Mutual Assurance is the fee owner of one office building located in the metropolitan area of Birmingham, Alabama. Mutual Assurance purchased its current home office building in March 1989 and during 1993 sold the office building which it formerly occupied. MAIC Holdings and its subsidiaries are occupying approximately 48,475 square feet of office space in its current home office building. The remaining 108,178 square feet of office space in this building are leased to unaffiliated persons or are available to be leased. The office building owned by Mutual Assurance is currently unencumbered.
MAIC Holdings' other insurance subsidiaries maintain additional office space under leases with unaffiliated persons which are not considered material.
For purposes of this management discussion and analysis, the term "Company" refers to MAIC Holdings, Inc. and its consolidated subsidiaries. The consolidated subsidiaries consist principally of operating insurance companies.
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 used to pay these items has been provided by operating activities. Cash provided from these activities was sufficient during 1996 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 (i) maintains what its management considers to be strong and adequate reinsurance, (ii) conducts regular actuarial reviews to ensure, among other things, that current reserves do not become deficient, and (iii) maintains adequate asset liquidity.
The Company's Board of Directors has authorized the purchase of up to $10,000,000 of its common stock in the open market. At December 31, 1996, approximately $3.4 million remains available for purposes of purchasing its own common stock in the open market.
The business combination of MOMED Holding Company (MOMED) was effective December 20, 1996. At December 31, 1996 the consolidated balance sheet of the Company includes the consolidated balance sheet of MOMED and its subsidiaries; however, MOMED operations for the period December 20, 1996 through December 31, 1996 were considered immaterial for inclusion in the Company's consolidated statement of income. Selected consolidated financial data for MOMED and its subsidiaries, including its primary subsidiary, Missouri Medical Insurance Company, for the years ending December 31, 1996 and 1995 is as follows (dollars in thousands):
The Company had consolidated net investment income of $32,114,000 for the year ended December 31, 1996, as compared to $29,582,000 for the year ended December 31, 1995, reflecting an increase of $2,532,000. The increased income is primarily due to an increase in the amount of invested assets. Invested assets, excluding those related to MOMED, increased to $567,142,000 at December 31, 1996 from $509,863,000 at December 31, 1995. The yield on invested assets decreased to 6.1% for 1996 from 6.2% for 1995. The average composition of invested assets changed little from 1995 to 1996, with non-taxable investments comprising an average of 56% for the year 1996 and 58% for the year 1995.
For purposes of the above discussion, invested assets are comprised of fixed maturities and equity securities at amortized cost, short-term investments and investment in unconsolidated subsidiary; 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 (annualized for interim periods) by the monthly average of invested assets.
Other income decreased by $2,010,000 for the year ended December 31, 1996 compared to the year ended December 31, 1995. The decrease is principally attributable to fewer capital gains realized upon the sale of securities during 1996 as compared to 1995.
The Company's losses and loss adjustment expenses for the years ended December 31, 1996 and 1995 reflect loss ratios of 78%. The above loss ratios reflect improvement of loss development in prior years coverage. However, as the Company continues its expansion efforts, the improvement of loss development for prior years could have a smaller impact on the loss ratios of future years.
The net increase in premiums written is due principally to (i) an increase of $14,586,000 in Mutual Assurance direct premiums written in states other than Alabama, (ii) the addition of physician premiums for MA-West Virginia in the amount of $9,320,000, (iii) PIC-Indiana premiums written of $9,054,000 and (iv) the addition of premiums assumed by Mutual Assurance from PIC-Ohio in the amount of $6,442,000. Effective January 1, 1995, MA-West Virginia received the exclusive endorsement of the West Virginia State Medical Association as a provider of physicians' professional liability insurance. Partially offsetting these increases is (i) a decrease of $3,442,000 on certain retrospective policies whose ultimate premiums are based on losses incurred on those policies and (ii) a $2,973,000 decrease in written premiums due to the elimination of the PROActive Insurance book of business, which is discussed in the following paragraph. Other variations in the normal course of business for the Company comprise the remainder of the variance.
Effective January 1, 1995, the group hospital and major medical health insurance book of business of PROActive Insurance was discontinued and assumed by an unrelated carrier. PROActive Insurance had no individual or hospital and major medical premiums in 1995. Management has not determined the future operations of PROActive Insurance.
The Company's effective tax rates for the years ended December 31, 1995 and 1994 were 23% and 20%, respectively. The 1995 and 1994 effective tax rates were lower than the statutory rate of 35%. The principal reason for the Company's lower effective tax rate is the effect of tax exempt investment income. There are no loss carryforwards included in the deferred tax asset.
The Consolidated Financial Statements and Financial Statement Schedules of MAIC Holdings 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 10 of the Notes to Consolidated Financial Statements of MAIC Holdings and its subsidiaries.