1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
AMENDMENT #1
(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 10
2
PREFACE
The purpose of this Amendment #1 to FORM 10-Q for the quarterly period ended
June 30, 1998 is to correct the Condensed Consolidated Statements of Income for
the Three Months Ended June 30, 1997. As submitted in the first filing of FORM
10-Q certain of the amounts for the Six Months Ended June 30, 1997 are repeated
in the column for the Three Months Ended June 30, 1997. This amendment will
correct this typographical error.
As required the registrant is submitting all of Item 1 with this amendment
followed by the signature page.
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.
4
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 $ 37,788 $ 94,970 $ 74,905
Premiums ceded (13,476) (8,650) (28,627) (17,365)
--------- --------- --------- ---------
Net premiums earned 34,579 29,138 66,343 57,540
Net investment income 9,732 9,426 19,420 18,884
Other income 1,900 128 2,787 739
--------- --------- --------- ---------
Total revenues 46,211 38,692 88,550 77,163
Expenses:
Losses and loss
adjustment expenses 36,678 28,694 70,051 58,869
Reinsurance recoveries (13,588) (9,487) (25,775) (19,425)
--------- --------- --------- ---------
Net losses and loss
adjustment expenses 23,090 19,207 44,276 39,444
Underwriting, acquisition
and insurance expenses 8,319 8,052 16,446 15,192
--------- --------- --------- ---------
Total expenses 31,409 27,259 60,722 54,636
--------- --------- --------- ---------
Income before income taxes 14,802 11,433 27,828 22,527
Provision for income taxes:
Current expense 2,072 3,423 3,997 6,728
Deferred expense (benefit) 1,704 (771) 2,849 (1,396)
--------- --------- --------- ---------
3,776 2,652 6,846 5,332
--------- --------- --------- ---------
Net income $ 11,026 $ 8,781 $ 20,982 $ 17,195
========= ========= ========= =========
Earnings per share:
Net Income - basic and diluted $ 0.51 $ 0.41 $ 0.98 $ 0.80
========= ========= ========= =========
Weighted average number of
common shares outstanding 21,492 21,496 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.
6
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.
7
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.
8
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
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 18, 1998 By: /s/ James J. Morello
------------------------
James J. Morello, Treasurer
(duly authorized officer and
principal financial officer)
10