<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                 FORM 10-K/A-1


(Mark One)
[X]  Annual report pursuant to section 13 or 15(d) of the Securities Exchange
     Act of 1934 [Fee Required] for the fiscal year ended December 31, 1999, or

[ ]  Transition report pursuant to section 13 or 15(d) of the Securities
     Exchange Act of 1934 [No Fee Required] for the transition period from
     ________ to _________.


Commission file number: 001-12129


                            Medical Assurance, Inc.
              ----------------------------------------------------
             (Exact name of registrant as specified in its charter)


        Delaware                                        63-1137505
------------------------                  ------------------------------------
(State of incorporation                   (I.R.S. Employer Identification No.)
 or organization)


  100 Brookwood Place,  Birmingham, AL                   35209
---------------------------------------------------------------
(Address of principal executive offices)             (Zip Code)


                                 (205) 877-4400
-------------------------------------------------------------------------------
              (Registrant's Telephone Number, Including Area Code)


Securities registered pursuant to Section 12(b) of the Act:

                                                        Name of Each Exchange
         Title of Each Class                             On Which Registered
         -------------------                           -----------------------

Common Stock, par value $1.00 per share                New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

                                     None.

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]  No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]

The aggregate market value of voting stock held by non-affiliates of the
registrant at March 1, 2000 was $413,887,175.

As of March 1, 2000, the registrant had outstanding approximately 23,398,414
shares of its common stock.

                                             Exhibit Index at page 52
                                             Page 1 of 54 pages
<PAGE>   2

Documents incorporated by reference in this Form 10-K:

         (i)      The Registration Statement on Form S-1 with respect to the
                  common stock of Mutual Assurance, Inc. (Commission File No.
                  33-35223) is incorporated by reference into Part IV of this
                  report.

         (ii)     The MAIC Holdings, Inc. Annual Report on Form 10-K for the
                  fiscal year ended December 31, 1994 (Commission File No.
                  0-19439) is incorporated by reference into Part IV of this
                  report.

         (iii)    Registration Statement on Form S-4 with respect to the common
                  stock of MAIC Holdings, Inc. (Commission File No. 33-91508)
                  originally filed April 20, 1995 is incorporated by reference
                  into Parts I and IV of this report.

         (iv)     The Mutual Assurance, Inc. Current Report on Form 8-K for
                  event occurring August 28, 1995 (Commission File No. 0-19439)
                  is incorporated by reference into Part IV of this Report.

         (v)      The MAIC Holdings, Inc. Annual Report on Form 10-K for the
                  fiscal year ended December 31, 1995 (Commission File No.
                  001-12129) is incorporated by reference into Part IV of this
                  report.

         (vi)     The MAIC Holdings, Inc. Proxy Statement for the 1996 Annual
                  Meeting (Commission File No. 0-19439) is incorporated herein
                  by reference into Part IV of this report.

         (vii)    The Registration Statement on Form S-4 with respect to the
                  Common Stock of MAIC Holdings, Inc. (Commission File No.
                  333-13465) is incorporated by reference into Part IV of this
                  report.

         (viii)   The Medical Assurance, Inc. Annual Report on Form 10-K for
                  the fiscal year ended December 31, 1996 (Commission File No.
                  001-12129) is incorporated herein by reference into Part IV
                  of this report.

         (ix)     The Medical Assurance, Inc. Annual Report on Form 10-K for
                  the fiscal year ended December 31, 1997 (Commission File No.
                  001-12129) is incorporated herein by reference into Part IV
                  of this report.

         (x)      The definitive proxy statement for the 2000 Annual Meeting of
                  the Stockholders of Medical Assurance, Inc. is incorporated by
                  reference into Part III of this report.



                                       2
<PAGE>   3
         This amendment to the Annual Report on Form 10K of Medical Assurance,
Inc. (the "Registrant") for the year ended December 31, 1999, is filed in
response to comments of the staff of the Securities and Exchange Commission made
with respect to the Form S-4 of ProAssurance Corporation and Joint Proxy
Statement of Registrant and Professionals Group, Inc. (File No. 333-49387):

         Item 1 has been revised to provide information regarding the reserves
for losses and loss adjustment expenses.

         Item 7 has been revised to address accident and health premiums and
losses.

         Item 14(a) has been revised to refer to revised financial statements
that include a revised opinion from Ernst & Young LLP and revisions to Note 3
and Note 6 of the Notes to Consolidated Financial Statements.

         Item 14(c) has been revised to refer to an updated Consent of Ernst &
Young LLP.


                                     PART 1


ITEM 1.  BUSINESS OF THE COMPANY

         Medical Assurance, Inc. ("MAI") was incorporated in the state of
Delaware on February 8, 1995 by its sole incorporator, The Medical Assurance
Company, Inc. (known as Mutual Assurance, Inc. until a name change in 1999), an
Alabama stock insurer ("MA-Alabama "), to serve as a holding company for
MA-Alabama and its subsidiaries. MAI is the holder of one-hundred percent
(100%) of the capital stock of MA-Alabama, Medical Assurance of West Virginia,
Inc., a West Virginia stock insurer ("MA-West Virginia"), Medical Assurance of
Indiana, Inc., an Indiana stock insurer ("MA-Indiana"), and Medical Assurance of
Missouri, Inc. (known as Missouri Medical Insurance Company until a name change
in 1999), a Missouri stock insurer ("MA-Missouri"). MAI, through its insurance
subsidiaries, is nationally recognized for providing malpractice protection to
physicians, hospitals, dentists and managed care and health care organizations
through programs which coordinate traditional insurance with effective clinical
risk management. MAI and its subsidiaries comprise insurance company holding
systems under the laws of Alabama, West Virginia, Indiana and Missouri. MAI and
its subsidiaries are sometimes collectively referred to as the Company.

         In 1995, the Board of Directors and Shareholders of MA-Alabama
approved a Plan of Exchange (the "Plan of Exchange") in accordance with the
Alabama Insurance Code in order to form a holding company for MA-Alabama and
its subsidiaries. The Plan of Exchange provided for the mandatory exchange of
one share of MAI common stock for each share of issued and outstanding
MA-Alabama common stock. The Plan of Exchange was effected August 31, 1995. For
accounting purposes, the historical financial statements of MA-Alabama and its
subsidiaries were restated as the consolidated financial statements of MAI and
its subsidiaries in a manner similar to that of a pooling combination. Prior to
the Plan of Exchange, MAI had no assets, liabilities, revenues or net income.

         Business Expansion

         The Company has been the predominant carrier of professional liability
insurance for Alabama physicians since it began business in 1977. The Company
is actively writing medical liability insurance for health care providers in
states principally located in the south and mid-west and is capable of
responding outside the region when an opportunity for business arises. In 1999,
approximately 65% of the written premiums of the Company were derived from
business in states other than Alabama.

         The Company has expanded its business by increasing the number of
states in which it directly writes insurance and by acquiring or combining with
other professional liability insurers. The Company intends to offer medical
malpractice liability insurance on a national basis and has applied for
authority to write directly property and casualty insurance in forty-two (42)
states. The Company is currently qualified to reinsure professional medical
liability in substantially all states. See "Marketing" and "Regulation" within
this caption.

          The Company has affected several business acquisitions and
combinations over the last five years that have resulted in the expansion of
its business. During 1995, the Company purchased all the capital stock of
MA-Indiana from the Indiana State Medical Association. MA-Indiana provides
medical professional liability insurance principally to physicians in the state
of Indiana. Effective July 16, 1995, the Company acquired the recurring
professional liability insurance business for health care providers of
Physicians Insurance Company of Ohio, which consisted principally of physicians
in the state of Ohio. On December 20, 1996, the Company acquired MOMED Holding
Co. ("MOMED"). MOMED, through its wholly owned subsidiary, MA-Missouri, provides
medical professional liability insurance to physicians principally in the State
of Missouri.



                                       3
<PAGE>   4

         Effective January 1, 1999 the Company acquired the recurring
professional liability insurance business for health care providers of Medical
Defense Associates (MDA) and Medical Defense Insurance Company (MDIC) which
consisted principally of physicians in the State of Missouri. As a part of the
purchase agreement the Company will manage all existing policies and prior
liabilities of MDA and MDIC.

INSURANCE PRODUCTS

         The Company offers professional liability insurance and reinsurance
for providers of health care services. Professional liability insurance
provides insurance against the legal liability of an insured (and against loss,
damage or expense incidental to a claim of such liability) arising out of the
death, injury or disablement of a person as the result of negligence or other
misconduct in rendering professional service.

         While professional liability insurance for physicians and their
related practice entities is the principal product offered by the Company, the
Company has undertaken to develop other insurance products necessitated by
changes in the health care industry. The Company has developed and markets
through its insurance subsidiaries liability insurance products for hospitals
and other health care facilities, dentists, managed care organizations,
physician practice management companies and integrated delivery systems to
include not only direct and vicarious professional liability insurance, but
general liability insurance, errors and omissions coverages, directors and
officers liability insurance, employment practices liability insurance and
other related coverages. The Company also offers professional office package
and workers compensation insurance products for physicians and dentists and
workers compensation insurance for health care facilities. The Company
presently intends to continue its efforts to develop insurance products
designed to meet the needs of customers in the health care market.

         The consolidation in the health care industry has resulted in intense
competition in the professional liability market for the largest accounts. As a
result, the Company has developed additional insurance products such as
workers' compensation and accident and health insurance to offer through
certain integrated delivery systems where the Company can strengthen its
professional liability relationship with large health care providers comprising
an integrated delivery system. As such products are developed the Company has
offered them through various programs to entities and individuals other than
health care providers.

MARKETING

         The Company markets its professional liability insurance products
directly and through independent agents. In connection with its direct
marketing efforts, the Company has provided and continues to provide various
services and communications to its insured physicians, dentists and hospitals
to promote its professional liability insurance products. These services and
communications include provision of risk management consultation, loss
prevention seminars and other educational programs for physicians, dentists,
nurses and hospital administrators; legislative oversight and active support or
opposition of proposed legislation relating to liability issues affecting the
health care industry; the preparation and dissemination of newsletters and
other printed material with information of interest to the health care
industry; and attendance at meetings of the state and local medical societies
and related organizations. In 1995, the Company became an accredited provider
of continuing medical education that has enabled it to sponsor numerous risk
management education seminars which has helped the Company gain exposure among
potential insureds. The purpose of these communications and services is to
convey that the Company understands the insurance needs of the health care
industry, and to promote a commonality of interest among the Company, its
insureds, and the medical community generally.



                                       4
<PAGE>   5

         The Company has entered into endorsement and marketing agreements with
organized medical societies and associations in certain states in which it
offers professional liability insurance, including the Medical Association of
the State of Alabama, the Alabama Dental Association, the West Virginia Hospital
Association, the Medical Association of the State of West Virginia, the Indiana
State Medical Association, and the Indiana Dental Association.

         Each of the above referenced endorsement and marketing agreements
generally provides the Company access to the meetings of the respective state
medical associations in order to make presentations and access to their
respective publications for advertisements. In addition, each of the respective
state medical associations agreed to assist the Company in marketing its
products and developing loss prevention programs, in monitoring proposed
legislation and administrative regulations in the respective states, and in
providing information on health care matters relating primarily to professional
liability. The Company generally pays annual compensation to each of the
associations for the endorsement and services provided under each respective
contract.

         The Company relies on direct marketing of its professional liability
insurance products to Alabama physicians and hospitals and to the majority of
its insureds in Missouri. As a result, the Company is not required to pay
commissions to insurance agents on the sale of a substantial portion of its
insurance products. The Company has increasingly relied on the use of agents
and brokers in its efforts to increase revenues through expansion of its
business outside of Alabama and Missouri and through the sale of insurance
products other than its historical core business of providing medical
malpractice liability insurance to physicians and surgeons. In addition, the
Company uses a related party in connection with the distribution of a certain
subset of its insurance and reinsurance products throughout the United States,
including without limitation, medical malpractice reinsurance, excess medical
malpractice insurance, managed care liability insurance, accident and health
insurance and reinsurance, and workers' compensation insurance and reinsurance.

UNDERWRITING AND CLAIMS

         The Company establishes and implements underwriting procedures for all
forms of insurance coverage. The Company is responsible for claims
investigation, case management, defense planning, and coordination and control
of attorneys in the defense of claims of its insureds. The Company has several
underwriting and claims committees whose members principally consist of local
physicians, dentists and representatives of hospitals and health care entities
who advise and participate in the administration of underwriting and claims
management with respect to the professional liability insurance written in many
states.

         The current policy of the Company is and has been to oppose settlement
of and to defend aggressively all claims that appear to have no merit. This
policy has been most successfully implemented by developing relationships with
attorneys who have significant experience in the defense of medical
professional liability claims and who are able to defend aggressively claims
against its insureds. Business expansion through acquisitions of, or
combinations with, insurers who have a significant presence in a state has
enhanced the ability of the Company to engage local defense counsel who will
respond to its defense strategy. The Company's claims management philosophy
contributes to increased loss adjustment expenses compared to those of other
property and casualty lines or others specializing in medical professional
liability insurance, but the Company believes it results in greater
policyholder loyalty and contributes to a lower pure loss ratio.



                                       5
<PAGE>   6

LOSS RESERVES

         Loss reserves are the liabilities established by the Company to
provide funds for payment of policyholders' claims in the future. A medical
professional liability insurance company must accumulate substantial loss
reserves because it has promised to pay substantial amounts in the future for
claims that have occurred in prior contract periods. These loss reserves are
established as balance sheet liabilities representing estimates of future
amounts needed to pay claims and related expenses with respect to insured
events which have occurred, including events that have not yet been reported to
the carrier.

         Loss and loss adjustment expense reserves associated with medical
professional liability coverage tend to be relatively higher than those
associated with other types of property and casualty insurance for two primary
reasons. First, the yearly increases in the overall costs of medical
professional liability insurance coverage have historically been among the
highest of the property and casualty insurance lines. These increased costs can
be attributed principally to increases in both the frequency and severity of
medical professional liability claims. Second, the complexity of medical
professional liability claims increases loss adjustment expenses. In addition
delays between the collection of premiums and the payment of losses is longer
for medical professional liability insurance than other property and casualty
lines. This delay, which is commonly referred to as the "long tail," is the
result of the length of time that elapses between the incident giving rise to
an insured claim and its reporting to the insurer, and the length of time that
elapses between the reporting of the claim to the insurer and the ultimate
resolution of the claim. Frequently, injuries are not discovered until years
after an incident, or the claimant may simply elect initially not to pursue the
recovery of damages. As a result of the delay, a major component of the loss
reserves includes an estimate of the claims that have been incurred but not yet
reported.

         There are two types of liability insurance policies, occurrence and
claims-made. Under occurrence coverage, insurance is provided against claims of
liability arising from incidents which "occur" during the policy period,
regardless of when claims arising out of such incidents may be reported.
Claims-made coverage provides protection against only those claims which arise
out of incidents occurring and of which notice to the insurer is given while
coverage is effective. Claims-made policies enable the insurer to estimate its
loss reserves with more certainty as reserves for losses are accrued in the
year that a claim is reported instead of in the year of occurrence as is the
case with occurrence policies. As a result, there is less dependence on the
actuarial determination of claims incurred but not reported in establishing the
amount of loss reserves with respect to claims-made coverage. At December 31,
1999, the Company's medical malpractice reserves were comprised of
approximately 22% occurrence reserves and approximately 78% claims-made
reserves.

         The determination of loss reserves is essentially a projection of
ultimate losses through an actuarial analysis of the claims history of the
Company and other professional liability insurers, subject to adjustments
deemed appropriate to management due to changing circumstances. Included in
their claims history are losses and loss adjustment expenses paid by the
Company in prior periods and case reserves for anticipated losses and loss
adjustment expenses developed by their respective claims departments as claims
are reported and investigated. Actuaries rely primarily on such historical loss
experience in determining reserve levels on the assumption that historical loss
experience provides a good indication of future loss experience despite the
uncertainties in loss trends and the delays in reporting and settling claims.
As additional information becomes available, the estimates reflected in earlier
loss reserves may be revised. Any increase in the amount of reserves, including
reserves for insured events of prior years, could have an adverse effect on
consolidated results of the Company for the period in which the adjustments are
made. The uncertainties inherent in estimating ultimate losses on the basis of
past experience have grown significantly in recent years principally as a
result of judicial expansion of liability standards and expansive
interpretations of insurance contracts. These uncertainties may be further
affected by, among other factors, changes in the rate of inflation, changes in
the propensities of individuals to file claims, and changes in the laws of the
states in which the Company does business. Despite these uncertainties,
management believes that the methods used by the Company to establish



                                       6
<PAGE>   7

reserves are reasonable and appropriate. These methods include a detailed
review of reserves for losses and loss adjustment expenses of each insurance
subsidiary being performed by the Company's independent actuaries for each
fiscal year. The independent actuaries prepare a report that includes a
recommendation as to the respective levels of reserves. Management considers
this recommendation as well as other factors, such as known, anticipated or
estimated changes in frequency and severity of claims and loss retention levels
and premium rates, in establishing the amount of its reserves for losses and
loss adjustment expenses.

         The statutory filings of each insurance company with the insurance
regulators must be accompanied by an independent actuary's certification as to
their respective reserves in accordance with the requirements of the National
Association of Insurance Commissioners.

         In establishing the amount of reserves for losses and loss adjustment
expenses for interim periods in the following year, management estimates a loss
ratio giving consideration to the recommendation in the report of the
independent actuaries and other factors described above. The estimated loss
ratio and existing reserves are subject to further adjustment during the year,
as deemed appropriate by management, to give consideration to unusual material
events.

CLAIMS RECONCILIATION

         The following table sets forth an analysis of consolidated property
and casualty loss reserve liabilities and loss adjustment expense ("LAE") for
the Company and provides a reconciliation of beginning and ending consolidated
liability balances for the years ended December 31, 1999, 1998 and 1997. As of
December 31, 1999, MAI's insurance subsidiaries had consolidated reserves for
losses and LAE on a generally accepted accounting principles (GAAP) basis that
exceeded those on a statutory basis by approximately $25 million, which is
principally due to the portion of GAAP reserves that are reflected for
statutory accounting purposes as unearned premiums. These unearned premiums are
applicable to extended reporting endorsements issued without a premium charge
upon death, disability, or retirement.



                                       7
<PAGE>   8

<TABLE>
<CAPTION>
                                                                                YEAR ENDED DECEMBER 31,
                                                                  -----------------------------------------------
                                                                      1999              1998              1997
                                                                  -----------       -----------       -----------
                                                                                  (DOLLARS IN 000'S)
<S>                                                               <C>               <C>               <C>
Reserve liability, net of reinsurance recoverables,
  at beginning of year                                            $   480,741       $   464,122       $   440,040

Provisions for losses and LAE occurring in the
  current year, net of reinsurance                                    158,303           141,201           124,352

Decrease in estimated  losses and LAE
  for claims  occurring in prior years, net of
  reinsurance                                                         (53,646)          (47,308)          (46,679)
                                                                  -----------       -----------       -----------

Total incurred during current year,
  net of reinsurance                                                  104,657            93,893            77,673

Losses and LAE payments for claims, net of
  reinsurance, occurring during:

  Current year                                                        (10,293)           (9,891)           (5,201)

  Prior years                                                         (88,826)          (67,383)          (48,390)
                                                                  -----------       -----------       -----------

Total paid, net of reinsurance                                        (99,119)          (77,274)          (53,591)
                                                                  -----------       -----------       -----------

Reserve liability, net of reinsurance recoverables,
  at end of year                                                  $   486,279       $   480,741       $   464,122
                                                                  ===========       ===========       ===========

Gross liability at end of year                                    $   665,786       $   660,631       $   614,720
Reinsurance recoverable                                               179,507           179,890           150,598
                                                                  -----------       -----------       -----------

Net liability at end of year                                      $   486,279       $   480,741       $   464,122
                                                                  ===========       ===========       ===========

Gross re-estimated liability                                                        $   600,285       $   505,663
Re-estimated recoverable                                                                173,190           141,467
                                                                                    -----------       -----------

Net re-estimated liability                                                          $   427,095       $   364,196
                                                                                    ===========       ===========
</TABLE>

Note:  The above amounts exclude life reserves.



                                       8
<PAGE>   9

LOSS RESERVE DEVELOPMENT TABLE

         The following table includes information regarding the development of
property and casualty reserves for liability for unpaid losses and LAE of the
Company for the years ended December 31, 1989 through 1999. The table includes
losses and LAE on both a direct and an assumed basis and is net of reinsurance
recoverables: (i) the line entitled "Balance Sheet Reserves, net of Reinsurance
Recoverables" reflects the amount recorded as the reserve for liability for
unpaid losses and LAE in the consolidated balance sheet at the end of each year
(the "Balance Sheet Reserves"); (ii) the section entitled "Cumulative Paid, net
of Reinsurance Recoverables, As Of" reflects the cumulative amounts paid as of
the end of each succeeding year with respect to the previously recorded Balance
Sheet Reserves; (iii) the section entitled "Re Estimated Net Liability As Of"
reflects the reestimated amount of the liability previously recorded as "Balance
Sheet Reserves" that includes the cumulative amounts paid and an estimate of
additional liability based upon claims experience as of the end of each
succeeding year (the "Net Re Estimated Liability"); (iv) the line entitled
"Redundancy (Deficiency)" reflects the difference between the previously
recorded Balance Sheet Reserve for each applicable year and the Net Re Estimated
Liability relating thereto as of the end of the most recent fiscal year; and (v)
the line entitled "% Redundancy (Deficiency)" reflects the ratio that the
Redundancy (Deficiency) bears to the Balance Sheet Reserve in each year during
such period.

         Information presented in the following table is cumulative and,
accordingly, each amount includes the effects of all changes in amounts for
prior years. The information relating to subsidiaries other than MA-Alabama is
limited to the property and casualty reserves from their respective dates of
acquisition. The GAAP basis claims reserves have not been discounted.



                                       9
<PAGE>   10

                    RESERVE DEVELOPMENT ANALYSIS BY
                                 RESERVE DATE

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,            1989     1990     1991     1992     1993   1994     1995     1996     1997     1998     1999
---------------------------------------------------------------------------------------------------------------------------------
                                                       (dollars in 000's)
<S>                               <C>      <C>      <C>      <C>     <C>     <C>      <C>      <C>      <C>      <C>      <C>
BALANCE SHEET RESERVES, NET
  OF REINSURANCE RECOVERABLES     169,732  202,937  228,119  252,739 272,392 295,541  352,521  440,040  464,122  480,741  486,279

CUMULATIVE PAID, NET OF
  REINSURANCE RECOVERABLES,
  AS OF:

End Of Year                             0        0        0        0       0       0        0        0        0        0        0

One Year Later                     15,986   17,340   19,560   19,752  21,296  24,102   27,532   48,390   67,383   89,864

Two Years Later                    30,361   34,374   35,461   36,185  40,988  42,115   58,769   98,864  128,758

Three Years Later                  45,266   44,498   46,417   52,550  53,186  58,793   80,061  136,992

Four Years Later                   52,702   52,076   58,124   58,526  61,153  65,520  107,005

Five Years Later                   59,235   61,196   62,573   63,325  66,419  76,291

Six Years Later                    65,976   63,682   65,090   68,021  73,308

Seven Years Later                  66,033   65,877   68,719   71,466

Eight Years Later                  67,625   69,014   71,305

Nine Years Later                   70,563   71,331

Ten Years Later                    72,098


RE ESTIMATED NET LIABILITY AS OF:


End Of Year                       169,732  202,937  228,119  252,739 272,392 295,541  352,521  440,040  464,122  480,741  486,279

One Year Later                    170,626  195,747  217,558  241,655 251,445 268,154  325,212  393,363  416,814  427,095

Two Years Later                   161,414  185,535  205,277  221,236 220,385 239,243  280,518  347,258  364,196

Three Years Later                 156,413  173,996  185,349  190,744 194,213 200,311  237,280  294,675

Four Years Later                  144,929  157,884  159,301  167,062 159,096 157,836  190,110

Five Years Later                  133,054  135,828  139,570  136,996 126,379 122,570

Six Years Later                   113,737  119,336  114,407  108,862 106,403

Seven Years Later                 101,621   93,875   98,177   94,908

Eight Years Later                  83,554   83,266   89,271

Nine Years Later                   80,392   77,771

Ten Years Later                    76,040

REDUNDANCY(DEFICIENCY)             93,692  125,166  138,848  157,831 165,989 172,971  162,411  145,365   99,926   53,646

% REDUNDANCY(DEFICIENCY)            55.20%   61.68%   60.87%   62.45%  60.94%  58.53%   46.07%   33.03%   21.53%   11.16%

BALANCE AT END OF YEAR PRESENTED:

Gross liability                                          311,394    355,735    432,937    548,732    614,720   660,631

Receivable from reinsurers                               (39,002)   (60,194)   (80,416)  (108,692)  (150,598) (179,890)
                                                         -------    -------    -------    -------    -------   -------
Net liability                                            272,392    295,541    352,521    440,040    464,122   480,741
                                                         =======    =======    =======    =======    =======   =======

BALANCE AT DECEMBER 31, 1999:

Gross reestimated liability                              122,781    165,950    236,980    378,082    505,663    600,285

Reestimated reinsurance recoverable                      (16,378)   (43,380)   (46,870)   (83,407)  (141,467)  (173,190)
                                                         -------    -------    -------    -------    -------    -------
                                                         106,403    122,570    190,110    294,675    364,196    427,095
                                                         =======    =======    =======    =======    =======    =======

Gross Redundancy (Deficiency)                            188,613    189,785    195,957    170,650    109,057     60,346
                                                         =======    =======    =======    =======    =======    =======
</TABLE>

Note: There may be a difference of 1 (,000) in the redundancies due to
rounding.



                                      10
<PAGE>   11

         Medical professional liability loss experience is volatile and
cyclical. Over the past twenty-five years, the industry has experienced several
periods of increasing claim frequency and severity, followed by periods of
relative stability. At other times, due to tort reform, favorable judicial
decisions, favorable economic conditions or other unknown factors, claim
frequency and/or severity have decreased. Malpractice claims generally require
an extended period of time to resolve, and in many jurisdictions, the average
life of a claim is five years or longer. The combination of changing conditions
and the extended time required for claim resolution result in a loss cost
estimation process that requires actuarial skill and good judgment, and such
estimates require periodic revision. We believe that it is prudent to establish
initial loss and loss expense reserves that are reasonable based on historical
experience as well as on facts and circumstances known at the balance sheet
date. To the extent that actual results positively deviate from expectations,
reserve estimates are subsequently reduced and ultimate paid losses and loss
expenses are less than the original estimates.

         The Company's loss and loss expense reserves have historically
developed favorably for several reasons. First, the Company utilizes a rigorous
and disciplined approach to investigating, managing and defending claims. This
philosophy has generally produced results that are better than industry
averages in terms of loss payments and the proportion of claims closed without
indemnity payment. The Company's volume of business, while substantial, is not
of a sufficient size to fully support the projection process, thus the
Company's data is supplemented with industry-based data. Ultimately, actual
payments on these reserves have been less than originally projected, creating
the redundancies.

         Second, reserves established in the late 1980's and early 1990's were
strongly influenced by the dramatically increased frequency and severity
experienced by the Company, and the industry as a whole, during the mid-1980's.
Some of these trends moderated, and in some cases, reversed, by the late 1980's
or early 1990's. However, the ability to recognize the improved environment was
delayed due to the extended time required for claims resolution. When these
trends moderated, the reserves proved to be redundant.

         Third, as the Company has commenced operations in new jurisdictions,
beginning with its first out-of-state expansion in 1993, there was substantial
uncertainty as to the loss experience that would be encountered. This
uncertainty caused an increased reliance on industry statistics; as a result,
reserve redundancies developed when actual results proved better than expected.

         Finally, the medical professional liability marketplace has been
extremely competitive for the past ten years. The Company believed that overall
loss experience would be worse than that which was anticipated by many of its
competitors. As a result, the Company prudently established accident year
reserves, resulting in accident year loss ratios in excess of 100% of earned
premium. In some instances, these loss ratios proved to be accurate, while in
other cases, experience has been better than expected and redundancies have
developed.

         In each year, the Company has utilized a consistent approach in
establishing reserve levels. The actuarial methodologies utilized include
incurred loss development, paid loss development and frequency-severity
projections. These techniques are applied to the data and the resulting
projections are evaluated by management to establish a best estimate of
reserves.


                                       11
<PAGE>   12

REINSURANCE

         In managing its underwriting risks and liquidity position, the Company
transfers portions of its insurance risks to reinsurers. This cession of risks
involves the payment of premiums to those reinsurers for their assumption of
these risks. Reinsurance protects the Company against losses of a catastrophic
nature and stabilizes underwriting results in those years in which such losses
occur. The cession of reinsurance does not discharge the Company from liability
to the policyholders, but it does permit recourse by it against the reinsurer
for losses paid within the scope of the reinsurance contract.

         Risks are reinsured under treaties pursuant to which the reinsurer
agrees to assume all or a portion of all risks insured by the Company above its
individual risk retention and up to the maximum individual limit offered
(currently $26 million). Generally, the Company's risk retention level is
dependent upon numerous factors including volume of business in a particular
region, service infrastructure within a region, level of experience within a
region, and the Company's analysis of the potential underwriting results within
each region. As a consequence, the Company's retention has varied between the
first $200,000 and the first $2 million since 1989. Currently, the Company
retains $2 million in Alabama, $1 million in Missouri and West Virginia, and
$250,000 elsewhere. The Company reinsures the risks above the maximum limits of
its reinsurance treaties on a facultative basis - the reinsurer agrees to
insure a particular risk up to a designated limit.

         Reinsurance is placed under reinsurance treaties and agreements with a
number of individual companies to avoid concentrations of credit risk. For
policy periods beginning on or after August 1, 1989, the Company has not placed
more than 25% of the total amount of risks ceded to reinsurers with any one
reinsurer. The Company relies on reinsurance brokers to assist in the analysis
of the credit quality of its reinsurers.

         Although reinsurer insolvencies have resulted in financial
difficulties for some insurance companies, the Company's reinsurance
recoverable at December 31, 1999 did not include any amounts due from any
financially troubled reinsurer.

INVESTMENTS

         Investment management services are provided to the Company by
independent third party investment managers. Such services include reviewing
and recommending investment policies and implementing and executing investment
strategies and are currently provided for a fee based upon the market value of
the investment portfolio managed by the Company. The general investment
policies of the Company are intended to accommodate its need for liquidity and
current income. The primary objective is to achieve a high level of after-tax
income, while minimizing risk. Accordingly, investment assets of the Company
substantially consist of fixed maturity securities, all of which are investment
grade as defined by national rating agencies. See Notes 1 and 2 of the Notes to
Consolidated Financial Statements for a description of the investments of the
Company at December 31, 1999.

COMPETITION

         Traditionally, the physicians and surgeons professional liability
market, the hospital professional liability market and the dental professional
liability market in Alabama have been highly competitive. The Company acquired
a substantial share of the Alabama physicians and surgeons professional
liability insurance market in 1977 when the primary Alabama medical
professional liability carrier withdrew from Alabama. Competitors, some of
which have greater financial resources than the Company, have entered


                                      12
<PAGE>   13

or reentered the Alabama market and many insurance companies currently offer
professional liability insurance in Alabama. Other companies engaged in similar
lines of business in other states may enter the Alabama market in the future.
However, the Company has maintained a dominant market share in Alabama through
aggressive defense policies, competitive pricing and a substantial direct
marketing effort.

         The Company plans to continue to expand the business of the Company
into other states through increased use of independent agents to market its
products and writing new business with multi-state health care providers having
a prior relationship with the Company. The Company also intends to expand its
business through business combinations with medical professional liability
insurers having name recognition and significant support in the medical
community in the states in which they do business. The Company believes that it
will be competitive with companies who have been offering medical professional
liability insurance in those states in which the Company writes insurance. In
its marketing efforts in other states, the Company must compete with insurance
companies that have pre-existing relationships with prospective customers and
name recognition in those states, and that in many cases have greater resources
than the Company. Marketing efforts in states other than Alabama will take
substantial time and resources in order for prospective customers to become
familiar with the Company and its insurance products.

         The Company believes that the principal competitive factors in the
professional liability insurance business are service, name recognition, and
price, and that it competes effectively in all these areas. The Company enjoys
significant name recognition in Alabama by virtue of having been organized by,
and originally operated for the principal benefit of, Alabama physicians. The
Company has attempted to use its heritage as a policyholder-founded company
dedicated to the medical professional liability insurance industry in general
as a means to compete in other states both directly and indirectly through its
affiliates. The services offered by the Company to its insureds as well as the
medical community in general are intended to promote name recognition and to
maintain and improve loyalty among the insureds.

REGULATION

         The insurance industry is highly regulated, primarily by departments
or agencies of the state governments. The Insurance Codes of the various states
in which the Company does business delegate regulatory, supervisory and
administrative powers to the State Commissioners or Departments of Insurance.
Such regulation, supervision and administration involve, among other things,
the licensing of insurers, financing of insurers, periodic examinations of the
affairs and financial condition of insurers, and review of annual and other
mandatory reports on the financial condition of insurers.

         Insurance companies are required to be licensed by the states in which
they do business. The Company is currently licensed to do business as a
property and casualty insurer in 42 states and the District of Columbia and has
or will apply for authority to do business in almost all states. In addition to
being licensed as a property and casualty insurer, the Company must submit for
approval all property and casualty policies, endorsements, underwriting
manuals, and rates to the Commissioners of Insurance in order to do business in
states in which it is licensed. Currently, the Company actively writes
professional liability insurance in 16 states. Approval of policy forms and
rates may take a substantial period of time after the license has been issued
in a particular state. Further, the possibility exists that the Company may be
unable to do business in a state in which it is licensed if desired policies,
endorsements, forms, manuals, or rates are not approved by the Commissioner of
Insurance in that state.

         The Company is an insurance holding company system regulated under the
Alabama Insurance Holding Company System Regulatory Act, the West Virginia
Holding Company System Act, the Indiana Holding Company System Regulatory Act
and the Missouri Holding Company System Regulatory Act (collectively the
"Holding Company Acts"). The Holding Company Acts generally prohibit anyone
from acquiring control of an insurance company without the approval of the
Commissioner in the state of


                                      13
<PAGE>   14

domicile of such insurance company. Under the Holding Company Acts, control is
presumed to exist if any person or persons acting in concert, directly or
indirectly, owns, controls, holds with the power to vote or holds proxies
representing a certain percentage of the voting securities of another person
(5% in Alabama, 10% in West Virginia, Indiana and Missouri).

         Most states require admitted property and casualty insurers to become
members of insolvency or guaranty funds or associations, which generally
protect policyholders against the insolvency of such insurers. Members of the
fund or association must contribute to the payment of certain claims made
against insolvent insurers. Maximum contributions required by law in any one
year vary between 1% and 2% of annual premium written by a member in that
state. Assessments from guaranty funds may, to a limited extent, be recovered
through future premium tax reductions.

         MAI's insurance subsidiaries must comply with mandatory capital and
solvency standards in the states in which they are authorized to do business.
The National Association of Insurance Commissioners (the "NAIC") has
established risk-based capital ("RBC") requirements to assist regulators in
monitoring the financial strength and stability of property and casualty
insurers. Under the NAIC requirements, regulatory compliance is determined by a
ratio of an insurer's regulatory total adjusted capital, as defined by the
NAIC, to its authorized control level of RBC, also defined by the NAIC. NAIC
guidelines do not require company or regulatory action for insurers that
achieve an RBC ratio of 2.0 or better. Each of the Company's insurance
subsidiaries achieved an RBC ratio at December 31, 1999 that was better than
2.0.

         The 1999 adjusted capital and authorized control level RBC (in
millions), and the related RBC ratio for each of the Company's insurance
subsidiaries follows:

<TABLE>
<CAPTION>
                                                       Authorized
                                        Adjusted         Control           RBC
                                        Capital         Level RBC         Ratio
                                        --------       ----------         -----

<S>                                     <C>            <C>                <C>
The Medical Assurance Company            $ 211.0         $   35.0          6.03
Medical Assurance of Indiana             $   8.8         $    2.8          3.08
Medical Assurance of Missouri            $  31.8         $    2.6         12.23
Medical Assurance of West Virginia       $   6.0         $    0.4         16.38
</TABLE>

         State insurance codes generally limit the source of dividends payable
by a stock insurer to that part of its available surplus funds which is derived
from realized net profits on its business. The Holding Company Acts require
that a domestic insurer obtain prior approval from the state's Commissioner
before the payment of any extraordinary dividend. The Holding Company Acts
would permit MAI's insurance subsidiaries to dividend to MAI as much as
approximately $54.8 million in 2000 without obtaining prior approval from the
commissioners. In turn, Delaware corporate law limits MAI from paying dividends
in excess of its surplus.

EMPLOYEES

         At December 31, 1999, MAI and its subsidiaries employed 269 persons.
None of the employees of MAI or its subsidiaries is represented by a labor
union. MAI considers its employee relations to be good.


                                      14
<PAGE>   15

ITEM. 7  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

         For purposes of this management discussion and analysis, the term
"Company" refers to Medical Assurance, Inc. and its consolidated subsidiaries.
The consolidated subsidiaries consist principally of operating insurance
companies.

LIQUIDITY AND CAPITAL RESOURCES

         The payment of losses, loss adjustment expenses, and operating
expenses in the ordinary course of business is currently the Company's
principal need for liquid funds. Cash provided from operating activities was
sufficient during 1999 to meet the Company's operating needs, and the Company
believes those sources will be sufficient to meet its cash needs for operating
purposes for at least the next twelve months. Prolonged and increasing levels
of inflation could cause increases in the dollar amount of losses and loss
adjustment expenses and may therefore adversely affect future reserve
development. To minimize such risk, the Company (a) maintains reinsurance at
levels management considers to be strong and adequate; (b) conducts regular
actuarial reviews to ensure, among other things, that reserves do not become
deficient; and (c) maintains adequate asset liquidity.

         The Company did not borrow any funds during the years ended December
31, 1999 and 1998, and currently has no requirements indicating a need to
borrow significant funds in the next twelve months. However, the need for
additional capital may arise in order to achieve the Company's goals of
business expansion, as discussed previously in Item 1. The Company continues to
have available through a lending institution a line of credit in the amount of
$40 million that could be used for these additional capital requirements. The
Company is not charged a fee nor is it required to maintain compensating
balances in connection with this line of credit. Additionally, in an effort to
protect the Company's investment portfolio against the possibility of higher
interest rates in the future, the Company reduced the average maturity of a
portion of that portfolio during the third and fourth quarters of 1998. This
reduction was the principal reason for the higher gross realized gains in 1998
as discussed in Note 2 of the accompanying Notes to Consolidated Financial
Statements.

         During 1999, the Company's Board of Directors increased the
authorization for purchases of its common stock by $10.0 million in March and
by an additional $10.0 million in August. The Company purchased approximately
1.1 million shares of its stock in 1999 at a cost of approximately $27.9
million. Treasury shares purchased during each quarter of 1999 and the
related cost (both approximate) are as follows: during the first quarter
126,000 treasury shares at a cost of $3.6 million, during the second quarter
205,000 shares at a cost of $5.6 million, during the third quarter 632,000
shares at a cost of $15.6 million, and during the fourth quarter 133,000
shares at a cost of $3.1 million. Share amounts give effect to the 1999 stock
dividend. At December 31, 1999 the Board purchase authorization had
effectively been exhausted.

         Effective January 1, 1999, the Company purchased the ongoing book of
medical professional liability insurance business of Medical Defense Associates
(MDA) and Medical Defense Insurance Company (MDIC). The Company has assumed
day-to-day management of existing policies and prior liabilities of MDA and
MDIC and provides aggregate excess of loss reinsurance to protect MDA and MDIC
from adverse loss development in excess of an agreed upon threshold.



                                      15
<PAGE>   16

MARKET RISK

         The Company is exposed to various market risks, including both
interest rate risk and equity price risk. Interest rate risk represents the
risk of changes in value of a financial instrument caused by fluctuations in
market interest rates. The Company handles market risks in accordance with its
established investment policies. The goal of these policies is to implement a
strategic asset allocation that maximizes the long-term rate of return at a
minimum level of risk given a set of asset classes and restrictions. Market
risk control relates principally to ratings of issuers and length to maturity.
The Company does not enter into derivative transactions.

         At December 31, 1999 fixed maturity securities totaling $640.1
million, at fair value, comprised 84% of the Company's invested assets of
$761.9 million. Thus, the most significant market risk to the Company is
interest rate risk related to the fixed maturity portfolio. The Company
believes it is in a position to keep these investments until final maturity and
does not invest in fixed maturity securities for trading purposes.
Nevertheless, fluctuations in market interest rates would significantly impact
the fair value of this portfolio.

         Effective duration is one common measure of the interest-sensitivity
of fixed-maturity securities. Stated simply, effective duration is a
calculation that takes stated maturity, yields, and call features into
consideration to predict an average age of expected cash flows related to a
security.

         The Company estimates that the fair value of its fixed maturity
portfolio and the weighted average effective duration would respond to
fluctuations in market interest rates as follows:


<TABLE>
<CAPTION>
                                                          Change in Interest Rate Basis Points
                                           ------------------------------------------------------------------
                                                                        Current
                                                                        -------
                                           -200 bps       -100 bps       Rates*        +100 bps      +200 bps
                                           --------       --------      -------        --------      --------

<S>                                        <C>            <C>           <C>            <C>           <C>
Projected fair value of portfolio (in
millions):                                  $693.1         $666.4        $640.1         $614.7        $590.9

Projected weighted average effective
duration of portfolio:                        3.67           3.75          3.84           3.77          3.71
</TABLE>

*Current rates are as of December 31, 1999

         At December 31, 1999 the fair value of the Company's investment in
common stocks, excluding preferred stocks as discussed in the following
paragraph, was $29.4 million which included net unrealized gains of $6.4
million. These securities are subject to price risk. A hypothetical 10%
increase in the market prices as of December 31, 1999 would increase the fair
value of these securities to $32.3 million; a hypothetical 10% decrease would
reduce the fair value to $26.5 million. The selected hypothetical change does
not reflect what could be considered the best or worst scenarios.

         At December 31, 1999 the Company has a limited investment in preferred
stocks. These securities were carried at fair value of $18.6 million at
December 31, 1999, including net unrealized losses of $0.1 million. These
securities carry fixed rates of return and thus, like fixed maturities, are
primarily subject to interest rate risk. The fixed maturities table above does
not include preferred stocks.

         The Company's cash and short-term investment portfolio at December
31, 1999 on a cost basis which approximates its fair value. This portfolio
lacks significant market rate sensitivity due to its short duration.



                                      16
<PAGE>   17

IMPACT OF YEAR 2000

         In prior years, the Company discussed the nature and progress of its
plans to become Year 2000 compliant. To date, the Company has experienced no
significant disruptions in mission critical information technology and
non-information technology systems and believes those systems successfully
responded to the Year 2000 date change.

         In 1996, as a part of its ongoing efforts to maintain effective and
efficient operations, the Company committed to and began replacing
substantially all the software and hardware used in its core computer
information system. Year 2000 compliance was an integral consideration of the
selection and implementation process for these systems. Implementation of the
component systems, which included testing for Year 2000 compliance, was
completed in mid-1999. Because Year 2000 compliance was incidental to the
implementation of the systems, costs specifically related to Year 2000
compliance have been minimal.

         The Company is not aware of any material problems resulting from Year
2000 issues as respects its internal systems, or the products and services of
third parties, nor is the Company aware of any claims against its insureds
resulting from Year 2000 related matters. The Company will continue to monitor
its mission critical computer applications to ensure that any latent Year 2000
matters that may arise are addressed promptly.



                                      17
<PAGE>   18

RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED
DECEMBER 31, 1998

Premiums

         The following table presents information related to consolidated
written and earned premiums and reinsurance expense (in thousands):

<TABLE>
<CAPTION>
                                                                                    Increase
                                              1999                 1998             (Decrease)
                                           --------------------------------------------------

<S>                                        <C>                  <C>                 <C>
Direct and assumed premiums written        $ 201,593            $ 192,479            $  9,114
                                           ==================================================

Premiums earned                            $ 207,492            $ 195,515            $ 11,977
Premiums ceded                               (43,068)             (54,199)             11,131
                                           --------------------------------------------------
Net premiums earned                        $ 164,424            $ 141,316            $ 23,108
                                           ==================================================
</TABLE>

         The largest component of the increase in direct and assumed premiums
written was a $17.2 million increase in medical malpractice premiums. The
increase in medical malpractice premiums includes assumed premiums of $3.9
million effective January 1, 1999 from the existing policies of the book of
business acquired from MDA and MDIC, as discussed under Liquidity and Capital
resources, an increase in assumed medical malpractice premiums of $1.9 million,
and $6.6 million of additional direct premiums resulting from the renewal of
the book of business purchased from MDA.

         The Company writes accident and health, workers compensation and
multi-line premiums from time to time as opportunities arise. These policies
historically yield lower margins than the Company's other lines of business and
thus are not a primary focus of operations. However, this business does provide
an opportunity to utilize the Company's capital and produces revenue from fees
and commissions. Given the uncertain market conditions in these areas,
variations in premiums are to be expected as pricing conditions change rapidly.
For the year ended December 31, 1999 as compared to the same period of 1998,
direct and assumed workers compensation and multi-line premiums written
increased $2.3 million, while direct and assumed accident and health premiums
written decreased by $10.5 million. The decrease was primarily due to the
termination in 1999 of a large program having written premiums of approximately
$9 million in 1999 as compared to $20 million in 1998. The premiums for this
program were heavily ceded, thus mitigating the impact of the terminated
program.

         The largest component of the increase in premiums earned is a $16.9
million increase in medical malpractice premiums. The increase in earned
medical malpractice premiums includes $7.1 million related to the MDA book of
business and a $5.8 million increase in medical malpractice premiums relating
to reinsurance of other insurers. The increase in earned medical malpractice
premiums was offset by a $6.4 million decrease in earned accident and health
premiums.

         The Company cedes reinsurance to provide for greater diversification
of business, allow management to control exposure to potential losses arising
from large risks, and provide capacity for additional growth. Premiums ceded
are estimated based on the terms of the respective reinsurance agreements. The
estimated expense is continually reviewed and any adjustments that become
necessary are included in current operations. Amounts recoverable from
reinsurers are estimated in a manner consistent with the loss liability
associated with the reinsured policies. The decrease in premiums ceded for the
year ended December 31, 1999 as compared to the year ended December 31, 1998 is
principally due to the decrease in earned accident and health premiums, which
are heavily ceded. The remaining decrease is due to a greater proportion of
premiums earned in states where cession levels are lower. The Company
continually reviews the levels of coverage ceded and the related costs.



                                      18

<PAGE>   19

Investment Income

         Consolidated net investment income was $39.3 million for the year
ended December 31, 1999 which was relatively unchanged as compared to net
investment income of $39.4 million for the year ended December 31, 1998. The
average yield on invested assets was 5.2% in 1999 as compared to 5.6% in 1998.
The decline in yield was largely offset by an increase in average invested
assets during 1999.

         Average invested assets were higher during 1999 as compared to 1998;
however, invested assets were $758.9 million at December 31, 1999 as compared
to $761.1 million at December 31, 1998. The decrease as of the end of the year
is largely attributable to 1999 treasury stock purchases of $27.9 million;
approximately $15.0 million of the 1999 purchases occurred in the last four
months of 1999. Thus, average invested assets for the year were impacted less
by treasury stock purchases than was the end of the year balance. The average
composition of invested assets changed little from 1999 to 1998, with
non-taxable investments comprising 57% of average invested assets in 1999 as
compared to 54% in 1998.

         For purposes of the above discussion, invested assets are comprised of
fixed maturities and equity securities at amortized cost and short-term
investments. The earnings on such invested assets constitute the related net
investment income. The Company calculates the yield on invested assets by
dividing the related investment income by the monthly average of invested
assets.

         The principal investment objective of the Company is to achieve a high
level of after-tax income while minimizing risk. Although fixed maturity
securities are purchased with the initial intent to hold such securities until
their maturity, disposals of securities prior to their respective maturities
may occur if management believes such disposals are consistent with the
Company's overall investment objectives, including maximizing after-tax yields.

Other Income

         Other income decreased to $4.3 million for the year ended December 31,
1999 compared to $12.9 million for the year ended December 31, 1998. The
decrease is principally attributable to a $9.5 million decrease in capital
gains realized upon the sale of securities during 1999 as compared to 1998. See
discussion under Liquidity and Capital Resources for more information regarding
gains realized in 1998.



                                      19
<PAGE>   20

Losses

         Consolidated net losses and loss adjustment expenses (losses) and the
related current year loss ratio are summarized in the following table (dollars
in thousands). The current year loss ratio is based on net premiums earned.

<TABLE>
<CAPTION>
                                                 Year ended
                                 December 31,  1999             December 31, 1998
                             -------------------------------------------------------
                             Losses         Loss            Losses        Loss
                                            Ratio                         Ratio
                             -------------------------------------------------------
<S>                          <C>            <C>             <C>           <C>
Incurred loss related to:
  Current year               $ 158,303         96%          $ 141,201        100%
                                               ==                            ===
  Prior years                  (53,646)                       (47,308)
                             ---------                      ---------
Net incurred loss            $ 104,657                      $  93,893
                             =========                      =========
</TABLE>

         Losses incurred include two components: a) actuarial evaluation of
incurred loss levels for the current accident year, and b) actuarial
re-evaluation of incurred loss levels for prior accident years. These components
take into consideration prior loss experience, loss trends, and changes in the
frequency and severity of claims. Any adjustments related to previously
established amounts are included in current operations.

         Medical malpractice claims are resolved over an extended number of
years and a number of these claims are litigated. Management uses its best
estimate in establishing its loss reserves, but during the extended period in
which claims are resolved the legal environment and other factors may change.
Consequently, ultimate losses are inherently difficult to estimate and actual
results may vary from the estimated amounts. Given the large volume of loss
reserves at any balance sheet date, a small change in the estimate of those
reserves can have a significant effect on current operations.

         The current accident year loss ratio (current accident year net loss
divided by net premiums earned) decreased to 96% from 100%. This change reflects
the Company's continued recognition of the decreasing trend in severity and
frequency of medical malpractice claims. The effect was favorable loss
development during the year ended December 31, 1999 of 53.6 million versus $47.3
million during the year ended December 31, 1998. These trends may not continue
and the Company may experience higher levels of incurred losses in subsequent
periods.

Underwriting, Acquisition and Insurance Expenses

         Underwriting, acquisition and insurance expenses are summarized in the
following table (in thousands):

<TABLE>
<CAPTION>
                                                                                     Increase
                                                           1999           1998      (Decrease)
                                                        --------------------------------------
<S>                                                     <C>             <C>         <C>
Underwriting, acquisition and insurance expenses
  before reduction by ceding commissions earned         $ 48,407        $ 44,624      $ 3,783
Ceding commissions earned                                 (8,195)        (11,116)       2,921
                                                        -------------------------------------
                                                        $ 40,212        $ 33,508      $ 6,704
                                                        =====================================
</TABLE>

         The increase in underwriting, acquisition and insurance expenses is
primarily due to increased amortization of policy acquisition costs associated
with new business. The decrease in ceding commissions earned is principally due
to lower ceded accident and health premiums in 1999. See Note 5 of the Notes to
Consolidated Financial Statements.

Income Taxes

         The Company's effective tax rate for both years ended December 31,
1999 and 1998 was 26%. The 1998 effective rate includes taxes netted against
the "Cumulative effect of accounting change" on the 1998 Consolidated Statement
of Income. The effective tax rates were lower than the statutory rate of 35%
primarily because of the effect of tax-exempt investment income. The deferred
tax asset did not include loss carryforwards at either December 31, 1999 or
December 31, 1998.



                                      20
<PAGE>   21

RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED
DECEMBER 31, 1997

Premiums

         The following table presents information related to consolidated
written and earned premiums and reinsurance expense (in thousands):

<TABLE>
<CAPTION>
                                                                         Increase
                                               1998          1997       (Decrease)
                                            --------------------------------------

<S>                                         <C>           <C>           <C>
Direct and assumed premiums written         $ 192,479     $ 188,195      $   4,284
                                            ======================================

Premiums earned                             $ 195,515     $ 158,061      $  37,454
Premiums ceded                                (54,199)      (39,094)       (15,105)
                                            --------------------------------------
Net premiums earned                         $ 141,316     $ 118,967      $  22,349
                                            ======================================
</TABLE>

         The increase in direct and assumed premiums written for the year ended
December 31, 1998 compared to the year ended December 31, 1997 is due
principally to an increase of $8.4 million of medical malpractice and accident
and health premiums, offset by a decrease of $4.0 million of workers
compensation premiums. Other variations in the normal course of business for
the Company comprise the remainder of the variance.

         Premiums earned for the year ended December 31, 1998 increased $37.4
million as compared to the year ended December 31, 1997, primarily attributable
to premiums earned from physician malpractice coverage and other new business
written in late 1997 in states other than Alabama.

         The $15.1 million increase in premiums ceded for the year ended
December 31, 1998 as compared to the year ended December 31, 1997 is
principally due to additional direct and assumed premiums in states other than
Alabama, offset by increased reinsurance retentions, and consequently lower
ceded premiums, for Alabama and West Virginia. The Company continually reviews
the levels of coverage ceded and the related costs.

Investment Income

         The Company had consolidated net investment income of $39.4 million
for the year ended December 31, 1998 as compared to $38.5 million for the year
ended December 31, 1997 reflecting an increase of approximately $900,000. The
increased income is primarily due to an increase in the amount of invested
assets offset somewhat by a decrease in the yield. Invested assets increased to
$761.1 million at December 31, 1998 from $681.1 million at December 31, 1997.
The yield on invested assets decreased to 5.6% for 1998 from 5.9% for 1997. The
average composition of invested assets changed little to 1998 from 1997, with
non-taxable investments comprising an average of 54% for 1998 and 58% for 1997.

         For purposes of the above discussion, invested assets are comprised of
fixed maturities and equity securities at amortized cost and short-term
investments. The earnings on such invested assets constitute the related net
investment income. The Company calculates the yield on invested assets by
dividing the related investment income by the monthly average of invested
assets.

Other Income

         Other income increased to $12.9 million for the year ended December
31, 1998 compared to $3.3 million for the year ended December 31, 1997. The
increase is principally attributable to a $9.5 million increase in capital
gains realized upon the sale of securities during 1998 as compared to 1997, as
discussed under Liquidity and Capital resources.



                                      21
<PAGE>   22

Losses

         Consolidated net losses and loss adjustment expenses (losses) and the
related current year loss ratio are summarized in the following table (dollars
in thousands). The current year loss ratio is based on net premiums earned.

<TABLE>
<CAPTION>
                                                  Year Ended
                                  December 31, 1998         December 31,  1997
                              ----------------------      ---------------------
                                               Loss                       Loss
                                Losses         Ratio        Losses        Ratio
                              ----------------------      ---------------------

<S>                           <C>              <C>        <C>             <C>
Incurred loss related to:
   Current year               $ 141,201         100%      $  124,353       105%
   Prior years                  (47,308)        ===          (46,679)      ===
                              ---------                   ----------
Net incurred loss             $  93,893                   $   77,674
                              =========                   ==========
</TABLE>


         Losses incurred include two components: (a) actuarial evaluation of
incurred loss levels for the current accident year, and (b) actuarial
re-evaluation of incurred loss levels for prior accident years. These
components take into consideration prior loss experience, loss trends, and
changes in the frequency and severity of claims. Any adjustments related to
previously established amounts are included in current operations.

         Medical malpractice claims are resolved over an extended number of
years and a number of these claims are litigated. Management uses its best
estimate in establishing its loss reserves, but during the extended period in
which claims are resolved the legal environment and other factors may change.
Consequently, ultimate losses are inherently difficult to estimate and actual
results may vary from the estimated amounts. Given the large volume of loss
reserves at any balance sheet date, a small change in the estimate of those
reserves can have a significant effect on current operations.

         The current accident year loss ratio (current accident year net loss
divided by net premiums earned) decreased to 100% from 105%. This change
reflects the Company's continued recognition of the decreasing trend in
severity and frequency of medical malpractice claims. The effect was favorable
loss development during the year ended December 31, 1998 of $47.3 million
versus $46.7 million during the year ended December 31, 1997. These trends may
not continue and the Company may experience higher levels of incurred losses in
subsequent periods.

Underwriting, Acquisition and Insurance Expenses

         Underwriting, acquisition and insurance expenses are summarized in the
following table (in thousands):

<TABLE>
<CAPTION>
                                                                                            Increase
                                                           1998              1997          (Decrease)
                                                       ----------------------------------------------

<S>                                                    <C>               <C>               <C>
Underwriting, acquisition and insurance expenses
   before reduction by ceding commissions earned       $  44,624         $   38,853         $   5,771
Ceding commissions earned                                (11,116)            (4,950)           (6,166)
                                                       ----------------------------------------------
                                                       $  33,508         $   33,903         $    (395)
                                                       ==============================================
</TABLE>

         The increase in underwriting, acquisition and insurance expenses is
due to increased amortization of policy acquisition costs associated with new
business and increased costs from state guaranty fund assessments, offset by
additional ceding commissions earned. Ceding commissions earned increased
primarily because during 1998 a greater portion of the Company's reinsurance
treaties provided for a ceding commission than was the case during 1997. See
Note 5 of the Notes to Consolidated Financial Statements.

Income Taxes

         The Company's effective tax rate for the years ended December 31, 1998
and 1997 was 26% and 24%, respectively. The effective tax rates were lower than
the statutory rate of 35% primarily because of the effect of tax-exempt
investment income. The increase is principally due to the tax-exempt income
representing a lesser percentage of operating income in 1998. There are no loss
carryforwards included in the deferred tax asset.



                                      22
<PAGE>   23

FORWARD LOOKING STATEMENTS

         The U.S. securities laws, including the Private Securities Litigation
Reform Act of 1995, provide a "safe harbor" for certain forward-looking
statements. This report contains forward-looking statements (identified by
words such as, but not limited to, "believe", "expect", "intend", "anticipate",
"estimate", and other analogous expressions) including statements concerning:
earnings, losses, capital requirements, loss reserves, the retention of current
business, competition, the expansion of product lines, the development or
acquisition of business in new geographical areas, and other matters.

         These forward-looking statements are based upon the Company's
estimates and anticipation of future events that are subject to certain risks
and uncertainties that could cause actual results to vary materially from the
expected results described in the forward-looking statements. Due to such risks
and uncertainties, readers are urged not to place undue reliance on
forward-looking statements. All forward-looking statements included in this
document are based upon information available to the Company on the date
hereof, and the Company undertakes no obligation to publicly update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise.

         Risks which could adversely affect the Company's operations and/or
cause actual results to differ materially from anticipated results include, but
are not limited to, the following:

         -        underwriting losses on the risks the Company insures are
                  greater than expected;
         -        changes in the interest rate environment and/or the
                  securities markets that adversely impact the fair value of
                  the Company's investments or operations;
         -        regulatory and legislative actions or decisions that
                  adversely affect the Company's business plans or operations;
         -        inability of the Company to achieve continued growth through
                  expansion into other states or through acquisitions or
                  business combinations; and
         -        general economic conditions that are worse than anticipated



                                      23

<PAGE>   24

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         The Consolidated Financial Statements and Financial Statement
Schedules of MAI and subsidiaries listed in Item 14(a) have been included
herein beginning on page 31. The Supplementary Financial Information required
by Item 302 of Regulation S-K is included in Note 11 of the Notes to
Consolidated Financial Statements of MAI and its subsidiaries.


                                      24

<PAGE>   25

                                    PART IV


ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON  FORM 8-K.

(a)    Financial Statements. The following consolidated financial statements of
       Medical Assurance, Inc. and subsidiaries are included herein in
       accordance with Item 8 of Part II of this report.

              Report of Ernst & Young LLP.

              Consolidated Balance Sheets - December 31, 1999 and 1998

              Consolidated Statements of Changes in Capital - years ended
              December 31, 1999, 1998 and 1997

              Consolidated Statements of Income - years ended December 31,
              1999, 1998 and 1997

              Consolidated Statements of Cash Flows - years ended December 31,
              1999, 1998 and 1997

              Notes to Consolidated Financial Statements.

       Financial Statement Schedules. The following consolidated financial
       statement schedules of MAI and subsidiaries are included herein in
       accordance with Item 14(d):

              Schedule I - Summary of Investments - Other than Investments in
              Related Parties.

              Schedule II - Condensed Financial Information of MAI.

              Schedule III - Supplementary Insurance Information.

              Schedule IV - Reinsurance.

              Schedule VI - Supplementary Property and Casualty Insurance
              Information.

       All other schedules to the consolidated financial statements required by
       Article 7 of Regulation S-X are not required under the related
       instructions or are inapplicable and therefore have been omitted.

(b)    MAI did not file any Reports on Form 8-K during the quarter ended
       December 31, 1999.

(c)    The exhibits required to be filed by Item 14(c) are listed herein in the
       Exhibit Index.

(d)    Financial Data Schedule as required by EDGAR (for SEC Use Only)


                                      25
<PAGE>   26

                                   SIGNATURES

Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on this the 20th day of
December, 2000.

                                 MEDICAL ASSURANCE, INC.


                                 By:/s/   A. Derrill Crowe, M.D.
                                    ----------------------------
                                          A. Derrill Crowe, M.D., President

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
Name                                        Title                               Date
----                                        -----                               ----

<S>                                         <C>                                 <C>
/s/A. Derrill Crowe                         President (principal                December 20, 2000
---------------------------                 executive officer)
A. Derrill Crowe, M.D.                      and Director


/s/James J. Morello                         Treasurer (principal                December 20, 2000
---------------------------                 financial officer and
James J. Morello                            principal accounting
                                            officer)


/s/Paul R. Butrus                           Director                            December 20, 2000
---------------------------
Paul R. Butrus

/s/Richard V. Bradley, M.D.                 Director                            December 20, 2000
---------------------------
Richard V. Bradley, M.D.

/s/Norton E. Cowart, M.D.                   Director                            December 20, 2000
---------------------------
Norton E. Cowart, M.D.

/s/Paul D. Everest, M.D.                    Director                            December 20, 2000
---------------------------
Paul D. Everest, M.D.

/s/Robert E. Flowers, M.D.                  Director                            December 20, 2000
---------------------------
Robert E. Flowers, M.D.

                                            Director
---------------------------
Leon C. Hamrick, M.D.

                                            Director
---------------------------
John P. North, Jr.
</TABLE>


                                      26
<PAGE>   27

                    Medical Assurance, Inc. and Subsidiaries

                       Consolidated Financial Statements



                  Years ended December 31, 1999, 1998 and 1997




                                    CONTENTS

Report of Independent Auditors............................................28

Audited Consolidated Financial Statements

Consolidated Balance Sheets...............................................29
Consolidated Statements of Changes in Capital.............................31
Consolidated Statements of Income.........................................32
Consolidated Statements of Cash Flows.....................................33
Notes to Consolidated Financial Statements................................34


                                      27
<PAGE>   28

Report of Independent Auditors

The Board of Directors



We have audited the accompanying Consolidated Balance Sheets of Medical
Assurance, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income, changes in capital, and cash flows
for each of the three years in the period ended December 31, 1999. Our audits
also included the financial statement schedules listed in the Index at Item
14(a). These financial statements and schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Medical
Assurance, Inc. and subsidiaries at December 31, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.



Ernst & Young LLP
Birmingham, Alabama
February 11, 2000


                                      28
<PAGE>   29
                    MEDICAL ASSURANCE, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                       (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>

                                                             DECEMBER 31          December 31
                                                                1999                 1998
                                                             -----------          -----------
<S>                                                          <C>                  <C>
ASSETS
Investments:
  Fixed maturities available for sale, at fair value          $  640,064           $  657,404
  Equity securities available for sale, at fair value             48,013               44,124
  Real estate, net                                                11,349               11,619
  Short-term investments                                          62,492               78,432
                                                             -----------          -----------
Total investments                                                761,918              791,579

Cash and cash equivalents                                         19,409                9,022
Premiums receivable                                               52,749               59,949
Receivable from reinsurers                                       179,508              179,890
Prepaid reinsurance premiums                                      15,663               13,467
Deferred taxes                                                    34,071               26,897
Other assets                                                      54,350               51,435
                                                             -----------          -----------
                                                              $1,117,668           $1,132,239
                                                             ===========          ===========
</TABLE>



See accompanying notes.


                                       29
<PAGE>   30


                    MEDICAL ASSURANCE, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                       (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                                 DECEMBER 31            DECEMBER 31
                                                                                     1999                   1998
                                                                                 -----------            -----------
<S>                                                                              <C>                    <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
  Policy liabilities and accruals:
    Reserve for losses and loss adjustment expenses                              $   665,792            $   660,640
    Unearned premiums                                                                 70,925                 76,229
    Reinsurance premiums payable                                                      34,921                 42,596
                                                                                 -----------            -----------
  Total policy liabilities                                                           771,638                779,465
  Other liabilities                                                                   20,306                 28,594
                                                                                 -----------            -----------
Total liabilities                                                                    791,944                808,059

Commitments and contingencies                                                             --                     --

Stockholders' equity:
  Common stock, par value $1 per share; 100,000,000
    shares authorized; 25,102,901 and 23,899,983
    shares issued, respectively                                                       25,103                 23,900
  Additional paid-in capital                                                         231,941                206,562
  Accumulated other comprehensive income (loss), net of
    deferred taxes (benefit) of $(2,920) and $6,611, respectively                     (5,424)                12,277
  Retained earnings                                                                  111,957                 91,622
                                                                                 -----------            -----------
                                                                                     363,577                334,361
    Less treasury stock at cost, 1,701,577 and 587,033 shares,
      respectively                                                                   (37,853)               (10,181)
                                                                                 -----------            -----------
Total stockholders' equity                                                           325,724                324,180
                                                                                 -----------            -----------


                                                                                 $ 1,117,668            $ 1,132,239
                                                                                 ===========            ===========
</TABLE>


See accompanying notes.

                                      30
<PAGE>   31

                   MEDICAL ASSURANCE, INC., AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL
                                (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                                    Accumulated
                                                                    Additional         Other
                                                        Common       Paid-In       Comprehensive       Retained         Treasury
                                                        Stock        Capital       Income (Loss)       Earnings          Stock
                                                       -------      ----------     -------------      ---------        ---------

<S>                                                   <C>            <C>              <C>             <C>              <C>
Balance at December 31, 1996                          $ 10,339       $ 123,218        $  8,157        $ 103,027        $    (176)
100% stock dividend                                     10,340         (10,340)             --               --               --
5% stock dividend*                                       1,032          29,862              --          (30,961)              --
Common stock issued for compensation                        10             288              --               --               --
Common stock issued for acquisition                          1               9              --               --               --
Purchase of treasury stock                                  --              --              --               --           (1,708)
Sale of treasury stock                                      --              --              --               --               85
Comprehensive income:
 Change in fair value of securities
  available for sale, net of deferred taxes                 --              --           6,547               --               --
 Net income                                                 --              --              --           37,458               --
Total comprehensive income
                                                      --------       ---------        --------        ---------        ---------
Balance at December 31, 1997                            21,722         143,037          14,704          109,524           (1,799)
10% stock dividend*                                      2,170          63,079              --          (65,302)              --
Common stock issued for compensation                         8             223              --               --               --
Purchase of treasury stock                                  --              --              --               --           (8,701)
Sale of treasury stock                                      --             223              --               --              319
Comprehensive income:
 Change in fair value of securities
  available for sale, net of deferred taxes                 --              --          (2,427)              --               --
 Net income                                                 --              --              --           47,400               --
Total comprehensive income
                                                      --------       ---------        --------        ---------        ---------
Balance at December 31, 1998                            23,900         206,562          12,277           91,622          (10,181)
5% stock dividend*                                       1,194          25,142              --          (26,365)              --
Common stock issued for compensation                         9             195              --               --               --
Purchase of treasury stock                                  --              --              --               --          (27,938)
Sale of treasury stock                                      --              42              --               --              266
Comprehensive income:
 Change in fair value of securities
  available for sale, net of deferred taxes                 --              --         (17,701)              --               --
 Net income                                                 --              --              --           46,700               --
Total comprehensive income
                                                      --------       ---------        --------        ---------        ---------
Balance at December 31, 1999                          $ 25,103       $ 231,941        $ (5,424)       $ 111,957        $ (37,853)
                                                      ========       =========        ========        =========        =========


<CAPTION>
                                                        Total
                                                      ---------

<S>                                                   <C>
Balance at December 31, 1996                          $ 244,565
100% stock dividend                                          --
5% stock dividend*                                          (67)
Common stock issued for compensation                        298
Common stock issued for acquisition                          10
Purchase of treasury stock                               (1,708)
Sale of treasury stock                                       85
Comprehensive income:
 Change in fair value of securities
  available for sale, net of deferred taxes
 Net income
Total comprehensive income                               44,005
                                                      ---------
Balance at December 31, 1997                            287,188
10% stock dividend*                                         (53)
Common stock issued for compensation                        231
Purchase of treasury stock                               (8,701)
Sale of treasury stock                                      542
Comprehensive income:
 Change in fair value of securities
  available for sale, net of deferred taxes
 Net income
Total comprehensive income                               44,973
                                                      ---------
Balance at December 31, 1998                            324,180
5% stock dividend*                                          (29)
Common stock issued for compensation                        204
Purchase of treasury stock                              (27,938)
Sale of treasury stock                                      308
Comprehensive income:
 Change in fair value of securities
  available for sale, net of deferred taxes
 Net income
Total comprehensive income                               28,999
                                                      ---------
Balance at December 31, 1999                          $ 325,724
                                                      =========
</TABLE>


*Cash was paid in lieu of fractional shares

See accompanying notes.

                                      31
<PAGE>   32
                    MEDICAL ASSURANCE, INC. AND SUBSIDIARIES
                       CONSOLIDATED STATEMENTS OF INCOME
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)



<TABLE>
<CAPTION>
                                                                                   Year Ended December 31
                                                                       1999                 1998               1997
                                                                     ---------           ---------           ---------
<S>                                                                  <C>                 <C>                 <C>
Revenues:
  Direct and assumed
    premiums written                                                 $ 201,593           $ 192,479           $ 188,195
                                                                     =========           =========           =========

  Premiums earned                                                    $ 207,492           $ 195,515           $ 158,061
  Premiums ceded                                                       (43,068)            (54,199)            (39,094)
                                                                     ---------           ---------           ---------
  Net premiums earned                                                  164,424             141,316             118,967
  Net investment income                                                 39,273              39,402              38,474
  Other income                                                           4,332              12,885               3,301
                                                                     ---------           ---------           ---------
Total revenues                                                         208,029             193,603             160,742

Expenses:
  Losses and loss
    adjustment expenses                                                157,056             152,270             118,025
  Reinsurance recoveries                                               (52,399)            (58,377)            (40,351)
                                                                     ---------           ---------           ---------
  Net losses and loss
    adjustment expenses                                                104,657              93,893              77,674
  Underwriting, acquisition
    and insurance expenses                                              40,212              33,508              33,903
                                                                     ---------           ---------           ---------
Total expenses                                                         144,869             127,401             111,577
                                                                     ---------           ---------           ---------

Income before income taxes
  and cumulative effect of accounting change                            63,160              66,202              49,165

Provision for income taxes:
  Current expense                                                       14,179               9,967              12,373
  Deferred expense (benefit)                                             2,281               7,712                (666)
                                                                     ---------           ---------           ---------
                                                                        16,460              17,679              11,707
                                                                     ---------           ---------           ---------
Income before cumulative effect of accounting
  change                                                                46,700              48,523              37,458

Cumulative effect of accounting change, net of tax                          --              (1,123)                 --
                                                                     ---------           ---------           ---------

Net income                                                           $  46,700           $  47,400           $  37,458
                                                                     =========           =========           =========

Basic and diluted earnings per share:
  Income before cumulative effect of accounting
    change                                                           $    1.95           $    1.96           $    1.51
  Cumulative effect of accounting change, net of tax                        --               (0.04)                 --
                                                                     =========           =========           =========
  Net income                                                         $    1.95           $    1.92           $    1.51
                                                                     =========           =========           =========


Weighted average number
 of common shares
 outstanding--basic and diluted                                         23,992              24,729              24,844
                                                                     =========           =========           =========
</TABLE>

See accompanying notes.


                                         32
<PAGE>   33

                    MEDICAL ASSURANCE, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                                       Year Ended December 31
                                                                             1999               1998             1997
                                                                          ---------          ---------         ---------
<S>                                                                       <C>                <C>               <C>
OPERATING ACTIVITIES
Net income                                                                $  46,700          $  47,400         $  37,458
Adjustments to reconcile net income
  to net cash provided by
  operating activities:
    Depreciation                                                              1,649              1,631             1,328
    Amortization                                                              4,835              1,587             1,683
    Net realized gain on sale of
      investments                                                            (1,787)           (11,281)           (1,739)
    Deferred income taxes (benefit)                                           2,281              7,712              (666)
    Policy acquisition costs deferred,
         net of related amortization                                          5,212             (5,693)           (2,714)
    Other                                                                        61                407               363
    Changes in assets and liabilities:
       Premiums receivable                                                    7,200             32,102           (58,155)
       Receivable from reinsurers                                               382            (29,292)          (41,906)
       Prepaid reinsurance premiums                                          (2,196)             4,113            (3,428)
       Other assets                                                          (1,811)            (5,107)           (1,480)
       Reserve for losses and loss
        adjustment expenses                                                   5,152             45,911            65,987
       Unearned premiums                                                     (5,304)            (3,471)           24,780
       Reinsurance premiums payable                                          (7,675)           (11,156)           21,963
       Other liabilities                                                     (8,288)               790             2,512
                                                                          ---------          ---------         ---------
Net cash provided by operating activities                                    46,411             75,653            45,986

INVESTING ACTIVITIES
Purchases of:
  Fixed maturities available for sale                                      (171,202)          (343,566)         (211,806)
  Equity securities available for sale                                      (22,605)           (14,399)          (15,691)
Proceeds from sale or maturities of:
  Fixed maturities available for sale                                       156,205            308,793           166,587
  Equity securities available for sale                                       23,216             16,905             6,890
Net decrease (increase) in short-term investments                            15,940            (32,957)           10,928
Other                                                                        (9,611)            (4,901)           (2,904)
                                                                          ---------          ---------         ---------
Net cash used by investing activities                                        (8,057)           (70,125)          (45,996)

FINANCING ACTIVITIES
Dividends paid                                                                  (29)               (53)              (67)
Purchases of treasury stock                                                 (27,938)            (8,701)           (1,708)
                                                                          ---------          ---------         ---------

Net cash used by financing activities                                       (27,967)            (8,754)           (1,775)
                                                                          ---------          ---------         ---------

Increase (decrease) in cash and cash equivalents                             10,387             (3,226)           (1,785)

Cash and cash equivalents at beginning of period                              9,022             12,248            14,033
                                                                          ---------          ---------         ---------

Cash and cash equivalents at end of period                                $  19,409          $   9,022         $  12,248
                                                                          =========          =========         =========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for income taxes                                $  18,556          $   8,072         $  12,175
                                                                          =========          =========         =========
</TABLE>

See accompanying notes.


                                         33
<PAGE>   34
                    Medical Assurance Inc., and Subsidiaries

                   Notes to Consolidated Financial Statements

1. ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of
Medical Assurance, Inc. (a Delaware corporation) and its subsidiaries. All
significant intercompany accounts and transactions between consolidated
companies have been eliminated.


BASIS OF PRESENTATION

The preparation of financial statements in accordance with generally accepted
accounting principles (GAAP) requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

The significant accounting policies followed by the Company that materially
affect financial reporting are summarized in these notes to the consolidated
financial statements.


SEGMENT INFORMATION

The Company operates in the United States of America and in only one reportable
industry segment, which is providing professional and general liability
insurance for physicians and surgeons, dentists, hospitals, and others engaged
in the delivery of health care.


INVESTMENTS

The Company invests only in investment grade securities with the intent at the
time of purchase that such securities will be held until maturity. However,
recognizing the need for the ability to respond to changes in tax position and
in market conditions, management has designated the debt and equity securities
included in its investment portfolio as available-for-sale. Securities
classified as available-for-sale are carried at fair value, and unrealized
gains and losses on such available-for-sale securities are excluded from
earnings and reported, net of tax effect, in stockholders' equity as
"Accumulated other comprehensive income" until realized. Real estate is
reported at cost, less allowances for depreciation. Short-term investments,
primarily composed of investments in United States (U.S.) Treasury obligations,
are reported at cost, which approximates fair value.

Investment income includes amortization of premium and accretion of discount
related to debt securities acquired at other than par value. Debt securities
with maturities beyond one year when purchased are classified as fixed
maturities. Realized gains and losses on sales of investments, and declines in
value judged to be other-than-temporary, are recognized on the specific
identification basis.


                                       34
<PAGE>   35

                    Medical Assurance Inc., and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


Fair values for fixed maturity and equity securities are based on quoted market
prices, where available. For fixed maturity and equity securities not actively
traded, fair values are estimated using values obtained from independent
pricing services. The carrying amounts reported in the balance sheet for cash
and cash equivalents and short-term investments approximate their fair values.


REAL ESTATE

Property and leasehold improvements are classified as investment real estate.
All balances are stated on the basis of cost. Depreciation is computed over
their estimated useful lives using the straight-line method. Accumulated
depreciation was approximately $5.2 million and $4.6 million at December 31,
1999 and 1998, respectively. Rental income and expenses are included in net
investment income.


CASH AND CASH EQUIVALENTS

For purposes of the consolidated statements of cash flows, the Company
considers all demand deposits and overnight investments to be cash equivalents.


REINSURANCE

Certain premiums are assumed from and ceded to other insurance companies under
various reinsurance agreements. The Company cedes reinsurance to provide for
greater diversification of business, allow management to control exposure to
potential losses arising from large risks, and provide additional capacity for
growth. A significant portion of the reinsurance is effected under reinsurance
contracts known as treaties and, in some instances, by negotiation on
individual risks.

Reinsurance expense is estimated based on the terms of the respective
reinsurance agreements. The estimated expense is continually reviewed and any
adjustments which become necessary are included in current operations. Amounts
recoverable from reinsurers are estimated in a manner consistent with the loss
liability associated with the reinsured policies.


DEFERRED POLICY ACQUISITION COSTS

Costs that vary with and are directly related to the production of new and
renewal premiums (primarily premium taxes, commissions and underwriting
salaries) are deferred to the extent they are recoverable against unearned
premiums and are amortized as related premiums are earned.


                                       35
<PAGE>   36

                    Medical Assurance Inc., and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES

The reserve for losses and loss adjustment expenses represents management's
best estimates of the ultimate cost of all losses incurred but unpaid. The
estimated liability is continually reviewed, and any adjustments which become
necessary are included in current operations.


CAPITAL RESOURCES

As of December 31, 1999 the Company did not have any material commitments for
capital expenditures. The Company continues to have available through a lending
institution a line of credit in the amount of $40 million that could be used
for additional capital requirements.


RECOGNITION OF REVENUES

Insurance premiums are recognized as revenues pro rata over the terms of the
policies.


PENSION PLANS

The Company has a defined contribution pension plan for employees who are at
least 21 years of age and have one or more years of service. The Company funds
the plan by contributing an amount equal to 10% of each participant's eligible
wages.

Consolidated pension plan expense for the years ended December 31, 1999, 1998
and 1997 was approximately $1.0 million, $1.0 million and $0.8 million,
respectively.


EMPLOYEE STOCK PURCHASE PLAN

The Company has a stock purchase plan for full-time employees who have
completed minimum service requirements. The plan allows each eligible employee
to purchase shares of the Company's common stock in the public market and the
Company will loan to each participant $0.35 for each $0.65 deposited in the
plan. The stock purchased with the loaned proceeds vests with the employee at
the end of four years. These loans are amortized to expense over the four-year
vesting period.


STOCK OPTIONS

In 1997, the Company adopted Statement of Financial Accounting Standards (SFAS)
No. 123, "Accounting for Stock-Based Compensation" that calls for companies to
measure employee stock compensation expense based on the fair value method of
accounting. However, as allowed by the statement, the Company elected the
continued use of Accounting Principles Board Opinion No. 25 "Accounting for
Stock Issued to Employees" with pro forma disclosure of net income and earnings
per share determined as if the fair value method had been applied in measuring
compensation cost.


                                       36
<PAGE>   37

                    Medical Assurance Inc., and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


INCOME TAXES

The Company files a consolidated federal income tax return. Deferred income
taxes are provided for temporary differences between financial and income tax
reporting relating primarily to unrealized gains on securities, discounting of
losses and loss adjustment expenses for income tax reporting, and the
limitation of the unearned premiums deduction for income tax reporting.


EARNINGS PER SHARE

Earnings per share data has been stated giving retroactive effect for the 5%,
10%, and 5% stock dividends declared in December 1999, 1998 and 1997,
respectively, as well as the two-for-one stock split declared in August 1997.


RECLASSIFICATION

The accompanying 1998 and 1997 financial statements have been reclassified to
conform to the 1999 presentation. These changes had no material effect on
previously reported results of operations or shareholders' equity.


ACCOUNTING CHANGES

Pursuant to the American Institute of Certified Public Accountants' Statement
of Position (SOP) 97-3, Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments, the Company changed its accounting policy
effective January 1, 1998 regarding guaranty fund assessments. Previously, the
Company recognized guaranty assessments in the period that notification
regarding the assessment was received. Guaranty assessments are now recognized
when an assessment is imposed or it is probable that an assessment will be
imposed and there is an obligation to pay the assessment, the amount of which
can be reasonably estimated. The cumulative effect on prior years has been
included in net income for the first quarter of 1998 in accordance with SOP
97-3. The adoption of the SOP decreased underwriting, acquisition and insurance
expenses for 1998 by $1.7 million.

In 1998, the Company adopted the SFAS 130, Reporting Comprehensive Income,
which establishes standards for the reporting and display of comprehensive
income and its components in a full set of general purpose financial
statements. The statement requires that enterprises classify items of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of the balance sheet. Items of other
comprehensive income are displayed in the Consolidated Statements of Changes in
Capital, and amounts for 1997 have been reclassified for comparative purposes.

In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, which is
required to be adopted in years beginning after June 15, 2000. Management does
not anticipate that the adoption of the new Statement will have a significant
effect on earnings or the financial position of the Company.


                                       37
<PAGE>   38

                    Medical Assurance Inc., and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


2. INVESTMENTS

The amortized cost and estimated fair value of fixed maturities and equity
securities (in thousands) are as follows:



<TABLE>
<CAPTION>



                                                            December 31, 1999
                                    ------------------------------------------------------------------
                                                      Gross                Gross             Estimated
                                    Amortized       Unrealized           Unrealized             Fair
                                      Cost            Gains               (Losses)             Value
                                    ------------------------------------------------------------------

<S>                                 <C>             <C>                  <C>                 <C>
U. S. Treasury securities           $ 18,765          $    216           $    (286)          $ 18,695
State and municipal bonds            446,887             2,319             (10,102)           439,104
Corporate bonds                      116,350                11              (3,875)           112,486
Mortgage-backed securities            67,055                 8              (2,954)            64,109
Certificates of deposit                5,670                --                  --              5,670
                                    ------------------------------------------------------------------
                                     654,727             2,554             (17,217)           640,064
Equity securities                     41,694             7,896              (1,577)            48,013
                                    ------------------------------------------------------------------
                                    $696,421          $ 10,450           $ (18,794)          $688,077
                                    ==================================================================
</TABLE>



<TABLE>
<CAPTION>


                                                            December 31, 1998
                                    ------------------------------------------------------------------
                                                      Gross                Gross
                                    Amortized       Unrealized           Unrealized         Estimated
                                      Cost            Gains               (Losses)         Fair  Value
                                    ------------------------------------------------------------------

<S>                                 <C>             <C>                  <C>               <C>
U. S. Treasury securities           $  30,877         $   1,230          $    (171)          $  31,936
State and municipal bonds             405,529            13,452             (2,054)            416,927
Corporate bonds                       119,713             4,305               (958)            123,060
Mortgage-backed securities             79,628             1,368             (1,185)             79,811
Certificates of deposit                 5,670                --                 --               5,670
                                    ------------------------------------------------------------------
                                      641,417            20,355             (4,368)            657,404
Equity securities                      41,223             4,727             (1,826)             44,124
                                    ------------------------------------------------------------------
                                    $ 682,640         $  25,082          $  (6,194)          $ 701,528
                                    ==================================================================

</TABLE>


                                       38
<PAGE>   39

                    Medical Assurance Inc., and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


The amortized cost and estimated fair value of fixed maturities (in thousands)
at December 31, 1999, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties. The Company uses the call date as the contractual maturity for
prerefunded state and municipal bonds which are 100% backed by U.S. Treasury
obligations.


<TABLE>
<CAPTION>

                                                      Amortized          Estimated
                                                        Cost             Fair Value
                                                      -----------------------------
<S>                                                   <C>                <C>
Due in one year or less                               $  34,742           $  34,815
Due after one year through five years                   352,307             348,236
Due after five years through ten years                  114,307             110,445
Due after ten years                                      86,316              82,459
Mortgage-backed securities                               67,055              64,109
                                                      -----------------------------
                                                      $ 654,727           $ 640,064
                                                      =============================
</TABLE>


Excluding investments in bonds and notes of the U. S. Government, U. S.
Government agency, or prerefunded state and municipal bonds which are 100%
backed by U.S. Treasury obligations, no investment in any person or its
affiliates exceeded 10% of stockholders' equity at December 31, 1999.

Amounts of investment income by investment category (in thousands) are as
follows:


<TABLE>
<CAPTION>

                                             Year ended December 31
                                  1999               1998               1997
                                ----------------------------------------------
<S>                             <C>                <C>                <C>
Fixed maturities                $ 34,711           $ 34,926           $ 35,570
Equities                           1,589              1,877              1,701
Real estate                        1,581              1,416              1,388
Short-term investments             3,325              2,955              2,122
Other                                839              1,021                 64
                                ----------------------------------------------
                                  42,045             42,195             40,845
Investment expenses               (2,772)            (2,793)            (2,371)
                                ----------------------------------------------
Net investment income           $ 39,273           $ 39,402           $ 38,474
                                ----------------------------------------------

</TABLE>


                                       39
<PAGE>   40

                    Medical Assurance Inc., and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


Gross gains and losses from sales of available for sale securities (in
thousands) are included in other income as follows:


<TABLE>
<CAPTION>

                                     Year ended December 31
                        1999               1998              1997
                      --------------------------------------------

<S>                   <C>               <C>                <C>
Gross gains           $ 3,865           $ 11,827           $ 2,283
Gross losses           (2,128)              (546)             (544)
                      --------------------------------------------
Net gains             $ 1,737           $ 11,281           $ 1,739
                      ============================================
</TABLE>


These amounts, net of related tax expense of $0.6 million, $3.9 million, and
$0.6 million, respectively, were reclassified from "Accumulated other
comprehensive income" included in stockholders' equity to "Other income" in the
Consolidated Statements of Income.

Proceeds from sales of investments in available for sale securities were $125.7
million, $272.5 million and $128.5 million during 1999, 1998 and 1997,
respectively.


3. REINSURANCE

The Company has various quota share and excess of loss assumption and cession
reinsurance agreements. As to the Company's cessions, the Company generally
retains between $250,000 and $2 million. The Company reinsures the risks above
the maximum limits of its reinsurance treaties on a facultative basis whereby
the reinsurer agrees to insure a particular risk up to a designated limit.

The effect of reinsurance on premiums written and earned (in thousands) in 1999
was as follows:


<TABLE>
<CAPTION>

                       Premiums
                       Written              Earned
                      -----------------------------

<S>                   <C>                 <C>
Direct                $ 184,669           $ 187,945
Assumed                  16,924              19,547
Ceded                   (44,670)            (43,068)
                      -----------------------------
Net Premiums          $ 156,923           $ 164,424
                      -----------------------------

</TABLE>


Reinsurance contracts do not relieve the Company from its obligations to
policyholders. A contingent liability exists with respect to reinsurance ceded
to the extent that any reinsurer does not meet the obligations assumed under
the reinsurance agreements. The Company continually monitors its reinsurers to
minimize its exposure to significant losses from reinsurer insolvencies.

At December 31, 1999, all reinsurance recoverables are considered collectible;
the amounts as shown in the accompanying consolidated balance sheets
approximate the fair value of the amounts recoverable from reinsurers. As
required by the various state insurance laws, reinsurance recoverables totaling
approximately $7.4 million are collateralized by letters of credit or funds
withheld.


                                       40
<PAGE>   41

                    Medical Assurance Inc., and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


4. INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences
between the amount of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred tax liabilities and assets (in thousands) are as follows:


<TABLE>
<CAPTION>


                                                           December 31
                                                      1999             1998
                                                    ------------------------

<S>                                                 <C>              <C>
Deferred tax liabilities:
     Unrealized gains on investments, net           $    --          $ 6,611
     Deferred acquisition costs                       2,734            4,557
     Other                                            3,764            2,457
                                                    ------------------------
Total deferred tax liabilities                        6,498           13,625

Deferred tax assets:
     Unrealized losses on investments, net            2,920               --
     Unpaid loss discount                            31,968           34,727
     Unearned premium adjustment                      5,681            5,795
                                                    ------------------------
Total deferred tax assets                            40,569           40,522
                                                    ------------------------
Net deferred tax assets                             $34,071          $26,897
                                                    ========================

</TABLE>


In the opinion of management, it is more likely than not that the Company will
realize the benefit of the deferred tax assets, and therefore, no valuation
allowance has been established.

A reconciliation of "expected" income tax expense (35% of income before income
taxes) to actual income tax expense in the accompanying financial statements
(in thousands) follows:


<TABLE>
<CAPTION>

                                                                 Year ended December 31
                                                      1999               1998               1997
                                                    ----------------------------------------------

<S>                                                 <C>                <C>                <C>
Computed "expected" tax expense                     $ 22,106           $ 23,171           $ 17,208
Tax-exempt municipal and state bond income            (5,815)            (5,744)            (5,153)
Other                                                    169                252               (348)
                                                    ----------------------------------------------

Total                                               $ 16,460           $ 17,679           $ 11,707
                                                    ==============================================
</TABLE>


                                       41
<PAGE>   42

                    Medical Assurance Inc., and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


5.  DEFERRED POLICY ACQUISITION COSTS

Deferred policy acquisition costs include premium taxes, ceding commissions,
brokerage fees and agents' commissions, and salaries, benefits and other
expenses associated with underwriting. Unamortized deferred acquisition costs
are included in other assets on the consolidated balance sheets and amounted to
approximately $7.8 million and $13.0 million at December 31, 1999, and 1998,
respectively.

As is common practice within the industry, reinsurance ceding commissions are
deducted from acquisition costs and amounted to $8.2 million, $11.1 million,
and $4.9 million for the years ended December 31, 1999, 1998 and 1997,
respectively. Amortization of deferred acquisition costs amounted to
approximately $21.4 million, $13.7 million, and $15.4 million for the years
ended December 31, 1999, 1998 and 1997, respectively. Underwriting and
insurance costs that are not directly related to the production of new and
renewal premiums are charged to expense as incurred. These costs were $18.8
million, $19.8 million and $18.5 million for the years ended December 31, 1999,
1998 and 1997, respectively.


6.  RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES

Activity in the reserve for losses and loss adjustment expenses (reserves) is
summarized as follows (in thousands):


<TABLE>
<CAPTION>

                                                                             1999            1998            1997
                                                                          ----------------------------------------
<S>                                                                       <C>             <C>            <C>
Balance at January 1                                                      $ 660,640       $ 614,729      $ 548,742
Less reinsurance recoverables                                               179,890         150,598        108,692
                                                                          ----------------------------------------
Net balance at January 1                                                    480,750         464,131        440,050

Incurred related to:
  Current year                                                              158,303         141,201        124,353
  Prior years                                                               (53,646)        (47,308)       (46,679)
                                                                          ----------------------------------------
Total incurred                                                              104,657          93,893         77,674

Paid related to:
  Current year                                                              (10,297)         (9,891)        (5,203)
  Prior years                                                               (88,826)        (67,383)       (48,390)
                                                                          ----------------------------------------
Total paid                                                                  (99,123)        (77,274)       (53,593)
                                                                          ----------------------------------------
Net balance at December 31                                                  486,284         480,750        464,131
Plus reinsurance recoverables                                               179,508         179,890        150,598
                                                                          ----------------------------------------
Balance at December 31                                                    $ 665,792       $ 660,640      $ 614,729
                                                                          ========================================
</TABLE>


                                       42
<PAGE>   43


                    Medical Assurance Inc., and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


The reserves were evaluated by independent consulting actuaries and reflect
consideration of prior loss experience and changes in the frequency and
severity of claims. Actual incurred losses may vary from estimated amounts due
to the inherent difficulty in estimating development of long-tailed lines of
business. In recent years, the Company has experienced favorable development of
prior year losses relative to the original estimates; there are no assurances
that such favorable development will continue due to several factors.

The Company's philosophy of rigorously investigating, managing and defending
claims has generally produced results that are better than industry averages in
terms of loss payments and the proportion of claims closed without indemnity
payment. Additionally, reserves established in the late 1980's and early 1990's
were strongly influenced by the dramatically increased frequency and severity
experienced by the Company, and the industry as a whole, during the mid-1980's.
Some of these trends moderated, and in some cases, reversed, by the late 1980's
or early 1990's, which have resulted in redundancies of prior accident year
reserves. Furthermore, as the Company has commenced operations in new
jurisdictions, beginning with its first out-of-state expansion in 1993, there
was substantial uncertainty as to the loss experience that would be
encountered. This uncertainty caused increased reliance on industry statistics;
as a result, reserve redundancies developed when actual results proved better
than expected.

The Company's management believes the unearned premiums under contracts,
together with the related anticipated investment income to be earned, is
adequate to discharge the related contract liabilities.

7. COMMITMENTS AND CONTINGENCIES

The Company is involved in various legal actions arising primarily from claims
related to insurance policies. At other times legal actions may arise from
claims asserted by policyholders. The legal actions arising from these claims
have been considered by the Company in establishing its reserves. While the
outcome of all legal actions is not presently determinable, the Company's
management is of the opinion, based on consultation with legal counsel, that
the settlement of these actions will not have a material adverse effect on the
Company's financial position or results of operations.


8. STOCKHOLDERS' EQUITY

At December 31, 1999, Medical Assurance, Inc. had 100 million shares of
authorized common stock and 50 million shares of authorized preferred stock.
The Board of Directors has the authority to determine the provisions for the
issuance of shares of the preferred stock, including the number of shares to be
issued and the designations, powers, preferences and rights, and the
qualifications, limitations or restrictions of such shares. At December 31,
1999, the Board of Directors had not authorized the issuance of any preferred
stock nor determined any provisions for the preferred stock.

The Board of Directors declared stock dividends of 5%, 10%, and 5% in December
1999, 1998 and 1997, respectively. In addition, the Board of Directors declared
a two-for-one stock split in the form of a 100% stock dividend on August 20,
1997. Cash was paid to shareholders for fractional shares. Earnings per share
data for 1999, 1998 and 1997 have been stated as if all of the above dividends
had been declared on January 1, 1997.

The Board of Directors of Medical Assurance, Inc. has reserved 1.9 million
shares of common stock for issuance in accordance with the Company's Incentive
Compensation Stock Plan. Under the terms of the plan, shares of Medical
Assurance, Inc. stock are available to be awarded to key employees of Medical
Assurance, Inc. and its subsidiaries. As of December 31 1999, 1998 and 1997,
there were approximately 34,000, 25,000, and 16,000 shares, respectively,
(after giving effect to subsequent stock dividends and stock split) issued
under the plan.

"Accumulated other comprehensive income (loss)" shown in the Consolidated
Statements of Changes in Capital is solely comprised of net unrealized gains
(losses) on securities available for sale.


                                       43
<PAGE>   44

                    Medical Assurance Inc., and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


9.  STOCK OPTIONS

Under the Company's Incentive Compensation Stock Plan, 74,000, 84,000 and
242,000 options were granted in 1999, 1998 and 1997, respectively, at $21.01
per share, $26.03 per share and $24.68 per share, respectively. All options
were granted at a price equal to the market price of the stock on the date of
the grant. Stock options expire in ten years and were fully vested as of the
grant date but are not exercisable for six months. The number of options
granted and the exercise price have been adjusted for the stock dividends
declared in 1999, 1998 and 1997. There were no options granted prior to 1997
and no options have been exercised to date.

Had the fair value method of accounting discussed in SFAS 123 been applied, net
income would have been reduced by $0.5 million or $0.02 basic earnings per
share in 1999, $0.6 million or $0.03 basic earnings per share in 1998, and $1.7
million or $0.07 basic earnings per share in 1997. The average fair value of
options granted during 1999, 1998 and 1997 was $10.14, $10.88 and $11.08,
respectively. The fair value was estimated using the Black-Scholes option
pricing model based on the weighted average assumptions of: risk-free interest
rate of 6.4% (1998-4.75% and 1997-5.92%); volatility of 0.275 (1998-0.250 and
1997-0.244), and for all years, expected life of 8 years and a dividend yield
of 0%.


10. STATUTORY ACCOUNTING AND DIVIDEND RESTRICTIONS

The Company's insurance subsidiaries are required to file statutory financial
statements with state insurance regulatory authorities. GAAP differs from
statutory accounting practices prescribed or permitted by regulatory
authorities. Differences between financial statement net income and statutory
net income are principally due to: (a) policy acquisition costs which are
deferred under GAAP but expensed for statutory purposes; (b) subsidiaries which
are consolidated for GAAP but are accounted for using the equity method for
statutory purposes with the annual change in the equity charged or credited
directly to capital rather than entering into the determination of net income;
and (c) deferred income taxes which are recorded under GAAP but not for
statutory purposes.

At December 31, 1999 and 1998, statutory capital for each company was
sufficient to satisfy regulatory requirements. Amounts of statutory capital and
surplus for the Company's insurance subsidiaries were $265.7 million and $245.0
million at December 31, 1999 and 1998, respectively.

The combined amounts of statutory net income for the years ended December 31,
1999, 1998 and 1997 for the Company's insurance subsidiaries were $53.4
million, $36.2 million, and $28.2 million, respectively.

Consolidated retained earnings are comprised primarily of subsidiaries'
retained earnings. Each insurance company is restricted under the applicable
State Insurance Code as to the amount of dividends it may pay without
regulatory consent. In 2000, the insurance subsidiaries can pay dividends in
the aggregate up to approximately $54.8 million without regulatory consent.


                                       44
<PAGE>   45

                    Medical Assurance Inc., and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following is a summary of unaudited quarterly results of operations (in
thousands, except per share amounts) for 1999 and 1998:


<TABLE>
<CAPTION>

                                                                         1999
                                                 1st             2nd             3rd               4th
                                              ----------------------------------------------------------
<S>                                           <C>              <C>              <C>              <C>
Net premiums earned                           $41,342          $37,953          $37,745          $47,384
Net investment income                           9,611            9,765           10,087            9,810
Other income                                    1,395              838              683            1,416
Net income                                     11,452           11,658           11,145           12,445
Basic and diluted earnings per share             0.47             0.48             0.47             0.53
</TABLE>


<TABLE>
<CAPTION>

                                                                         1998
                                                 1st             2nd             3rd               4th
                                              ----------------------------------------------------------
<S>                                           <C>              <C>              <C>              <C>

Net premiums earned                           $31,764          $34,579          $37,676          $37,297
Net investment income                           9,688            9,732           10,157            9,825
Other income                                      887            1,900            4,899            5,199
Income before cumulative effect of
  accounting change                             9,859           11,397           13,536           13,731
Net income                                      8,736           11,397           13,536           13,731
Basic and diluted earnings per share:
     Income before cumulative effect of
       accounting change                         0.40             0.46             0.55             0.56
     Net Income                                  0.35             0.46             0.55             0.56

</TABLE>


Quarterly earnings per share data for 1999 and 1998 have been restated giving
retroactive effect as if the 1999 and 1998 stock dividends had been declared on
January 1, 1998. The sum of the above amounts may vary from the annual amounts
because of rounding.


                                       45
<PAGE>   46

                    MEDICAL ASSURANCE, INC. AND SUBSIDIARIES
               SCHEDULE I -- SUMMARY OF INVESTMENTS -- OTHER THAN
                         INVESTMENTS IN RELATED PARTIES
                               DECEMBER 31, 1999
                             (DOLLARS IN THOUSANDS)


<TABLE>
<CAPTION>


                                                                                        COST
                                                                                         OR                         AMOUNT AT WHICH
                                                                                     AMORTIZED           FAIR        SHOWN IN THE
Type of Investment                                                                      COST            VALUE        BALANCE SHEET
                                                                                     ---------         --------     ---------------
<S>                                                                                  <C>               <C>          <C>
Fixed Maturities:
  Bonds:
    U.S. Treasury securities ..................................................       $ 18,765         $ 18,695         $ 18,695
    State and municipal bonds .................................................        446,887          439,104          439,104
    Corporate bonds ...........................................................        116,350          112,486          112,486
    Mortgage-backed securities ................................................         67,055           64,109           64,109
    Certificates of deposit ...................................................          5,670            5,670            5,670
                                                                                      --------         --------         --------
        Total fixed maturities ................................................        654,727          640,064          640,064
                                                                                      --------         ========         --------
Equity securities .............................................................         41,694         $ 48,013           48,013
                                                                                                       ========
Real estate, net...............................................................         11,349                            11,349
Short-term investments ........................................................         62,492                            62,492
                                                                                      --------                          --------
        Total investments .....................................................       $770,262                          $761,918
                                                                                      ========                          ========

</TABLE>


                                       46
<PAGE>   47


                    MEDICAL ASSURANCE, INC. AND SUBSIDIARIES
          SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                           DECEMBER 31, 1999 AND 1998
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                           CONDENSED BALANCE SHEETS

                                                                  DECEMBER 31
                                                            ----------------------
                                                               1999          1998
                                                            --------      --------
ASSETS
<S>                                                         <C>           <C>
Short-term investments                                      $ 24,588      $ 14,816
Equity securities, available for sale, at fair value          10,593            --
Investment in subsidiaries - at equity                       287,369       308,196
Receivable from subsidiaries                                   2,410         3,732
Cash                                                           1,934         1,684
Other assets                                                     733            60
                                                            --------      --------
                                                            $327,627      $328,488
                                                            ========      ========
LIABILITIES AND STOCKHOLDERS' EQUITY

Other liabilities                                           $  1,903      $  4,308

Stockholders' equity
     Common stock                                             25,103        23,900
     Other stockholders' equity, including unrealized
         gains or losses on securities of subsidiaries       300,621       300,280
                                                            --------      --------
Total stockholders' equity                                  $325,724      $324,180
                                                            --------      --------
                                                            $327,627      $328,488
                                                            ========      ========

<CAPTION>
                           CONDENSED STATEMENTS OF INCOME
                                                            YEAR ENDED DECEMBER 31
                                                           ------------------------
                                                               1999         1998
                                                            --------      --------
<S>                                                         <C>           <C>

Revenues:
Investment income                                           $    595      $    327
Other income                                                     636         1,018
                                                            --------      --------
                                                               1,231         1,345

Expenses:
Other expenses                                                 1,116         1,739
                                                            --------      --------
Income (loss) before income tax benefit and equity
    in undistributed net income of subsidiaries                  115          (394)
Federal and state income tax benefit                            (491)          (54)
                                                            --------      --------
Income (loss) before equity in undistributed
    net income of subsidiaries                                   606          (340)
Equity in undistributed net income of subsidiaries            46,094        47,740
                                                            --------      --------
Net income                                                  $ 46,700      $ 47,400
                                                            ========      ========
</TABLE>


                                      47
<PAGE>   48


                    MEDICAL ASSURANCE, INC. AND SUBSIDIARIES
          SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                           DECEMBER 31, 1999 AND 1998
                                 (IN THOUSANDS)


                       CONDENSED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31
                                                            -----------------------
                                                               1999         1998
                                                            --------      --------
<S>                                                         <C>           <C>
Cash used by operating activities                           $ (2,364)     $ (1,267)

Investing activities
     Cash received from subsidiaries                          20,000        15,000
     Net increase (decrease) in short-term investments        (9,772)      (12,223)
     Proceeds from sale of equity securities                   4,370         1,685
     Purchase of equity securities                           (12,162)
     Other                                                       207          (295)
                                                            --------      --------
                                                               2,643         4,167
Financing activities
     Dividends paid                                              (29)          (53)
     Purchase of Treasury Stock                                   --        (1,681)
                                                            --------      --------
                                                                 (29)       (1,734)

Increase in cash                                            $    250      $  1,166
                                                            ========      ========
</TABLE>


NOTES TO CONDENSED FINANCIAL STATEMENTS

1.       Basis of Presentation

In the parent-only financial statements, the Company's investment in
subsidiaries is stated at cost plus equity in undistributed earnings of
subsidiaries since the date of acquisition. The Company's share of net income
of its unconsolidated subsidiaries is included in consolidated income using the
equity method. The parent-only financial statements should be read in
conjunction with the Company's consolidated financial statements.

2.       Related Party Transactions

The Company received dividends of $20 million in 1999 and $15 million in 1998
from The Medical Assurance Company, Inc.

During 1999, one of the Company's subsidiaries, The Medical Assurance Company,
Inc., purchased 1.1 million shares of the Company's stock in the open market at
a cost of approximately $27.9 million. In the parent-only financial statements,
stockholders' equity has been reduced by the cost of all treasury shares,
whether owned by the Company or by its subsidiaries. The Company's investment
in subsidiaries has been reduced by the cost of the treasury shares owned by
the subsidiaries.


                                      48
<PAGE>   49


                    MEDICAL ASSURANCE, INC. AND SUBSIDIARIES
               SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
                 YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                    1999           1998          1997
                                                                    ----           ----          ----

<S>                                                              <C>            <C>           <C>
Deferred policy acquisition costs ..........................     $  7,808       $ 13,020      $  7,304
Reserve for losses and loss adjustment expenses ............      665,792        660,640       614,729
Unearned premiums ..........................................       70,925         76,229        79,700
Net premiums earned ........................................      164,424        141,316       118,967
Premiums assumed from other companies ......................       19,546         12,811        12,628
Net investment income ......................................       39,273         39,402        38,474
Net losses and loss adjustment expenses ....................      104,657         93,893        77,674
Underwriting, acquisition and insurance expenses:
     Amortization of deferred policy acquisition costs .....       21,450         13,735        15,412
     Other underwriting, acquisition
          and insurance expenses ...........................       18,762         19,773        18,491
Net premiums written .......................................      156,922        141,787       140,200
</TABLE>


                                       49
<PAGE>   50


                    MEDICAL ASSURANCE INC. AND SUBSIDIARIES
                           SCHEDULE IV - REINSURANCE
                 YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                   1999           1998          1997
                                                                 --------       --------      --------
<S>                                                              <C>            <C>           <C>
PROPERTY & CASUALTY
Earned premiums before reinsurance                               $172,597       $161,954      $138,352
Reinsurance expense                                               (28,850)       (32,636)      (32,432)
Assumed from other companies                                       14,203          6,240        11,401
                                                                 --------       --------      --------
          Net premiums earned                                    $157,950       $135,558      $117,321
                                                                 ========       ========      ========

Percentage of amount assumed to net                                  8.99%          4.60%         9.72%
                                                                 ========       ========      ========

ACCIDENT AND HEALTH
Gross premiums earned                                            $ 15,348       $ 24,040      $  8,308
Ceded to other companies                                          (14,218)       (21,563)       (6,662)
Assumed from other companies                                        5,344          3,281            --
                                                                 --------       --------      --------

          Net premiums earned                                    $  6,474       $  5,758      $  1,646
                                                                 ========       ========      ========

Percentage of amount assumed to net                                 82.55%         56.98%         0.00%
                                                                 ========       ========      ========

OTHER
Gross premiums earned                                                  --             --            --
Ceded to other companies                                               --             --            --
Assumed from other companies                                           --             --            --
                                                                 --------       --------      --------

          Net premiums earned                                    $     --       $     --      $     --
                                                                 ========       ========      ========

Percentage of amount assumed to net                                  0.00%          0.00%         0.00%
                                                                 ========       ========      ========

Total net premiums earned                                        $164,424       $141,316      $118,967
                                                                 --------       --------      --------
</TABLE>



                                      50
<PAGE>   51


                    MEDICAL ASSURANCE, INC. AND SUBSIDIARIES
    SCHEDULE VI - SUPPLEMENTARY PROPERTY AND CASUALTY INSURANCE INFORMATION
                 Years Ended December 31, 1999, 1998, and 1997
                             (dollars in thousands)

<TABLE>
<CAPTION>
                                                            1999            1998            1997
                                                            ----            ----            ----
<S>                                                      <C>             <C>             <C>
Deferred policy acquisition costs .................      $   7,808       $  13,020       $   7,304
Reserve for losses and loss adjustment expenses ...        665,792         660,640         614,729
Unearned premiums .................................         70,925          76,229          79,700
Net premiums earned ...............................        164,424         141,316         118,967
Net investment income .............................         39,273          39,402          38,474
Losses and loss adjustment expenses incurred
     related to current year, net of reinsurance ..        158,303         141,201         124,353
Losses and loss adjustment expenses incurred
     related to prior year, net of reinsurance ....        (53,646)        (47,308)        (46,679)
Amortization of deferred policy acquisition costs .         21,450          13,735          15,412
Paid losses and loss adjustment expenses related to
     current year losses, net of reinsurance ......        (10,297)         (9,891)         (5,203)
Paid losses and loss adjustment expenses related to
     prior year losses, net of reinsurance ........        (88,826)        (67,383)        (48,390)
</TABLE>



                                      51
<PAGE>   52


                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit
Number   Description                                                                    Page
------   -----------                                                                    ----
<S>     <C>                                                                             <C>
3.1      Certificate of Incorporation of Medical Assurance, Inc. (3)

3.2      Certificate Amendment to Certificate of Incorporation of Medical
         Assurance, Inc. (9)

3.3      Bylaws of Medical Assurance, Inc. (3)

4        Specimen of Common Stock Certificate of Medical Assurance, Inc. (9)

10.1     Employment Agreement between A. Derrill Crowe, M.D. and Mutual
         Assurance, Inc., including amendments (1)

10.2     Employment Agreement between Bradley DeMonbrun, Ltd. and MOMED Holding
         Co., including amendments (7)

10.3     Medical Assurance, Inc. Incentive Compensation Stock Plan (formerly
         known as the Mutual Assurance, Inc. 1995 Stock Award Plan) (3)

10.4     Amendment and Assumption Agreement by and between Mutual Assurance,
         Inc. and MAIC Holdings, Inc. dated April 8, 1996 (6)

10.5     MAIC Holdings, Inc. Director Deferred Compensation Plan (9)

10.6     MAIC Holdings, Inc. Executive Incentive Compensation Plan (9)

10.7     Agreement between the Medical Association of the State of Alabama and
         Mutual Assurance Society of Alabama dated July 1, 1977 (1)

10.8     Endorsement and Marketing Agreement by and between Mutual Assurance,
         Inc., West Virginia Health Services, Inc., a West Virginia corporation
         wholly-owned by West Virginia Hospital Association, a West Virginia
         non- profit corporation, and West Virginia Hospital Insurance Company,
         a West Virginia insurance company, dated January 1, 1994 (2)
</TABLE>



                                      52
<PAGE>   53


<TABLE>
<CAPTION>
Exhibit
Number   Description                                                                    Page
------   -----------                                                                    ----
<S>      <C>                                                                            <C>

10.9     Endorsement and Marketing Agreement by and between Medical Assurance
         of West Virginia, Inc., a West Virginia insurance corporation and
         subsidiary of Mutual Assurance, Inc., and the West Virginia State
         Medical Association, a West Virginia non-profit corporation dated
         December 1, 1994 (2)

10.10    Endorsement, Marketing and Sponsorship Agreement effective as of
         January 1, 1995 between Physicians Insurance Company of Indiana and
         The Indiana State Medical Association (6)

10.11    Stock Purchase Agreement by and between Mutual Assurance, Inc. and
         Indiana State Medical Association, an Indiana non-profit corporation
         and Physicians Insurance Company of Indiana, an Indiana insurance
         company effective as of January 1, 1995 (3)

10.12    Escrow Agreement among Physicians Insurance Company of Ohio, Mutual
         Assurance, Inc., and SouthTrust Bank of Alabama, National Association
         effective as of July 16, 1995 (4)

10.13    Credit Agreement dated as of December 15, 1995, between Medical
         Assurance, Inc. and SouthTrust Bank of Alabama, National Association
         (5)

10.14    Agreement and Plan of Merger between MOMED Holding Co., MAIC Holdings,
         Inc. and MOMED Acquisition, Inc. dated June 11, 1996 (7)

10.15    First Amended and Restated MOMED Holding Co. Self-Insured Directors
         and Officers Liability Trust Agreement between MOMED Holding Co., a
         Missouri corporation; its subsidiaries; and Boatmen's Trust Company, a
         trust company organized under the laws of Missouri, dated May 7, 1993
         (7)

10.16    Nomination Agreement between MOMED Holding Co. and MAIC Holdings, Inc.
         dated December 10, 1996 (8)

21       Subsidiaries of Medical Assurance, Inc. (previously filed)

23       Consent of Ernst & Young LLP                                                    55

27.1     Financial Date Schedule (for SEC use only) (previously filed)
</TABLE>


                                      53
<PAGE>   54


(1)      Filed as an exhibit to Mutual Assurance's Registration Statement on
         Form S-1 (Commission File No. 33-35223) and incorporated herein by the
         reference pursuant to Rule 12b-32 of the Securities and Exchange
         Commission.

(2)      Filed as an exhibit to Mutual Assurance's Form 10K for the year ended
         December 31, 1994 (Commission File No. 0-19439) and incorporated
         herein by reference pursuant to Rule 12b-32 of the Securities and
         Exchange Commission.

(3)      Filed as an exhibit to MAIC Holdings' Registration Statement on Form
         S-4 (Commission File No. 33-91508) and incorporated herein by
         reference pursuant to Rule 12b-32 of the Securities and Exchange
         Commission.

(4)      Filed as an exhibit to Mutual Assurance's Form 8-K for event occurring
         August 28, 1995 (Commission File No. 0-19439) and incorporated herein
         by this reference pursuant to Rule 12b-32 of the Securities and
         Exchange Commission.

(5)      Filed as an exhibit to MAIC Holdings' Form 10-K for the year ended
         December 31, 1995 (Commission File No. 001-12129) and incorporated
         herein by reference pursuant to Rule 12b-32 of the Securities and
         Exchange Commission.

(6)      Filed as an exhibit to MAIC Holdings' Proxy Statement for the 1996
         Annual Meeting (Commission File No. 0-19439) and incorporated herein
         by reference pursuant to Rule 12b-32 of the Securities and Exchange
         Commission.

(7)      Filed as an exhibit to MAIC Holdings' Registration Statement on Form
         S-4 (Commission File No. 333-13465) and incorporated herein by
         reference pursuant to Rule 12b-32 of the Securities and Exchange
         Commission.

(8)      Filed as an exhibit to MAIC Holdings' Form 10-K for the year ended
         December 31, 1996 (Commission File No. 001-12129) and incorporated
         herein by reference pursuant to Rule 12b-32 of the Securities and
         Exchange Commission.

(9)      Filed as an exhibit to the Medical Assurance, Inc. Form 10-K for the
         year ended December 31, 1997 (Commission File No. 001-12129) and
         incorporated herein by reference pursuant to Rule 12b-32 of the
         Securities and Exchange Commission.


                                      54