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. MAI and its subsidiaries are occupying approximately 55,226 square feet of office space in its current home office building. The remaining 101,427square 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.
MAI's other insurance subsidiaries maintain additional office space under leases with unaffiliated persons which are not considered material.
(B) The Board of Directors declared special stock dividends in December 1997 (5%), 1996 (6%), 1995 (6%), 1994 (5%) and 1993 (5%); and in August 1997 the Board declared a two-for-one stock split. All Net income per share and Total capital per share data on this page has been restated as if the dividends and the stock split had been declared on January 1, 1993. Additionally, treasury stock is excluded from the date of acquisition for purposes of determining the weighted average number of shares outstanding used in the computation of net income per share of common stock.
(C) Total investments and capital at December 31, 1997, 1996, 1995, 1994 and 1993 includes net unrealized gains and/or losses on available-for-sale securities resulting from the Company's adoption of FASB Statement 115. In accordance with FASB Statement 115, prior-year financial statements have not been restated to reflect this change in accounting principle.
(D) As a result of the December 20, 1996 acquisition of MOMED, amounts attributable to MOMED are included in the above balance sheet data but are considered immaterial for inclusion in the Company's 1996 operations. Reference Note 8 of the Notes to Consolidated Financial Statements of MAIC Holdings and subsidiaries.
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 1997 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 develop ment. 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 its common stock in the open market; the Company purchased 102,600 (giving effect to the 2 for 1 stock split in 1997) shares of its stock in 1997. At December 31, 1997, approximately $6.6 million remains available for purposes of purchasing its own common stock.
Total consideration paid for the 1996 and 1995 business expansion transactions was approximately $32,162,000, including 837,774 (after giving effect to subsequent stock dividends and the stock split) shares of the Company's stock issued as part of the 1996 purchase of MOMED. Intangible assets recorded in connection with the above transactions totaled $7,653,000 and are being amortized over periods ranging from 10 to 20 years.
Of the $50,355,000 increase in written premiums, $23,300,000 is attributable to increased medical malpractice premiums, of which $11,000,000 relates to the inclusion of MOMED in 1997. The remaining increase is attributable to other related lines of business (see Business Expansion), which principally includes an increase of $18,945,000 in accident and health premiums, and an $8,401,000 increase in workers compensation premiums.
The Company had consolidated net investment income of $38,474,000 for the year ended December 31, 1997, as compared to $32,114,000 for the year ended December 31, 1996, reflecting an increase of $6,360,000. The increased income is primarily due to (1) an increase in the amount of invested assets, and (2) 1997 investment income attributable to MOMED of $4,306,000. Invested assets increased to $681,074,000 at December 31, 1997 from $639,861,000 at December 31, 1996, which includes $74,531,000 and $72,719,000 at 1997 and 1996, respectively, attributable to MOMED. The yield on invested assets decreased to 5.9% for 1997 from 6.1% for 1996. The average composition of invested assets changed little from 1996 to 1997, with non-taxable investments comprising an average of 58% for the year 1997 and 56% for the year 1996.
The reserve for losses and loss adjustment expenses represents management's conservative best estimates of the ultimate cost of all losses incurred but unpaid. 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. The estimated liability is continually reviewed and any adjustments which become necessary are included in current operations. The Company's management believes that its actual incurred losses and loss adjustment expenses will not significantly exceed its reported estimated amounts.
The Company is evaluating Year 2000 compliance by third parties with which it does a significant amount of business, and is not currently aware of any problems that will have a material impact on its operations.
The increase in premiums written and earned for the year ended December 31, 1996 compared to the year ended December 31, 1995 is due principally to an increase of $14,647,000 in direct premiums written in states other than Alabama and the addition of $11,469,000 of reinsurance premiums. Other variations in the normal course of business for the Company comprise the remainder of the variance. The $11,080,000 increase in premiums ceded for the year ended December 31, 1996 as compared to the year ended December 31, 1995 is principally due to additional written and assumed premiums in states other than Alabama, and as respects this new business, increased cessions of risks to reinsurers.
Consolidated expenses increased by $7,833,000 (44%) for the year ended December 31, 1996 compared to the year ended December 31, 1995. The increase resulted primarily from policy acquisition costs associated with new business.
The Consolidated Financial Statements and Financial Statement Schedules of MAI and subsidiaries listed in Item 14(a) have been included herein beginning on page 29. 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 MAI and its subsidiaries.