<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, 2000 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.
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(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
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(Address of principal executive offices) (Zip Code)
(205) 877-4400
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(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 November 3, 2000, there were 22,588,038 shares of the registrant's common
stock outstanding.
Page 1 of 23
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Table of Contents
<TABLE>
<S> <C>
Part I - Financial Information
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....................................................11
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......................................21
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K.................................................................23
Signatures....................................................................................................23
</TABLE>
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MEDICAL ASSURANCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30 December 31
2000 1999
------------ -----------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available for sale, at fair value $ 635,075 $ 640,064
Equity securities available for sale, at fair value 71,612 48,013
Real estate, net 11,194 11,349
Short-term investments 57,923 62,492
----------- -----------
Total investments 775,804 761,918
Cash and cash equivalents 18,512 19,409
Premiums receivable 63,948 52,749
Receivable from reinsurers on unpaid losses and loss
adjustment expenses 185,725 179,508
Prepaid reinsurance premiums 8,358 15,663
Deferred taxes 31,987 34,071
Other assets 66,041 54,350
----------- -----------
$ 1,150,375 $ 1,117,668
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Policy liabilities and accruals:
Reserve for losses and loss adjustment expenses $ 678,793 $ 665,792
Unearned premiums 81,302 70,925
Reinsurance premiums payable 37,408 34,921
----------- -----------
Total policy liabilities 797,503 771,638
Other liabilities 13,399 20,306
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Total liabilities 810,902 791,944
Commitments and contingencies -- --
Stockholders' equity:
Common stock, par value $1 per share; 100,000,000
shares authorized; 25,105,441 and 25,102,901
shares issued, respectively 25,105 25,103
Additional paid-in capital 231,968 231,941
Accumulated other comprehensive loss, net of
deferred tax benefits of $(1,177) and $(2,920), respectively (2,185) (5,424)
Retained earnings 131,257 111,957
----------- -----------
386,145 363,577
Less treasury stock at cost, 2,437,503 and 1,701,577 shares,
respectively (46,672) (37,853)
----------- -----------
Total stockholders' equity 339,473 325,724
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$ 1,150,375 $ 1,117,668
=========== ===========
</TABLE>
See accompanying notes.
3
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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 (LOSS) EARNINGS ACCOUNTS
---------- ------------- --------- --------
<S> <C> <C> <C> <C>
Balance at December 31, 1999 $ 325,724 $ (5,424) $111,957 $219,191
Comprehensive income
Net income 19,300 19,300
Other comprehensive income, net of tax
Unrealized gains on securities, net of
reclassification adjustment of $473
for gains included in net income 3,239 3,239
---------
Comprehensive income 22,539
Common stock issued for compensation 40 40
Net purchases of treasury stock (8,830) (8,830)
--------- -------- -------- --------
Balance at September 30, 2000 $ 339,473 $ (2,185) $131,257 $210,401
========= ======== ======== ========
<CAPTION>
ACCUMULATED
OTHER OTHER
COMPREHENSIVE RETAINED CAPITAL
TOTAL INCOME (LOSS) EARNINGS ACCOUNTS
---------- ------------- --------- --------
<S> <C> <C> <C> <C>
Balance at December 31, 1998 $ 324,180 $ 12,277 $ 91,622 $220,281
Comprehensive income
Net income 34,255 34,255
Other comprehensive (loss), net of tax
Unrealized losses on securities, net of
reclassification adjustment of $936
for gains included in net income (14,478) (14,478)
-------
Comprehensive income 19,777
Common stock issued for compensation 85 85
Net purchases of treasury stock (24,745) (24,745)
--------- ---------- --------- --------
Balance at September 30, 1999 $ 319,297 $ (2,201) $ 125,877 $195,621
========= ========== ========= ========
</TABLE>
See accompanying notes.
4
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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
--------------------------- -----------------------------
2000 1999 2000 1999
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Direct and assumed premiums written $ 62,371 $ 44,301 $ 167,849 $ 153,950
======== ======== ========= =========
Premiums earned $ 56,901 $ 49,930 $ 157,472 $ 150,877
Premiums ceded (12,338) (12,185) (31,795) (33,837)
-------- -------- --------- ---------
Net premiums earned 44,563 37,745 125,677 117,040
Net investment income 10,072 10,087 29,679 29,463
Other income 810 683 2,679 2,916
-------- -------- --------- ---------
Total revenues 55,445 48,515 158,035 149,419
Expenses:
Losses and loss adjustment expenses 49,105 32,149 132,147 102,855
Reinsurance recoveries (8,620) (9,464) (25,826) (30,801)
-------- -------- --------- ---------
Net losses and loss
adjustment expenses 40,485 22,685 106,321 72,054
Underwriting, acquisition
and insurance expenses 9,145 10,784 28,857 31,071
-------- -------- --------- ---------
Total expenses 49,630 33,469 135,178 103,125
-------- -------- --------- ---------
Income before income taxes 5,815 15,046 22,857 46,294
Provision for income taxes:
Current expense 1,528 1,707 3,243 10,777
Deferred expense (benefit) (913) 2,194 314 1,262
-------- -------- --------- ---------
615 3,901 3,557 12,039
-------- -------- --------- ---------
Net income $ 5,200 $ 11,145 $ 19,300 $ 34,255
======== ======== ========= =========
Earnings per share:
Net income--basic and diluted $ 0.22 $ 0.47 $ 0.83 $ 1.42
======== ======== ========= =========
Weighted average number of common shares
outstanding--basic and diluted 23,158 23,919 23,329 24,182
======== ======== ========= =========
</TABLE>
See accompanying notes.
5
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MEDICAL ASSURANCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
----------------------------
2000 1999
-------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net cash provided by operating activities $ 24,863 $ 30,079
INVESTING ACTIVITIES
Purchases of fixed maturities available for sale (83,289) (152,519)
Purchases of equity securities available for sale (33,923) (13,518)
Proceeds from sale or maturities of fixed
maturities available for sale 93,273 137,420
Proceeds from sale of equity securities available for sale 8,913 15,919
Net decrease in short-term investments 4,569 29,567
Other (6,533) (8,436)
-------- ---------
Net cash provided by (used by) investing activities (16,990) 8,433
FINANCING ACTIVITIES
Purchases of treasury stock (8,770) (24,519)
-------- ---------
Net cash used by financing activities (8,770) (24,519)
-------- ---------
(Decrease) increase in cash and cash equivalents (897) 13,993
Cash and cash equivalents at beginning of period 19,409 9,022
-------- ---------
Cash and cash equivalents at end of period $ 18,512 $ 23,015
======== =========
</TABLE>
See accompanying notes.
6
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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, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000. For further information, refer to the December 31, 1999
audited consolidated financial statements and accompanying notes.
2. SEGMENT INFORMATION
The Company operates in the United States of America and in only one
reportable industry segment, which is providing professional and general
liability insurance for physicians and surgeons, dentists, hospitals, and others
engaged in the delivery of health care.
3. INVESTMENTS
Proceeds from sales of investments in fixed maturities and equities
available for sale were approximately $64.8 million and $107.0 million for the
nine months ended September 30, 2000 and 1999, respectively. Gross realized
gains on such sales were approximately $2.6 million and $3.1 million at
September 30, 2000 and 1999, respectively; gross realized losses on such sales
were approximately $1.9 million and $1.7 million at September 30, 2000 and 1999,
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 $709.7 million and $696.4 million at September 30, 2000 and
December 31, 1999, respectively.
7
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Medical Assurance, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
4. RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
The reserves for losses and loss adjustment expenses at September 30,
2000 and December 31, 1999 represent management's best estimate of the ultimate
cost of all losses incurred but unpaid and 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. Losses incurred and the related reserves are established
utilizing a combination of two components: a) the application of expected loss
factors to earned exposures for the current accident year, and b) actuarial
re-evaluation of incurred loss levels for prior accident years. These components
take into consideration prior loss experience, loss trends, and changes in the
frequency and severity of claims. Any adjustments related to previously
established amounts are included in current operations.
5. DEFERRED POLICY ACQUISITION COSTS
Costs that vary with and are directly related to the production of new
and renewal premiums (primarily premium taxes, commissions and underwriting
salaries) are deferred to the extent they are recoverable against unearned
premiums and are amortized as related premiums are earned. Amortization of
deferred acquisition costs, net of ceding commissions earned, amounted to
approximately $15.5 million and $16.9 million for the nine months ended
September 30, 2000 and 1999, respectively.
As is common practice within the industry, reinsurance ceding
commissions are deducted from underwriting, acquisition and insurance expenses
and amounted to $6.0 million and $6.5 million for the nine months ended
September 30, 2000 and 1999, respectively.
6. INCOME TAXES
Income tax expense differs from the normal relationship to financial
statement income principally because of tax-exempt interest income.
8
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Medical Assurance, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
7. STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE
On December 8, 1999 the Board of Directors declared a 5% stock
dividend. Cash was paid to shareholders for fractional shares. Earnings per
share data for 1999 has been restated as if this dividend had been declared on
January 1, 1999.
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, 2000, the Board of
Directors had not authorized the issuance of any preferred stock nor determined
any provisions for the preferred stock.
In July 2000 the Company's Board of Directors authorized the purchase
of up to one million shares of its common stock in the open market. The
Company's purchase of any of its shares is subject to limitations that may be
imposed on such purchases by applicable securities laws and regulations and the
rules of the New York Stock Exchange. The timing of the purchases and the number
of shares to be bought at any one time depend on market conditions and the
Company's other capital requirements. As of September 30, 2000, the Company has
purchased 739,000 shares at a cost of $8.9 million related to this
authorization.
8. CONSOLIDATION AGREEMENT
On June 22, 2000 the Company entered into a definitive agreement to
consolidate with Professionals Group, Inc. ("Professionals Group") (NASDAQ
National Market: PICM). The entity resulting from the consolidation of
Professionals Group and the Company will be known as ProAssurance Corporation.
Professionals Group is an insurance holding company that provides
medical professional liability insurance and related services to physicians,
dentists, hospitals and other health care providers and facilities. At June 30,
2000 Professionals Group also owned 77% of MEEMIC Holdings, Inc. (NASDAQ
National Market: MEMH) which provides personal auto and homeowners coverages
primarily to educational employees and other Michigan based policy holders
through MEEMIC Insurance Company.
As of June 30, 2000, Professionals Group had total assets of $1,111
million, total policy liabilities of $785 million, and shareholders' equity of
$224 million. Professionals Group had approximately 8.9 million shares of common
stock outstanding as of June 30, 2000.
9
<PAGE> 10
Medical Assurance, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
ProAssurance Corporation will own all of the stock of the Company and
of Professionals Group. Upon completion of the consolidation, the Company's
shareholders will exchange their shares on a one-for-one basis for shares of
ProAssurance Corporation and Professionals Group shareholders will receive their
choice of $12.00 in cash and $14.00 in shares of stock in the new holding
company (based on the "market value" of the Company's stock during a period
preceding closing) or $26.00 cash for each share of Professionals Group stock
they own. The amount of cash consideration payable with respect to each share of
Professionals Group upon completion of the consolidation may be increased or
decreased to reflect certain increases or decreases in the aggregate market
value of Professionals Group's portfolio assets that occur between December 31,
1999 and the end of the second-to-last calendar month preceding the completion
of the consolidation. At least 10% of the value of the consideration issued to
the stockholders of Professionals Group, taken as a whole, must be represented
by shares of stock in the new holding company. The cash payable to the
shareholders of Professionals Group will be financed in part from cash dividends
to ProAssurance Corporation from the Company and Professionals Group and will
require that additional dividends be paid to the Company and Professionals Group
from their respective insurance subsidiaries. ProAssurance Corporation will
finance the balance of the cash needed for the consolidation through a bank
loan. The amount of cash to be derived from the insurance subsidiaries, as well
as the terms of the bank financing, is subject to regulatory approval.
The consolidation, which is subject to certain insurance and anti-trust
regulatory approvals and to shareholder approvals, is expected to be completed
in early 2001. The combination of the Company and ProAssurance Corporation will
be reported in a manner similar to a pooling of interests. The combination with
Professionals Group will be accounted for as a purchase.
9. 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.
10
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Medical Assurance, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 operating activities was sufficient during
the first nine months of 2000 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. The Company did not
borrow any funds during the nine-month periods ended September 30, 2000 and
1999.
As discussed in the accompanying Notes to the Condensed Consolidated
Financial Statements, the Company has entered into a definitive agreement with
Professionals Group, Inc. to consolidate under a newly formed insurance holding
company to be named ProAssurance Corporation. On November 6, 2000 ProAssurance
Corporation filed an S-4 registration statement (Registration number 333-49378)
related to the consolidation that provides detailed information about the
consolidation as well as pro forma financial statements.
The consolidation is subject to various contingencies, including
regulatory and shareholder approval but is expected to be effective in early
2001. The proposed consolidation and the financing thereof are subject to
regulatory approval. In addition, the plan of financing is subject to review by
A. M. Best rating agency as each party's obligation to complete the
consolidation is subject to the condition that the other party's insurance
subsidiaries have a rating of A- or higher from A. M. Best rating agency at the
time of the consolidation, and is subject to the further condition that no
insurance subsidiary shall have received a notification from A. M. Best rating
agency that its rating will be lower than A- after giving effect to the
consolidation.
The consolidation will result in a substantial cash payment to
Professionals Group shareholders. As described in the S-4, the consolidation is
expected to be financed with dividends to ProAssurance Corporation from the
Company and Professionals Group of approximately $50 million each and a bank
term loan of up to $110 million. The Company and Professionals Group will
require dividends from their respective insurance subsidiaries in order to fund
the cash requirements of the consolidation and payment of debt service on the
term loan. The payment of dividends from insurance subsidiaries will initially
be funded from the sales and maturities of investment assets. The Company
anticipates that debt service on the loan will be substantially funded from
operating cash flow.
The Company continues to have available through a lending institution a
line of credit in the amount of $40 million. This line will be replaced by a
revolving credit facility of up to $40 million made available to ProAssurance
and its subsidiaries after the consolidation.
11
<PAGE> 12
In July 2000 the Company's Board of Directors authorized the purchase
of up to one million shares of its common stock in the open market, believing
that under certain market conditions that the repurchase of shares represents
one of the most effective uses of Company capital. The Company's purchase of any
of its shares is subject to limitations that may be imposed on such purchases by
applicable securities laws and regulations and the rules of the New York Stock
Exchange. The timing of the purchases and the number of shares to be bought at
any one time depend on market conditions and the capital requirements of the
business combination with Professionals Group. As of September 30, 2000, the
Company has purchased 739,000 shares at a cost of $8.9 million related to this
authorization.
YEAR 2000
To date, the Company has experienced no Year 2000 related disruptions
in mission critical information technology and non-information technology
systems and believes those systems successfully responded to the Year 2000 date
change.
The Company is not aware of any material problems resulting from Year
2000 issues as respects its internal systems, or the products and services of
third parties, nor is the Company aware of any claims against its insureds
resulting from Year 2000 related matters. The Company will continue to monitor
its mission critical computer applications to ensure that any latent Year 2000
matters that may arise are addressed promptly.
12
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RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 1999
Premiums
The following table presents information related to consolidated
written, earned and ceded premiums (in thousands):
<TABLE>
<CAPTION>
Nine months ended
September 30
-------------------------- Increase
2000 1999 (Decrease)
-------- -------- ----------
<S> <C> <C> <C>
Direct and assumed premiums written $167,849 $153,950 $ 13,899
======== ======== ========
Direct and assumed premiums earned $157,472 $150,877 $ 6,595
Less: Premiums ceded 31,795 33,837 (2,042)
-------- -------- --------
Net premiums earned $125,677 $117,040 $ 8,637
======== ======== ========
</TABLE>
Direct and assumed medical malpractice premiums written totaled $139.6
million and $137.4 million, respectively, for the nine month periods ended
September 30, 2000 and 1999. Medical malpractice premiums written during the
nine months ended September 30, 2000 increased by $2.2 million as compared to
the same period of 1999. An increase of approximately $9.2 million resulted from
premiums written at higher rates, as described in the next paragraph. Partially
offsetting this increase was a decrease of $3.9 million resulting from one-time
additional premiums written in January 1999 related to the purchase of a book of
business.
The Company believes that medical malpractice rate increases are
warranted based on current loss trends (see discussion under "Losses"). The
Company has begun implementing its approved rate increases; additional rate
increases are planned. Additionally, the Company has reduced discretionary
discounts in an effort to write premiums in all states at the Company's current
filed and approved rates. As these measures are implemented, the Company may
experience a loss of insureds, however, to date, the Company has maintained an
approximate 90% retention rate. Since premiums are earned over an entire policy
period (usually one year) the full effect of the rate increases will phase in
throughout the year after each policy is written at the higher rate.
The Company writes accident and health, workers compensation and
multi-line premiums from time to time as opportunities arise. These policies
historically yield lower margins than the Company's other lines of business and
thus are not a primary focus of operations. However, this business does provide
an opportunity to utilize the Company's capital and produces revenue from fees
and commissions. Given the uncertain market conditions in these areas,
variations in premiums are to be expected as pricing conditions change rapidly.
For the nine months ended September 30, 2000 as compared to the same period of
1999, direct and assumed workers compensation and multi-line premiums written
increased $9.9 million, while direct and assumed accident and health premiums
written increased by $1.7 million.
13
<PAGE> 14
Direct and assumed medical malpractice premiums earned decreased $4.3
million for the nine months ended September 30, 2000 as compared to same period
in 1999. As with written premiums, $3.4 million of this decrease was due to
one-time additional premiums earned in 1999 related to the purchase of a book of
business. The decrease in medical malpractice premiums earned was more than
offset by a $10.9 million net increase from other types of premiums, primarily
workers compensation 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 that 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 decrease in premiums ceded for the
nine months ended September 30, 2000 as compared to the nine months ended
September 30, 1999 is primarily due to decreased direct accident and health
premiums earned, which are heavily ceded. The Company continually reviews the
levels of coverage ceded and the related costs.
Investment Income
Consolidated net investment income was $29.7 million for the nine
months ended September 30, 2000, a small increase over consolidated net
investment income of $29.5 million for the same period of 1999. The annualized
average pre-tax investment yield was 5.2% for both nine month periods while
average invested assets increased slightly during 2000 as compared to 1999.
Average invested assets for 2000 did not increase significantly as compared to
1999 primarily due to $15.0 million of treasury stock purchased in the last four
months of 1999 and $8.9 million in the third quarter of 2000. The Company
anticipates a reduction of invested assets in 2001 in order to complete the
consolidation with Professionals Group as discussed under "Liquidity".
14
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Losses
Consolidated net losses and loss adjustment expenses (losses) and the
related current year loss ratio are summarized in the following table (dollars
in thousands). The current year loss ratio is based on net premiums earned.
<TABLE>
<CAPTION>
Nine months ended
September 30, 2000 September 30, 1999
--------------------------------- ----------------------------------
Loss Loss
Losses Ratio Losses Ratio
--------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Incurred loss related to:
Current year $ 128,821 103% $ 113,417 97%
====== ===
Prior years (22,500) (41,363)
------------ ---------
Net incurred loss $ 106,321 $ 72,054
============ =========
</TABLE>
Losses incurred include two components: a) the application of expected
loss factors to earned exposures for the current accident year, and b) actuarial
re-evaluation of incurred loss levels for prior accident years. These components
take into consideration prior loss experience, loss trends, and changes in the
frequency and severity of claims. Any adjustments related to previously
established amounts are included in current operations.
Medical malpractice claims are resolved over an extended number of
years and a number of these claims are litigated. Management uses its best
estimate in establishing its loss reserves, but during the extended period in
which claims are resolved the legal environment and other factors may change.
Consequently, ultimate losses are inherently difficult to estimate and actual
results may vary from the estimated amounts. Given the large volume of loss
reserves at any balance sheet date, a small change in the estimate of those
reserves can have a significant effect on current operations.
The current accident year loss ratio (current accident year net loss
divided by net premiums earned) increased to 103% from 97%. This change is due
to increasing trends in severity and frequency of medical malpractice claims
recognized by the Company during the first nine months of 2000. As a result of
these same trends, the per claim average ultimate payment of indemnity and loss
adjustment expenses for recent accident years appears likely to exceed
comparable averages for previous years. Although such per claim average remains
within the level contemplated by the previously established reserves, the effect
was favorable loss development during the nine months ended September 30, 2000
of $22.5 million versus $41.4 million during the nine months ended September 30,
1999. If these trends continue, the Company may experience higher levels of
incurred losses in subsequent periods.
Other Income
Other income decreased by $237,000 for the nine months ended September
30, 2000 as compared to the nine months ended September 30, 1999. The decrease
is principally attributable to lower capital gains realized upon the sale of
securities during 2000 as compared to 1999 offset by an increase in fee income.
15
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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
2000 1999 (Decrease)
------- ------- ---------
<S> <C> <C> <C>
Underwriting, acquisition and insurance expenses
before reduction for ceding commissions earned $34,828 $37,543 $(2,715)
Less: Ceding commissions earned 5,971 6,472 (501)
------- ------- -------
Underwriting, acquisition and insurance expenses $28,857 $31,071 $(2,214)
======= ======= =======
</TABLE>
Underwriting, acquisition and insurance expenses were lower for the
nine months ended September 30, 2000 as compared to the nine months ended
September 30, 1999 primarily due to the mix of business reflecting lower policy
acquisition costs related to medical malpractice premiums and the Company's
efforts in controlling expenses offset in part by higher policy acquisition
costs related to increased workers compensation premiums.
State guaranty fund assessments, which are also included in
underwriting, acquisition and insurance expenses, were approximately $502,000
for the nine months ended September 30, 2000 as compared to $1.9 million for the
nine months ended September 30, 1999.
The decrease in ceding commissions earned for the nine months ended
September 30, 2000 as compared to the nine months ended September 30, 1999 is
principally due to lower ceded accident and health premiums earned.
Income Taxes
The Company's effective tax rate was 16% for the nine months ended
September 30, 2000 and 26% for the nine months ended September 30, 1999. These
rates are lower than the statutory rate of 35% principally due to the effect of
tax-exempt investment income. The effective rate for 2000 was lower than the
rate for 1999 because tax exempt income represented a larger portion of income
before income taxes.
16
<PAGE> 17
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE
MONTHS ENDED SEPTEMBER 30, 1999
Premiums
The following table presents information related to consolidated
written, earned and ceded premiums (in thousands):
<TABLE>
<CAPTION>
Three months ended
September 30
------------------------- Increase
2000 1999 (Decrease)
------------------------- ------------
<S> <C> <C> <C>
Direct and assumed premiums written $62,371 $44,301 $18,070
======= ======= =======
Direct and assumed premiums earned $56,901 $49,930 $ 6,971
Less: Premiums ceded 12,338 12,185 153
------- ------- -------
Net premiums earned $44,563 $37,745 $ 6,818
======= ======= =======
</TABLE>
Direct and assumed medical malpractice premiums written totaled $48.5
million and $40.3 million, respectively, for the three month periods ended
September 30, 2000 and 1999, an increase of $8.2 million. Of this increase,
approximately $6.5 million resulted from premiums written at higher rates, as
previously discussed in our analysis of premiums for the nine months ended
September 30, 2000.
During the quarter ended September 30, 2000 as compared to the same
period of 1999, direct and assumed accident and health premiums written
increased $5.6 million; direct and assumed workers compensation and multi-line
premiums written increased $4.3 million for the same period. As previously
discussed, given the uncertain market conditions in these areas, variations in
premiums are to be expected as pricing conditions change rapidly.
Direct and assumed medical malpractice premiums earned did not change
significantly as compared to the same quarter of 1999. Direct and assumed
accident and health, workers compensation, and multi-line premiums earned
increased by $6.2 million for the quarter ended September 30, 2000 as compared
to the same period of 1999.
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 that 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 increase in premiums ceded is due
primarily to the increase in direct and assumed accident and health, workers
compensation, and multi-line premiums earned, which are heavily ceded. The
Company continually reviews the levels of coverage ceded and the related costs.
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<PAGE> 18
Investment Income
The Company earned consolidated net investment income of $10.1 million
for both the third quarter of 2000 and the third quarter of 1999. The annualized
average pre-tax investment yield for the third quarter of 2000 was 5.3% as
compared to 5.4% for 1999; the decrease in yield was offset by an increase in
average invested assets.
Losses
Consolidated net losses and loss adjustment expenses (losses) and the
related current year loss ratio are summarized in the following table (dollars
in thousands). The current year loss ratio is based on net premiums earned.
<TABLE>
<CAPTION>
Three months ended
September 30, 2000 September 30, 1999
-------------------------- ---------------------------
Loss Loss
Losses Ratio Losses Ratio
-------------------------- ---------------------------
<S> <C> <C> <C> <C>
Incurred loss related to:
Current year $ 45,485 102% $ 37,548 99%
=== ===
Prior years (5,000) (14,863)
-------- ----------
Net incurred loss $ 40,485 $ 22,685
======== ==========
</TABLE>
Losses incurred include two components: a) the application of expected
loss factors to earned exposures for the current accident year, and b) actuarial
re-evaluation of incurred loss levels for prior accident years. These components
take into consideration prior loss experience, loss trends, and changes in the
frequency and severity of claims. Any adjustments related to previously
established amounts are included in current operations.
Medical malpractice claims are resolved over an extended number of
years and a number of these claims are litigated. Management uses its best
estimate in establishing its loss reserves, but during the extended period in
which claims are resolved the legal environment and other factors may change.
Consequently, ultimate losses are inherently difficult to estimate and actual
results may vary from the estimated amounts. Given the large volume of loss
reserves at any balance sheet date, a small change in the estimate of those
reserves can have a significant effect on current operations.
The current accident year loss ratio (current accident year net loss
divided by net premiums earned) for the quarter increased to 102% from 99%. This
change is due to increasing trends in severity and frequency of medical
malpractice claims recognized by the Company during 2000. As a result of these
same trends, the per claim average ultimate payment of indemnity and loss
adjustment expenses for recent accident years appears likely to exceed
comparable averages for previous years. Although such per claim average remains
within the level contemplated by the previously established reserves, the effect
was favorable loss development during the quarter ended September 30, 2000 of
$5.0 million versus $14.9 million during the quarter ended September 30, 1999.
If these trends continue, the Company may experience higher levels of incurred
losses in subsequent periods.
The current year loss ratio of 102% for the quarter ended September 30,
2000 is lower than the same ratio for the year-to-date period of 103%. The
difference is due, in part, to rate increases implemented during the second and
third quarters of 2000 that had a greater impact upon the quarter than on the
year as a whole.
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<PAGE> 19
Other Income
Other income increased by $127,000 for the quarter ended September 30,
2000 as compared to the quarter ended September 30, 1999. The increase is
principally attributable to an increase in realized capital gains between the
quarters.
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
2000 1999 (Decrease)
-------------------------- ----------
<S> <C> <C> <C>
Underwriting, acquisition and insurance expenses
before reduction by ceding commissions earned $12,785 $13,259 $ (474)
Less: Ceding commissions earned 3,640 2,475 1,165
------- ------- -------
Underwriting, acquisition and insurance expenses $ 9,145 $10,784 $(1,639)
======= ======= =======
</TABLE>
The decrease in underwriting, acquisition and insurance expenses for
the third quarter of 2000 as compared to the third quarter of 1999 primarily
results from changes in the mix of earned premiums between the quarters and a
decrease of $1.4 million in state guaranty fund assessments.
Ceding commissions earned for the quarter ended September 30, 2000
increased $1.2 million as compared to the quarter ended September 30, 1999 due
to changes in the mix of earned premiums between the quarters.
19
<PAGE> 20
Income Taxes
The Company's effective tax rate was 11% for the three months ended
September 30, 2000 and 26% for the three months ended September 30, 1999. These
rates are lower than the statutory rate of 35% principally due to the effect of
tax-exempt investment income. The effective rate for 2000 was lower than the
rate for 1999 because tax exempt income represented a larger portion of income
before income taxes.
20
<PAGE> 21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to various market risks, including both interest
rate risk and equity price risk. The Company handles market risks in accordance
with its established investment policies. The goal of these policies 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 restrictions.
Interest rate risk represents the risk of changes in value of a financial
instrument caused by fluctuations in market interest rates. Control of interest
rate risk relates principally to ratings of issuers and length to maturity. The
Company does not enter into derivative transactions.
At September 30, 2000 fixed maturity securities of $635 million, at
fair value, including unrealized losses of $8 million, comprised 82% of the
Company's invested assets of $776 million. Thus, the most significant market
risk to the Company is interest rate risk related to the fixed maturity
portfolio. The Company believes it is in a position to keep these investments
until final maturity and does not invest in fixed maturity securities for
trading purposes. Nevertheless, fluctuations in market interest rates would
significantly impact the fair value of this portfolio.
Effective duration is one common measure of the interest-sensitivity of
fixed-maturity securities. Stated simply, effective duration is a calculation
that takes stated maturity, yields, and call features into consideration to
predict an average age of expected cash flows related to a security.
The Company estimates that the fair value of its fixed maturity
portfolio and the weighted average effective duration would respond to
fluctuations in market interest rates as follows:
<TABLE>
<CAPTION>
Change in Interest Rate Basis Points
-----------------------------------------------------------------------
Current
-200** -100** Rates* +100** +200**
---- ---- -------- ---- ----
<S> <C> <C> <C> <C> <C>
Fair value of portfolio (in millions) $677 $656 $ 635 $614 $593
Weighted average effective duration of
portfolio 3.1 3.1 3.3 3.4 3.4
</TABLE>
*Current rates are as of September 30, 2000
**Projected amounts
At September 30, 2000 the fair value of the Company's investment in
common stocks, excluding preferred stocks as discussed in the following
paragraph, was $44 million which included net unrealized gains of $4 million.
These securities are subject to equity price risk. A hypothetical 10% increase
in the market prices as of September 30, 2000 would increase the fair value of
these securities to $49 million; a hypothetical 10% decrease would reduce the
fair value to $40 million. The selected hypothetical change does not reflect
what could be considered the best or worst scenarios.
At September 30, 2000 the Company has a limited investment in preferred
stocks. At September 30, 2000 these securities were carried at fair value of $27
million, which also
21
<PAGE> 22
approximated amortized cost. These securities carry fixed rates of return and
thus, like fixed maturities, are primarily subject to interest rate risk. The
fixed maturities table above does not include preferred stocks.
The Company's cash and short-term investment portfolio at September 30,
2000 was on a cost basis which approximates its fair value. This portfolio lacks
significant market rate sensitivity due to its short duration.
FORWARD-LOOKING STATEMENTS
THIS DISCUSSION CONTAINS HISTORICAL INFORMATION, AS WELL AS
FORWARD-LOOKING STATEMENTS THAT ARE BASED UPON THE COMPANY'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. WHEN THE COMPANY
USES THE WORDS "ANTICIPATES," "BELIEVES," "ESTIMATES," "EXPECTS," "HOPES,"
"INTENDS," OR SIMILAR EXPRESSIONS, THE COMPANY IS MAKING 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, LEGAL, 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 THE COMPANY'S
OBJECTIVES OR PLANS WILL BE REALIZED. FOR EVERY FORWARD-LOOKING STATEMENT, THE
COMPANY CLAIMS THE PROTECTION OF THE SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
CONTAINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
22
<PAGE> 23
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.
None
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 13, 2000 By: /s/ James J. Morello
------------------------------------
James J. Morello, Treasurer
(duly authorized officer and
principal financial officer)
23
