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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 MARCH 31, 2001 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
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(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 April 27, 2001, there were 22,584,483 shares of the registrant's common
stock outstanding.
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Table of Contents
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
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K.................................. 20
Signatures..................................................................... 20
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MEDICAL ASSURANCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31 December 31
2001 2000
----------- -----------
ASSETS
Investments:
Fixed maturities available for sale, at fair value $ 576,477 $ 603,497
Equity securities available for sale, at fair value 79,179 80,872
Real estate, net 11,196 11,237
Short-term investments 143,247 100,920
----------- -----------
Total investments 810,099 796,526
Cash and cash equivalents 16,260 8,550
Premiums receivable 65,446 54,405
Receivable from reinsurers on unpaid losses
and loss adjustment expenses 172,436 166,202
Prepaid reinsurance premiums 7,491 2,704
Deferred taxes 30,851 30,757
Other assets 59,205 63,692
----------- -----------
$ 1,161,788 $ 1,122,836
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Policy liabilities and accruals:
Reserve for losses and loss adjustment expenses $ 671,939 $ 659,659
Unearned premiums 95,205 78,495
Reinsurance premiums payable 33,102 27,249
----------- -----------
Total policy liabilities 800,246 765,403
Other liabilities 12,436 12,266
----------- -----------
Total liabilities 812,682 777,669
Commitments and contingencies -- --
Stockholders' equity:
Common stock, par value $1 per share; 100,000,000
shares authorized; 25,107,372 and 25,106,821
shares issued, respectively 25,107 25,107
Additional paid-in capital 231,994 231,988
Accumulated other comprehensive income (loss), net of
deferred taxes (benefit) of $435 and $(460), respectively 806 (854)
Retained earnings 138,530 136,257
----------- -----------
396,437 392,498
Less treasury stock at cost, 2,425,039 shares (47,331) (47,331)
----------- -----------
Total stockholders' equity 349,106 345,167
----------- -----------
$ 1,161,788 $ 1,122,836
=========== ===========
See accompanying notes.
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MEDICAL ASSURANCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL (UNAUDITED)
(IN THOUSANDS)
ACCUMULATED
OTHER OTHER
COMPREHENSIVE RETAINED CAPITAL
TOTAL INCOME (LOSS) EARNINGS ACCOUNTS
-------------- --------------- ---------- ------------
Balance at December 31, 2000 $ 345,167 $ (854) $ 136,257 $ 209,764
Comprehensive income
Net income 2,273 2,273
Other comprehensive income, net of tax
Unrealized gains on securities, net of
reclassification adjustment of $20
for gains included in net income 1,660 1,660
--------------
Comprehensive income 3,933
Common stock issued for compensation 6 6
-------------- --------------- ---------- -----------
Balance at March 31, 2001 $ 349,106 $ 806 $ 138,530 $ 209,770
============== =============== ========== ===========
ACCUMULATED
OTHER OTHER
COMPREHENSIVE RETAINED CAPITAL
TOTAL INCOME (LOSS) EARNINGS ACCOUNTS
-------------- --------------- ---------- ------------
Balance at December 31, 1999 $ 325,724 $ (5,424) $ 111,957 $ 219,191
Comprehensive income
Net income 7,695 7,695
Other comprehensive income, net of tax
Unrealized gains on securities, net of
reclassification adjustment of $246
for gains included in net income 235 235
----------
Comprehensive income 7,930
Common stock issued for compensation 19 19
Net purchases of treasury stock 69 69
-------------- -------------- ---------- ------------
Balance at March 31, 2000 $ 333,742 $ (5,189) $ 119,652 $ 219,279
============== ============== ========== ============
See accompanying notes.
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MEDICAL ASSURANCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended
March 31
--------------------------------
2001 2000
-------- --------
Revenues:
Direct and assumed
premiums written $ 78,870 $ 61,954
======== ========
Premiums earned $ 62,160 $ 46,742
Premiums ceded (12,615) (9,466)
-------- --------
Net premiums earned 49,545 37,276
Net investment income 10,178 9,765
Other income 691 883
-------- --------
Total revenues 60,414 47,924
Expenses:
Losses and loss
adjustment expenses 58,404 37,014
Reinsurance recoveries (11,418) (7,359)
-------- --------
Net losses and loss
adjustment expenses 46,986 29,655
Underwriting, acquisition
and insurance expenses 12,016 8,679
-------- --------
Total expenses 59,002 38,334
-------- --------
Income before income taxes 1,412 9,590
Provision for income taxes:
Current expense 127 1,198
Deferred (benefit) expense (988) 697
-------- --------
(861) 1,895
-------- --------
Net income $ 2,273 $ 7,695
======== ========
Earnings per share:
Net income--basic and diluted $ 0.10 $ 0.33
======== ========
Weighted average number
of common shares
outstanding--basic and diluted 22,697 23,403
======== ========
See accompanying notes.
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MEDICAL ASSURANCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
Three Months Ended
March 31
--------------------------------
2001 2000
-------- --------
OPERATING ACTIVITIES
Net cash provided by operating activities $ 19,766 $ 5,498
INVESTING ACTIVITIES
Purchases of fixed maturities available for sale (57,504) (25,688)
Purchases of equity securities available for sale (9,794) (13,588)
Proceeds from sale or maturities of fixed
maturities available for sale 91,381 18,120
Proceeds from sale of equity securities available for sale 6,802 3,049
Net (increase) decrease in short-term investments (42,327) 9,206
Other (614) (2,255)
-------- --------
Net cash used by investing activities (12,056) (11,156)
FINANCING ACTIVITIES -- --
Increase (decrease) in cash and cash equivalents 7,710 (5,658)
Cash and cash equivalents at beginning of period 8,550 19,409
-------- --------
Cash and cash equivalents at end of period $ 16,260 $ 13,751
======== ========
See accompanying notes.
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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 three month period ended March 31, 2001 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2001. For further information, refer to the December 31, 2000
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 $73.0 million and $3.9 million for the
three-month periods ended March 31, 2001 and 2000, respectively. Gross realized
gains on such sales were approximately $0.6 million and $0.9 million at March
31, 2001 and 2000, respectively; gross realized losses on such sales were
approximately $0.5 million and $0.6 million at March 31, 2001 and 2000,
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 $654.0 million and $685.7 million at March 31, 2001 and December
31, 2000, respectively.
4. RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
The reserves were evaluated and reflect consideration of prior loss
experience and changes in the frequency and severity of claims. Actual incurred
losses may vary from estimated amounts due to the inherent difficulty in
estimating development of long-tailed lines of business.
The Company's philosophy of rigorously investigating, managing and
defending claims has generally produced results that are better than industry
averages in terms of loss payments and the proportion of claims closed without
indemnity payment. Additionally, reserves established in the late 1980's and
early 1990's were strongly influenced by the dramatically increased frequency
and severity experienced by the Company, and the industry as a whole, during the
mid-1980's. Some of these trends moderated, and in some cases, reversed, by the
late 1980's or early 1990's, which have, resulted in redundancies of prior
accident year reserves. Furthermore, as the Company commenced operations in new
jurisdictions, beginning with its first out-of-state expansion in 1993, there
was substantial uncertainty as to the loss experience that would be
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Medical Assurance, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
encountered. This uncertainty caused increased reliance on industry statistics;
as a result, reserve redundancies developed when actual results proved better
than expected.
Because of the increasing trends in severity and frequency of medical
malpractice claims recognized by the Company during the year 2000, 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 no favorable loss development
during the three months ended March 31, 2001 versus $10 million during the three
months ended March 31, 2000. If these trends continue, the Company may
experience higher levels of incurred losses in subsequent periods.
The Company's management believes the unearned premiums under contracts,
together with the related anticipated investment income to be earned, is
adequate to discharge the related contract liabilities.
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 $7.7 million and $4.0 million for the three months ended March 31,
2001 and 2000, respectively.
As is common practice within the industry, reinsurance ceding
commissions are deducted from underwriting, acquisition and insurance expenses
and amounted to $2.0 million and $1.0 million for the three months ended March
31, 2001 and 2000, respectively.
6. INCOME TAXES
Income tax expense differs from the normal relationship to financial
statement income principally because of tax-exempt interest income.
7. STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE
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 March 31, 2001, the Board of
Directors had not authorized the issuance of any preferred stock nor determined
any provisions for the preferred stock.
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Medical Assurance, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 December
31, 2000 Professionals Group owned 84% of MEEMIC Holdings, Inc. (NASDAQ National
Market: MEMH), which provides personal auto and homeowners coverages primarily
to educational employees, and other Michigan based policyholders through MEEMIC
Insurance Company.
As of December 31, 2000, Professionals Group had total assets of $1,137
million, total policy liabilities of $805 million, and shareholders' equity of
$244 million. Professionals Group had approximately 8.9 million shares of common
stock outstanding as of December 31, 2000.
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 exchange
their shares for their choice of either $12.00 in cash and shares of stock in
the new holding company having an assumed value of $14.00 based on the "market
value" of the Company's stock during the twenty trading day period ending on
June 25, 2001 or $26.00 cash. 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 March 31, 2001,
the Professionals Group estimates their portfolio adjustment would result in an
increase in the cash payment of approximately $1.95 for each share of
Professionals Group. At least 10% of the value of the consideration paid 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 credit
agreement which was executed on May 10, 2001. 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 other
regulatory approvals and to shareholder approvals, is expected to be completed
on June 27, 2001. The combination of the Company and ProAssurance Corporation
will be accounted for as a corporate reorganization of the Company and will be
treated 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
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Medical Assurance, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Company is involved in various legal actions arising primarily from
claims related to insurance policies. At other times legal actions may arise
from claims asserted by policyholders. The legal actions arising from these
claims 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 is of the opinion, based on consultation with legal counsel, that the
settlement of these actions will not have a material adverse effect on the
Company's financial position or results of operations.
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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 (LAE), and operating
expenses in the ordinary course of business is currently the Company's principal
need for liquid funds. Cash provided from operating activities was sufficient
during the first three months of 2001 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 believes
that its reserves for losses and LAE are adequate to discharge outstanding
contractual liabilities. To minimize the risk of adverse reserve development in
the future, the Company maintains reinsurance at levels management considers to
be strong and adequate; conducts regular actuarial reviews; and maintains
adequate asset liquidity. The Company did not borrow any funds during the three
months ended March 31, 2001.
On June 22, 2000, the Company and Professionals Group, Inc. ("PICM")
entered into an Agreement to Consolidate, which provides for the Company and
PICM to become wholly owned subsidiaries of a newly formed holding company,
ProAssurance Corporation ("ProAssurance"). PICM is an insurance holding company
that offers medical professional liability insurance principally through its
100% owned subsidiary, ProNational Insurance Company, and automobile and
personal lines insurance through its 84% owned subsidiary, MEEMIC Holdings, Inc.
PICM's common stock is currently traded in the NASDAQ National Market under the
trading symbol "PICM." Upon the consummation of the proposed consolidation, each
share of the Company's common stock will be exchanged for one share of
ProAssurance common stock; and each share of PICM common stock will be exchanged
for either a combination of cash and ProAssurance common stock or cash only.
ProAssurance has filed a registration statement on Form S-4 (Securities
Exchange Commission File No. 333-49378) with respect to the shares of its common
stock to be issued in the consolidation, which includes a description of the
Agreement to Consolidate and the transaction contemplated thereby. Shareholders
of the Company and Professionals Group are receiving a Notice and Proxy allowing
them to vote on the proposed transaction at special meetings on June 25, 2001.
The Company expects the merger to be approved at those meetings, and the
transaction is expected to close on June 27, 2001. The shares of ProAssurance
common stock issued to the Company and PICM shareholders will be listed on the
New York Stock Exchange with trading expected to begin on June 28, 2001, under
the trading symbol PRA; the shares of the Company common stock will be delisted
from the New York Stock Exchange; and the shares of PICM common stock will be
delisted from NASDAQ.
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The proposed consolidation will require a substantial cash payment to
the PICM shareholders, which is likely to exceed $200 million. The Company
anticipates that up to $135 million of the cash required for the consolidation
will be funded from currently available cash and short-term investment assets of
the Company and PICM and that the remainder of the requirement will be funded
from a bank credit facility of up to $150 million, including a term loan of up
to $110 million. This bank credit agreement was executed on May 10, 2001. The
Company anticipates that operating cash flows of the insurance subsidiaries of
ProAssurance will be sufficient to fund debt service on the bank loan.
The Company continues to have available through a lending institution a
line of credit in the amount of $40 million. This line is expected to be
replaced by a revolving credit facility of up to $40 million made available to
ProAssurance and its subsidiaries after the consolidation.
The Company did not purchase any of its common shares during the first
quarter of 2001, but did purchase approximately 98,000 shares of its common
stock during April 2001 at a total cost of $1.3 million. As of April 30, 2001
the remaining Board purchase authorization is approximately 1,030,000 shares.
The Company has purchased approximately 378,000 shares of Professionals Group
common stock in the open market at a total cost of approximately $9.3 million or
an average per share price of $24.59. The shares were purchased in anticipation
of the consolidation in order to reduce the cost of the transaction.
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RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE
MONTHS ENDED MARCH 31, 2000
Premiums
The following table presents information related to consolidated
written, earned and ceded premiums (in thousands):
Three months ended
March 31
------------------- Increase
2001 2000 (Decrease)
------------------- ---------
Direct and assumed premiums written $ 78,870 $ 61,954 $ 16,916
======== ======== ========
Direct and assumed premiums earned $ 62,160 $ 46,742 $ 15,418
Less: Premiums ceded 12,615 9,466 3,149
-------- -------- --------
Net premiums earned $ 49,545 $ 37,276 $ 12,269
======== ======== ========
Direct and assumed medical malpractice premiums written during the
three months ended March 31, 2001 increased by $8.3 million as compared to the
same period of 2000, from $55.1 million to $63.4 million. After giving effect to
insureds that did not renew, a net increase of approximately $4.2 million
resulted from rate increases and writing premiums at approved higher rates; see
next paragraph.
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 88% 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 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 has provided
an opportunity to utilize the Company's capital and produces revenue from fees
and commissions. Given the various uncertain market conditions in these areas,
variations in premiums are expected. For the three months ended March 31, 2001
as compared to the same period of 2000, direct and assumed workers compensation
and multi-line premiums written increased $3.6 million, and direct and assumed
accident and health premiums written increased by $5.0 million. The Company's
participation in these lines of business will be substantially reduced over the
next twelve months.
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Direct and assumed medical malpractice premiums earned increased $6.9
million for the three months ended March 31, 2001 as compared to same period in
2000. Direct and assumed accident and health, workers compensation and
multi-line premiums earned increased by $8.5 million during the three months
ended March 31, 2001 as compared to the same period of 2000.
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.
Premiums ceded increased by approximately $3.1 million for the three
months ended March 31, 2001 as compared to the three months ended March 31, 2000
primarily related to the increase in gross premiums earned.
Investment Income
The Company had consolidated net investment income of $10.2 million for
the three months ended March 31, 2001, as compared to $9.8 million for the three
months ended March 31, 2000. Average invested assets for the three months ended
March 31, 2001 were $29 million greater than the comparable period for 2000, and
annualized average pre-tax investment yields remained the same.
Other Income
Other income decreased by $0.2 million for the quarter ended March 31,
2001 as compared to the quarter ended March 31, 2000. The decrease is
principally attributable to lower capital gains realized upon the sale of
securities during the first quarter of 2001 compared to the first quarter of
2000.
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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.
March 31, 2001 March 31, 2000
------------------- --------------------
Loss Loss
Losses Ratio Losses Ratio
------------------- --------------------
Incurred loss related to:
Current year $ 46,986 95% $ 39,655 106%
===== ======
Prior years - (10,000)
-------- --------
Net incurred loss $ 46,986 $ 29,655
======== ========
Losses incurred include two components: a) actuarial evaluation of
incurred loss levels 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) decreased to 95% from 106%. This change is due
to two factors. The first factor is an increase in premiums earned resulting
from rate increases and the removal of discretionary discounts as described in
the discussion of premiums. This improvement in rate adequacy resulted in a 4%
decrease in the current accident year loss ratio after increasing loss costs
were considered. Since the rate increases caused some physicians to obtain
coverage elsewhere, the Company reduced the loss reserve for reporting
endorsements to be issued in the event of Death, Disability, or Retirement
(DDR). This reduction resulted in a 1% decrease in the overall loss ratio.
The second factor in the decrease in the loss ratio for the three
months ended March 31, 2001 is an increase in premiums earned from accident and
health, workers compensation, and multiline premiums, which typically carry a
lower loss ratio than medical malpractice coverage. While the Company has made
the decision to decrease emphasis on these lines, the normal variations in the
premium volume in these lines resulted in higher premiums earned for the three
months ended March 31, 2001 as compared to the same period in 2000. This
increase in earned premiums resulted in a 6% decrease in the overall loss ratio
for the current accident year.
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Because of the increasing trends in severity and frequency of
medical malpractice claims recognized by the Company during the year 2000, 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 no favorable loss
development during the three months ended March 31, 2001 versus $10 million
during the three months ended March 31, 2000. If these trends continue, the
Company may experience higher levels of incurred losses in subsequent periods.
Reinsurance recoveries increased by $4.1 million for the three months
ended March 31, 2001 as compared to the three months ended March 31, 2000
principally due to the increase in gross losses. Amounts recoverable from
reinsurers are estimated in a manner consistent with the loss liability
associated with the reinsured policies. The Company continually reviews the
levels of coverage ceded and the related costs.
Underwriting, Acquisition, and Insurance Expenses
Underwriting, acquisition and insurance expenses are summarized in the
following table (in thousands):
Three months ended
March 31
------------------ Increase
2001 2000 (Decrease)
------------------- ----------
Underwriting, acquisition and insurance expenses
before reduction by ceding commissions earned $ 14,025 $ 9,687 $ 4,338
Less: Ceding commissions earned 2,009 1,008 1,001
-------- ------- -------
Underwriting, acquisition and insurance expenses $ 12,016 $ 8,679 $ 3,337
======== ======= =======
The increase in underwriting, acquisition and insurance expenses is
primarily due to higher acquisition costs in 2001 as compared to 2000. Certain
premiums, primarily workers compensation and accident and health, have higher
acquisition costs than the Company's medical malpractice premiums. The increase
in these premiums in 2001 over 2000 (see Premiums above) is the principal reason
for the increase in acquisition costs.
The increase in ceding commissions earned for the quarter ended March
31, 2001 as compared to the quarter ended March 31, 2000 is principally due to
higher ceded workers compensation and accident and health premiums.
Income Taxes
The Company's income tax provision is significantly affected by
tax-exempt income from securities. Tax-exempt income was relatively unchanged
from 2000 to 2001. Because of the substantial decrease in income before taxes,
the Company has a total income tax benefit of $861,000 in 2001 compared to an
effective income tax expense rate of 20% in 2000.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK MARKET RISK
The Company is exposed to various market risks, including both interest
rate risk and equity price risk. Interest rate risk represents the risk of
changes in value of a financial instrument caused by fluctuations in market
interest rates. 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. Market risk
control relates principally to ratings of issuers and length to maturity. The
Company does not enter into derivative transactions.
At March 31, 2001 fixed maturity securities totaling $577 million, at
fair value, including unrealized gains of $7 million, comprised 71% of the
Company's invested assets of $810 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 may
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:
Change in Interest Rate Basis Points
-----------------------------------------------------------------
Current
-200 bps -100 bps Rates* +100 bps +200 bps
-------- -------- ------ -------- --------
Projected fair value of portfolio (in
millions): $612 $594 $576 $558 $541
Projected weighted average effective 2.74 2.75 2.83 2.92 2.95
duration of portfolio (in years):
*Current rates are as of March 31, 2001.
At March 31, 2001 the fair value of the Company's investment in common
stocks, excluding preferred stocks as discussed in the following paragraph, was
$46 million, which included net unrealized losses of $6.8 million. These
securities are subject to equity price risk. A hypothetical 10% increase in the
market prices as of March 31, 2001 would increase the fair value of these
securities to $51 million; a hypothetical 10% decrease would reduce the fair
value to $41 million. The selected hypothetical change does not reflect what
could be considered the best or worst scenarios.
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At March 31, 2001 the Company had a limited investment in preferred
stocks. At March 31, 2001, these securities were carried at fair value of $33
million, which also 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 March 31,
2001 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
The U.S. securities laws, including the Private Securities Litigation
Reform Act of 1995, provide a "safe harbor" for certain forward-looking
statements. This report contains forward-looking statements (identified by words
such as, but not limited to, "believe", "expect", "intend", "anticipate",
"estimate", and other analogous expressions) including statements concerning:
earnings, losses, capital requirements, loss reserves, the retention of current
business, competition, the expansion of product lines, the development or
acquisition of business in new geographical areas, the proposed consolidation
with Professionals Group, and other matters.
These forward-looking statements 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. Due to such risks
and uncertainties, readers are urged not to place undue reliance on
forward-looking statements. All forward-looking statements included in this
document are based upon information available to the Company on the date hereof,
and the Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Risks which could adversely affect the Company's operations and/or
cause actual results to differ materially from anticipated results include, but
are not limited to, the following:
- underwriting losses on the risks the Company insures are
higher or lower than expected;
- unexpected changes in loss trends which might require the
reevaluation of the liability for loss and loss adjustment
expenses, thus resulting in an increase or decrease in the
liability and a corresponding adjustment to earnings;
- the Company's ability to retain current business, acquire new
business, expand product lines, and a variety of other factors
affecting daily operations such as, but not limited to,
economic, legal, competitive, and market conditions which may
be beyond the Company's control and are thus difficult or
impossible to predict;
- changes in the interest rate environment and/or the securities
markets that adversely impact the fair value of the Company's
investments or operations;
- inability of the Company to achieve continued growth through
expansion into other states or through acquisitions or
business combinations;
- general economic conditions that are worse than anticipated;
- inability to obtain regulatory approval of, or to implement,
premium rate increases;
- changes in the legal system that affect the frequency and
severity of claims;
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- significantly increased competition among insurance providers
and related pricing weaknesses in some markets;
- changes in the availability, cost, quality, or collectibility
of reinsurance; and
- regulatory and legislative actions or decisions that adversely
affect the Company.
For every forward-looking statement, the Company claims the protection
of the safe harbor for forward-looking statements under the Private Securities
Litigation Reform Act of 1995.
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
None.
(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.
May 11, 2001 By: /s/ James J. Morello
--------------------
James J. Morello, Treasurer
(duly authorized officer and
principal financial officer)
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