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, 1998 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______ to ______.
Commission file number 0-19439
Medical Assurance, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 63-1137505
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation of organization)
100 Brookwood Place, Birmingham, AL 35209
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(205) 877-4400
-------------------------------
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x. No .
--- ---
As of June 30, 1998, there were 21,486,376 shares of the registrant's common
stock outstanding.
Page 1 of 16
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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....................................................10
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K.................................................................16
Signatures....................................................................................................16
3
Medical Assurance, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
($ in thousands, except per share data)
JUNE 30 DECEMBER 31
1998 1997
----------- -----------
ASSETS
Investments:
Fixed maturities available for sale, at market value $ 627,644 617,914
Equity securities available for sale, at market value 52,415 44,880
Real estate, net 11,648 11,933
Short-term investments 45,887 45,475
----------- -----------
Total investments 737,594 720,202
Cash and cash equivalents 30,579 12,248
Premiums receivable 111,920 92,051
Receivable from reinsurers 173,554 150,598
Prepaid reinsurance premiums 17,354 17,580
Deferred taxes 31,140 33,273
Other assets 34,273 37,221
----------- -----------
$ 1,136,414 $ 1,063,173
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Policy liabilities and accruals:
Reserve for losses and loss adjustment expenses $ 649,799 $ 614,729
Unearned premiums 88,873 79,700
Reinsurance premiums payable 68,293 53,752
----------- -----------
Total policy liabilities 806,965 748,181
Income taxes payable 1,067 1,240
Other liabilities 21,734 26,564
----------- -----------
Total liabilities 829,766 775,985
Commitments and contingencies -- --
Stockholders' equity:
Common stock, par value $1 per share; 100,000,000
shares authorized; 21,721,699 and 21,721,562
shares issued, respectively 21,722 21,722
Additional paid-in capital 143,164 143,037
Accumulated other comprehensive income, net of
deferred taxes of $7,240 and $7,947, respectively 13,446 14,704
Retained earnings 130,506 109,524
----------- -----------
308,838 288,987
Less treasury stock at cost, 235,323 and 222,201 shares,
respectively (2,190) (1,799)
----------- -----------
Total stockholders' equity 306,648 287,188
----------- -----------
$ 1,136,414 $ 1,063,173
=========== ===========
See accompanying notes.
3
4
Medical Assurance, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Capital (Unaudited)
(in thousands)
Accumulated
Other Other
Comprehensive Retained Capital
Total Income Earnings Accounts
----------- ------------- ----------- ----------
Balance at December 31, 1997 $ 287,188 $ 14,704 $ 109,524 $ 162,960
Comprehensive income
Net income 20,982 20,982
Other comprehensive income, net of tax
Unrealized gains on securities, net of
reclassification adjustment of $2,376 (1,258) (1,258)
---------
Comprehensive income 19,724
Net purchase of treasury stock (268) (268)
Common stock issued for compensation 4 4
--------- --------- --------- ---------
Balance at June 30, 1998 $ 306,648 $ 13,446 $ 130,506 $ 162,696
========= ========= ========= =========
Accumulated
Other Other
Comprehensive Retained Capital
Total Income Earnings Accounts
----------- ------------- ----------- ----------
Balance at December 31, 1996 $ 244,565 $ 8,157 $ 103,027 $ 133,381
Comprehensive income
Net income 17,195 17,195
Other comprehensive income, net of tax
Unrealized gains on securities, net of
reclassification adjustment of $32 211 211
---------
Comprehensive income 17,406
Net purchase of treasury stock (1,703) (1,703)
Common stock issued for compensation 11 11
--------- --------- --------- ---------
Balance at June 30, 1997 $ 260,279 $ 8,368 $ 120,222 $ 131,689
========= ========= ========= =========
See accompanying notes.
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5
Medical Assurance, Inc. and Subsidiaries
Condensed Consolidated Statements of Income (Unaudited)
(in thousands, except per share data)
Three Months Ended Six Months Ended
June 30 June 30
------------------------ ---------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Revenues:
Direct and assumed
premiums written $ 48,364 $ 39,446 $ 104,725 $ 91,536
========= ========= ========= =========
Premiums earned $ 48,055 $ 74,905 $ 94,970 $ 74,905
Premiums ceded (13,476) (17,365) (28,627) (17,365)
--------- --------- --------- ---------
Net premiums earned 34,579 57,540 66,343 57,540
Net investment income 9,732 18,884 19,420 18,884
Other income 1,900 739 2,787 739
--------- --------- --------- ---------
Total revenues 46,211 77,163 88,550 77,163
Expenses:
Losses and loss
adjustment expenses 36,678 58,869 70,051 58,869
Reinsurance recoveries (13,588) (19,425) (25,775) (19,425)
--------- --------- --------- ---------
Net losses and loss
adjustment expenses 23,090 39,444 44,276 39,444
Underwriting, acquisition
and insurance expenses 8,319 15,192 16,446 15,192
--------- --------- --------- ---------
Total expenses 31,409 54,636 60,722 54,636
--------- --------- --------- ---------
Income before income taxes 14,802 22,527 27,828 22,527
Provision for income taxes:
Current expense 2,072 6,728 3,997 6,728
Deferred expense (benefit) 1,704 (1,396) 2,849 (1,396)
--------- --------- --------- ---------
3,776 5,332 6,846 5,332
--------- --------- --------- ---------
Net income $ 11,026 $ 17,195 $ 20,982 $ 17,195
========= ========= ========= =========
Earnings per share:
Net Income - basic and diluted $ 0.51 $ 0.80 $ 0.98 $ 0.80
========= ========= ========= =========
Weighted average number of
common shares outstanding 21,492 21,492 21,493 21,532
========= ========= ========= =========
See accompanying notes.
5
6
MEDICAL ASSURANCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
Six Months Ended
June 30
--------------------
1998 1997
-------- --------
OPERATING ACTIVITIES
Net income $ 20,982 $ 17,195
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 346 705
Amortization 9,559 6,933
Policy acquisition costs, deferred (9,322) (9,318)
Net realized gain on sale of investments (2,376) (32)
Deferred income taxes (benefit) 2,849 (1,396)
Other 137 17
Changes in assets and liabilities:
Premiums receivable (19,869) (29,457)
Income taxes receivable/payable (173) (1,740)
Receivable from reinsurers (22,956) (21,707)
Prepaid reinsurance premiums 226 4,041
Other assets 3,448 (2,263)
Reserve for losses and loss adjustment expenses 35,070 36,666
Unearned premiums 9,173 11,276
Reinsurance premiums payable 14,541 8,231
Other liabilities (4,830) (687)
-------- --------
Net cash provided by operating activities 36,805 18,464
INVESTING ACTIVITIES
Purchases of fixed maturities available for sale (139,343) (99,574)
Purchases of equity securities available for sale (9,113) (6,361)
Proceeds from sale or maturities of fixed
maturities available for sale 127,678 75,697
Proceeds from sale of equity securities
available for sale 3,222 4,278
Net (increase) decrease in short-term investments (412) 7,670
Other (58) (625)
-------- --------
Net cash used in investing activities (18,026) (18,915)
FINANCING ACTIVITIES
Purchase of treasury stock (448) (1,709)
-------- --------
Net cash used by financing activities (448) (1,709)
-------- --------
Increase in cash and cash equivalents 18,331 (2,160)
Cash and cash equivalents at beginning of period 12,248 14,033
-------- --------
Cash and cash equivalents at end of period $ 30,579 $ 11,873
======== ========
See accompanying notes.
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7
Medical Assurance, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements include
the accounts of Medical Assurance, Inc. and its subsidiaries, together referred
to as the Company. The financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and notes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments, consisting of normal recurring
accruals, considered necessary for a fair presentation have been included.
Operating results for the six month period ended June 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998. For further information, refer to the December 31, 1997
audited consolidated financial statements and accompanying notes.
Medical Assurance, Inc. has 100 million shares of authorized common stock and 50
million shares of authorized preferred stock. The Board of Directors has the
authorization to determine the provisions for the issuance of shares of the
preferred stock, including the number of shares to be issued and the
designations, powers, preferences and rights, and the qualifications,
limitations or restrictions of such shares. At June 30, 1998, the Board of
Directors had not authorized the issuance of any preferred stock nor determined
any provisions for the preferred stock.
2. NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
130, "Reporting Comprehensive Income," which establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. The new rules require that enterprises
classify items of other comprehensive income separately from retained earnings
and additional paid-in capital in the equity section of the balance sheet. Items
of other comprehensive income are displayed in a separate condensed consolidated
statement of changes in capital, and amounts for 1997 are provided for
comparative purposes.
FASB Statement 131, "Disclosures About Segments of an Enterprise and Related
Information" was issued in June 1997 and is effective for years beginning after
December 15, 1997. This Statement changes the way public companies report
segment information in annual financial statements and requires public companies
to report selected segment information in interim financial reports to
shareholders. Under the Statement's "management approach," public companies are
to report financial and descriptive information about their operating segments.
Operating segments are revenue-producing components of an enterprise for which
separate financial information is produced internally and are subject to
evaluation by the chief operating decision maker in deciding how to allocate
resources to segments. Since the statement is not required to be applied to
interim financial statements in the initial year of application, the Company
will evaluate and implement this statement by year end.
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8
Medical Assurance, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
3. INVESTMENTS
Proceeds from sales of investments in fixed maturities and equities available
for sale were $117.0 million and $34.3 million for the six months ended June 30,
1998 and 1997, respectively. Gross realized gains on such sales were $2,597,000
and $297,000 at June 30, 1998 and 1997 respectively; gross realized losses on
such sales were $221,000 and $265,000 at June 30, 1998 and 1997, respectively.
Realized gains and losses are included as a component of other income. The
amortized cost of fixed maturities and equity securities available for sale was
$659.3 million and $640.1 million at June 30, 1998 and December 31, 1997,
respectively.
4. RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
The reserves for losses and loss adjustment expenses represent management's best
estimate of the ultimate cost of all losses incurred but unpaid. Incurred losses
and loss adjustment expenses for the six month periods ending June 30, 1998 and
1997 were principally based on the application of an expected loss ratio to
premiums earned. These loss ratios take into consideration prior loss
experience, loss trends, the Company's loss retention levels, changes in
frequency and severity of claims and rates charged.
The reserves are evaluated at least annually by independent consulting
actuaries. Actual incurred losses may vary from estimated amounts due to the
inherent difficulty in estimating development of long-tailed lines of business.
The estimated liability is continually reviewed and any adjustments which become
necessary are included in current operations. The Company's management believes
that its actual incurred losses and loss adjustment expenses will not
significantly exceed its reported estimated amounts.
5. 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 amounted to approximately $6.0 million and $6.6
million for the six months ended June 30, 1998 and 1997, respectively.
As is common practice within the industry, reinsurance ceding commissions are
deducted from underwriting, acquisition, and insurance expenses and amounted to
$3.6 million and $1.7 million for the six months ended June 30, 1998 and 1997,
respectively.
6. INCOME TAXES
Income tax expense differs from the normal relationship to financial statement
income principally because of tax-exempt interest income.
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9
Medical Assurance, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
7. EARNINGS PER SHARE
On December 3, 1997 the Board of Directors declared a 5% stock dividend. Cash
was paid to shareholders for fractional shares. Earnings per share data for 1997
has been restated as if the above dividend had been declared on January 1, 1997.
On August 20, 1997, the Board of Directors declared a two-for-one stock split,
which was effected by transferring the par value of the split shares in the
amount of $10.3 million from additional paid-in capital to common stock.
Earnings per share data for 1997 has been restated as if the stock split had
been declared on January 1, 1997.
8. COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal actions arising primarily from claims
made under insurance policies; these legal actions have been considered by the
Company in establishing its reserves. While the outcome of all legal actions is
not presently determinable, the Company's management and its legal counsel are
of the opinion that the settlement of these actions will not have a material
adverse effect on the Company's financial position or results of operations.
9
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
For purposes of this management discussion and analysis, the term "Company"
refers to Medical Assurance, Inc. and its subsidiaries. The consolidated
subsidiaries consist principally of operating insurance companies.
LIQUIDITY AND CAPITAL RESOURCES
The payment of losses, loss adjustment expenses, and operating expenses in the
ordinary course of business is currently the Company's principal need for liquid
funds. Cash used to pay these items has been provided by operating activities.
Cash provided from these activities was sufficient during the first six months
of 1998 to meet the Company's operating needs, and the Company believes those
sources will be sufficient to meet its cash needs for operating purposes for at
least the next twelve months. Prolonged and increasing levels of inflation could
cause increases in the dollar amount of losses and loss adjustment expenses and
may therefore adversely affect future reserve development. To minimize such
risk, the Company (i) maintains what its management considers to be strong and
adequate reinsurance, (ii) conducts regular actuarial reviews to ensure, among
other things, that reserves do not become deficient, and (iii) maintains
adequate asset liquidity.
The Company did not borrow any funds during the six months ended June 30, 1998
and 1997, and currently has no requirements indicating a need to borrow
significant funds in the next twelve months. However, the need for additional
capital may arise in order to achieve the Company's ultimate goal of expansion,
as discussed in subsequent paragraphs. The Company continues to have available
through a lending institution a line of credit in the amount of $40 million that
could be used for these additional capital requirements. The Company is not
charged a fee nor is it required to maintain compensating balances in connection
with this line of credit.
The Company's Board of Directors has authorized the purchase of up to $15
million of its common stock in the open market. At June 30, 1998, approximately
$6.0 million remains available for purposes of purchasing its own common stock
in the open market.
BUSINESS EXPANSION
The Company, through Mutual Assurance, Inc. (Mutual Assurance), has been
developing a marketing strategy to address the insurance needs of hospitals and
vertically integrated health care providers. The Company expects organizations
such as these to represent increasing market opportunities for professional
liability and related insurance products because of the trend toward the
consolidation of health care providers. In certain instances, Mutual Assurance's
surplus is a competitive factor in the "large account" market because its
principal competitors are larger than those with whom Mutual Assurance has
historically had to compete.
To further its expansion, the Company is offering certain insurance and
reinsurance products including, without limitation, medical malpractice
reinsurance, excess medical malpractice insurance, managed care liability
insurance, provider stop loss insurance, accident and health insurance, and
workers' compensation insurance. The Company also intends to expand through the
acquisition of, or combination with, medical professional liability insurers
that have a significant presence in states other than Alabama.
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IMPACT OF YEAR 2000
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
New software systems that the Company has acquired and implemented for ongoing
operational purposes function properly with respect to dates in the year 2000
and thereafter. The Company's timetable for completing its conversion to the new
software is such that the Company does not believe the Year 2000 Issue poses a
significant operational problem. Becoming Year 2000 compliant is incidental to
implementing the new software system; therefore, costs specifically related to
Year 2000 compliance are minimal.
The Company is continuing to identify third parties with which it does a
significant amount of business and evaluate their Year 2000 compliance. The
Company is not currently aware of any problems that will have a material impact
on its operations.
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RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS
ENDED JUNE 30, 1997
Premiums
- --------
The following table presents information related to consolidated written and
earned premiums and reinsurance expense (in thousands):
Six Months Ended
June 30 Increase
--------------------------- (Decrease)
1998 1997
---------------------------
Direct and assumed premiums written $ 104,725 $ 91,536 $ 13,189
============ ============ ===========
Premiums earned $ 94,970 $ 74,905 $ 20,065
Premiums ceded (28,627) (17,365) (11,262)
------------ ------------ -----------
Net premiums earned $ 66,343 $ 57,540 $ 8,803
============ ============ ===========
The increase in premiums written and earned for the six months ended June 30,
1998 as compared to the six months ended June 30, 1997 is due primarily to an
increase of $12.4 million in accident and health premiums.
The Company cedes reinsurance to provide for greater diversification of
business, allow management to control exposure to potential losses arising from
large risks, and provide capacity for additional growth. Premiums ceded are
estimated based on the terms of the respective reinsurance agreements. The
estimated expense is continually reviewed and any adjustments which become
necessary are included in current operations. Amounts recoverable from
reinsurers are estimated in a manner consistent with the loss liability
associated with the reinsured policies. The $11.2 million increase in premiums
ceded for the six months ended June 30, 1998 as compared to the six months ended
June 30, 1997 is principally due to additional written premiums and assumed
premiums, and as respects this new business, increased cessions of risks to
reinsurers. The Company continually reviews the levels of coverages ceded and
the related costs.
Investment Income
- -----------------
The Company had consolidated net investment income of $19.4 million for the six
months ended June 30, 1998, as compared to $18.9 million for the six months
ended June 30, 1997, reflecting an increase of $536,000. The increased
investment income is principally a result of an increase in the amount of
interest-bearing investments held by the Company. Offsetting this increase was a
decrease in the average rates of return; the rate of return for the first half
of 1998 was 5.7% compared to 5.9% for the comparable period in 1997.
12
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Losses
- ------
Consolidated losses and loss adjustment expenses (losses) and the related loss
ratios are summarized in the following table (dollars in thousands). The ratio
for losses below is based on premiums earned; the ratio for net losses is based
on net premiums earned.
Six Months Ended
June 30, 1998 June 30,1997
------------------------ ----------------------
Loss Loss
Losses Ratio Losses Ratio
------------------------ ----------------------
Losses $ 70,051 74% $ 58,869 79%
=== ---
Reinsurance recoveries (25,775) (19,425)
----------- ------------
Net losses $ 44,276 67% $ 39,444 69%
=========== === ============ ===
The Company's losses in the six months ended June 30, 1998 reflect a loss ratio
of 74% as compared to a loss ratio of 79% for the six months ended June 30,1997.
Losses for both periods are principally based on the application of expected
loss ratios to premiums earned. These loss ratios take into consideration prior
loss experience, loss trends, the Company's loss retention levels, changes in
frequency and severity of claims, and rates charged.
The above loss ratios reflect improvement of loss development in prior years
coverage of $18.0 million in 1998 and $16.1 million in 1997. However, as the
Company continues its expansion efforts, the improvement of loss development for
prior years could have a smaller or less favorable impact on the loss ratios of
future years.
Other Income
- ------------
Other income increased by $2.0 million for the six months ended June 30, 1998 as
compared to the six months ended June 30,1997. The increase is principally
attributable to increased capital gains realized upon the sale or other
disposition of securities during the first half of 1998 compared to the first
half of 1997.
Underwriting, Acquisition, and Insurance Expenses
- -------------------------------------------------
Underwriting, acquisition and insurance expenses are summarized in the following
table (in thousands):
Six Months Ended
June 30
----------------------- Increase
1998 1997 (Decrease)
----------------------- ----------
Underwriting, acquisition and insurance expenses
before reduction by ceding commissions earned $ 20,012 $ 16,908 $ 3,104
Ceding commissions earned (3,566) (1,716) (1,850)
------------ ------------ -----------
$ 16,446 $ 15,192 $ 1,254
============ ============ ===========
Expenses increased by $1.3 million (which are net of ceding commissions earned,
see note 5 of the accompanying Notes to Condensed Consolidated Financial
Statements for more information) for the six months ended June 30, 1998 compared
to the six months ended June 30,1997. Amortization of deferred policy
acquisition costs increased $1.8 million which is principally attributable to
new business. Other expenses increased $1.3 million primarily from salary and
benefit increases and other miscellaneous expenses relating to the daily
operation of the company. Ceding commissions earned increased principally
because during 1998 a greater portion of the Company's reinsurance treaties
provided for a ceding commission than was the case during the comparable period
of 1997.
Income Taxes
- ------------
The Company's effective tax rates of 25% and 24% for the six months ended June
30, 1998 and 1997, respectively, are lower than the statutory rate of 35%
principally due to the effect of tax exempt investment income.
13
14
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE
MONTHS ENDED JUNE 30, 1997
Premiums
- --------
The following table presents information related to consolidated written and
earned premiums and reinsurance expense (in thousands):
Three Months Ended
June 30
------------------------------- Increase
1998 1997 (Decrease)
------------------------------- ----------
Direct and assumed premiums written $ 48,364 $ 39,446 $ 8,918
============ ============ ===========
Premiums earned $ 48,055 $ 37,788 $ 10,267
Premiums ceded (13,476) (8,650) (4,826)
------------ ------------ -----------
Net premiums earned $ 34,579 $ 29,138 $ 5,441
============ ============ ===========
The increase in premiums written and earned for the three months ended June 30,
1998 as compared to the three months ended June 30, 1997 is due primarily to an
increase of $6.6 million in accident and health premiums.
The Company cedes reinsurance to provide for greater diversification of
business, allow management to control exposure to potential losses arising from
large risks, and provide capacity for additional growth. Premiums ceded are
estimated based on the terms of the respective reinsurance agreements. The
estimated expense is continually reviewed and any adjustments which become
necessary are included in current operations. Amounts recoverable from
reinsurers are estimated in a manner consistent with the loss liability
associated with the reinsured policies. The $4.8 million increase in premiums
ceded for the three months ended June 30, 1998 as compared to the three months
ended June 30, 1997 is principally due to additional written premiums and
assumed premiums, and as respects this new business, increased cessions of risks
to reinsurers. The Company continually reviews the levels of coverages ceded and
the related costs.
Investment Income
- -----------------
The Company had consolidated net investment income of $9.7 million for the three
months ended June 30, 1998, as compared to $9.4 million for the three months
ended June 30, 1997, reflecting an increase of $300,000. The increased
investment income is principally a result of an increase in the amount of
investments held by the Company. Offsetting this increase was a decrease in the
average rates of return; the rate of return for the three months ended June 30,
1998 was 5.7% compared to 5.9% for the comparable period in 1997.
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Losses
- ------
Consolidated losses and loss adjustment expenses (losses) and the related loss
ratios are summarized in the following table (dollars in thousands). The ratio
for losses below is based on premiums earned; the ratio for net losses is based
on net premiums earned.
Three Months Ended
June 30, 1998 June 30,1997
------------------------- ----------------------
Loss Loss
Losses Ratio Losses Ratio
------------------------- ----------------------
Losses $ 36,678 76% $ 28,694 76%
=== ===
Reinsurance recoveries (13,588) (9,487)
------------- ------------
Net losses $ 23,090 67% $ 19,207 66%
============= === ============ ===
The Company's losses in the three months ended June 30, 1998 and 1997 reflect a
loss ratio of 76%. Losses for both periods are principally based on the
application of expected loss ratios to premiums earned. These loss ratios take
into consideration prior loss experience, loss trends, the Company's loss
retention levels, changes in frequency and severity of claims, and rates
charged.
The above loss ratios reflect improvement of loss development in prior years
coverage of $9.0 million in 1998 and $8.7 million in 1997. However, as the
Company continues its expansion efforts, the improvement of loss development for
prior years could have a smaller or less favorable impact on the loss ratios of
future years.
Other Income
- ------------
Other income increased by $1.8 million for the quarter ended June 30, 1998 as
compared to the quarter ended June 30,1997. The increase is principally
attributable to increased capital gains realized upon the sale or other
disposition of securities during the second quarter of 1998 compared to the
second quarter of 1997.
Underwriting, Acquisition, and Insurance Expenses
- -------------------------------------------------
Underwriting, acquisition and insurance expenses are summarized in the following
table (in thousands):
Three Months Ended
June 30
------------------------------ Increase
1998 1997 (Decrease)
------------------------------ ----------
Underwriting, acquisition and insurance expenses
before reduction by ceding commissions earned $ 9,741 $ 8,789 $ 952
Ceding commissions earned (1,422) (737) (685)
------------ ------------- ------------
$ 8,319 $ 8,052 $ 267
=========== ============ ===========
Expenses increased by $267,000 (which are net of ceding commissions earned, see
note 5 of the accompanying Notes to Condensed Consolidated Financial Statements
for more information) for the quarter ended June 30, 1998 compared to the
quarter ended June 30,1997. Amortization of deferred policy acquisition costs
increased $470,000 which is principally attributable to new business. Other
expenses increased $482,000 primarily from salary and benefit increases and
other miscellaneous expenses relating to the daily operation of the company.
Ceding commissions earned increased for the same reason explained in the
year-to-date analysis.
Income Taxes
- ------------
The Company's effective tax rates of 26% for the three months ended June 30,
1998 and 23% for the comparable period in 1997 are lower than the statutory rate
of 35% principally due to the effect of tax exempt investment income.
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit (27) required of Item 601 of Regulation SK-Financial Data
Schedule (for SEC use only).
(b) Reports on 8-K. No reports on Form 8-K have been filed during the
quarter for which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant had duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Medical Assurance, Inc.
August 12, 1998 By: /s/ James J. Morello
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James J. Morello, Treasurer
(duly authorized officer and
principal financial officer)
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