1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended SEPTEMBER 30, 1999
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 September 30, 1999, there were 22,401,561 shares of the registrant's
common stock outstanding.
Page 1 of 19
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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.................................................................19
Signatures....................................................................................................19
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MEDICAL ASSURANCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
September 30 December 31
1999 1998
------------ -----------
ASSETS
Investments:
Fixed maturities available for sale, at fair value $ 648,238 $ 657,404
Equity securities available for sale, at fair value 43,227 44,124
Real estate, net 11,503 11,619
Short-term investments 48,896 78,432
----------- -----------
Total investments 751,864 791,579
Cash and cash equivalents 23,015 9,022
Premiums receivable 57,360 59,949
Receivable from reinsurers 190,252 179,890
Prepaid reinsurance premiums 10,533 13,467
Deferred taxes 33,472 26,897
Other assets 50,532 51,435
----------- -----------
$ 1,117,028 $ 1,132,239
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Policy liabilities and accruals:
Reserve for losses and loss adjustment expenses $ 652,472 $ 660,640
Unearned premiums 79,302 76,229
Reinsurance premiums payable 36,386 42,596
----------- -----------
Total policy liabilities 768,160 779,465
Other liabilities 29,571 28,594
----------- -----------
Total liabilities 797,731 808,059
Commitments and contingencies -- --
Stockholders' equity:
Common stock, par value $1 per share; 100,000,000
shares authorized; 23,901,675 and 23,899,983
shares issued, respectively 23,902 23,900
Additional paid-in capital 206,645 206,562
Accumulated other comprehensive income (loss), net of
deferred taxes (benefit) of $(1,185) and $6,611, respectively (2,201) 12,277
Retained earnings 125,877 91,622
----------- -----------
354,223 334,361
Less treasury stock at cost, 1,500,114 and 587,033 shares,
respectively (34,926) (10,181)
----------- -----------
Total stockholders' equity 319,297 324,180
----------- -----------
$ 1,117,028 $ 1,132,239
=========== ===========
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 Earnings Accounts
--------- --------- -------- --------
Balance at December 31, 1998 $ 324,180 $ 12,277 $ 91,622 $220,281
Comprehensive income
Net income 34,255 34,255
Other comprehensive income, net of tax
Unrealized losses on securities, net of
reclassification adjustment of $936 (14,478) (14,478)
---------
Comprehensive income 19,777
Common stock issued for compensation 85 85
Net purchases of treasury stock (24,745) (24,745)
--------- -------- -------- --------
Balance at September 30, 1999 $ 319,297 $ (2,201) $125,877 $195,621
========= ======== ======== ========
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 33,669 33,669
Other comprehensive income, net of tax
Unrealized gains on securities, net of
reclassification adjustment of $6,620 144 144
---------
Comprehensive income 33,813
Common stock issued for compensation 16 16
Net purchases of treasury stock (6,352) (6,352)
--------- -------- -------- --------
Balance at September 30, 1998 $ 314,665 $ 14,848 $143,193 $156,624
========= ======== ======== ========
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 Nine Months Ended
September 30 September 30
----------------------- -------------------------
1999 1998 1999 1998
-------- -------- --------- ---------
Revenues:
Direct and assumed
premiums written $ 44,301 $ 43,319 $ 153,950 $ 148,044
======== ======== ========= =========
Premiums earned $ 49,930 $ 49,510 $ 150,877 $ 144,480
Premiums ceded (12,185) (11,834) (33,837) (40,461)
-------- -------- --------- ---------
Net premiums earned 37,745 37,676 117,040 104,019
Net investment income 10,087 10,157 29,463 29,577
Other income 683 4,899 2,916 7,686
-------- -------- --------- ---------
Total revenues 48,515 52,732 149,419 141,282
Expenses:
Losses and loss
adjustment expenses 32,149 37,850 102,855 107,901
Reinsurance recoveries (9,464) (11,984) (30,801) (37,759)
-------- -------- --------- ---------
Net losses and loss
adjustment expenses 22,685 25,866 72,054 70,142
Underwriting, acquisition
and insurance expense 10,784 8,342 31,071 24,365
-------- -------- --------- ---------
Total expenses 33,469 34,208 103,125 94,507
-------- -------- --------- ---------
Income before income taxes
and cumulative effect of accounting change 15,046 18,524 46,294 46,775
Provision for income taxes:
Current expense 1,707 2,853 10,777 6,999
Deferred expense 2,194 2,135 1,262 4,984
-------- -------- --------- ---------
3,901 4,988 12,039 11,983
-------- -------- --------- ---------
Income before cumulative effect of accounting
change 11,145 13,536 34,255 34,792
Cumulative effect of accounting change, net of tax - - - (1,123)
-------- -------- --------- ---------
Net income $ 11,145 $ 13,536 $ 34,255 $ 33,669
======== ======== ========= =========
Basic and diluted earnings per share:
Income before cumulative effect of accounting
change $ 0.49 $ 0.57 $ 1.49 $ 1.47
Cumulative effect of accounting change, net of tax - - - (0.05)
-------- -------- --------- ---------
Net income $ 0.49 $ 0.57 $ 1.49 $ 1.42
======== ======== ========= =========
Weighted average number
of common shares
outstanding--basic and diluted 22,782 23,613 23,031 23,633
======== ======== ========= =========
See accompanying notes.
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MEDICAL ASSURANCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
Nine Months Ended
September 30
-----------------------------
1999 1998
--------- ---------
OPERATING ACTIVITIES
Net cash provided by operating activities $ 30,079 $ 76,496
INVESTING ACTIVITIES
Purchases of fixed maturities available for sale (152,519) (248,029)
Purchases of equity securities available for sale (13,518) (10,861)
Proceeds from sale or maturities of fixed
maturities available for sale 137,420 225,568
Proceeds from sale of equity securities available for sale 15,919 9,746
Net decrease (increase) in short-term investments 29,567 (13,030)
Other (8,436) (3,124)
--------- ---------
Net cash provided (used) by investing activities 8,433 (39,730)
FINANCING ACTIVITIES
Purchases of treasury stock (24,519) (2,672)
--------- ---------
Net cash used by financing activities (24,519) (2,672)
--------- ---------
Increase in cash and cash equivalents 13,993 34,094
Cash and cash equivalents at beginning of period 9,022 12,248
--------- ---------
Cash and cash equivalents at end of period $ 23,015 $ 46,342
========= =========
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 nine months ended September 30, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999. For further information, refer to the December 31, 1998
audited consolidated financial statements and accompanying notes.
The accompanying 1998 financial statements have been reclassified to conform to
the 1999 presentation. These changes had no material effect on previously
reported results of operations or shareholders' equity.
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 $107.0 million and $209.3 million for the nine months ended
September 30, 1999 and 1998, respectively. Gross realized gains on such sales
were approximately $3.1 and $6.6 million for the nine months ended September 30,
1999 and 1998, respectively. Gross realized losses on such sales were
approximately $1.7 million and $333,000, 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 $694.9 million and
$682.6 million at September 30, 1999 and December 31, 1998, respectively.
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MEDICAL ASSURANCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
The reserve for losses and loss adjustment expenses represents management's best
estimate of the ultimate cost of all losses incurred but unpaid. Incurred losses
and loss adjustment expenses for the nine months ended September 30, 1999 and
1998 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 that 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 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 $16.9 million and $10.5
million for the nine months ended September 30, 1999 and 1998, respectively.
As is common practice within the industry, reinsurance ceding commissions are
deducted from underwriting, acquisition, and insurance expenses and amounted to
$6.5 million and $7.4 million for the nine months ended September 30, 1999 and
1998, 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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Medical Assurance, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 September 30, 1999, the Board of
Directors had not authorized the issuance of any preferred stock nor determined
any provisions for the preferred stock.
On December 3, 1998 the Board of Directors declared a 10% stock dividend. Cash
was paid to shareholders for fractional shares. Earnings per share data for 1998
has been restated as if the above dividend had been declared on January 1, 1998.
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.
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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, 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 nine months
of 1999 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 (a) maintains what its management considers to be strong and
adequate reinsurance, (b) conducts regular actuarial reviews to ensure, among
other things, that reserves do not become deficient, and (c) maintains adequate
asset liquidity.
The Company did not borrow any funds during the nine months ended September 30,
1999 and 1998, 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 goal of expansion. 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 portfolio of fixed maturities and equity securities is classified
as available-for-sale and is carried at fair value, as discussed in Note 1 of
the notes to the December 31, 1998 audited consolidated financial statements.
At September 30, 1999 the fair value of fixed maturities and equity securities
was $3.4 million less than the amortized cost of those securities. At December
31, 1998 the fair value of fixed maturities and equity securities was $18.8
million more than the amortized cost of those securities. The $22.2 million
reduction in fair value at September 30, 1999 as compared to December 31, 1998
is primarily due to the impact of higher market interest rates at September 30,
1999 on the fair value of fixed maturities.
The Company's Board of Directors has authorized the purchase of its common stock
in the open market. The Board increased this authorization by $10 million in
March 1999 and by an additional $10 million in August 1999. As of September 30,
1999 the total remaining purchase authorization was approximately $3.1 million.
During the nine months ended September 30, 1999 the Company purchased 917,479
shares of its stock at a cost of $24.8 million.
Effective January 1, 1999 the Company purchased the ongoing book of medical
professional liability insurance business of Medical Defense Associates (MDA)
and Medical Defense Insurance Company (MDIC), subsidiaries of Medical Defense
Holding Company of Springfield, Missouri. The Company has assumed day-to-day
management of existing policies and prior
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liabilities of MDA and MDIC and provides aggregate excess of loss reinsurance to
protect MDA and MDIC from adverse loss development in excess of an agreed upon
threshold.
IMPACT OF YEAR 2000
The Company's comprehensive Year 2000 initiatives are designed to ensure that
there is no adverse effect on the Company's core business operations and that
transactions with customers, suppliers, and financial institutions are fully
supported. 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 the
two digit year "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.
In 1996, the Company committed to and began replacing substantially all of the
software and hardware used in its core computer information system. The
component systems that perform the critical functions of the new information
system have now been tested for Year 2000 compliance. The Company believes that
these systems, including both software and hardware, function properly with
respect to dates in the year 2000 and beyond and that the Year 2000 issue does
not pose significant problems for its core computer operations. Because Year
2000 compliance is incidental to the implementation of the new information
system, costs specifically related to Year 2000 compliance have been minimal.
The Company is reliant on various third party business partners. The Company's
own readiness for the year 2000 could be impacted by the readiness of these
third parties. The Company has identified the third party relationships that it
believes to be significant and has obtained information from the parties
regarding their efforts and expectations related to Year 2000 compliance. To
date, the Company is not aware of any third party issue that would materially
impact the Company's results of operations, liquidity or capital resources.
The Company has also evaluated the risk of claims against its policyholders for
medical incidents resulting in bodily injury to patients as a consequence of
Year 2000 computer or medical device failure. The Company has required that
hospitals and other large health care facilities complete questionnaires as to
their Year 2000 preparedness in underwriting their professional liability
insurance policies. If the questionnaire of a health care facility is not
returned or provides inadequate or unsatisfactory information regarding this
issue, the policy issued to such facility will exclude coverage for medical
incidents caused by Year 2000 problems. The Company has not surveyed insureds
who are physicians and surgeons as to their Year 2000 compliance and intends to
offer coverage for claims from such medical incidents because the Company does
not believe that physicians and surgeons will have significantly greater risk of
liability if they are not Year 2000 compliant.
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While the Company believes its efforts are adequate to address its Year 2000
concerns, there can be no guarantee that full compliance will be achieved or
that the systems of other companies on which the Company's systems and
operations rely will be converted on a timely basis and therefore will not have
a material effect on the Company. The Company's expectations about the
completion of its Year 2000 efforts, the related costs, and its assessment of
the anticipated business, operational and financial risks to the Company are
subject to a number of uncertainties and assumptions regarding future events
including, among others, representations of third parties and the continued
availability of trained personnel. This disclosure as well as the information
previously filed by the Company regarding its Year 2000 readiness during the
period January 1, 1996 to October 19, 1998 are designated as a Year 2000
readiness disclosure related to the Year 2000 Information and Readiness
Disclosure Act.
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RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 1998
Premiums
The following table presents information related to consolidated written and
earned premiums and reinsurance expense (in thousands):
Nine Months Ended
September 30 Increase
1999 1998 (Decrease)
----------------------------- ------------
Direct and assumed premiums written $ 153,950 $ 148,044 $ 5,906
============ ============ ============
Direct and assumed premiums earned $ 150,877 $ 144,480 $ 6,397
Premiums ceded (33,837) (40,461) 6,624
------------- ------------ ------------
Net premiums earned $ 117,040 $ 104,019 $ 13,021
============ ============ ============
The largest component of the increase in direct and assumed premiums written was
a $16.9 million increase in medical malpractice premiums. The increase in
medical malpractice premiums includes assumed premiums of $3.9 million from the
existing policies of the book of business acquired from MDA and MDIC, as
discussed under Liquidity and Capital Resources in Item 2, an increase in other
assumed medical malpractice premiums of $1.4 million, and $4.8 million of
additional direct premiums originating from the book of business purchased from
MDA. Offsetting the increase in medical malpractice premiums was a $12.2 million
decrease in accident and health premiums.
The largest component of the increase in direct and assumed premiums earned is
an $11.4 million increase in medical malpractice premiums. The increase in
earned medical malpractice premiums includes $5.0 million related to the MDA
book of business and a 3.9 million increase in other assumed medical malpractice
premiums. The increase in earned medical malpractice premiums was offset by a
$5.6 million decrease in earned accident and health premiums.
Historically, the Company writes accident and health premiums from time to time.
Direct accident and health premiums are heavily reinsured; volume fluctuations
in direct accident and health premiums are largely offset by similar
fluctuations in ceded accident and health premiums. Earnings on direct accident
and health premiums are primarily derived from fee and commission income.
The Company cedes reinsurance to provide for greater diversification of
business, allow management to control exposure to potential losses arising from
large risks, and provide capacity for additional growth. Premiums ceded are
estimated based on the terms of the respective reinsurance agreements. The
estimated expense is continually reviewed and any adjustments that become
necessary are included in current operations. Amounts recoverable from
reinsurers are estimated in a manner consistent with the loss liability
associated with the reinsured policies. The decrease in premiums ceded for the
nine months ended September 30, 1999 as compared to the nine months ended
September 30, 1998 is principally due to the decrease in earned accident and
health premiums, which are heavily ceded. The remaining decrease is due to a
greater proportion of premiums earned in states where cession levels are lower.
The Company continually reviews the levels of coverage ceded and the related
costs.
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Investment Income
The Company's consolidated net investment income was $29.5 million and $29.6
million, for the nine months ended September 30, 1999 and 1998, respectively.
The annualized average pre-tax investment yield for the nine months ended
September 30, 1999 was 5.2% as compared to 5.7% for the nine months ended
September 30, 1998. The reduction in the average yield is primarily due to a
shortening of the Company's investment portfolio in the later half of 1998 and
an increase in the proportion of the portfolio invested in tax-exempt
securities. The dollar amount of investment income was relatively unchanged
between the two periods because the reduction in the average yield was offset by
higher average invested funds during 1999 as compared to 1998.
During the nine months ended September 30, 1999 the Company repurchased $24.8
million of its own stock, of which $15.6 million was repurchased during the
third quarter. Most of the third quarter purchases occurred during the last half
of the quarter, and thus will have a greater impact on average invested funds
for the remainder of 1999.
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.
Nine Months Ended
September 30, 1999 September 30, 1998
------------------ ------------------
Loss Loss
Losses Ratio Losses Ratio
------ ----- ------ -----
Losses $ 102,855 68% $ 107,901 75%
== ==
Reinsurance recoveries (30,801) (37,759)
------------ ------------
Net losses $ 72,054 62% $ 70,142 67%
============ == ============ ==
Losses for both periods are principally based on the application of expected
loss ratios to premiums earned. These loss ratios give effect to improvement of
loss development in prior years' coverage of $41.4 million in 1999 and $31.0
million in 1998. 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 decreased by approximately $4.8 million for the nine months ended
September 30, 1999 as compared to the nine months ended September 30, 1998. The
change is attributable to decreased capital gains realized upon the sale of
securities during 1999 as compared to the same period in 1998.
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Underwriting, Acquisition, and Insurance Expenses
Underwriting, acquisition and insurance expenses are summarized in the following
table (in thousands):
Nine Months Ended
September 30 Increase
1999 1998 (Decrease)
----------------------------- -----------
Underwriting, acquisition and insurance
expenses before reduction by ceding
commissions earned $ 37,543 $ 31,760 $ 5,783
Ceding commissions earned (6,472) (7,395) 923
------------ ------------ ------------
$ 31,071 $ 24,365 $ 6,706
============ ============ ============
The increase in underwriting, acquisition and insurance expense is primarily due
to amortization of increased policy acquisition costs associated with new
business. The decrease in ceding commissions earned is principally due to lower
ceded accident and health premiums.
Income Taxes
The Company's effective tax rate of 26% for both nine month periods ended
September 30, 1999 and 1998 was lower than the statutory rate of 35% principally
due to the effect of tax-exempt investment income.
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RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE
MONTHS ENDED SEPTEMBER 30, 1998
Premiums
The following table presents information related to consolidated written and
earned premiums and reinsurance expense (in thousands):
Three Months Ended
September 30 Increase
1999 1998 (Decrease)
----------------------------- ----------
Direct and assumed premiums written $ 44,301 $ 43,319 $ 982
============ ============ ===========
Direct and assumed premiums earned $ 49,930 $ 49,510 $ 420
Premiums ceded (12,185) (11,834) (351)
------------ ------------ ------------
Net premiums earned $ 37,745 $ 37,676 $ 69
============ ============ ============
The increase in direct and assumed premiums written is the net of a $1.0 million
increase in medical malpractice premiums (of which approximately $2.4 million is
attributable to direct premiums originating from the book of business purchased
from MDA,) a $2.1 million increase in multi-line premiums (primarily workers
compensation) and a $2.2 million decrease in accident and health premiums.
The increase in direct and assumed premiums earned is due to increases in direct
medical malpractice and multi-line premiums (primarily workers compensation)
offset by decreases in accident and health premiums and assumed medical
malpractice premiums. Third quarter 1999 earned premiums include $1.3 million
related to the book of business purchased from MDA.
Historically, the Company writes accident and health premiums from time to time.
Direct accident and health premiums are heavily reinsured; volume fluctuations
in direct accident and health premiums are largely offset by similar
fluctuations in ceded accident and health premiums. Earnings on direct accident
and health premiums are primarily derived from fee and commission income.
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 slight increase in premiums ceded
for the three months ended September 30, 1999 as compared to the three months
ended September 30, 1998 is due to proportional variations in the related
premiums earned. The Company continually reviews the levels of coverage ceded
and the related costs.
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Investment Income
The Company had consolidated net investment income of $10.1 million for the
three months ended September 30, 1999, as compared to $10.2 million for the
three months ended September 30, 1998. The annualized pre-tax investment yield
for the three months ended September 30, 1999 was 5.4% compared to 5.6% for the
comparable period in 1998. The reduction in the investment yield was due to a
shortening of the Company's investment portfolio in the later half of 1998 and
an increase in the proportion of the portfolio invested in tax-exempt
securities.
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
September 30, 1999 September 30, 1998
------------------ ------------------
Loss Loss
Losses Ratio Losses Ratio
------------ ----- ----------- -----
Losses $ 32,149 64% $ 37,850 77%
== ==
Reinsurance recoveries (9,464) (11,984)
------------ ------------
Net losses $ 22,685 60% $ 25,866 69%
============ == ============ ==
Losses for both periods are principally based on the application of expected
loss ratios to premiums earned. These loss ratios give effect to improvement of
loss development in prior years' coverage of $14.9 million in 1999 and $13.0
million in 1998. 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 decreased by $4.2 million for the quarter ended September 30, 1999
as compared to the quarter ended September 30, 1998. The decrease is
attributable to reduced capital gains realized upon the sale of securities
during the third quarter of 1999 compared to the third quarter of 1998.
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Underwriting, Acquisition, and Insurance Expenses
Underwriting, acquisition and insurance expenses are summarized in the following
table (in thousands):
Three Months Ended
September 30
----------------------------- Increase
1999 1998 (Decrease)
----------------------------- ----------
Underwriting, acquisition and insurance
expenses before reduction by
ceding commissions earned $ 13,259 $ 12,171 $ 1,088
Ceding commissions earned (2,475) (3,829) 1,354
------------ ------------ ------------
$ 10,784 $ 8,342 $ 2,442
============ ============ ============
The increase in underwriting, acquisition and insurance expenses is primarily
due to amortization of increased policy acquisition costs. The decrease in
ceding commissions earned is related to decreased accident and health premiums
in 1999 as compared to 1998.
Income Taxes
The Company's effective tax rates of 26% for the three months ended September
30, 1999 and 27% for the comparable period in 1998 are lower than the statutory
rate of 35% principally due to the effect of tax-exempt investment income. The
effective rate for 1999 was lower than the rate for 1998 because tax-exempt
income represented a greater portion of total income.
FORWARD LOOKING STATEMENTS
This discussion contains historical information, as well as forward-looking
statements (identified by words such as, but not limited to, "believe,"
"expect," "intend," "anticipate," "estimate," and other analogous expressions)
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 earnings,
losses, the retention of current business, expansion of product lines, Year 2000
compliance, and development of business in new geographical areas depend on a
variety of factors, including economic, 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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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.
November 12, 1999 By: /s/ James J. Morello
---------------------------
James J. Morello, Treasurer
(duly authorized officer and
principal financial officer)
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