The combined ratio for the workers' compensation insurance business was 98.7% compared to 101.9% for the comparable prior year period. The reduction was due to a 198 basis point decrease in the loss ratio and a 122 basis point decrease in the expense ratio. The decrease in the loss ratio was largely due to the new reinsurance agreement for losses occurring on and after July 1, 1998 and as a result of the Company's ability to overlay and implement managed care techniques to the workers' compensation claims. The combined ratio excluding the effect of the new reinsurance agreement was 101.6% for the year ended December 31, 1998. In addition, favorable loss development on prior accident years totalled $9.6 million for the year ended December 31, 1998, compared to net favorable loss development of $9.0 million for the comparable prior year period. The favorable loss development is largely due to actual paid losses being below projected losses. There can be no assurance that favorable development, or the magnitude thereof, will continue in the future. The reduction in the expense ratio was largely due to a reduction in agents' commissions, as a result of a ceding commission related to the new reinsurance agreement and from lower salaries and related benefits expenses. The losses and loss adjustment expense ratio for the year ended December 31, 1998 reflect the Company's current projection of the ultimate costs of claims occurring in the current as well as prior accident years. Such projections are subject to change and any change would be reflected in the income statement. Workers' compensation claims are paid over several years. Until payment is made, the Company invests the monies, earning a yield on the invested balance.
Integration, Settlement and Other Costs. In the fourth quarter of 1998, the Company expensed approximately $13.9 million, $10.3 million after tax, of costs primarily associated with the settlement of the protest pertaining to its military services contract as well as costs associated with the integration of the Kaiser-Texas business acquired October 31, 1998 (see Note 14 to the Consolidated Financial Statements).
Professional Fees. Revenue for professional medical services is recorded on the accrual basis in the period in which the services are provided. Such revenue is recorded at established rates net of provisions for estimated contractual and charitable allowances.
Reclassifications. Certain amounts in the Consolidated Financial Statements for the years ended December 31, 1997 and 1996 have been reclassified to conform with the current year presentation.
CII also has reinsurance treaties in effect. Effective January 1, 1998, workers' compensation claims between $500,000 and $100,000,000 per occurrence are reinsured. In 1997 and 1996, workers' compensation claims between $350,000 and $60,000,000 per occurrence were reinsured. In addition, effective July 1, 1998, workers' compensation claims below $500,000 per occurrence are reinsured under quota share and excess reinsurance agreements (referred to as "low level reinsurance") with an A+ rated carrier. Under this agreement, CII reinsures 30% of the first $10,000 of each loss, 75% of the next $40,000
Adjustable Rate Mortgage Note. In 1998, the Company repaid a mortgage which had an adjustable rate with an interest margin of 3% over the Federal Home Loan Bank Board 11th District Cost of Funds Index, a maximum interest rate of five percentage points above the initial rate of 11.85% and a minimum interest rate of 8%.