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 101,427 square 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.
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 $397,000 and the investment property secures a bank loan in the approximate amount of $147,000.
(B) The Board of Directors declared special stock dividends in December 1998 (10%), 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, 1994. 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. Reference Note 10 of the Notes to Consolidated Financial Statements of Medical Assurance, Inc., and subsidiaries.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATION.
For purposes of this management discussion and analysis, the term "Company" refers to Medical Assurance, Inc. (a Delaware Corporation) and its consolidated subsidiaries. The consolidated subsidiaries consist principally of operating insurance companies.
The Company did not borrow any funds during the years ended December 31, 1998 and 1997, 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 paragraphs. 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. Additionally, in an effort to protect the Company's investment portfolio against the possibility of higher interest rates in the future, the Company reduced the average maturity of a portion of that portfolio during the third and fourth quarters of 1998. This reduction was the principal reason for the higher gross realized gains discussed in Note 2 of the accompanying Notes to Consolidated Financial Statements.
The Company's Board of Directors has authorized the purchase of its common stock in the open market; the Company purchased 364,870 (after giving effect to the 1998 stock dividend) shares of its stock in 1998. At December 31, 1998, approximately $7.9 million remained available for purposes of purchasing its own common stock. On March 8, 1999 the Company announced that it had authorized an additional $10.0 million for the purchase of its stock.
The Company is exposed to various market risks, principally interest rates on its investment portfolio. Market risk represents the risk of changes in value of a financial instrument caused by fluctuations in interest rates. The Company handles market risks in accordance with its established policies, whose goal is to implement a strategic asset allocation that maximizes the long-term rate of return at a minimum level of risk given a set of asset classes and
The fair value of the Company's cash and short-term investment portfolio at December 31, 1998 approximated carrying value due to its short-term duration. Most of the investments in the long-term portfolio are at fixed rates, and have a fair value at December 31, 1998 of $657.4 million. Although not expected, a one percentage point change in the interest rate would change the fair value of that portfolio by approximately $24 million. The Company believes it is in a position to keep these investments until final maturity.
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.
In September 1998, the Company entered into an agreement with Medical Defense Holding Company (MDHC) of Springfield, Missouri to purchase the ongoing book of medical professional liability insurance business of MDHC's subsidiaries, Medical Defense Associates
(MDA) and Medical Defense Insurance Company (MDIC). The transaction was effective January 1, 1999. The Company has assumed day-to-day management of existing policies and prior liabilities of MDA and MDIC and provides aggregate excess of loss reinsurance to protect MDA and MDIC from adverse loss development in excess of an agreed upon threshold.
The Company is reliant on various third party business partners. The Company's own readiness for the year 2000 will be impacted by the readiness of these third parties. The Company has identified the third party relationships that it believes to be significant and has obtained information from the parties regarding their efforts and expectations related to Year 2000 compliance. To date, the Company is not aware of any third party issue that would materially impact the Company's results of operations, liquidity or capital resources.
While the Company believes its planning efforts are adequate to address its Year 2000 concerns, there can be no guarantee that full compliance will be achieved or that the systems of other companies on which the Company's systems and operations rely will be converted on a
timely basis and therefore will not have a material effect on the Company. The Company's expectations about the completion of its Year 2000 efforts, the related costs, and its assessment of the anticipated business, operational and financial risks to the Company are subject to a number of uncertainties and assumptions regarding future events including, among others, representations of third parties and the continued availability of trained personnel. This disclosure as well as the information previously filed by the Company regarding its Year 2000 readiness during the period January 1, 1996 to October 19, 1998 are designated as a Year 2000 readiness disclosure related to the Year 2000 Information and Readiness Disclosure Act.
RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
The increase in direct and assumed premiums written for the year ended December 31, 1998 compared to the year ended December 31, 1997 is due principally to an increase of $8.4 million of medical malpractice and accident and health premiums, offset by a decrease of $4.0 million of workers compensation premiums. Other variations in the normal course of business for the Company comprise the remainder of the variance.
Direct and assumed premiums earned for the year ended December 31, 1998 increased $37.4 million as compared to the year ended December 31, 1997, primarily attributable to premiums earned from physician malpractice coverage and other new business written in late 1997 in states other than Alabama.
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 $15.1 million increase in premiums ceded for the year ended December 31, 1998 as compared to the year ended December 31, 1997 is principally due to additional direct and assumed premiums in states other than Alabama, offset by increased reinsurance retentions, and consequently lower ceded premiums, for Alabama and West Virginia. The Company continually reviews the levels of coverage ceded and the related costs.
Other income increased to $12.9 million for the year ended December 31, 1998 compared to $3.3 million for the year ended December 31, 1997. The increase is principally attributable to a $9.5 million increase in capital gains realized upon the sale of securities during 1998 as compared to 1997.
Consolidated losses and loss adjustment expenses (losses) and the related loss ratios are summarized in the following table (dollars in thousands). The ratio for losses below is based on premiums earned; the ratio for net losses is based on net premiums earned.
Loss ratios in both years reflect improvement of loss development in prior years coverage. However, the improvement of loss development for prior years could have a smaller impact on the loss ratios of future years. See Note 6 to the Consolidated Financial Statements for additional information concerning losses.
Of the $50.4 million increase in written premiums, $23.3 million is attributable to increased medical malpractice premiums, of which $11.0 million relates to the inclusion of MOMED in 1997. The remaining increase is attributable to other related lines of business, which principally includes an increase of $18.9 million in accident and health premiums, and an $8.4 million increase in workers compensation premiums. The $9.5 million 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 had consolidated net investment income of $38.5 million for the year ended December 31, 1997 as compared to $32.1 million for the year ended December 31, 1996, reflecting an increase of $6.4 million. The increased income is primarily due to (a) an increase in the amount of invested assets, and (b) 1997 investment income attributable to MOMED of $4.3 million. Invested assets increased to $681.1 million at December 31, 1997 from $639.9 million at December 31, 1996 which includes $74.5 million and $72.7 million 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 1997 and 56% for 1996.
Equity securities increased to $44.9 million at December 31, 1997 from $33.1 million at December 31, 1996. The equity securities for 1997 consisted of $23.2 million of fixed rate
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.
Consolidated loss and loss adjustment expenses (losses) and the related loss ratios are summarized in the following table (dollars in thousands). The ratio for losses below is based on premiums earned; the ratio for net losses is based on net premiums earned.
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.
Consolidated expenses increased by $8.2 million (32%) for the year ended December 31, 1997 compared to the year ended December 31, 1996, of which $2.4 million is attributable to the inclusion of MOMED in 1997. The additional increase results primarily from policy acquisition costs associated with new business, along with the other costs associated with the Company's business strategy.
The Company's effective tax rate for the years ended December 31, 1997 and 1996 was 24%. The 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.
This discussion contains historical information, as well as forward-looking statements that are based upon Medical Assurance's estimates and anticipation of future events that are subject to certain risks and uncertainties that could cause actual results to vary materially from the expected results described in the forward-looking statements. The Company's expectations regarding losses, the retention of current business, expansion of product lines, development of business in new geographical areas, Year 2000 compliance, and market risks depend on a variety of factors, including economic, competitive and market conditions which may be beyond the Company's control and are thus difficult or impossible to predict. In view of the many uncertainties inherent in the forward-looking statements made in this document, the inclusion of such information should not be taken as representation by the Company or any other person that Medical Assurance's objectives or plans will be realized.