessary as experience develops or new information becomes known; such adjustments are included in current operations. Although the estimates of the reserves for unpaid loss and loss adjustment expenses at December 31, 2000 aze reasonable in the circumstances, it is possible that the Company's actual incurred loss and loss adjustment expenses will not conform to the assumptions irherert in the determination of the reserves. ?n particulaz the med.cai malpractice, other liability and surety lines of business aze characterized by relatively low frequency and high severity of claims. Modest changes in the frequency and/or severity assumptions used in the reserving estimation process may result in significant reserve changes. Therefore, it is possible normal expected fluctuations and variances inherent in the ]oss and loss adjustment expense reserve process might produce a future loss and loss adjustment expense reserve estimate which may have a material impact on the Company's surplus.