<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended SEPTEMBER 30, 1998 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______ to ______.
Commission file number 0-19439
Medical Assurance, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 63-1137505
- ------------------------------- -------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation of organization)
100 Brookwood Place, Birmingham, AL 35209
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(205) 877-4400
-------------------------------
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (l) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No .
--- ---
As of September 30, 1998, there were 21,256,989 shares of the registrant's
common stock outstanding.
Page 1 of 18
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Table of Contents
<TABLE>
<CAPTION>
Part I - Financial Information
<S> <C>
Item l. Condensed Consolidated Financial Statements (Unaudited)
of Medical Assurance, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets.............................................................3
Condensed Consolidated Statements of Changes in Capital...........................................4
Condensed Consolidated Statements of Income.......................................................5
Condensed Consolidated Statements of Cash Flows...................................................6
Notes to Condensed Consolidated Financial Statements..............................................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................................................10
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K.................................................................18
Signatures........................................................................................................18
</TABLE>
<PAGE> 3
Medical Assurance, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
($ in thousands, except per share data)
<TABLE>
<CAPTION>
SEPTEMBER 30 December 31
1998 1997
---------------------------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available for sale, at market value $ 648,820 $ 617,914
Equity securities available for sale, at market value 43,169 44,880
Real estate, net 11,488 11,933
Short-term investments 58,505 45,475
----------- -----------
Total investments 761,982 720,202
Cash and cash equivalents 46,342 12,248
Premiums receivable 64,107 92,051
Receivable from reinsurers 176,215 150,598
Prepaid reinsurance premiums 19,451 17,580
Deferred taxes 29,498 33,273
Other assets 45,389 37,221
----------- -----------
$ 1,142,984 $ 1,063,173
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Policy liabilities and accruals:
Reserve for losses and loss adjustment expenses $ 665,111 $ 614,729
Unearned premiums 83,117 79,700
Reinsurance premiums payable 52,658 53,752
----------- -----------
Total policy liabilities 800,886 748,181
Income taxes payable 4,920 1,240
Other liabilities 21,695 26,564
----------- -----------
Total liabilities 827,501 775,985
Commitments and contingencies -- --
Stockholders' equity:
Common stock, par value $1 per share; 100,000,000
shares authorized; 21,722,140 and 21,721,562
shares issued, respectively 21,722 21,722
Additional paid-in capital 143,241 143,037
Accumulated other comprehensive income, net of
deferred taxes of $7,995 and $7,947, respectively 14,848 14,704
Retained earnings 144,011 109,524
----------- -----------
323,822 288,987
Less treasury stock at cost, 465,151 and 222,201 shares,
respectively (8,339) (1,799)
----------- -----------
Total stockholders' equity 315,483 287,188
----------- -----------
$ 1,142,984 $ 1,063,173
=========== ===========
</TABLE>
See accompanying notes
3
<PAGE> 4
Medical Assurance, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Capital (Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Accumulated
Other Other
Comprehensive Retained Capital
Total Income Earnings Accounts
-------- ------------- -------- --------
<S> <C> <C> <C> <C>
Balance at December 31, 1997 $287,188 $14,704 $109,524 $162,960
Comprehensive income
Net income 34,487 34,487
Other comprehensive income, net of tax
Unrealized gains on securities, net of
reclassification adjustment of $6,620 144 144
--------
Comprehensive income 34,631
Net purchase of treasury stock (6,352) (6,352)
Common stock issued for compensation 16 16
-------- ------- -------- --------
Balance at September 30, 1998 $315,483 $14,848 $144,011 $156,624
======== ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other Other
Comprehensive Retained Capital
Total Income Earnings Accounts
-------- ------------- -------- --------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 $244,565 $ 8,157 $103,027 $133,381
Comprehensive income
Net income 27,088 27,088
Other comprehensive income, net of tax
Unrealized gains on securities, net of
reclassification adjustment of $904 4,528 4,528
--------
Comprehensive income 31,616
Net purchase of treasury stock (1,623) (1,623)
Common stock issued for compensation 26 26
-------- ------- -------- --------
Balance at September 30, 1997 $274,584 $12,685 $130,115 $131,784
======== ======= ======== ========
</TABLE>
See accompanying notes.
4
<PAGE> 5
Medical Assurance, Inc. and Subsidiaries
Condensed Consolidated Statements of Income (Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------- ---------------------------
1998 1997 1998 1997
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Direct and assumed
premiums written $ 43,319 $ 43,266 $ 148,044 $ 134,802
======== ======== ========= =========
Premiums earned $ 49,510 $ 41,382 $ 144,480 $ 116,287
Premiums ceded (11,834) (10,608) (40,461) (27,973)
-------- -------- --------- ---------
Net premiums earned 37,676 30,774 104,019 88,314
Net investment income 10,157 9,523 29,577 28,407
Other income 4,899 1,283 7,686 2,023
-------- -------- --------- ---------
Total revenues 52,732 41,580 141,282 118,744
Expenses:
Losses and loss
adjustment expenses 37,850 32,634 107,901 91,503
Reinsurance recoveries (11,984) (11,328) (37,759) (30,753)
-------- -------- --------- ---------
Net losses and loss
adjustment expenses 25,866 21,306 70,142 60,750
Underwriting, acquisition
and insurance expenses 8,387 7,656 24,833 22,850
-------- -------- --------- ---------
Total expenses 34,253 28,962 94,975 83,600
-------- -------- --------- ---------
Income before income taxes 18,479 12,618 46,307 35,144
Provision for income taxes:
Current expense 2,839 3,346 6,836 10,075
Deferred expense (benefit) 2,135 (622) 4,984 (2,019)
-------- -------- --------- ---------
4,974 2,724 11,820 8,056
-------- -------- --------- ---------
Net income $ 13,505 $ 9,894 $ 34,487 $ 27,088
======== ======== ========= =========
Earnings per share:
Net Income - basic and diluted $ 0.63 $ 0.46 $ 1.61 $ 1.26
======== ======== ========= =========
Weighted average number of
common shares outstanding 21,468 21,487 21,487 21,517
======== ======== ========= =========
</TABLE>
See accompanying notes.
5
<PAGE> 6
Medical Assurance, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
-----------------------------
1998 1997
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 34,487 $ 27,088
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation (514) 1,042
Amortization 15,798 13,377
Policy acquisition costs, deferred (18,732) (14,813)
Net realized gain on sale of investments (6,260) (904)
Deferred income taxes (benefit) 4,984 (2,019)
Other (5,095) 26
Changes in assets and liabilities:
Premiums receivable 27,944 (34,724)
Income taxes receivable/payable 3,680 (827)
Receivable from reinsurers (25,617) (33,098)
Prepaid reinsurance premiums (1,871) 1,231
Other assets (4,227) (4,057)
Reserve for losses and loss adjustment expenses 50,382 54,403
Unearned premiums 3,417 13,160
Reinsurance premiums payable (1,094) 13,869
Other liabilities (4,869) 576
--------- ---------
Net cash provided by operating activities 72,413 34,330
INVESTING ACTIVITIES
Purchases of fixed maturities available for sale (248,029) (147,253)
Purchases of equity securities available for sale (10,861) (10,900)
Proceeds from sale or maturities of fixed
maturities available for sale 225,568 107,396
Proceeds from sale of equity securities available for sale 9,746 5,077
Net (increase) decrease in short-term investments (13,030) 15,607
Other 959 (728)
--------- ---------
Net cash used in investing activities (35,647) (30,801)
FINANCING ACTIVITIES
Purchase of treasury stock (2,672) (1,623)
--------- ---------
Net cash used by financing activities (2,672) (1,623)
--------- ---------
Increase in cash and cash equivalents 34,094 1,906
Cash and cash equivalents at beginning of period 12,248 14,033
--------- ---------
Cash and cash equivalents at end of period $ 46,342 $ 15,939
========= =========
</TABLE>
See accompanying notes.
6
<PAGE> 7
Medical Assurance, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements include
the accounts of Medical Assurance, Inc. and its subsidiaries, together referred
to as the Company. The financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and notes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments, consisting of normal recurring
accruals, considered necessary for a fair presentation have been included.
Operating results for the nine months ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998. For further information, refer to the December 31, 1997
audited consolidated financial statements and accompanying notes.
Medical Assurance, Inc. has 100 million shares of authorized common stock and
50 million shares of authorized preferred stock. The Board of Directors has the
authorization to determine the provisions for the issuance of shares of the
preferred stock, including the number of shares to be issued and the
designations, powers, preferences and rights, and the qualifications,
limitations or restrictions of such shares. At September 30, 1998, the Board of
Directors had not authorized the issuance of any preferred stock nor determined
any provisions for the preferred stock.
2. NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
130, "Reporting Comprehensive Income," which establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. The new rules require that enterprises
classify items of other comprehensive income separately from retained earnings
and additional paid-in capital in the equity section of the balance sheet.
Items of other comprehensive income are displayed in a separate condensed
consolidated statement of changes in capital, and amounts for 1997 are provided
for comparative purposes.
FASB Statement 131, "Disclosures About Segments of an Enterprise and Related
Information" was issued in June 1997 and is effective for years beginning after
December 15, 1997. This Statement changes the way public companies report
segment information in annual financial statements and requires public
companies to report selected segment information in interim financial reports
to shareholders. Under the Statement's "management approach," public companies
are to report financial and descriptive information about their operating
segments. Operating segments are revenue-producing components of an enterprise
for which separate financial information is produced internally and are subject
to evaluation by the chief operating decision maker in deciding how to allocate
resources to segments. Since the statement is not required to be applied to
interim financial statements in the initial year of application, the Company
will evaluate and implement this statement by year end.
7
<PAGE> 8
Medical Assurance, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
3. INVESTMENTS
Proceeds from sales of investments in fixed maturities and equities available
for sale were $209.3 million and $73.0 million for the nine months ended
September 30, 1998 and 1997, respectively. Gross realized gains on such sales
were $6.6 million and $1.2 million at September 30, 1998 and 1997 respectively;
gross realized losses on such sales were $333,000 and $265,000 at September 30,
1998 and 1997, respectively. Realized gains and losses are included as a
component of other income. The amortized cost of fixed maturities and equity
securities available for sale was $669.1 million and $640.1 million at
September 30, 1998 and December 31, 1997, respectively.
4. RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
The reserves for losses and loss adjustment expenses represent management's
best estimate of the ultimate cost of all losses incurred but unpaid. Incurred
losses and loss adjustment expenses for the nine months ended September 30,
1998 and 1997 were principally based on the application of an expected loss
ratio to premiums earned. These loss ratios take into consideration prior loss
experience, loss trends, the Company's loss retention levels, changes in
frequency and severity of claims and rates charged.
The reserves are evaluated at least annually by independent consulting
actuaries. Actual incurred losses may vary from estimated amounts due to the
inherent difficulty in estimating development of long-tailed lines of business.
The estimated liability is continually reviewed and any adjustments which
become necessary are included in current operations. The Company's management
believes that its actual incurred losses and loss adjustment expenses will not
significantly exceed its reported estimated amounts.
5. POLICY ACQUISITION COSTS
Costs that vary with and are directly related to the production of new and
renewal premiums are deferred to the extent they are recoverable against
unearned premiums and are amortized as the related premiums are earned. These
costs include premium taxes, ceding commissions, brokerage fees and agents'
commissions, and salaries, benefits and other expenses associated with
underwriting.
As is common practice within the industry, reinsurance ceding commissions are
deducted from acquisition costs and amounted to $7.4 million and $3.6 million
for the nine months ended September 30, 1998 and 1997, respectively, and $3.8
million and $1.9 million for the three months ended September 30, 1998 and
1997, respectively. Amortization of deferred acquisition costs, net of ceding
commissions, amounted to approximately $11.0 million and $9.8 million for the
nine months ended September 30, 1998 and 1997, respectively, and approximately
$4.0 million and $3.2 million for the three months ended September 30, 1998 and
1997, respectively. Underwriting and insurance costs that are not directly
related to the production of new and renewal premiums are charged to expense as
incurred. These costs were $13.8 million and $13.1 million for the nine months
ended September 30, 1998 and 1997, respectively, and $3.9 million and $3.2
million for the three months ended September 30, 1998 and 1997 respectively.
8
<PAGE> 9
Medical Assurance, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
6. INCOME TAXES
Income tax expense differs from the normal relationship to financial statement
income principally because of tax-exempt interest income.
7. EARNINGS PER SHARE
On December 3, 1997 the Board of Directors declared a 5% stock dividend. Cash
was paid to shareholders for fractional shares. Earnings per share data for
1997 has been restated as if the above dividend had been declared on January 1,
1997.
On August 20, 1997, the Board of Directors declared a two-for-one stock split,
which was effected by transferring the par value of the split shares in the
amount of $10.3 million from additional paid-in capital to common stock.
Earnings per share data for 1997 has been restated as if the stock split had
been declared on January 1, 1997.
8. COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal actions arising primarily from claims
made under insurance policies; these legal actions have been considered by the
Company in establishing its reserves. While the outcome of all legal actions is
not presently determinable, the Company's management and its legal counsel are
of the opinion that the settlement of these actions will not have a material
adverse effect on the Company's financial position or results of operations.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
For purposes of this management discussion and analysis, the term "Company"
refers to Medical Assurance, Inc. and its subsidiaries. The consolidated
subsidiaries consist principally of operating insurance companies.
LIQUIDITY AND CAPITAL RESOURCES
The payment of losses, loss adjustment expenses, and operating expenses in the
ordinary course of business is currently the Company's principal need for
liquid funds. Cash used to pay these items has been provided by operating
activities. Cash provided from these activities was sufficient during the first
nine months of 1998 to meet the Company's operating needs, and the Company
believes those sources will be sufficient to meet its cash needs for operating
purposes for at least the next twelve months. Prolonged and increasing levels
of inflation could cause increases in the dollar amount of losses and loss
adjustment expenses and may therefore adversely affect future reserve
development. To minimize such risk, the Company (i) maintains what its
management considers to be strong and adequate reinsurance, (ii) conducts
regular actuarial reviews to ensure, among other things, that reserves do not
become deficient, and (iii) maintains adequate asset liquidity.
The Company did not borrow any funds during the nine months ended September 30,
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 goal of expansion,
as discussed in subsequent 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 portfolio against the possibility of higher interest rates in the
future, the Company began reducing the average maturity of a portion of that
portfolio during the third quarter. This was the principal reason for the
higher gross realized gains discussed in Note 3 of the accompanying Notes to
Condensed Consolidated Financial Statements.
The Company's Board of Directors has authorized the purchase of up to $25
million of its common stock in the open market. At September 30, 1998,
approximately $9.8 million remains available for purposes of purchasing its own
common stock in the open market.
In September 1998 the Company reached an agreement in principle 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 proposed transaction, which has been approved by both
Boards, will be effective January 1, 1999. The Company will assume day-to-day
management of existing policies and prior liabilities of MDA and MDIC and
provide aggregate excess of loss reinsurance to protect MDA and MDIC from
adverse loss development in excess of an agreed threshold. The ultimate
purchase price is not expected to exceed 10% of the Company's consolidated
assets prior to the transaction.
10
<PAGE> 11
BUSINESS EXPANSION
The Company, through Mutual Assurance, Inc. (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 the "large account" market
because its principal competitors are larger than those with whom Mutual
Assurance has historically had to compete.
To further its expansion, the Company is offering certain insurance and
reinsurance products including, without limitation, medical malpractice
reinsurance, excess medical malpractice insurance, managed care liability
insurance, provider stop loss insurance, accident and health insurance, and
workers' compensation insurance. 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.
IMPACT OF YEAR 2000
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
New software systems that the Company has acquired and is in the process of
implementing 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 systems; therefore,
costs specifically related to Year 2000 compliance are minimal.
The Company has undertaken to identify third parties with which it does a
significant amount of business and to contact these parties regarding their
Year 2000 compliance efforts. While this process is not complete, the Company
is not currently aware of any problems that will have a material impact on its
operations.
11
<PAGE> 12
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 1997
Premiums
The following table presents information related to consolidated written and
earned premiums and reinsurance expense (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended
September 30
----------------------- Increase
1998 1997 (Decrease)
---- ---- ---------
<S> <C> <C> <C>
Direct and assumed premiums written $ 148,044 $ 134,802 $ 13,242
========= ========= =========
Premiums earned $ 144,480 $ 116,287 $ 28,193
Premiums ceded (40,461) (27,973) $ (12,488)
--------- --------- ---------
Net premiums earned $ 104,019 $ 88,314 $ 15,705
========= ========= =========
</TABLE>
The increase in premiums written for the nine months ended September 30, 1998
as compared to the nine months ended September 30, 1997 is due primarily to
increases of $ 6.2 million in accident and health premiums and $ 7.8 million in
medical malpractice premiums.
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 capacity for additional 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 $12.5 million increase in premiums
ceded for the nine months ended September 30, 1998 as compared to the nine
months ended September 30, 1997 is principally due to additional written and
assumed premiums, and as respects this new business, increased cessions of
risks to reinsurers offset in part by reduced cessions to reinsurers within
certain markets. The Company continually reviews the levels of coverages ceded
and the related costs.
Investment Income
The Company had consolidated net investment income of $29.6 million for the
nine months ended September 30, 1998, as compared to $28.4 million for the nine
months ended September 30, 1997, reflecting an increase of $1.2 million. The
increased investment income is principally a result of an increase in the
amount of interest-bearing investments held by the Company. Offsetting this
increase was a decrease in the average rates of return; the rate of return for
the first nine months of 1998 was 5.7% compared to 5.9% for the comparable
period in 1997.
12
<PAGE> 13
Losses
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.
<TABLE>
<CAPTION>
Nine months Ended
September 30, 1998 September 30,1997
------------------ -----------------
Loss Loss
Losses Ratio Losses Ratio
------ ----- ------ -----
<S> <C> <C> <C> <C>
Losses $107,901 75% $ 91,503 79%
== ==
Reinsurance recoveries (37,759) (30,753)
-------- --------
Net losses $ 70,142 67% $ 60,750 69%
======== == ======== ==
</TABLE>
The Company's losses in the nine months ended September 30, 1998 reflect a loss
ratio of 75% as compared to a loss ratio of 79% for the nine months ended
September 30,1997. Losses for both periods are principally based on the
application of expected loss ratios to premiums earned. These loss ratios take
into consideration prior loss experience, loss trends, the Company's loss
retention levels, changes in frequency and severity of claims, and rates
charged.
The above loss ratios reflect improvement of loss development in prior years
coverage of $31.0 million in 1998 and $25.8 million in 1997. However, as the
Company continues its expansion efforts, the improvement of loss development
for prior years could have a smaller or less favorable impact on the loss
ratios of future years.
Other Income
Other income increased by $5.7 million for the nine months ended September 30,
1998 as compared to the nine months ended September 30,1997. The increase is
principally attributable to increased capital gains realized upon the sale or
other disposition of securities during the first nine months of 1998 compared
to the first nine months of 1997.
Underwriting, Acquisition, and Insurance Expenses
Underwriting, acquisition and insurance expenses are summarized in the
following table (in thousands):
<TABLE>
<CAPTION> Nine Months Ended
September 30
---------------------- Increase
1998 1997 (Decrease)
---- ---- ----------
<S> <C> <C> <C>
Underwriting, acquisition and insurance expenses,
before reduction by ceding commissions earned $ 32,228 $ 26,465 $ 5,763
Ceding commissions earned (7,395) (3,615) 3,780
-------- -------- -------
$ 24,833 $ 22,850 $ 1,983
======== ======== =======
</TABLE>
Expenses increased by $2.0 million (which are net of ceding commissions earned,
see Note 5 of the accompanying Notes to Condensed Consolidated Financial
Statements for more information) for the nine months ended September 30, 1998
compared to the nine months ended September 30,1997. The increase was due to an
increase in acquisition costs of $1.2 million and an increase in other
operating expenses of $0.8 million primarily from salary and benefit increases
and other miscellaneous expenses relating to the daily operation of the
Company.
13
<PAGE> 14
Income Taxes
The Company's effective tax rates of 26% and 23% for the nine months ended
September 30, 1998 and 1997, respectively, are lower than the statutory rate of
35% principally due to the effect of tax-exempt investment income.
14
<PAGE> 15
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE
MONTHS ENDED SEPTEMBER 30, 1997
Premiums
The following table presents information related to consolidated written and
earned premiums and reinsurance expense (in thousands):
<TABLE>
<CAPTION>
Three Months ended
September 30
-------------------------- Increase
1998 1997 (Decrease)
---- ---- ----------
<S> <C> <C> <C>
Direct and assumed premiums written $ 43,319 $ 43,266 $ 53
======== ======== =======
Premiums earned $ 49,510 $ 41,382 $ 8,128
Premiums ceded (11,834) (10,608) (1,226)
-------- -------- -------
Net premiums earned $ 37,676 $ 30,774 $ 6,902
======== ======== =======
</TABLE>
The increase in premiums written for the three months ended September 30, 1998
as compared to the three months ended September 30, 1997 is due primarily to
increases in reinsurance assumed of $4.7 million offset by decreases in
premiums written.
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 capacity for additional 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 $1.2 million increase in premiums
ceded for the three months ended September 30, 1998 as compared to the three
months ended September 30, 1997 is principally due to additional written
premium and assumed premiums, and as respects this new business, increased
cessions of risks to reinsurers offset in part by reduced cessions to
reinsurers within certain markets. The Company continually reviews the levels
of coverages ceded and the related costs.
Investment Income
The Company had consolidated net investment income of $10.2 million for the
three months ended September 30, 1998, as compared to $9.5 million for the
three months ended September 30, 1997, reflecting an increase of $634,000. The
increased investment income is principally a result of an increase in the
amount of investments held by the Company. Offsetting this increase was a
decrease in the average rates of return; the rate of return for the three
months ended September 30, 1998 was 5.6% compared to 5.8% for the comparable
period in 1997.
15
<PAGE> 16
Losses
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.
<TABLE>
<CAPTION>
Three months ended
September 30, 1998 September 30, 1997
--------------------- --------------------
Loss Loss
Losses Ratio Losses Ratio
------ ----- ------ -----
<S> <C> <C> <C> <C>
Losses $ 37,850 77% $32,634 79%
== ==
Reinsurance recoveries (11,984) (11,328)
-------- -------
Net losses $ 25,866 69% $21,306 69%
======== == ======= ==
</TABLE>
The Company's losses in the three months ended September 30, 1998 reflect a
loss ratio of 77% as compared to a loss ratio of 79% for the three months ended
September 30, 1997. Losses for both periods are principally based on the
application of expected loss ratios to premiums earned. These loss ratios take
into consideration prior loss experience, loss trends, the Company's loss
retention levels, changes in frequency and severity of claims, and rates
charged.
The above loss ratios reflect improvement of loss development in prior years
coverage of $13.0 million in 1998 and $9.1 million in 1997. However, as the
Company continues its expansion efforts, the improvement of loss development
for prior years could have a smaller or less favorable impact on the loss
ratios of future years.
Other Income
Other income increased by $3.6 million for the quarter ended September 30, 1998
as compared to the quarter ended September 30,1997. The increase is principally
attributable to increased capital gains realized upon the sale or other
disposition of securities during the third quarter of 1998 compared to the
third quarter of 1997.
Underwriting, Acquisition, and Insurance Expenses
Underwriting, acquisition and insurance expenses are summarized in the
following table (in thousands):
<TABLE>
<CAPTION>
Three Months ended
September 30
---------------------- Increase
1998 1997 (Decrease)
---- ---- ----------
<S> <C> <C> <C>
Underwriting, acquisition and insurance expenses $12,216 $ 9,555 $2,661
before reduction by ceding commissions earned,
Ceding commissions earned (3,829) (1,899) 1,930
------- ------- ------
$ 8,387 $ 7,656 $ 731
======= ======= ======
</TABLE>
As compared to the quarter ended September 30, 1997, underwriting, acquisition
and insurance expenses (which are net of ceding commissions earned, see Note 5
of the accompanying Notes to Condensed Consolidated Financial Statements for
more information) increased by $2.6 million. The increase is due to a $3.0
million increase in the amortization of policy acquisition costs offset by
increased ceding commissions earned of $1.9 million, both of which are
primarily attributable to an increase in premiums earned for the quarter.
16
<PAGE> 17
Income Taxes
The Company's effective tax rates of 27% for the three months ended September
30, 1998 and 26% for the comparable period in 1997 are lower than the statutory
rate of 35% principally due to the effect of tax-exempt investment income.
17
<PAGE> 18
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit (27) required of Item 601 of Regulation SK-Financial Data
Schedule (for SEC use only).
(b) Reports on 8-K. No reports on Form 8-K have been filed during the
quarter for which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant had duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Medical Assurance, Inc.
November 15, 1998 By: /s/ James J. Morello
---------------------------
James J. Morello, Treasurer
(duly authorized officer and
principal financial officer)
18
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MEDICAL ASSURANCE, INC. FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 648,820
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 43,169
<MORTGAGE> 0
<REAL-ESTATE> 11,488
<TOTAL-INVEST> 761,982
<CASH> 46,342
<RECOVER-REINSURE> 176,215
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 1,142,984
<POLICY-LOSSES> 665,111
<UNEARNED-PREMIUMS> 83,117
<POLICY-OTHER> 52,658
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 21,722
<OTHER-SE> 293,761
<TOTAL-LIABILITY-AND-EQUITY> 1,142,984
104,019
<INVESTMENT-INCOME> 29,577
<INVESTMENT-GAINS> 6,260
<OTHER-INCOME> 1,426
<BENEFITS> 70,142
<UNDERWRITING-AMORTIZATION> 11,823
<UNDERWRITING-OTHER> 13,010
<INCOME-PRETAX> 46,307
<INCOME-TAX> 11,820
<INCOME-CONTINUING> 34,487
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 34,487
<EPS-PRIMARY> 1.61
<EPS-DILUTED> 1.61
<RESERVE-OPEN> 464,131
<PROVISION-CURRENT> 101,142
<PROVISION-PRIOR> (31,000)
<PAYMENTS-CURRENT> (4,132)
<PAYMENTS-PRIOR> (41,168)
<RESERVE-CLOSE> 488,973
<CUMULATIVE-DEFICIENCY> (31,000)
</TABLE>
