The following selected financial data, other than the selected statutory data, are derived from our consolidated financial statements which were prepared in accordance with generally accepted accounting principles. The data should be read in conjunction with the consolidated financial statements, related notes and other financial information included elsewhere in this report. The selected statutory data are derived from our annual statements which were prepared in accordance with statutory accounting practices as required by insurance regulatory authorities. See Note 19 of the consolidated financial statements included under Item 8
for a discussion of the principal differences between GAAP and statutory accounting practices and a reconciliation of consolidated net income and equity between GAAP and statutory accounting bases.
(a) APAssurance acquired Kentucky Medical Insurance Company in 1996 in a transaction accounted for under the purchase method of accounting. APAssurance"s mergers with New Mexico Physicians Mutual Insurance Company and State Mutual Insurance Company in 1997 were accounted for under the pooling method of accounting.
(c) Operating results for the year ended December 31, 1999 include the effects of a one-time settlement with the Internal Revenue Service. Without this settlement, net income for the year ended December 31, 1999 would have been approximately $4.6 million.
(d) The weighted average shares outstanding for the period from December 13, 2000, the date of the closing of the conversion, through December 31, 2000 were 11,134,981 basic common shares and 11,260,797 common shares assuming dilution. There were no cash dividends declared during the periods presented.
The Company is a leading provider of medical professional liability insurance coverage, writing in 13 states throughout the country. This insurance coverage protects physicians and other health providers from claims filed against them for alleged acts of medical malpractice. Medical professional liability insurance represented 61% of our direct premiums written in 2000. We are also a writer of workers' compensation insurance in 11 states, insuring a variety of business classes. In addition, through December 31, 2000, we provided a limited amount of general personal and commercial coverage and participate in a small number of health insurance programs. Finally, we have begun to develop a financial services segment, which currently generates fee-based revenue for various consulting services.
Set forth below are our GAAP ratios by product line for each of the last three years.
Direct premiums written increased $13.5 million, or 7.1%, to $203.2 million in 2000 from 1999. Medical professional liability direct premiums written increased $1.1 million, or .9%, to $124.0 million in 2000, compared to $122.9 million in 1999. Increases in Florida of $6.3 million, or 45.6%, and small increases in several other states were offset by decreases in Michigan, down $4.7 million, or 10.0%, and Kentucky, down $2.0 million, or 10.3%. The increase in Florida is due to our relatively new presence in this market coupled with our price increases. The decreases in Michigan and Kentucky are the result of our on-going efforts to re-underwrite each book of business periodically and eliminate unacceptable risks and, to a lesser extent, physician practice consolidation and price competition. We also instituted substantial price increases, including a 17.9% increase in Florida, a 4.9% increase in Michigan, an 8.6% increase in New Mexico, a 7.1% increase in Kentucky and a 14.9% increase in Ohio.
Workers' compensation direct premiums written increased $7.6 million, or 17.6%, to $50.7 million in 2000. The majority of this increase was in the Minnesota market, which was up $3.5 million, or 18.7%, and Illinois, up $2.1 million, or 85.9%. The increase in workers' compensation direct premiums written resulted
Personal and commercial lines direct premiums written increased $1.6 million, or 11.3%, to $15.2 million in 2000. Health insurance direct premiums written increased $3.3 million to $13.2 million in 2000. With the conclusion of 2000, we have begun the process of winding down both of these lines of business. Effective January 1, 2001 we no longer write personal and commercial business. We have also notified all of our health insurance partners of our intentions to exit this line.
Losses and loss adjustment expenses increased $22.6 million, or 17.3%, to $153.5 million in 2000. The 2000 reported loss ratio was 85.1% compared to 88.1% in 1999. The accident year loss ratio, which excludes the effects of prior year developments of loss reserves, was 91.5% in 2000 compared to 101.4% in 1999. We continued to see a decline in both the calendar year reported loss ratio and the accident year loss ratio in 2000. These decreases are primarily the result of rate increases and a change in the mix of business.
Personal and commercial underwriting expenses increased $150,000, or 3.4%, to $4.6 million in 2000. As a percentage of premiums earned, the underwriting expense ratio decreased to 35.8% in 2000 from 41.3% in 1999. This decrease was due to specific expense reduction efforts for this line of business.
Investment income, excluding realized investment gains, increased $6.2 million, or 20.2%, to $36.8 million in 2000. The increase reflects a shift of some of our portfolio from tax exempt securities to higher yield taxable corporate securities in the first quarter of 2000 and a higher amount of invested assets. Net realized investment gains were $1.2 million and $1.8 million during 2000 and 1999, respectively.
Additional restructuring charges of $919,000 were incurred in 2000. This includes approximately $802,000 in severance charges related to the elimination of 14 staff members located in our New Mexico and Lapeer branch offices and our health insurance operation at our East Lansing, Michigan home office. These events are expected to generate annual savings of approximately $2.0 million in salaries and rent. At December 31, 2000 there were no additional amounts accrued for restructuring.
We have incurred $501,000 of conversion expenses in 2000. The increase in amortization expense is a result of the acquisition of a management company in October 1999 which previously had performed all of the managerial functions for APAssurance and its subsidiaries.
Workers' compensation direct premiums written were up $8.5 million or 24.6% to $43.2 million in 1999. The largest gains were experienced in Minnesota with an increase of $2.7 million, Iowa with an increase of $2.4 million, and Kentucky with an increase of $1.1 million. Minnesota's growth is an expansion of a long- term market, whereas Kentucky and Iowa are relatively new markets for APAssurance. In addition, we took various rate increases, which impacted our 1999 premiums.
Personal and commercial direct premiums written were up $1.5 million or 12.3% to $13.7 million as a result of rate increases and cross-selling to physicians. Health direct premiums written increased $6.7 million or 205.4% to $9.9 million, as this was only our second full year of writing health premiums.
On a line of business basis, the medical professional liability loss ratio for 1999 was 86.5% as compared to 91.4% for 1998. The medical professional liability loss ratio continued to benefit from favorable experience in
Underwriting expenses increased $1.6 million or 4.1% in 1999 to $40.0 million. The underwriting expense ratio was 26.9% in 1999 as compared to 28.1% in 1998. The primary reason for the decrease in expense ratio from 1998 was our ability to control the rate of expense growth to an amount lower than our premium growth. Specifically, control over hiring new personnel, reduction in travel and other service expenses, and lower professional fees resulted in lower expenses. These savings were partially offset by $0.5 million of development costs relating to the alternative risk transfer initiative and APDirect.
Federal income taxes showed a credit of $23.7 million in 1999 versus an expense of $3.4 million in 1998. The credit was the result of a settlement with the Internal Revenue Service regarding the treatment of certain loss reserves on prior years' tax returns. The settlement included $25.3 million in taxes and $9.8 million in interest for a total of $35.1 million. After associated professional fees, other costs, and tax of $2.1 million on the interest component, the net impact was $29.1 million on 1999 operations. The effective tax rate without the impact of this settlement was approximately 15%, compared to 27% in 1998. The decrease in the effective tax rate was the result of more of our pre-tax income being generated from tax-exempt interest.
The primary sources of our liquidity, on both a short- and long-term basis, are funds provided by insurance premiums collected, net investment income, recoveries from reinsurance and proceeds from the maturity or sale of invested assets. The primary uses of cash, on both a short- and long-term basis, are losses, loss adjustment expenses, operating expenses, reinsurance premiums and taxes. In addition, we are indebted to a related party in the amount of $10 million in connection with the purchase of Stratton-Cheeseman Management Company. The indebtedness is due in installments, without interest, over the next nine years beginning in April 2001. At December 31, 2000, we had no material commitments for capital expenditures.
In 2000, we had $255.9 million of cash available and an investment portfolio of $506.1 million. The large cash position at December 31, 2000 reflects the receipt of the net proceeds of $142.5 million from our stock offerings in December. In addition, due to poor market expectations and to increased current investment yields, we liquidated our equity securities portfolio in early December 2000, generating an additional $36 million in cash. The portfolio includes $13.9 million of bonds maturing in the next year to meet short-term cash flow needs. On a long-term basis, fixed income securities are purchased on a basis intended to provide adequate cash flows from future maturities. In 2000, $158.6 million of bonds mature in the next one to five years and $251.9 million mature in the next five to ten years.
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT YEAR ENDED DECEMBER 31, 2000
American Physicians Capital, Inc. (APCapital) is an insurance holding company incorporated under Michigan law on December 13, 2001.
American Physicians Assurance Corporation -- a stock insurance company incorporated under Michigan law (APA), formerly Mutual Insurance Corporation of America (MICOA).
Alpha Advisors -- an Illinois corporation that provides investment management services.
On December 13, 2000, the conversion of APA from a mutual company to a stock corporation was consummated according to a Plan of Conversion adopted by the Board of Directors of MICOA on June 28, 2000, with subsequent amendment on October 2, 2000. This plan was approved by MICOA policyholders at a special meeting held on November 29, 2000 and by the State of Michigan Office of Financial and Insurance Services. The Plan of Conversion included several key components, including: formation of APCapital to be the ultimate parent holding company; the conversion of APA from a mutual insurance company to stock company and wholly-owned by APCapital; the transfer of ICA, RML, APConsulting, APDirect Sales, and Alpha Advisors, Inc. from APA to wholly-owned subsidiaries of APCapital.