<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 JUNE 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
-------------------------------------------------------------------------------
(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 June 30, 2000, there were 23,406,069 shares of the registrant's common
stock outstanding.
Page 1 of 21
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Table of Contents
<TABLE>
<S> <C> <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......................................... 20
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K.................................................................. 21
Signatures .................................................................................................... 21
</TABLE>
<PAGE> 3
MEDICAL ASSURANCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30 December 31
2000 1999
----------- -----------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available for sale, at fair value $ 642,664 $ 640,064
Equity securities available for sale, at fair value 65,263 48,013
Real estate, net 11,191 11,349
Short-term investments 48,577 62,492
----------- -----------
Total investments 767,695 761,918
Cash and cash equivalents 19,396 19,409
Premiums receivable 59,706 52,749
Receivable from reinsurers 189,308 179,508
Prepaid reinsurance premiums 8,858 15,663
Deferred taxes 32,887 34,071
Other assets 55,540 54,350
----------- -----------
$ 1,133,390 $ 1,117,668
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Policy liabilities and accruals:
Reserve for losses and loss adjustment expenses $ 669,582 $ 665,792
Unearned premiums 75,832 70,925
Reinsurance premiums payable 36,770 34,921
----------- -----------
Total policy liabilities 782,184 771,638
Other liabilities 11,357 20,306
----------- -----------
Total liabilities 793,541 791,944
Commitments and contingencies -- --
Stockholders' equity:
Common stock, par value $1 per share; 100,000,000
shares authorized; 25,104,572 and 25,102,901
shares issued, respectively 25,105 25,103
Additional paid-in capital 231,957 231,941
Accumulated other comprehensive loss, net of
deferred tax benefits of $(2,960) and $(2,920), respectively (5,497) (5,424)
Retained earnings 126,057 111,957
----------- -----------
377,622 363,577
Less treasury stock at cost, 1,698,503 and 1,701,577 shares,
respectively (37,773) (37,853)
----------- -----------
Total stockholders' equity 339,849 325,724
----------- -----------
$ 1,133,390 $ 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 14,100 14,100
Other comprehensive (loss), net of tax
Unrealized losses on securities, net of
reclassification adjustment of $376
for gains included in net income (73) (73)
---------
Comprehensive income 14,027
Common stock issued for compensation 29 29
Sale of treasury stock 69 69
--------- -------- -------- --------
Balance at June 30, 2000 $ 339,849 $ (5,497) $126,057 $219,289
========= ======== ======== ========
<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 23,110 23,110
Other comprehensive (loss), net of tax
Unrealized losses on securities, net of
reclassification adjustment of $886
for gains included in net income (11,914) (11,914)
---------
Comprehensive income 11,196
Common stock issued for compensation 36 36
Net purchases of treasury stock (9,093) (9,093)
--------- -------- -------- --------
Balance at June 30, 1999 $ 326,319 $ 363 $114,732 $211,224
========= ======== ======== ========
</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 Six Months Ended
June 30 June 30
----------------------- -------------------------
2000 1999 2000 1999
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Direct and assumed
premiums written $ 43,524 $ 31,579 $ 105,478 $ 109,649
======== ======== ========= =========
Premiums earned $ 53,829 $ 49,195 $ 100,571 $ 100,947
Premiums ceded (9,991) (11,242) (19,457) (21,652)
-------- -------- --------- ---------
Net premiums earned 43,838 37,953 81,114 79,295
Net investment income 9,842 9,765 19,607 19,376
Other income 986 838 1,869 2,233
-------- -------- --------- ---------
Total revenues 54,666 48,556 102,590 100,904
Expenses:
Losses and loss
adjustment expenses 46,028 35,286 83,042 70,706
Reinsurance recoveries (9,847) (12,292) (17,206) (21,337)
-------- -------- --------- ---------
Net losses and loss
adjustment expenses 36,181 22,994 65,836 49,369
Underwriting, acquisition
and insurance expenses 11,033 9,615 19,712 20,287
-------- -------- --------- ---------
Total expenses 47,214 32,609 85,548 69,656
-------- -------- --------- ---------
Income before income taxes 7,452 15,947 17,042 31,248
Provision for income taxes:
Current expense 517 4,184 1,715 9,070
Deferred expense (benefit) 530 105 1,227 (932)
-------- -------- --------- ---------
1,047 4,289 2,942 8,138
-------- -------- --------- ---------
Net income $ 6,405 $ 11,658 $ 14,100 $ 23,110
======== ======== ========= =========
Earnings per share:
Net income--basic and diluted $ 0.27 $ 0.48 $ 0.60 $ 0.95
======== ======== ========= =========
Weighted average number
of common shares
outstanding--basic and diluted 23,405 24,202 23,404 24,316
======== ======== ========= =========
</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>
Six Months Ended
June 30
-----------------------------
2000 1999
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net cash provided by operating activities $ 11,305 $ 23,442
INVESTING ACTIVITIES
Purchases of fixed maturities available for sale (35,228) (133,833)
Purchases of equity securities available for sale (23,516) (6,787)
Proceeds from sale or maturities of fixed
maturities available for sale 32,948 96,743
Proceeds from sale of equity securities available for sale 4,589 10,162
Net decrease in short-term investments 13,915 29,706
Other (4,026) (6,347)
----------- -----------
Net cash used by investing activities (11,318) (10,356)
FINANCING ACTIVITIES
Purchases of treasury stock -- (9,230)
----------- -----------
Net cash used by financing activities -- (9,230)
----------- -----------
(Decrease) increase in cash and cash equivalents (13) 3,856
Cash and cash equivalents at beginning of period 19,409 9,022
----------- -----------
Cash and cash equivalents at end of period $ 19,396 $ 12,878
=========== ===========
</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 six months ended June 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 $12.3 million and $76.2 million for the
six months ended June 30, 2000 and 1999, respectively. Gross realized gains on
such sales were approximately $1.4 million and $2.6 million at June 30, 2000 and
1999, respectively; gross realized losses on such sales were approximately $0.9
million and $1.2 million at June 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 $716.4 million and
$696.4 million at June 30, 2000 and December 31, 1999, respectively.
7
<PAGE> 8
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 June 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 $10.5 million and $10.8 million for the six months ended June 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 $2.3 million and $4.0 million for the six months ended June 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 June 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.
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 "Medical and Professionals
Assurance, Inc."
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.
Professionals Group also owns 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 March 31, 2000, Professionals Group had total assets of
$1,094 million, total policy liabilities of $874 million, and shareholders'
equity of $220 million. Professionals Group had approximately 9.0 million shares
of common stock outstanding as of March 31, 2000.
9
<PAGE> 10
MEDICAL ASSURANCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Medical and Professionals Assurance, Inc. ("MPAI") 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 MPAI 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 available from the Company and Professionals Group and their
respective insurance subsidiaries. The Company intends to finance the balance
through debt. 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 MPAI 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
<PAGE> 11
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 six 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 six-month periods ended June 30, 2000 and 1999.
The Company continues to have available through a lending institution
a line of credit in the amount of $40 million. The Company is not charged a fee
nor is it required to maintain compensating balances in connection with this
line of credit.
As discussed in the accompanying Notes to the Condensed Consolidated
Financial Statements and in the report on Form 8-K as listed in Item 6(b)
hereof, the Company has entered into a definitive agreement with Professionals
Group, Inc. to consolidate into a newly formed insurance holding company to be
named Medical and Professionals Assurance, Inc. The consolidation is subject to
various contingencies, including regulatory and shareholder approval but is
expected to be effective in early 2001. The consolidation will result in a
substantial cash payment to Professionals Group shareholders. Based on the
number of Professionals Group shares outstanding at March 31, 2000, the amount
of this cash payment will range from $107 to $209 million, dependent upon the
number of Professional Group shareholders that elect to receive an exchange of
cash versus the number of shareholders that elect to receive cash and stock.
The cash payable to the shareholders of Professionals Group will be
financed in part from cash available from the Company and Professionals Group
and their respective insurance subsidiaries. The Company intends to initially
finance the balance through indebtedness with banks or other financial
institutions. 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.
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.
11
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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.
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 - SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS
ENDED JUNE 30, 1999
Premiums
The following table presents information related to consolidated
written, earned and ceded premiums (in thousands):
<TABLE>
<CAPTION>
Six months ended
June 30
------------------------------ Increase
2000 1999 (Decrease)
-------- -------- ----------
<S> <C> <C> <C>
Direct and assumed premiums written $105,478 $109,649 $(4,171)
======== ======== =======
Direct and assumed premiums earned $100,571 $100,947 $ (376)
Less: Premiums ceded 19,457 21,652 (2,195)
-------- -------- -------
Net premiums earned $ 81,114 $ 79,295 $ 1,819
======== ======== =======
</TABLE>
Direct and assumed medical malpractice premiums written totaled $91.2
million and $97.1 million, respectively, for the six month periods ended June
30, 2000 and 1999. Medical malpractice premiums written during the six months
ended June 30, 2000 decreased by $5.9 million as compared to the same period of
1999. Approximately $3.9 million of this decrease resulted 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 increased its efforts to
write premiums in all states at the Company's current approved "manual" rates.
As rate increases are implemented, the Company may experience a loss of
insureds, however, the Company does not believe the measures taken to date have
materially lowered retention rates. 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 price.
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 six months ended June 30, 2000 as compared to the same period of 1999,
direct and assumed workers compensation and multi-line premiums increased $5.6
million, offset by a $3.8 million decrease in direct and assumed accident and
health premiums written.
Direct and assumed medical malpractice premiums earned decreased $5.0
million for the six months ended June 30, 2000 as compared to same period in
1999. As with written premiums, $3.1 million of this decrease was due to
one-time additional premiums earned in 1999 related to the purchase of a book of
business. Direct and assumed accident and health, workers compensation and
multi-line premiums earned increased by $4.6 million during the six months ended
June 30, 2000 as compared to the same period of 1999.
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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
six months ended June 30, 2000 as compared to the six months ended June 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
The Company had consolidated net investment income of $19.6 million for
the six months ended June 30, 2000, as compared to $19.4 million for the six
months ended June 30, 1999. The annualized average pre-tax investment yield for
both six-month periods was 5.2% and average invested assets were at about the
same levels for both periods. Average invested assets for 2000 did not increase
as compared to 1999 primarily due to $15.0 million of treasury stock purchased
in the last four months of 1999.
Losses
Consolidated 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>
Six months ended
June 30, 2000 June 30, 1999
----------------------- -------------------------
Loss Loss
Losses Ratio Losses Ratio
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Incurred loss related to:
Current year $ 83,336 103% $ 75,869 96%
=== ==
Prior years (17,500) (26,500)
-------- --------
Net incurred loss $ 65,836 $ 49,369
======== ========
</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.
14
<PAGE> 15
The current accident year loss ratio (current accident year net loss
divided by net premiums earned) increased to 103% from 96%. This change is due
to increasing trends in severity and frequency of medical malpractice claims
recognized by the Company during the first six 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 six months ended June 30, 2000 of
$17.5 million versus $26.5 million during the six months ended June 30, 1999. If
these trends continue, the Company may experience higher levels of incurred
losses in subsequent periods.
Other Income
Other income decreased by $0.4 million for the six months ended June
30, 2000 as compared to the six months ended June 30, 1999. The decrease is
principally attributable to lower capital gains realized upon the sale of
securities during 2000 as compared to 1999.
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>
Six months ended
June 30
------------------------------ Increase
2000 1999 (Decrease)
-------- -------- ----------
<S> <C> <C> <C>
Underwriting, acquisition and insurance expenses
before reduction by ceding commissions earned $22,043 $24,284 $(2,241)
Less: Ceding commissions earned 2,331 3,997 (1,666)
------- ------- -------
Underwriting, acquisition and insurance expenses $19,712 $20,287 $ (575)
======= ======= =======
</TABLE>
Underwriting, acquisition and insurance expenses were lower for the six
months ended June 30, 2000 as compared to the six months ended June 30, 1999
primarily due to the mix of business reflecting lower policy acquisition costs
related to medical malpractice premiums 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 $419,000
for the six months ended June 30, 2000 as compared to $468,000 for the six
months ended June 30, 1999.
The decrease in ceding commissions earned for the six months ended June
30, 2000 as compared to the six months ended June 30, 1999 is principally due to
lower ceded accident and health premiums.
Income Taxes
The Company's effective tax rate was 17% for the six months ended June
30, 2000 and 26% for the six months ended June 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.
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<PAGE> 17
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE
MONTHS ENDED JUNE 30, 1999
Premiums
The following table presents information related to consolidated
written, earned and ceded premiums (in thousands):
<TABLE>
<CAPTION>
Three months ended
June 30
----------------------------- Increase
2000 1999 (Decrease)
------- ------- ----------
<S> <C> <C> <C>
Direct and assumed premiums written $43,524 $31,579 $11,945
======= ======= =======
Direct and assumed premiums earned $53,829 $49,195 $ 4,634
Less: Premiums ceded 9,991 11,242 (1,251)
------- ------- -------
Net premiums earned $43,838 $37,953 $ 5,885
======= ======= =======
</TABLE>
Direct and assumed medical malpractice premiums written totaled $36.1
million and $35.4 million, respectively, for the three month periods ended June
30, 2000 and 1999. Medical malpractice premiums written during the quarter ended
June 30, 2000 increased by $0.6 million as compared to the quarter ended June
30, 1999, which is not a significant change.
The Company began implementation of rate increases during the second
quarter of 2000 as previously discussed. 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
price.
During the quarter ended June 30, 2000 as compared to the same period
of 1999, direct and assumed accident and health premiums written increased $7.3
million; direct and assumed workers compensation and multi-line premiums
increased $4.0 million for the same periods. This increase largely reflects
timing differences between first and second quarters of 1999 and 2000 with
regard to policies issued, renewed and canceled; as previously discussed, the
year to date increase related to these lines was $1.8 million.
Direct and assumed medical malpractice premiums earned decreased $1.8
million for the quarter ended June 30, 2000 when compared to the same quarter of
1999. Approximately $1.2 million of this decrease was due to one-time additional
premiums recognized during the second quarter of 1999 related to the purchase of
a book of business. Direct and assumed accident and health, workers
compensation, and multi-line premiums earned increased by $6.4 million for the
quarter ended June 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 decrease in premiums ceded is due
primarily to lower direct accident and
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<PAGE> 18
health premiums, which are heavily ceded, earned for the second quarter of 2000
as compared to the second quarter of 1999. The remaining decrease is due to a
greater proportion of earned premiums in states where the cession levels are
lower. The Company continually reviews the levels of coverage ceded and the
related costs.
Investment Income
The Company had consolidated net investment income of approximately
$9.8 million for each of the quarters ended June 30, 2000. The annualized
average pre-tax investment yield for each quarter was 5.2%. The level of average
invested assets was approximately the same during both quarters. Average
invested assets for 2000 did not increase as compared to 1999 primarily due to
$15.0 million of treasury stock purchased in the last four months of 1999.
Losses
Consolidated 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
June 30, 2000 June 30, 1999
----------------------- -------------------------
Loss Loss
Losses Ratio Losses Ratio
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Incurred loss related to:
Current year $ 43,681 100% $ 36,244 96%
=== ==
Prior years (7,500) (13,250)
-------- --------
Net incurred loss $ 36,181 $ 22,994
======== ========
</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.
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<PAGE> 19
The current accident year loss ratio (current accident year net loss
divided by net premiums earned) for the quarter increased to 100% from 96%. 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 June 30, 2000 of $7.5
million versus $13.3 million during the quarter ended June 30, 1999. If these
trends continue, the Company may experience higher levels of incurred losses in
subsequent periods.
Other Income
Other income increased by $148,000 for the quarter ended June 30, 2000
as compared to the quarter ended June 30, 1999. The increase is principally
attributable to additional fee income earned in 2000, offset by a $134,000
decrease in realized capital gains.
Underwriting, Acquisition, and Insurance Expenses
Underwriting, acquisition and insurance expenses are summarized in the
following table (in thousands):
<TABLE>
<CAPTION>
Three months ended
June 30
----------------------------- Increase
2000 1999 (Decrease)
------- ------- ----------
<S> <C> <C> <C>
Underwriting, acquisition and insurance expenses
before reduction by ceding commissions earned $12,356 $11,146 $ 1,210
Less: Ceding commissions earned 1,323 1,531 (208)
------- ------- -------
Underwriting, acquisition and insurance expenses $11,033 $ 9,615 $ 1,418
======= ======= =======
</TABLE>
The increase in underwriting, acquisition and insurance expenses for
the second quarter of 2000 as compared to the second quarter of 1999 primarily
results from changes in the mix of earned premiums between the quarters,
particularly due to increased workers compensation premiums earned. Included in
this increase was approximately $370,000 of state guaranty fund assessments.
Ceding commissions earned for the quarter ended June 30, 2000 decreased
as compared to the quarter ended June 30, 1999 due to changes in the mix of
earned premiums between the quarters.
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<PAGE> 20
Income Taxes
The Company's effective tax rate was 14% for the three months ended
June 30, 2000 and 27% for the three months ended June 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the reported market risks since
the end of the most recent fiscal year as described In the Company's Annual
Report on Form 10-K for the year ended December 31, 1999.
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. 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.
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<PAGE> 21
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.
A report was filed on June 30, 2000 to report that Medical Assurance,
Inc and Professionals Group, Inc. had entered into a definitive
agreement to consolidate and to provide certain information about the
proposed consolidation. The Consolidation Agreement between Medial
Assurance and Professionals and other related documents were included
in the report.
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.
August 11, 2000 By: /s/ James J. Morello
---------------------------
James J. Morello, Treasurer
(duly authorized officer and
principal financial officer)
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