MOMED is the fee owner of one office building located in the metropolitan area of St. Louis, Missouri. MOMED and its subsidiaries are occupying 7,709 square feet as their home offices and the
remaining 6,501 square feet of office space in this building are leased to unaffiliated persons or is available to be leased. MOMED also owns an apartment building that is held as an investment in real estate. The home office building currently secures a bank loan in the approximate amount of $500,000 and the investment property secures a bank loan in the approximate amount of $166,000.
(A) Net income for 1993 includes $3.6 million which represents the cumulative effect of a change in accounting for income taxes resulting from the adoption of Financial Accounting Standards Board (FASB) Statement 109. (B) In December, 1995 and 1996, the Board of Directors declared a 6% stock dividend and in December of 1994, 1993 and 1992 the Board of Directors declared a 5% stock dividend. Earnings per share data for 1996, 1995, 1994, 1993 and 1992 have been restated as if all dividends had been declared on January 1, 1992. 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.
MAIC Holdings, Inc. is a Delaware corporation formed by Mutual Assurance, Inc. (Mutual Assurance) to serve as a holding corporation for Mutual Assurance and other subsidiaries. On August 31, 1995, Mutual Assurance and MAIC Holdings, Inc. consummated an Agreement and Plan of Exchange (Plan of Exchange) which generally provided that Mutual Assurance shareholders exchanged their common shares, par value $1 per share, for an equal amount of the common stock of MAIC Holdings, Inc., par value $1 per share.
The Company did not borrow any funds during the years ended December 31, 1996 and 1995, and currently has no requirements indicating a need to borrow significant funds in the next twelve months. However, the need for additional capital may arise in order to achieve the Company's ultimate goals of expansion, as discussed in the following paragraph. The Company continues to have available through a lending institution a line of credit in the amount of $40 million that could be used for these additional capital requirements. The Company is not charged a fee nor is it required to maintain compensating balances in connection with this line of credit.
The Company, through Mutual Assurance, has been developing a marketing strategy to address the
insurance needs of hospitals and vertically integrated health care providers. The Company expects organizations such as these to represent increasing market opportunities for professional liability and related insurance products because of the trend toward the consolidation of health care providers. In certain instances, Mutual Assurance's surplus is a competitive factor in this "large account" market because its principal competitors are larger than those with whom Mutual Assurance has historically had to compete.
During July 1996, MAI Corporation, a wholly-owned subsidiary, purchased 100% of the minority-owned interest of LifeSouth, resulting in LifeSouth becoming a wholly-owned subsidiary of MAI Corporation. During July 1995, the Company acquired the recurring medical professional insurance business of Physicians Insurance Company of Ohio and its subsidiary.
The above summary operation information does not necessarily reflect the results of operations as they actually would have been if the acquisition had occurred at the beginning of the periods presented or of results which may occur in the future.
Total consideration paid for the 1996, 1995 and 1994 business expansion transactions was approximately $33,600,000, including 376,359 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 $6,535,000 and are being amortized over periods ranging from 10 to 20 years.
RESULTS OF OPERATIONS -- YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
The increase in premiums written 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 premiums assumed. Earned premiums increased for the year ended December 31, 1996 as compared to the year ended December 31, 1995 as a result of new premiums written during 1996 and 1995. Other variations in the normal course of business for the Company comprise the remainder of the variance.
The Company cedes reinsurance to provide for greater diversification of business, allow management to control exposure to potential losses arising from large risks, and provide additional capacity for growth. Premiums ceded are estimated based on the terms of the respective reinsurance agreements. The estimated expense is continually reviewed and any adjustments which become necessary are included in current operations. Amounts recoverable from reinsurers are estimated in a manner consistent with the loss liability associated with the reinsured policies. 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 results primarily from policy acquisition costs associated with new business, along with the other costs associated with the Company's current business strategy. This strategy calls for the Company to continue investing in potential acquisition opportunities and the possibility of expansion into additional markets.
The Company's effective tax rates for the years ended December 31, 1996 and 1995 were 24% and 23%, respectively. The 1996 and 1995 effective tax rates were lower than the statutory rate of 35%, principally because of the effect of tax exempt investment income. There are no loss carryforwards included in the deferred tax asset.
RESULTS OF OPERATIONS -- YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
The $6,708,000 increase in premiums ceded for the year ended December 31, 1995 as compared to the year ended December 31, 1994 is principally due to (i) new business written by MA-West Virginia, (ii) an increase in Mutual Assurance business outside the state of Alabama, including PIC-Ohio, and (iii) an increase in business from the addition of PIC-Indiana.
The Company had consolidated net investment income of $29,582,000 for the year ended December 31, 1995, reflecting an increase of $6,510,000 (28.2%) as compared to the year ended
December 31, 1994. The increased income is primarily due to an increase in the amount of invested assets, which for 1995 includes the investments of PIC-Indiana. In addition, the yield on invested assets increased to approximately 6.2% for 1995 from approximately 5.6% for 1994. The 1995 purchase of PIC-Indiana contributed $34,870,000 to the portfolio. Excluding the PIC-Indiana investments and their respective investment income, the yield on the remaining investments increased to approximately 6.0% in 1995 from 5.6% in 1994. The increase in the yield of invested assets primarily resulted from higher available market rates of interest on taxable investments.
Consolidated loss and loss adjustment expenses and the related loss ratios are summarized in the following table (dollars in thousands). The ratio for losses and loss adjustment expenses below is based on premiums earned; the ratio for net losses and loss adjustment expenses is based on net premiums earned.
The increase in reinsurance recoveries primarily results from (i) reinsurance treaties related to MA-West Virginia and (ii) reinsurance recoveries resulting from the increase in Mutual Assurance business outside the state of Alabama, including PIC-Ohio and (iii) an increase in business resulting from the addition of PIC-Indiana.
Consolidated expenses increased by $7,434,000 (71.1%) for the year ended December 31, 1995 compared to the year ended December 31, 1994. The increase in consolidated expenses occurred primarily as a result of new business obtained by the Company during 1995. As the Company continues
its expansion efforts, additional costs are expected to be incurred to investigate potential opportunities and to integrate the successful opportunities into the Company's operations.