The current year's provision for loss and loss adjustment expense, which is based upon policyholder exposure, expected frequency of losses, and severity of losses, was fairly stable for 1996 and 1995. The 1994 current year provision was approximately $4,000,000 less than the 1996 and 1995 amounts primarily because the Company increased its retention from $500,000 per claim to $750,000 per claim effective January 1, 1995. The loss and loss adjustment expenses reflected in the consolidated financial statements, and shown in the Reconciliation of Liability for Loss and Loss Adjustment Expense as total incurred loss and loss adjustment expense, include adjustments of prior years' estimates.
Incurred loss and loss adjustment expenses for 1996 and 1995 of $32,257,000 and $37,560,000, respectively, are significantly greater than the $11,334,000 in 1994. During 1994, the liability for loss and loss adjustment expenses was extensively reevaluated by management which resulted in a significant reduction, $24,941,000, in these liabilities for years prior to 1994. That reduction was supported by outside actuarial evaluation. There were smaller reversals of prior years' liabilities in 1996 and 1995. Following the 1994 extensive review and liability reduction, management does not expect prior year liability reductions of similar significance in future years.
3. Offsetting the two major reasons for the increase in 1995 net premiums, which total $7,381,000, is one item which caused a decrease. In 1994, the Company reduced its estimated unearned premium liability for free death, disability and retirement reporting endorsements by $2,903,000 which increases net premium. A further small decrease in this liability, $310,000, was recorded in 1995. The difference, $2,593,000, causes 1995 net premium to be lower by that amount.
We have audited the accompanying consolidated balance sheets of Midwest Medical Insurance Holding Company and Subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, changes in other shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedules listed in the index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
DECEMBER 31 1996 1995 -------------------------- ASSETS Investments (NOTE 4): Fixed maturities at fair value (cost: 1996--$179,979; 1995--$174,544) $183,561 $182,817 Equity securities at fair value (cost: 1996--$20,237; 1995--$17,670) 38,001 28,311 Short-term 7,898 15,015 -------------------------- 229,460 226,143
Income taxes (benefit) (NOTE 7) 1,458 (1,711) 6,417 Net income $ 7,481 $ 1,725 $14,495 -------------------------------------- --------------------------------------
On January 1, 1994, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities". Consistent with management's classification of its investments in debt and equity securities as available for sale, such investments are carried at fair value with unrealized holding gains and losses reflected as a separate component of equity, net of applicable deferred taxes. As a result of the initial adoption of SFAS No. 115, the balance of redeemable stock and other shareholders' equity increased by $8,000 and $7,762,000, respectively, on January 1, 1994.
The Company accounts for these shares by increasing Common Stock by the par value ($.01 per share) of the newly issued shares, increasing paid-in capital by the excess of the redemption value over par and charging stock compensation expense for the full redemption value. Once vested, policyholders will continue to earn shares for each month they remain insured with MMIC according to the stock allocation formula. The Company accounts for additional shares issued to vested policyholders by increasing Common Stock for the par value of the shares and decreasing retained earnings by the same amount.
Net unrealized appreciation of fixed maturities (decreased) increased by $(4,691,000), $11,630 and $(15,610,000) and net unrealized appreciation of equity securities increased by $7,123,000, $6,078,000 and $232,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
Current provision (benefit) $1,160 $(2,193) $5,991 Deferred tax provision 298 482 426 --------------------------------------- $1,458 $(1,711) $6,417 --------------------------------------- ---------------------------------------