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 $437,000 and the investment property secures a bank loan in the approximate amount of $157,000.
(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.
For purposes of this management discussion and analysis, the term "Company" refers to Medical Assurance, Inc. (formerly MAIC Holdings, Inc.) and its consolidated subsidiaries. The consolidated subsidiaries consist principally of operating insurance companies.
Medical Assurance, Inc. is a Delaware corporation formed by Mutual Assurance, Inc. (Mutual Assurance) to serve as a holding corporation for Mutual Assurance and other subsidiaries. Shareholders approved a proposal to change the holding company's name from MAIC Holdings, Inc. to Medical Assurance, Inc. effective June 1, 1997.
The Company did not borrow any funds during the years ended December 31, 1997 and 1996, 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 below. 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, principally 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.
The Company has developed additional insurance products such as workers' compensation and accident and health insurance to offer to these large accounts to enhance its overall insurance package. As products such as these are developed, the Company may offer these coverages to entities other than health care providers.
In addition to its expansion into this growing market for "large accounts", the Company also intends to expand through the acquisition of, or combination with, medical professional liability insurers that have a significant presence in states other than Alabama. During 1997, 1996 and 1995, the Company completed the following business combinations:
During July 1995, the Company acquired the recurring medical professional insurance business of Physicians Insurance Company of Ohio and its subsidiary.
The business combination of MOMED Holding Company (MOMED) was effective December 20, 1996. The consolidated balance sheets of the Company include the consolidated balance sheets 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 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 $ 9,450,000 increase in premiums ceded for the year ended December 31, 1997 as compared to the year ended December 31, 1996 is principally due to additional written and assumed premiums, and as respects this new business, increased cessions of risks to reinsurers. The Company continually reviews the levels of coverages ceded and the related costs.
For purposes of the above discussion, invested assets are comprised of fixed maturities and equity securities at amortized cost and short-term investments; 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.
Equity securities increased to $44,880,000 at December 31, 1997 from $33,066,000 at December 31, 1996. The equity securities for 1997 consisted of $23,201,000 of fixed rate preferred stocks and $21,679,000 of common stocks compared to $22,307,000 of fixed rate preferred stocks and $10,759,000 of common stocks for 1996. Disposition of investments prior to maturity may result in a net gain or loss which would be classified as "Other Income".
Other income increased by approximately $600,000 for the year ended December 31, 1997 compared to the year ended December 31, 1996. The increase is principally attributable to greater capital gains realized upon the sale of securities during 1997 as compared to 1996.
The Company's losses and loss adjustment expenses for the years ended December 31, 1997 and 1996 reflect loss ratios of 75% and 78%, respectively. 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. See Footnote 9 to the Consolidated Financial Statements included elsewhere herein.
The increase in reinsurance recoveries primarily results from the increase in losses and loss adjustment expenses and the increased cessions to reinsurers.
New software systems that the Company has acquired and implemented for ongoing operational purposes function properly with respect to dates in the year 2000 and thereafter. The Company's timetable for completing its conversion to the new software is such that the Company does not believe the Year 2000 Issue poses a significant operational problem. Becoming Year 2000 compliant is incidental to implementing the new software system; therefore, costs specifically related to Year 2000 compliance are minimal.
RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
The following table presents information related to consolidated written and earned premiums and reinsurance expense (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. Equity securities of $33 million at December 31, 1996 and $6.6 million at December 31, 1995 are primarily fixed rate preferred stocks.
Other income decreased by $2,010,000 for the year ended December 31, 1996 compared to the year ended December 31, 1995. The increase 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. The increase in reinsurance recoveries primarily results from the increase in losses and loss adjustment expenses and the increased cessions to reinsurers.