(B) The Board of Directors declared special stock dividends in December 1999 (5%), 1998 (10%), 1997 (5%), and 1996 (6%); 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, 1996. 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) 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.
As discussed in Item I of this report, the Company has entered into an Agreement to Consolidate pursuant to which MAI and PICM will become wholly-owned subsidiaries of a newly formed insurance holding company, ProAssurance. The proposed consolidation will require a substantial cash payment to the PICM shareholders, which is likely to exceed $200 million. The Company anticipates that up to $135 million of the cash required for the consolidation will be funded from currently available cash and investment assets of the Company and PICM and that the remainder of the requirement will be funded from a bank credit facility of up to $150 million, including a term loan of up to $110 million. The Company anticipates that operating cash flows of the insurance subsidiaries of ProAssurance will be sufficient to fund debt service on the bank loan. The proposed consolidation, which is subject to regulatory and shareholder approvals and other conditions, is expected to be completed in the second fiscal quarter of 2001.
The Company continues to have available through a lending institution a line of credit in the amount of $40 million. This line is expected to be replaced by a revolving credit facility of up to $40 million made available to ProAssurance and its subsidiaries after the consolidation.
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's cash and short-term investment portfolio at December 31, 2000 was on a cost basis which approximates its fair value. This portfolio lacks significant market rate sensitivity due to its short duration.
The Company believes that medical malpractice rate increases are warranted based on current loss trends (see discussion under "Losses"). The Company has begun implementing its approved rate increases; additional rate increases are planned. Additionally, the Company has reduced discretionary discounts in an effort to write premiums in all states at the Company's current filed and approved rates. As these measures are implemented, the Company may experience a loss of insureds, however, to date, the Company has maintained an approximate 90% retention rate. Since premiums are earned over an entire policy period (usually one-year) the full effect of the rate increases will phase in throughout the year after each policy is written at the higher price.
Direct and assumed medical malpractice premiums earned decreased $4.9 million for the year ended December 31, 2000 as compared to same period in 1999. As with written premiums, $3.9 million of this decrease was due to one-time additional premiums earned in 1999 related to the purchase of a book of business. Direct and assumed accident and health, workers compensation and multi-line premiums earned increased by $13.7 million during the year ended December 31, 2000 as compared to the same period of 1999.
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 Company's effective tax rate decreased to 14% in 2000 from 26% for 1999. Tax exempt investment income, the primary item causing effective rates to be lower than the statutory 35% rate, remained level but other pre-tax income items decreased $35 million in 2000 compared to 1999. No loss carryforwards existed at December 31, 2000 or 1999.
RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
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 book of business acquired in 1999 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.
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. In 1998, the Company reduced the average maturity of a portion of its investment portfolio in an effort to protect the portfolio against the possibility of future increases in interest rates. This reduction was the principal reason for higher realized gains in 1998.
Consolidated losses and loss adjustment expenses (losses) and the related loss ratios are summarized in the following table (dollars in thousands). The current year loss ratio is based on net premiums earned.
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.
Underwriting, acquisition and insurance expenses are summarized in the following table (in thousands):
- underwriting losses on the risks the Company insures are higher or lower than expected; - unexpected changes in loss trends which might require the reevaluation of the liability for loss and loss adjustment expenses, thus resulting in an increase or decrease in the liability and a corresponding adjustment to earnings; - the Company's ability to retain current business, acquire new business, expand product lines, and a variety of other factors affecting daily operations such as, but not limited to, economic, legal, competitive, regulatory and market conditions which may be beyond the Company's control and are thus difficult or impossible to predict; - changes in the interest rate environment and/or the securities markets that adversely impact the fair value of the Company's investments 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.
For every forward-looking statement, the Company claims the protection of the safe harbor for forward-looking statements under the Private Securities Litigation Reform Act of 1995.