-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, V/sGsx9TtnGDhh4SCu6PTw0DBmDIdJsguV05qutfX704L5uo8ufanX/R0TLFBTGB v9pq4JUMh2gDth4c8V418A== 0000950144-97-002914.txt : 19970327 0000950144-97-002914.hdr.sgml : 19970327 ACCESSION NUMBER: 0000950144-97-002914 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970326 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAIC HOLDINGS INC CENTRAL INDEX KEY: 0000944492 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 630720042 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-12129 FILM NUMBER: 97563477 BUSINESS ADDRESS: STREET 1: P O BOX 590009 CITY: BIRMINGHAM STATE: AL ZIP: 35259 BUSINESS PHONE: 2058774400 MAIL ADDRESS: STREET 1: P O BOX 590009 CITY: BIRMINGHAM STATE: AL ZIP: 35259 10-K 1 MAIC HOLDINGS 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) X Annual report pursuant to section 13 or 15(d) of the Securities - --- Exchange Act of 1934 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996] for the fiscal year ended December 31, 1996, or Transition report pursuant to section 13 or 15(d) of the Securities - --- Exchange Act of 1934 [No Fee Required] for the transition period from _________________ to _________________. Commission file number: 001-12129 MAIC Holdings, Inc. ------------------------------------------------------ (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Delaware 63-1137505 - ----------------------- ------------------------------------ (State of incorporation (I.R.S. Employer Identification No.) or organization) 100 Brookwood Place, Birmingham, AL 35209 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Securities registered pursuant to Section 12(b) of the Act: Common Stock, par value $1.00 per share Securities registered pursuant to Section 12(g) of the Act: None. Indicate by check mark whether the registrant (1) 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 --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock held by non-affiliates of the registrant at February 28, 1997 was $313,607,524. AS OF DECEMBER 31, 1996, THE REGISTRANT HAD OUTSTANDING APPROXIMATELY 10,282,031 SHARES OF ITS COMMON STOCK. Exhibit Index at page 59 2 Documents incorporated by reference in this Form 10-K: (i) The Registration Statement on Form S-1 with respect to the common stock of Mutual Assurance, Inc. (Commission File No. 33-35223) is incorporated by reference into Part IV of this report. (ii) The Mutual Assurance, Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (Commission File No. 0-19439), is incorporated by reference into Part IV of this report. (iii) Registration Statement on Form S-4 with respect to the common stock of MAIC Holdings, Inc. (Commission File No. 33-91508) originally filed April 20, 1995 is incorporated by reference into Parts I and IV of this report. (iv) The Mutual Assurance, Inc. Current Report on Form 8-K for event occurring July 14, 1995 (Commission File No. 0-19439), is incorporated by reference into Part IV of this Report. (v) The Mutual Assurance, Inc. Current Report on Form 8-K for event occurring August 28, 1995 (Commission File No. 0-19439), is incorporated by reference into Part IV of this Report. (vi) The MAIC Holdings, Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (Commission File No. 0-19439), is incorporated by reference into Part IV of this report. (vii) The MAIC Holdings, inc. Proxy Statement for the 1996 Annual Meeting (Commission File No. 0-19439) is incorporated herein by reference into Part IV of this report. (viii) The Registration Statement on Form S-4 with respect to the Common Stock of MAIC Holdings, Inc. (Commission File No. 333-13465) is incorporated by reference into Part IV of this report. (ix) The definitive proxy statement for the 1997 Annual Meeting of the Stockholders of MAIC Holdings, Inc. is incorporated by reference into Part III of this Report. 2 3 PART I ITEM 1. BUSINESS OF THE COMPANY MAIC Holdings, Inc. ("MAIC Holdings") was incorporated in the state of Delaware on February 8, 1995 by its sole incorporator, Mutual Assurance, Inc., an Alabama stock insurer ("Mutual Assurance"), to serve as a holding company for Mutual Assurance and its subsidiaries. MAIC Holdings and its subsidiaries are sometimes collectively referred to as the Company. The Company's wholly-owned insurance subsidiaries include: Mutual Assurance, Medical Assurance of West Virginia, Inc., a West Virginia stock insurer ("MA-West Virginia"), Physicians Insurance Company of Indiana, Inc., an Indiana stock insurer ("PIC-Indiana"), and Missouri Medical Insurance Company, a Missouri stock insurer ("MOMEDICO"). The Company is nationally recognized for providing malpractice protection to physicians, hospitals, dentists and managed care and health care organizations through programs which coordinate traditional insurance with effective clinical management. The Company comprises insurance company holding systems under the laws of Alabama, West Virginia, Indiana and Missouri. RECENT DEVELOPMENTS Formation of Holding Company In 1995, the Board of Directors and Shareholders of Mutual Assurance approved a Plan of Exchange (the "Plan of Exchange") in accordance with the Alabama Insurance Code in order to form a holding company for Mutual Assurance and its subsidiaries. The Plan of Exchange provided for the mandatory exchange of one share of MAIC Holdings common stock for each share of issued and outstanding Mutual Assurance common stock. The Plan of Exchange was effected on August 31, 1995. At the effective time of the Plan of Exchange, MAIC Holdings had no stockholders. As a result of the Plan of Exchange, Mutual Assurance became a wholly-owned subsidiary of MAIC Holdings and the shareholders of Mutual Assurance became the sole stockholders of MAIC Holdings without any material change in their proportionate ownership of Mutual Assurance and its subsidiaries. Additionally, in accordance with the Plan of Exchange, Mutual Assurance distributed as a dividend to MAIC Holdings all of its capital stock in MA-West Virginia and PIC-Indiana. For accounting purposes, the historical financial statements of Mutual Assurance and its subsidiaries were restated as the consolidated financial statements of MAIC Holdings and its subsidiaries in a manner similar to that of a pooling combination. Prior to the Plan of Exchange, MAIC Holdings had no assets, liabilities, revenues or net income. Listing on New York Stock Exchange. On September 23, 1996, MAIC Holdings' common stock was listed for trading on the New York Stock Exchange ("NYSE") under the trading symbol "MAI." Simultaneously, MAIC Holdings' common stock was delisted from trading on NASDAQ/NMS. As a result, MAIC Holdings is now subject to the rules and regulations of the NYSE rather than the rules and regulations of The Nasdaq Stock Market, Inc. 3 4 Tender Offer for LifeSouth, Inc. On June 3, 1996, MAI Corporation, a wholly-owned subsidiary of Mutual Assurance, announced a cash tender offer for the purchase of the shares of common stock of LifeSouth, Inc. ("LifeSouth") at a cash price of $12.24 per share. At the time of the tender offer, MAI Corporation owned approximately 58% of the common stock of LifeSouth, and LifeSouth owned all of the stock of PROActive Insurance Corporation, which had discontinued its business as a health insurer in 1995. The tender offer was made pursuant to an Agreement and Plan of Merger dated as of May 31, 1996 between MAI Corporation and LifeSouth which required MAI Corporation to make the tender offer, and upon the completion thereof, provided for LifeSouth to be merged into MAI Corporation ("Merger") with MAI Corporation surviving the Merger. Pursuant to the Merger, each share of LifeSouth common stock not purchased in the tender offer (other than shares previously owned by Mutual Assurance or MAI Corporation) were automatically converted into the right to receive $12.24 in cash, without any interest thereon. As a result of the consummation of the tender offer and the Merger, MAIC Holdings through MAI Corporation became the sole shareholder of PROActive Insurance Company. MAI Corporation paid, in the aggregate (including fees and expenses), approximately $2.1 million for the outstanding stock of LifeSouth, Inc., none of which was obtained through any third party financing. The tender offer price was based upon the liquidation value of LifeSouth and PROActive. Business Expansion The Company has been the predominant carrier of professional liability insurance for Alabama physicians since it began business in 1977. The Company is actively writing medical liability insurance for health care providers in states principally located in the south and midwest. The Company currently intends to become a "super-regional" insurer with an active presence in the south and midwest, but with the capability to respond outside the region when an opportunity for business arises. In 1996, approximately 53% of the written premiums of the Company were derived from business in states other than Alabama. The majority of this expansion has occurred through business combinations with other companies and acquisitions of books of business. See "Marketing" and "Regulation" within this caption. Effective January 1, 1994, the Company purchased 100% of the common stock of MA-West Virginia (formerly known as West Virginia Hospital Insurance Company). Effective January 1, 1995, the Company purchased fifty-one and seven tenths percent (51.7%) of the outstanding capital stock of PIC-Indiana from the Indiana State Medical Association ("ISMA") and during the remainder of 1995, acquired substantially all of the remaining shares of the capital stock of PIC-Indiana. Effective July 16, 1995, Mutual Assurance acquired the recurring professional liability insurance business for health care providers of Physicians Insurance Company of Ohio, an Ohio stock insurer, and its subsidiaries (collectively referred to hereafter as "PIC-Ohio"). On December 20, 1996, the Company acquired by merger MOMED Holding Co. ("MOMED"). MOMED operates as an insurance holding company, and through its wholly-owned subsidiary, MOMEDICO, is engaged in the business of providing medical professional liability insurance to physicians principally in the State of Missouri. In the aggregate, the Company paid approximately $33.6 million in cash and common stock of MAIC Holdings in order to effect all of the above transactions, none of which was obtained through any third party financing. INSURANCE PRODUCTS The Company offers professional liability insurance and reinsurance for providers of health care 4 5 services. Professional liability insurance provides insurance against the legal liability of an insured (and against loss, damage or expense incidental to a claim of such liability) arising out of the death, injury or disablement of a person as the result of negligence or other misconduct in rendering professional service. While professional liability insurance for physicians and their related practice entities is the principal product offered by the Company, the Company believes that providing insurance to hospitals and other health care organizations continues to represent a significant area for further growth of its insurance business as well as an opportunity to increase its share of the physician market. In recent years, hospitals and vertically integrated health care providers have had an increasingly greater degree of influence over the professional liability insurance coverages of medical staff and affiliated physicians. As this trend continues, the Company expects to increase the number of the physicians insured by its insurance subsidiaries through such relationships. The Company believes that further development of its joint physician-hospital professional liability insurance programs offers significant opportunities to reduce losses and loss adjustment expenses through the control of the defense of claims commonly made against both a physician and a hospital with respect to a single incident. The Company has undertaken to develop other insurance products necessitated by changes in the health care industry. The Company has developed and markets through its insurance subsidiaries liability insurance products for health care facilities, managed care organizations, physician practice management companies and integrated delivery systems to include not only direct and vicarious professional liability insurance, but general liability insurance, errors and omissions coverages, directors and officers liability insurance, employment practices liability insurance and other related coverages. The Company presently intends to continue its efforts to develop insurance products designed to meet the needs of customers in the health care market. The Company, through its subsidiary, PROActive Insurance Corporation ("PROActive Insurance"), offered health insurance through January 1, 1995. PROActive Insurance remains authorized to write life and accident insurance in Alabama, but has no active business at the current time. Historically, the operations of PROActive were an insignificant source of revenue to MAIC Holdings and were not material to its business. MARKETING The Company has provided and continues to provide various services and communications to its insured physicians, dentists and hospitals to promote its professional liability insurance products. These services and communications include provision of risk management consultation, loss prevention seminars and other educational programs for physicians, dentists, nurses and hospital administrators; legislative oversight and active support or opposition of proposed legislation relating to liability issues affecting the health care industry; the preparation and dissemination of newsletters and other printed material with information of interest to the health care industry; and attendance at meetings of the state and local medical societies and related organizations. In 1995, the Company became an accredited provider of continuing medical education that has enabled it to sponsor numerous risk management education seminars which has helped the Company gain exposure among potential insureds. The purpose of these communications and services is to convey that the Company understands the insurance needs of the health care industry, and to promote a commonality of interest between the Company, its insureds, and the medical community generally. The Company has entered into endorsement and marketing agreements with organized medical societies and associations in the states in which it offers professional liability insurance, including the Medical Association of the State of Alabama, the Alabama Dental Association, the West Virginia Hospital Association, West Virginia Hospital Services, Inc., the Medical Association of the State of West Virginia, the Indiana State Medical Association and the Missouri State Medical Association. 5 6 Each of the above referenced endorsement and marketing agreements generally provides the Company access to the meetings of the respective state medical associations in order to make presentations and access to their respective publications for advertisements. In addition, each of the respective state medical associations agreed to assist the Company in developing loss prevention programs, in monitoring proposed legislation and administrative regulations in the respective states, and in providing information on health care matters relating primarily to professional liability. The Company generally pays annual compensation to each of the associations for the endorsement and services provided under each respective contract. The Company directly markets its professional liability insurance products to Alabama physicians and hospitals. As a result, the Company is not required to pay commissions to insurance agents on the sale of insurance products resulting from direct marketing efforts by its employees. However, as the Company has expanded its business into other states, it relies on independent agents to market and service its insurance products. Since 1995, the Company has engaged managing general agents for the purpose of procuring, underwriting and servicing certain insurance and reinsurance products through the United States, 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. UNDERWRITING AND CLAIMS The Company establishes and implements underwriting procedures for all forms of professional liability coverage. The Company is responsible for claims investigation, case management, defense planning, and coordination and control of attorneys in the defense of claims of its insureds. The Company has underwriting and claims committees whose members principally consist of local physicians, dentists and representatives of hospitals and health care entities who advise and participate in the administration of underwriting and claims management in many states. The current policy of the Company is and has been to refuse settlement of and to defend aggressively all claims that appear to have no merit. The Company believes that it has developed relationships with attorneys in Alabama who have significant experience in the defense of medical professional liability claims and who are able to defend aggressively claims against its insureds. As the Company intends to develop similar relationships with defense counsel in other states in which it does business through its subsidiaries, business expansion has been principally through acquisitions of, or combinations with, insurers who have a significant presence in a state in order to be in a position to engage local defense counsel who will respond to its defense strategy. This philosophy contributes to increased allocated loss adjustment expenses compared to those of other property and casualty lines, but the Company believes it results in greater policyholder loyalty and contributes to the Company's superior combined ratio, which is generally below the industry average and well below its main competitors. LOSS RESERVES Loss reserves are the liabilities established by the Company to provide funds for payment of policyholders' claims in the future. A medical professional liability insurance company must accumulate substantial loss reserves because it has promised to pay substantial amounts in the future for claims that have occurred in prior contract periods. These loss reserves are established as balance sheet liabilities representing estimates of future amounts needed to pay claims and related expenses with respect to insured events which have occurred, including events that have not yet been reported to the carrier. 6 7 Loss and loss adjustment expense reserves associated with medical professional liability coverage tend to be relatively higher than those associated with other types of property and casualty insurance for two primary reasons. First, the yearly increases in the overall costs of medical professional liability insurance coverage have historically been among the highest of the property and casualty insurance lines. These increased costs can be attributed principally to increases in both the frequency and severity of medical professional liability claims. Second, the delays between the collection of premiums and the payment of losses is longer for medical professional liability insurance than other property and casualty lines. This delay, which is commonly referred to as the "long tail," is the result of the length of time that elapses between the incident giving rise to an insured claim and its reporting to the insurer, and the length of time that elapses between the reporting of the claim to the insurer and the ultimate resolution of the claim. Frequently, injuries are not discovered until years after an incident, or the claimant may simply elect initially not to pursue the recovery of damages. Once a claim is initiated, the complexity of medical professional liability claims also contributes to the long tail. There are two types of insurance policies, occurrence and claims-made. Under occurrence coverage, insurance is provided against claims of liability arising from incidents which "occur" during the policy period, regardless of when claims arising out of such incidents may be reported. Claims-made coverage provides protection against only those claims which arise out of incidents occurring and of which notice to the insurer is given while coverage is effective. Claimsmade policies enable the insurer to estimate its loss reserves with more certainty as reserves for losses are accrued in the year that a claim is reported in the case of claims-made policies instead of in the year of occurrence in the case of occurrence policies. As a result, there is less dependence on the actuarial determination of claims incurred but not reported in establishing the amount of loss reserves with respect to claims-made coverage. At December 31, 1996, the Company's reserves were comprised of approximately 25% occurrence reserves and approximately 75% claims-made reserves. The determination of loss reserves is essentially a projection of ultimate losses through an actuarial analysis of the claims history of the Company and other professional liability insurers, subject to adjustments deemed appropriate to management due to changing circumstances. Included in their claims history are losses and loss adjustment expenses paid by the Company in prior periods and case reserves for anticipated losses and loss adjustment expenses developed by their respective claims departments as claims are reported and investigated. Actuaries rely primarily on such historical loss experience in determining reserve levels on the assumption that historical loss experience provides a good indication of future loss experience despite the uncertainties in loss cost trends and the delays in reporting and settling claims. As additional information becomes available, the estimates reflected in earlier loss reserves may be revised. Any increase in the amount of reserves, including reserves for insured events of prior years, could have an adverse effect on consolidated results of the Company for the period in which the adjustments are made. The uncertainties inherent in estimating ultimate losses on the basis of past experience have grown significantly in recent years principally as a result of judicial expansion of liability standards and expansive interpretations of insurance contracts. These uncertainties may be further affected by, among other factors, changes in the rate of inflation and changes in the propensities of individuals to file claims, and changes in the laws of the states in which the Company does business. Despite these uncertainties, management believes that the methods used by the Company to establish their reserves are reasonable and appropriate. These methods include a detailed review of reserves for losses and loss adjustment expenses of each insurance subsidiary being performed by the Company's independent actuaries for each fiscal year. The independent actuaries prepare a report that includes a recommendation as to the respective levels of reserves. Management considers this recommendation as well as other factors, such as known, anticipated or estimated changes in frequency and severity of claims and loss retention levels 7 8 and premium rates, in establishing the amount of its reserves for losses and loss adjustment expenses. In connection with the audit of the Company's consolidated financial statements at the end of each fiscal year, the Company's independent auditors (whose unqualified report is included in Part II of this report) also perform an analysis on the consolidated loss reserves to determine if there is sufficient historical claims experience upon which to rely in projecting loss reserves and to determine if the amount of loss reserves is adequate based on such analysis. In addition, the statutory filings of Mutual Assurance, MA-West Virginia, PIC-Indiana and MOMEDICO with the insurance regulators must now be accompanied by an independent actuaries' certification as to their respective reserves in accordance with the requirements of the National Association of Insurance Commissioners. In establishing the amount of reserves for losses and loss adjustment expenses for interim periods in the following year, management estimates a loss ratio giving consideration to the recommendation in the report of the independent actuaries and other factors described above. The estimated loss ratio and existing reserves are subject to further adjustment during the year, as deemed appropriate by management, to give consideration to unusual material events. Management consults with its independent actuaries during the year for advice concerning the adequacy of reserves and loss ratios. CLAIMS RECONCILIATION The following table sets forth an analysis of consolidated property and casualty loss reserve liabilities and loss adjustment expense ("LAE") for the Company and provides a reconciliation of beginning and ending consolidated liability balances for the years ended December 31, 1996, 1995, and 1994. As of December 31, 1996, MAIC Holdings' insurance subsidiaries had consolidated reserves for losses and LAE on a generally accepted accounting principles basis that exceeded those on a statutory basis by approximately $20.2 million, which represents that portion of GAAP reserves that are reflected for statutory accounting purposes as unearned premiums. These unearned premiums are applicable to extended reporting endorsements issued without a premium charge upon death, disability, or retirement. 8 9
YEAR ENDED DECEMBER 31, ----------------------------------------------- 1996 1995 1994 --------- --------- --------- (DOLLARS IN 000'S) Reserve liability, net of reinsurance recoverables, at beginning of year $ 352,521 $ 295,541 $ 272,392 Provisions for losses and LAE occurring in the current year, net of reinsurance Insurance subsidiaries 100,186 78,856 62,015 Acquired subsidiary -- 2,231 374 Decrease in estimated losses and LAE for claims occurring in prior years, net of reinsurance (27,427) (27,389) (20,948) --------- --------- --------- Total incurred during current year, net of reinsurance 72,759 53,698 41,441 Losses and LAE payments for claims, net of reinsurance, occurring during: The current year Insurance subsidiaries (3,468) (2,191) (2,242) Acquired subsidiary -- (5,398) (624) Prior years (27,415) (24,102) (21,295) --------- --------- --------- Total paid, net of reinsurance (30,883) (31,691) (24,161) --------- --------- --------- Reserve liability, net of reinsurance recoverables, of acquired subsidiaries 45,643 34,973 5,869 --------- --------- --------- Reserve liability, net of reinsurance recoverables, at end of year $ 440,040 $ 352,521 $ 295,541 ========= ========= ========= Gross liability at end of year $ 548,732 $ 432,937 $ 355,735 Reinsurance recoverable 108,692 80,416 60,194 --------- --------- --------- Net liability at end of year $ 440,040 $ 352,521 $ 295,541 ========= ========= ========= Gross re-estimated liability $ 400,226 $ 290,703 Re-estimated recoverable 74,997 51,460 --------- --------- Net re-estimated liability $ 325,229 $ 239,243 ========= =========
Note: The above amounts exclude accident and health reserves. 9 10 LOSS RESERVE DEVELOPMENT TABLE The following table includes information regarding the development of property and casualty reserves for liability for unpaid losses and LAE of the Company for the years ended December 31, 1986 through 1996: (i) the line entitled "Balance Sheet Reserves, Net of Reinsurance Recoverables" reflects the amount recorded as the reserve for liability for unpaid losses and LAE in the consolidated balance sheet at the end of each year (the "Balance Sheet Reserves"); (ii) the section entitled "Cumulative Paid, Net of Reinsurance Recoverables, As Of" reflects the cumulative amounts paid as of the end of each succeeding year with respect to the previously recorded Balance Sheet Reserves; (iii) the section entitled "Reestimated Net Liability As Of" reflects the reestimated amount of the liability previously recorded as "Balance Sheet Reserves" based upon claims experience as of the end of each succeeding year (the "Net Reestimated Liability"); (iv) the line entitled "Redundancy (Deficiency)" reflects the difference between the previously recorded Balance Sheet Reserve for each applicable year and the Net Reestimated Liability relating thereto as of the end of the most recent fiscal year; and (v) the line entitled "% Redundancy (Deficiency)" reflects the ratio that the Redundancy (Deficiency) bears to the Balance Sheet Reserve in each year during such period. The table also includes a section that is intended to compare the Net Reestimated Liability for losses and LAE with the Balance Sheet Reserves as increased to include the reserve for liability for unpaid losses and LAE assumed when the Company commuted substantially all of its quota share reinsurance agreements for losses applicable to all periods prior to August 1, 1989 (the "Commutation") The restated portion of the table includes (i) a line entitled "Reserves Assumed in 1989 and 1990 Commutation -- Cumulative" to reflect the reserves for liability for unpaid losses and LAE assumed by Mutual Assurance in the Commutation; (ii) a line entitled "Balance Sheet Reserves, Net of Reinsurance Recoverables, After Giving Effect to 1989 and 1990 Commutation" to reflect the sum of the Balance Sheet Reserves and the cumulative reserve for liability for unpaid losses and LAE assumed in the Commutation (the "Adjusted Balance Sheet Reserves"); (iii) a line entitled "Redundancy (Deficiency) in Balance Sheet Reserves, Net of Reinsurance Recoverables, After Giving Effect to 1989 and 1990 Commutation" to reflect the difference between the Adjusted Balance Sheet Reserves and the Net Reestimated Liability for each year prior to 1989; and (iv) a line entitled "% Redundancy (Deficiency) After Giving Effect to 1989 and 1990 Commutation" to reflect the ratio that such difference bears to the Adjusted Balance Sheet Reserves. Information presented in the following table is cumulative and, accordingly, each amount includes the effects of all changes in amounts for prior years. This information is limited to the property and casualty reserves of the Company from their respective dates of acquisition. The GAAP basis claims reserves have not been discounted. 10 11 RESERVE DEVELOPMENT ANALYSIS BY RESERVE DATE
1986 1987 1988 1989 1990 1991 - ----------------------------------------------------------------------------------------------------------------------- (Dollars in 000's) BALANCE SHEET RESERVES, NET OF REINSURANCE RECOVERABLES 72,865 90,000 119,396 169,732 202,937 228,119 CUMULATIVE PAID, NET OF REINSURANCE RECOVERABLES, AS OF: End Of Year 0 0 0 0 0 0 One Year Later 9,521 8,937 13,697 15,986 17,340 19,560 Two Years Later 16,952 21,046 27,516 30,361 34,374 35,461 Three Years Later 26,548 32,799 39,210 45,266 44,498 46,417 Four Years Later 34,944 43,455 50,250 52,702 52,076 58,124 Five Years Later 43,194 52,763 54,118 59,235 61,196 62,573 Six Years Later 51,279 56,047 59,168 65,976 63,682 Seven Years Later 52,701 60,275 64,206 66,033 Eight Years Later 53,218 65,210 63,953 Nine Years Later 57,837 64,921 Ten Years Later 57,220 RE ESTIMATED NET LIABILITY AS OF: End Of Year 72,865 90,000 119,396 169,732 202,937 228,119 One Year Later 77,368 96,004 133,910 170,626 195,747 217,558 Two Years Later 84,188 111,166 137,080 161,414 185,535 205,277 Three Years Later 94,517 115,759 128,526 156,413 173,996 185,349 Four Years Later 97,492 108,444 126,641 144,929 157,884 159,301 Five Years Later 90,959 108,851 115,556 133,054 135,828 139,570 Six Years Later 91,404 102,345 108,017 113,737 119,336 Seven Years Later 86,861 95,914 93,649 101,621 Eight Years Later 80,410 84,862 85,378 Nine Years Later 71,177 82,074 Ten Years Later 67,715 REDUNDANCY(DEFICIENCY) 5,150 7,926 34,018 68,111 83,601 88,549 % REDUNDANCY(DEFICIENCY) 7.07% 8.81% 28.49% 40.13% 41.20% 38.82% RESERVES ASSUMED IN 1989 & 1990 COMMUTATION -- CUMULATIVE 14,065 17,218 19,075 1,969 BALANCE SHEET RESERVES, NET OF REINSURANCE RECOVERABLES, AFTER GIVING EFFECT TO 1989 & 1990 COMMUTATION 86,930 107,218 138,471 171,701 202,937 228,119 REDUNDANCY(DEFICIENCY) IN BALANCE SHEET RESERVES, NET OF REINSURANCE RECOVERABLES, AFTER GIVING EFFECT TO 1989 & 1990 COMMUTATION 19,215 25,144 53,093 70,080 83,601 88,549 % REDUNDANCY(DEFICIENCY) AFTER GIVING EFFECT TO 1989 & 1990 COMMUTATION 22.10% 23.45% 38.34% 40.82% 41.20% 38.82% 1992 1993 1994 1995 1996 - --------------------------------------------------------------------------------------------------------- (Dollars in 000's) BALANCE SHEET RESERVES, NET OF REINSURANCE RECOVERABLES 252,739 272,392 295,541 352,521 440,040 CUMULATIVE PAID, NET OF REINSURANCE RECOVERABLES, AS OF: End Of Year 0 0 0 0 0 One Year Later 19,752 21,296 24,102 27,532 Two Years Later 36,185 40,988 42,115 Three Years Later 52,550 53,186 Four Years Later 58,526 Five Years Later Six Years Later Seven Years Later Eight Years Later Nine Years Later Ten Years Later RE ESTIMATED NET LIABILITY AS OF: End Of Year 252,739 272,392 295,541 352,521 440,040 One Year Later 241,655 251,445 268,154 325,212 Two Years Later 221,236 220,385 239,243 Three Years Later 190,744 194,213 Four Years Later 167,062 Five Years Later Six Years Later Seven Years Later Eight Years Later Nine Years Later Ten Years Later REDUNDANCY(DEFICIENCY) 85,677 78,179 56,298 27,309 % REDUNDANCY(DEFICIENCY) 33.90% 28.70% 19.05% 7.75% RESERVES ASSUMED IN 1989 & 1990 COMMUTATION -- CUMULATIVE BALANCE SHEET RESERVES, NET OF REINSURANCE RECOVERABLES, AFTER GIVING EFFECT TO 1989 & 1990 COMMUTATION 252,739 272,392 295,541 352,521 REDUNDANCY(DEFICIENCY) IN BALANCE SHEET RESERVES, NET OF REINSURANCE RECOVERABLES, AFTER GIVING EFFECT TO 1989 & 1990 COMMUTATION 85,677 78,179 56,298 27,309 % REDUNDANCY(DEFICIENCY) AFTER GIVING EFFECT TO 1989 & 1990 COMMUTATION 33.90% 28.70% 19.05% 7.75%
Note: There may be a difference of 1 (,000) in the redundancies due to rounding. 11 12 The table reflects deficiencies resulting from increases in the reestimated liability for losses as compared to the Balance Sheet Reserve for losses in 1986 and 1987. These deficiencies result in large part from the Commutation in which the Company reassumed in 1989 and 1990 reserves for losses which had been ceded to reinsurers in prior years. Pursuant to the Commutation, the Company assumed in 1989 and 1990 liability for unpaid losses and LAE in the amount of approximately $21,000,000 and $2,000,000, respectively, previously ceded to reinsurers. Reserves for such reassumed liability had not been included in the Company's balance sheet prior to 1989 because it had been ceded to reinsurers. The reserves for such previously ceded liability were first included in the Company's balance sheet reserves at the end of the years in which they were reassumed, namely 1989 and 1990. On the other hand, the "Reestimated Liability" for the last succeeding year in the table has included the cumulative unpaid losses and LAE expenses in the reestimated liability attributable to years prior to 1989. Accordingly, a large part of the deficiency in the above-referenced years results from the comparison of Reestimated Liability that includes cumulative liability for previously ceded unpaid losses and loss adjustment expenses with Balance Sheet Reserves that do not include reserves for such liability. The Company believes that the table reflects its conservative approach to the reservation of losses and LAE, particularly when compared with the amount of paid losses and LAE as set forth in the table. REINSURANCE In managing its underwriting risks and liquidity position, the Company transfers portions of its insurance risks to reinsurers. Reinsurance protects the Company against losses of a catastrophic nature and stabilizes underwriting results in those years in which such losses occur. This cession of risks involves the payment of premiums to those reinsurers for their assumption of these risks. The cession of reinsurance does not discharge the Company from liability to the policyholders, but it does permit recourse by it against the reinsurer for losses paid within the scope of the reinsurance contract. Generally the Company's reinsurance program segregates between business written in Alabama and business written in all other states. Since 1989, risks in excess of $1,000,000 per loss are reinsured for business written in Alabama. For all losses on Alabama business before August 1, 1989, the Company reinsures individual risks exceeding $4,000,000 with an aggregate of $7,000,000. In states other than Alabama, risks written since 1996 which are greater than $200,000 are reinsured. Before 1996, the Company reinsured risks written in other states exceeding amounts ranging from $200,000 to $1,000,000. Risks are reinsured under treaties pursuant to which the reinsurer agrees to assume all or a portion of all risks insured by the Company above its individual risk retention and up to the maximum individual limit offered (currently $26,000,000). The Company reinsures the risks above the maximum limits of its reinsurance treaties on a facultative basis -- the reinsurer agrees to insure a particular risk up to a designated limit. Reinsurance is placed under reinsurance treaties and agreements with a number of individual companies to avoid concentrations of credit risk. For policy periods beginning on or after August 1, 1989, the Company has not placed more than 25% of the total amount of risks ceded to reinsurers with any one reinsurer. The Company relies on reinsurance intermediaries to assist in the analysis of the credit quality of its reinsurers. Although reinsurer insolvencies have resulted in financial difficulties for some insurance companies, the Company's reinsurance recoverable at December 31, 1996 did not include any amounts due from any financially troubled reinsurer. INVESTMENTS Investment management services are provided to the Company by independent third party 12 13 investment managers. Such services include reviewing and recommending investment policies and implementing and executing investment strategies and are currently provided for a fee based upon the market value of the investment portfolio managed by the Company. The general investment policies of the Company are intended to accommodate its need for liquidity and current income. The primary objective is to achieve a high level of after-tax income, while minimizing risk. Accordingly, investment assets of the Company substantially consist of fixed maturity securities, all of which are investment grade as defined by national rating agencies. See Note 2 of the Notes to the Consolidated Financial Statements for a description of the investments of the Company at December 31, 1996. COMPETITION Traditionally, the physicians and surgeons professional liability market, the hospital professional liability market and the dental professional liability market in the State of Alabama have been highly competitive. The Company acquired a substantial share of the Alabama physicians and surgeons professional liability insurance market in 1977 when the primary Alabama medical professional liability carrier withdrew from Alabama. Competitors, some of which have greater financial resources than the Company, have entered or reentered the Alabama market, and many insurance companies currently offer professional liability insurance in Alabama. Other companies engaged in similar lines of business in other states may enter the Alabama market in the future. However, the Company has maintained a dominant market share in Alabama through aggressive defense, competitive pricing and a substantial market effort. The Company plans to continue to expand the business of the Company into other states through marketing new business through independent agents and writing new business with multi-state health care providers having a prior relationship with the Company. The Company also intends to expand its business through business combinations with medical professional liability insurers having name recognition and significant support in the medical community in the states in which they do business. The Company believes that it will be competitive with companies who have been offering medical professional liability insurance in those states in which the Company writes insurance. In its marketing efforts in other states, the Company must compete with insurance companies that have pre-existing relationships with prospective customers and name recognition in those states, and that in many cases have greater resources than the Company. Marketing efforts in states other than Alabama will take substantial time and resources in order for prospective customers to become familiar with the Company and its insurance products. The Company believes that the principal competitive factors in the professional liability insurance business are service, name recognition, and price, and that it competes effectively in all these areas. The Company enjoys significant name recognition in the State of Alabama by virtue of having been organized by, and operated for the principal benefit of, Alabama physicians. The Company has attempted to use its heritage as a policyholder-founded company dedicated to the medical professional liability insurance industry in general as a means to compete in other states both directly and indirectly through its affiliates. The services offered by the Company to its insureds as well as the medical community in general are intended to promote name recognition and to maintain and improve loyalty among the insureds. REGULATION The insurance industry is highly regulated, primarily by departments or agencies of the state governments. The Insurance Codes of the various states in which the Company does business delegate regulatory, supervisory and administrative powers to the State Commissioners or Departments of Insurance. Such regulation, supervision and administration involve, among other things, the licensing 13 14 of insurers, financing of insurers, periodic examinations of the affairs and financial condition of insurers, and review of annual and other mandatory reports on the financial condition of insurers. Insurance companies are required to be licensed by the states in which they do business. The Company is currently licensed to do business as a property and casualty insurer in 37 states and the District of Columbia and has or will apply for authority to do business in almost all states. In addition to being licensed as a property and casualty insurer, the Company must submit for prior approval all property and casualty policies, endorsements, underwriting manuals, and rates to the Commissioners of Insurance in order to do business in states in which it is licensed. Currently, the Company is able to write professional liability insurance in 22 states. Approval of policy forms and rates may take a substantial period of time after the license has been issued in a particular state. Further, the possibility exists that the Company may be unable to do business in a state in which it is licensed if desired policies, endorsements, forms, manuals, or rates are not approved by the Commissioner of Insurance in that state. The Company is an insurance holding company system regulated under the Alabama Insurance Holding Company System Regulatory Act, the West Virginia Holding Company System Act, the Indiana Holding Company System Regulatory Act and the Missouri Holding Company System Regulatory Act (collectively the "Holding Company Acts"). The Holding Company Acts generally prohibit anyone from acquiring control of an insurance company without the approval of the Commissioner in the state of domicile of such insurance company. Under the Holding Company Acts, control is presumed to exist if any person or persons acting in concert, directly or indirectly, owns, controls, holds with the power to vote or holds proxies representing a certain percentage of the voting securities of another person (5% in Alabama, 10% in West Virginia, Indiana and Missouri). MAIC Holdings' insurance subsidiaries must comply with mandatory capital and solvency standards in the states in which they are authorized to do business. In addition, the state insurance codes generally limit the source of dividends payable by a stock insurer to that part of its available surplus funds which is derived from realized net profits on its business. The Holding Company Acts require that a domestic insurer give prior notice to the state Commissioner before the payment of any extraordinary dividend. The Holding Company Acts would permit MAIC Holdings' insurance subsidiaries to dividend to MAIC Holdings as much as approximately $30,000,000 as a dividend in 1997 without such notice to the Commissioners. In turn, Delaware corporate law limits MAIC Holdings from paying dividends in excess of its surplus. EMPLOYEES At December 31, 1996, MAIC Holdings and its subsidiaries employed 202 persons. None of the employees of MAIC Holdings or its subsidiaries is represented by a labor union. MAIC Holdings considers its employee relations to be good. ITEM 2. PROPERTIES Mutual Assurance is the fee owner of one office building located in the metropolitan area of Birmingham, Alabama. Mutual Assurance purchased its current home office building in March 1989 and during 1993 sold the office building which it formerly occupied. MAIC Holdings and its subsidiaries are occupying approximately 48,475 square feet of office space in its current home office building. The remaining 108,178 square feet of office space in this building are leased to unaffiliated persons or are available to be leased. The office building owned by Mutual Assurance is currently unencumbered. MOMED is the fee owner of one office building located in the metropolitan area of St. Louis, Missouri. MOMED and its subsidiaries are occupying 7,709 square feet as their home offices and the 14 15 remaining 6,501 square feet of office space in this building are leased to unaffiliated persons or is available to be leased. MOMED also owns an apartment building that is held as an investment in real estate. The home office building currently secures a bank loan in the approximate amount of $500,000 and the investment property secures a bank loan in the approximate amount of $166,000. MAIC Holdings' other insurance subsidiaries maintain additional office space under leases with unaffiliated persons which are not considered material. ITEM 3. LEGAL PROCEEDINGS MAIC Holdings' insurance subsidiaries are involved in various legal actions, a substantial number of which arise primarily from claims made under insurance policies. While the outcome of all legal actions is not presently determinable, management and its legal counsel are of the opinion that these actions will not have a material adverse effect on the financial position or results of operations of MAIC Holdings and its subsidiaries. Included in these actions is an action that was filed in 1992 in the Circuit Court of Jefferson County, Alabama, by Owen B. Evans, M.D. claiming in excess of $50 million for compensatory and punitive damages as a result of bad faith and outrageous conduct in Mutual Assurance's defense of Dr. Evans in a civil suit filed against him in Mobile County, Alabama, in which the plaintiff was awarded damages in the amount of $10,000,000. The basis of Dr. Evans' claim is that Mutual Assurance failed to settle the underlying case against him within his policy limits, and he has claimed compensatory damages and punitive damages. The underlying case has been resolved, and the judgment against Dr. Evans has been set aside. The action filed by Dr. Evans against Mutual Assurance includes claims for bad faith failure to settle and the tort of outrage. Mutual Assurance has been granted a non-final judgment on the pleadings with respect to the claim for bad faith failure to settle. The claim for the tort of outrage remains pending. Although Management is unable to predict the outcome of this matter if it is litigated to a conclusion, Management is currently of the opinion that the case can be settled for an amount that would not be material to the business of Mutual Assurance. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. EXECUTIVE OFFICERS OF MAIC HOLDINGS The executive officers of MAIC Holdings serve at the pleasure of the Board of Directors. Set forth below are the current executive officers of MAIC Holdings and a brief description of their principal occupation and employment during the last five years. A. DERRILL CROWE, M.D. -- Age 60 -- Dr. Crowe has been Chairman of the Board and President of MAIC Holdings since its formation on February 8, 1995. Dr. Crowe has been President, Chief Executive Officer and a director of Mutual Assurance since its organization in 1976. Dr. Crowe serves as a director of each of MAIC Holdings insurance subsidiaries and participates on their respective claims and underwriting committees. Dr. Crowe currently serves on the Board of Directors of Citation Corp. PAUL R. BUTRUS -- Age 56 -- Mr. Butrus has served as a director and Executive Vice President of MAIC Holdings since its formation on February 8, 1995. Mr. Butrus has been employed by Mutual 15 16 Assurance and its subsidiaries since 1977, most recently as Vice President and Chief Operating Officer of Mutual Assurance since 1993, and has served as a director of Mutual Assurance since February of 1992. Mr Butrus serves as a director of each of MAIC Holdings insurance subsidiaries and participates on their respective claims and underwriting committees. Mr. Butrus also serves on the Board of Directors of Prime Medical Services, Inc. JAMES J. MORELLO -- Age 48 -- Mr. Morello has been the Treasurer of MAIC Holdings since its formation on February 8, 1995. Mr. Morello has been employed as Treasurer and Chief Financial Officer of Mutual Assurance since 1984. Mr. Morello is a certified public accountant. ROBERT D. FRANCIS -- Age 34 -- Mr. Francis has been the Secretary of MAIC Holdings since its formation on February 8, 1995. Mr. Francis has served as Secretary of Mutual Assurance since 1989. MARTIN ENNIS -- Age 46 -- Mr. Ennis is Senior Vice President of Mutual Assurance. Mr. Ennis has been employed by Mutual Assurance for over fifteen years, principally in claims administration and hospital services. Mr. Ennis is currently in charge of the claims department of Mutual Assurance and is responsible for supervising and coordinating claims administration and hospital services performed by other insurance subsidiaries of MAIC Holdings. 16 17 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. At December 31, 1996, MAIC Holdings had 2,474 stockholders of record and 10,282,031 shares of common stock outstanding. MAIC Holdings' common stock currently trades on The New York Stock Exchange under the symbol "MAI"; prior to September 23, 1996, the common stock of MAIC Holdings traded on the NASDAQ National Market Tier of the NASDAQ Stock Market under the symbol "MAIC." The quarterly price range for MAIC Holdings common stock is shown below:
Quarter 1996 1995 ------- ---- ---- High Low High Low ---- --- ---- --- First $33.37 $31.00 $27.25 $25.25 Second 38.00 32.25 30.00 26.00 Third 37.63 30.38 32.00 28.00 Fourth 34.25 32.38 35.25 29.25
The quotations above reflect trading on The New York Stock Exchange effective September 23, 1996 and, prior to that date, on the NASDAQ Stock Market. Activity prior to September 23, 1996 reflects interdealer prices without retail mark up, mark down or commission and may not necessarily represent actual transactions. Information regarding restrictions on the ability of MAIC Holdings and its insurance subsidiaries to pay dividends is incorporated by reference from the last paragraph under the caption "Regulation" in Item 1 on page 18 of this Form 10-K. On December 4, 1996 and December 14, 1995, the Board of Directors of MAIC Holdings declared stock dividends of six percent. On December 14, 1994, December 16, 1993, and December 10, 1992, the Board of Directors of Mutual Assurance declared stock dividends of five percent. Neither Mutual Assurance nor MAIC Holdings has paid any cash dividends on its common stock. MAIC Holdings currently intends to continue its policy of not paying a regular cash dividend. 17 18 ITEM 6. SELECTED FINANCIAL DATA
- ----------------------------------------------------------------------------------------------------------------- Years Ended December 31 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------------- (in thousands, except share and per share amounts) OPERATING DATA:(E) Direct and assumed premiums written $ 137,840 $ 108,442 $ 74,275 $ 65,856 $ 68,090 Earned premiums 134,162 94,517 73,282 65,553 68,369 Reinsurance expense (29,644) (18,564) (11,856) (8,324) (9,876) Net premiums earned 104,518 75,953 61,426 57,228 58,493 Net investment income 32,114 29,582 23,072 22,468 21,673 Other income 2,728 4,738 1,109 7,976 4,928 Total revenues 139,360 110,273 85,607 87,672 85,094 Net losses and loss adjustment expenses 72,759 53,642 43,887 44,774 48,629 Net income (A) 31,149 29,663 24,767 30,529 22,900 Net income per share of common stock (B) $ 3.14 $ 2.99 $ 2.48 $ 3.00 $ 2.24 Weighted average number of shares outstanding 9,931,276 9,930,607 9,979,235 10,174,848 10,230,086
(A) Net income for 1993 includes $3.6 million which represents the cumulative effect of a change in accounting for income taxes resulting from the adoption of Financial Accounting Standards Board (FASB) Statement 109. (B) In December, 1995 and 1996, the Board of Directors declared a 6% stock dividend and in December of 1994, 1993 and 1992 the Board of Directors declared a 5% stock dividend. Earnings per share data for 1996, 1995, 1994, 1993 and 1992 have been restated as if all dividends had been declared on January 1, 1992. Additionally, treasury stock is excluded from the date of acquisition for purposes of determining the weighted average number of shares outstanding used in the computation of net income per share of common stock.
- --------------------------------------------------------------------------------------------- December 31 1996 1995 1994 1993 1992 - --------------------------------------------------------------------------------------------- BALANCE SHEET DATA:(E) Total investments $ 666,759 $ 543,998 $ 437,865 $ 423,098 $ 367,396 Total assets (C) 905,308 720,478 565,744 507,529 438,061 Reserve for losses and loss adjustment expenses (C) 548,742 432,945 356,000 312,333 283,507 Total liabilities (C) 660,743 512,465 404,194 352,619 322,189 Total capital (D) 244,565 206,030 159,648 153,138 114,384 Total capital per share of common stock outstanding $ 23.79 $ 21.99 $ 18.06 $ 17.94 $ 13.77 Common stock outstanding at end of year 10,282,031 9,369,832 8,839,708 8,535,762 8,307,561
(C) Total investments and capital at December 31, 1996, 1995, 1994 and 1993 includes net unrealized gains and/or losses on available-for-sale securities resulting from the Company's adoption of FASB Statement 115. In accordance with FASB Statement 115, prior-year financial statements have not been restated to reflect this change in accounting principle. (D) Data prior to 1993 has been reclassified for the adoption of FASB Statement 113. (E) As a result of the December 20, 1996 acquisition of MOMED, amounts attributable to MOMED are included in the above balance sheet data but are considered immaterial for inclusion in the Company's 1996 operations. Reference Note 8 of the Notes to Consolidated Financial Statements of MAIC Holdings and subsidiaries. 18 19 ITEM. 7 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 MAIC Holdings, Inc. and its consolidated subsidiaries. The consolidated subsidiaries consist principally of operating insurance companies. MAIC Holdings, Inc. is a Delaware corporation formed by Mutual Assurance, Inc. (Mutual Assurance) to serve as a holding corporation for Mutual Assurance and other subsidiaries. On August 31, 1995, Mutual Assurance and MAIC Holdings, Inc. consummated an Agreement and Plan of Exchange (Plan of Exchange) which generally provided that Mutual Assurance shareholders exchanged their common shares, par value $1 per share, for an equal amount of the common stock of MAIC Holdings, Inc., par value $1 per share. 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 1996 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 current reserves do not become deficient, and (iii) maintains adequate asset liquidity. The Company did not borrow any funds during the years ended December 31, 1996 and 1995, 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 goals of expansion, as discussed in the following paragraph. 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 $10,000,000 of its common stock in the open market. At December 31, 1996, approximately $3.4 million remains available for purposes of purchasing its own common stock in the open market. BUSINESS EXPANSION The Company, through Mutual Assurance, has been developing a marketing strategy to address the 19 20 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 this "large account" market because its principal competitors are larger than those with whom Mutual Assurance has historically had to compete. In addition to its expansion into this growing market for "large accounts", 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. During 1996, 1995 and 1994, the Company completed the following business combinations:
ACCOUNTING DATE COMPANY LOCATION TREATMENT - ---------------------------------------------------------------------------------------------------- January 1994 Medical Assurance of West Virginia, Inc. West Virginia Purchase January 1995 Physicians Insurance Company of Indiana, Inc. Indiana Purchase December 1996 MOMED Holding Company Missouri Purchase
During July 1996, MAI Corporation, a wholly-owned subsidiary, purchased 100% of the minority-owned interest of LifeSouth, resulting in LifeSouth becoming a wholly-owned subsidiary of MAI Corporation. During July 1995, the Company acquired the recurring medical professional insurance business of Physicians Insurance Company of Ohio and its subsidiary. The business combination of MOMED Holding Company (MOMED) was effective December 20, 1996. At December 31, 1996 the consolidated balance sheet of the Company includes the consolidated balance sheet of MOMED and its subsidiaries; however, MOMED operations for the period December 20, 1996 through December 31, 1996 were considered immaterial for inclusion in the Company's consolidated statement of income. Selected consolidated financial data for MOMED and its subsidiaries, including its primary subsidiary, Missouri Medical Insurance Company, for the years ending December 31, 1996 and 1995 is as follows (dollars in thousands):
Year ended December 31 1996 1995 ---------------------- Total investments $73,616 $72,504 Total policy liabilities 68,730 61,679 Premiums written 11,098 12,599 Net premiums earned 11,208 11,666 Net investment income 4,336 4,236 Net losses and loss adjustment expenses 6,720 10,734 Net income 4,333 4,077
The above summary operation information does not necessarily reflect the results of operations as they actually would have been if the acquisition had occurred at the beginning of the periods presented or of results which may occur in the future. 20 21 Total consideration paid for the 1996, 1995 and 1994 business expansion transactions was approximately $33,600,000, including 376,359 shares of the Company's stock issued as part of the 1996 purchase of MOMED. Intangible assets recorded in connection with the above transactions totaled $6,535,000 and are being amortized over periods ranging from 10 to 20 years. RESULTS OF OPERATIONS -- YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 PREMIUMS The following table presents information related to consolidated written and earned premiums and reinsurance expense (dollars in thousands):
Increase 1996 1995 (Decrease) ----------------------- ---------- Direct and assumed premiums written $ 137,840 $ 108,442 $29,398 ========= ========= ======= Premiums earned $ 134,162 $ 94,517 $39,645 Premiums ceded (29,644) (18,564) 11,080 --------- --------- ------- Net premiums earned $ 104,518 $ 75,953 $28,565 ========= ========= =======
The increase in premiums written for the year ended December 31, 1996 compared to the year ended December 31, 1995 is due principally to an increase of $14,647,000 in direct premiums written in states other than Alabama and the addition of $11,469,000 of premiums assumed. Earned premiums increased for the year ended December 31, 1996 as compared to the year ended December 31, 1995 as a result of new premiums written during 1996 and 1995. Other variations in the normal course of business for the Company comprise the remainder of the variance. 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 additional capacity for 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 $11,080,000 increase in premiums ceded for the year ended December 31, 1996 as compared to the year ended December 31, 1995 is principally due to additional written and assumed premiums in states other than Alabama, and as respects this new business, increased cessions of risks to reinsurers. INVESTMENT INCOME 21 22 The Company had consolidated net investment income of $32,114,000 for the year ended December 31, 1996, as compared to $29,582,000 for the year ended December 31, 1995, reflecting an increase of $2,532,000. The increased income is primarily due to an increase in the amount of invested assets. Invested assets, excluding those related to MOMED, increased to $567,142,000 at December 31, 1996 from $509,863,000 at December 31, 1995. The yield on invested assets decreased to 6.1% for 1996 from 6.2% for 1995. The average composition of invested assets changed little from 1995 to 1996, with non-taxable investments comprising an average of 56% for the year 1996 and 58% for the year 1995. For purposes of the above discussion, invested assets are comprised of fixed maturities and equity securities at amortized cost, short-term investments and investment in unconsolidated subsidiary; the earnings on such invested assets constitute the related net investment income. The Company calculates the yield on invested assets by dividing the related investment income (annualized for interim periods) by the monthly average of invested assets. The principal investment objective of the Company is to achieve a high level of after-tax income while minimizing risk. Although fixed maturity securities are purchased with the initial intent to hold such securities until their maturity, disposals of securities prior to their respective maturities may occur if management believes such disposals are consistent with the Company's overall investment objectives, including maximizing after-tax yields. Equity securities of $33 million at December 31, 1996 and $6.6 million at December 31, 1995 are primarily fixed rate preferred stocks. Disposition of investments prior to maturity may result in a net gain or loss which would be classified as "Other Income". OTHER INCOME Other income decreased by $2,010,000 for the year ended December 31, 1996 compared to the year ended December 31, 1995. The decrease is principally attributable to fewer capital gains realized upon the sale of securities during 1996 as compared to 1995. LOSSES The reserve for losses and loss adjustment expenses represents management's best estimates of the ultimate cost of all losses incurred but unpaid. The reserves were evaluated by independent consulting actuaries 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 estimated liability is continually reviewed and any adjustments which become necessary are included in current operations. However, the Company's management believes its actual incurred losses and loss adjustment expenses will not vary significantly from reported estimated amounts. Consolidated loss 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. 22 23
1996 1995 ------------------------------------------- Loss Loss Losses Ratio Losses Ratio -------------------- ----------------- Losses $104,025 78% $73,325 78% Reinsurance recoveries (31,266) == (19,683) == -------- ------- Net losses $ 72,759 70% $53,642 71% ======== == ======= ==
The Company's losses and loss adjustment expenses for the years ended December 31, 1996 and 1995 reflect loss ratios of 78%. The above loss ratios reflect improvement of loss development in prior years coverage. However, as the Company continues its expansion efforts, the improvement of loss development for prior years could have a smaller impact on the loss ratios of future years. The increase in reinsurance recoveries primarily results from the increase in losses and loss adjustment expenses and the increased cessions to reinsurers. UNDERWRITING, ACQUISITION AND INSURANCE EXPENSES Consolidated expenses increased by $7,833,000 (44%) for the year ended December 31, 1996 compared to the year ended December 31, 1995. The increase results primarily from policy acquisition costs associated with new business, along with the other costs associated with the Company's current business strategy. This strategy calls for the Company to continue investing in potential acquisition opportunities and the possibility of expansion into additional markets. INCOME TAXES The Company's effective tax rates for the years ended December 31, 1996 and 1995 were 24% and 23%, respectively. The 1996 and 1995 effective tax rates were lower than the statutory rate of 35%, principally because of the effect of tax exempt investment income. There are no loss carryforwards included in the deferred tax asset. RESULTS OF OPERATIONS -- YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 23 24 Premiums The following table presents information related to consolidated written and earned premiums and reinsurance expense (dollars in thousands):
Increase 1995 1994 (Decrease) ----------------------- ------- Direct and assumed premiums written $ 108,442 $ 74,275 $34,167 ========= ======== ======= Premiums earned $ 94,517 $ 73,282 $21,235 Premiums ceded (18,564) (11,856) 6,708 --------- -------- ------- Net premiums earned $ 75,953 $ 61,426 $14,527 ========= ======== =======
The net increase in premiums written is due principally to (i) an increase of $14,586,000 in Mutual Assurance direct premiums written in states other than Alabama, (ii) the addition of physician premiums for MA-West Virginia in the amount of $9,320,000, (iii) PIC-Indiana premiums written of $9,054,000 and (iv) the addition of premiums assumed by Mutual Assurance from PIC-Ohio in the amount of $6,442,000. Effective January 1, 1995, MA-West Virginia received the exclusive endorsement of the West Virginia State Medical Association as a provider of physicians' professional liability insurance. Partially offsetting these increases is (i) a decrease of $3,442,000 on certain retrospective policies whose ultimate premiums are based on losses incurred on those policies and (ii) a $2,973,000 decrease in written premiums due to the elimination of the PROActive Insurance book of business, which is discussed in the following paragraph. Other variations in the normal course of business for the Company comprise the remainder of the variance. Effective January 1, 1995, the group hospital and major medical health insurance book of business of PROActive Insurance was discontinued and assumed by an unrelated carrier. PROActive Insurance had no individual or hospital and major medical premiums in 1995. Management has not determined the future operations of PROActive Insurance. The $6,708,000 increase in premiums ceded for the year ended December 31, 1995 as compared to the year ended December 31, 1994 is principally due to (i) new business written by MA-West Virginia, (ii) an increase in Mutual Assurance business outside the state of Alabama, including PIC-Ohio, and (iii) an increase in business from the addition of PIC-Indiana. Investment Income The Company had consolidated net investment income of $29,582,000 for the year ended December 31, 1995, reflecting an increase of $6,510,000 (28.2%) as compared to the year ended 24 25 December 31, 1994. The increased income is primarily due to an increase in the amount of invested assets, which for 1995 includes the investments of PIC-Indiana. In addition, the yield on invested assets increased to approximately 6.2% for 1995 from approximately 5.6% for 1994. The 1995 purchase of PIC-Indiana contributed $34,870,000 to the portfolio. Excluding the PIC-Indiana investments and their respective investment income, the yield on the remaining investments increased to approximately 6.0% in 1995 from 5.6% in 1994. The increase in the yield of invested assets primarily resulted from higher available market rates of interest on taxable investments. Other Income Other income increased by $3,629,000 for the year ended December 31, 1995 compared to the year ended December 31, 1994. The increase is principally attributable to higher capital gains realized upon the sale of securities during 1995 as compared to 1994. Losses Consolidated loss and loss adjustment expenses and the related loss ratios are summarized in the following table (dollars in thousands). The ratio for losses and loss adjustment expenses below is based on premiums earned; the ratio for net losses and loss adjustment expenses is based on net premiums earned.
1995 1994 ------------------------------------------- Loss Loss Losses Ratio Losses Ratio ---------------------- --------------- Losses $ 73,325 78% $56,777 77% ======== == ======= == Reinsurance recoveries (19,683) (12,890) -------- ------- Net losses $ 53,642 71% $43,887 71% ======== == ======= ==
The Company's losses and loss adjustment expenses for the year ended December 31, 1995 reflect a loss ratio of 78% compared to a loss ratio of 77% for the year ended December 31, 1994. The above loss ratios reflect improvement of loss development in prior years coverage. The increase in reinsurance recoveries primarily results from (i) reinsurance treaties related to MA-West Virginia and (ii) reinsurance recoveries resulting from the increase in Mutual Assurance business outside the state of Alabama, including PIC-Ohio and (iii) an increase in business resulting from the addition of PIC-Indiana. Underwriting, Acquisition, and Insurance Expenses Consolidated expenses increased by $7,434,000 (71.1%) for the year ended December 31, 1995 compared to the year ended December 31, 1994. The increase in consolidated expenses occurred primarily as a result of new business obtained by the Company during 1995. As the Company continues 25 26 its expansion efforts, additional costs are expected to be incurred to investigate potential opportunities and to integrate the successful opportunities into the Company's operations. Income Taxes The Company's effective tax rates for the years ended December 31, 1995 and 1994 were 23% and 20%, respectively. The 1995 and 1994 effective tax rates were lower than the statutory rate of 35%. The principal reason for the Company's lower effective tax rate is the effect of tax exempt investment income. There are no loss carryforwards included in the deferred tax asset. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Consolidated Financial Statements and Financial Statement Schedules of MAIC Holdings and subsidiaries listed in Item 14(a) have been included herein beginning on page 31. The Supplementary Financial Information required by Item 302 of Regulation S-K is included in Note 10 of the Notes to Consolidated Financial Statements of MAIC Holdings and its subsidiaries. 26 27 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not Applicable. 27 28 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by this Item regarding executive officers is included in Part I of this Form 10-K (Pages 15-16) in accordance with Instruction 3 of the Instructions to Paragraph (b) of Item 401 of Regulation S-K. The information required by this Item regarding directors is incorporated by reference pursuant to General Instruction G(3) of Form 10-K from MAIC Holdings' definitive proxy statement for the 1997 Annual Meeting of its Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A on or before April 30, 1997. ITEM 11. EXECUTIVE COMPENSATION. The information required by this Item is incorporated by reference pursuant to General Instruction G(3) of Form 10-K from MAIC Holdings' definitive proxy statement for the 1997 Annual Meeting of its Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A on or before April 30, 1997. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. PRINCIPAL STOCKHOLDERS. The information required by this Item is incorporated by reference pursuant to General Instruction G(3) of Form 10-K from MAIC Holdings' definitive proxy statement for the 1997 Annual Meeting of its Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A on or before April 30, 1997. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this Item is incorporated by reference pursuant to General Instruction G(3) of Form 10-K from MAIC Holdings' definitive proxy statement for the 1997 Annual Meeting of its Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A on or before April 30, 1997. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) Financial Statements. The following consolidated financial statements of MAIC Holdings, Inc. and subsidiaries are included herein in accordance with Item 8 of Part II of this report. Report of Ernst & Young LLP. Consolidated balance sheets -- December 31, 1996 and 1995. 28 29 Consolidated statements of changes in capital -- years ended December 31, 1996, 1995 AND 1994. Consolidated statements of income -- years ended December 31, 1996, 1995 and 1994. Consolidated statements of cash flows -- years ended December 31, 1996, 1995 and 1994. Notes to consolidated financial statements. Financial Statement Schedules. The following consolidated financial statement schedules of MAIC Holdings and subsidiaries are included herein in accordance with Item 14(d): Schedule I -- Summary of Investments -- Other than Investments in Related Parties. Schedule II -- Condensed Financial Information of MAIC Holdings. Schedule III -- Supplementary Insurance Information. Schedule IV -- Reinsurance. Schedule VI -- Supplementary Property and Casualty Information. All other schedules to the consolidated financial statements required by Article 7 of Regulation S-X are not required under the related instructions or are inapplicable and therefore have been omitted. (b) MAIC Holdings filed one Report on Form 8-K for an event occurring during the quarter ended December 31, 1996. (c) The exhibits required to be filed by Item 14(c) are listed herein in the Exhibit Index. (d) Financial Data Schedule as required by EDGAR (for SEC USE Only) 29 30 SIGNATURES Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this the 24 day of March, 1997. MAIC HOLDINGS, INC. By: /s/ A. Derrill Crowe, M.D. -------------------------------- A. Derrill Crowe, M.D. President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
NAME TITLE DATE - ---- ----- ---- /s/ A. Derrill Crowe President (principal March 24, 1997 - ------------------------------ executive officer) A. Derrill Crowe, M.D. and Director /s/ James J. Morello Treasurer (principal March 24, 1997 - ------------------------------ financial officer and James J. Morello principal accounting officer) /s/ Paul R. Butrus Director March 24, 1997 - ------------------------------ Paul R. Butrus /s/ Richard V. Bradley, M.D. Director March 24, 1997 - ------------------------------ Richard V. Bradley Director March , 1997 - ------------------------------ Norton E. Cowart /s/ Paul D. Everest Director March 24, 1997 - ------------------------------ Paul D. Everest, M.D. Director March , 1997 - ------------------------------ Robert E. Flowers, M.D. /s/ Leon C. Hamrick Director March 24, 1997 - ------------------------------ Leon C. Hamrick, M.D. Director March , 1997 - ------------------------------ John P. North, Jr.
30 31 MAIC Holdings, Inc. and Subsidiaries Consolidated Financial Statements Years ended December 31, 1996, 1995 and 1994 CONTENTS Report of Independent Auditors ............................................ 32 Audited Consolidated Financial Statements Consolidated Balance Sheets ............................................... 33 Consolidated Statements of Changes in Capital ............................. 35 Consolidated Statements of Income ......................................... 36 Consolidated Statements of Cash Flows ..................................... 37 Notes to Consolidated Financial Statements ................................ 39
31 32 Report of Independent Auditors Board of Directors MAIC Holdings, Inc. We have audited the accompanying consolidated balance sheets of MAIC Holdings, Inc. and subsidiaries as of December 31, 1996 and 1995 and the related consolidated statements of income, changes in capital and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We did not audit the balance sheet of MOMED Holding Company, a wholly-owned subsidiary acquired in 1996, which statement reflects total assets of $91 million as of December 31, 1996. That balance sheet was audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the balance sheet data included for MOMED Holding Company, is based solely on the report of other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and, as to the balance sheet at December 31, 1996, the report of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of MAIC Holdings, Inc. and subsidiaries at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Ernst & Young LLP Birmingham, Alabama February 6, 1997 32 33 MAIC Holdings, Inc., and Subsidiaries Consolidated Balance Sheets
DECEMBER 31 1996 1995 ----------------------------- (DOLLAR AMOUNTS IN THOUSANDS) ASSETS Investments: Fixed maturities available for sale, at market value $564,938 $483,734 Equity securities available for sale, at market value 33,036 6,615 Real estate, net 12,352 11,816 Investment in unconsolidated affiliate 30 3,535 Short-term investments 56,403 38,298 -------- -------- Total investments 666,759 543,998 Cash and cash equivalents 14,033 4,238 Premiums receivable 33,896 20,417 Receivable from reinsurers 108,692 80,468 Prepaid reinsurance premiums 14,152 13,272 Deferred taxes 36,132 29,340 Other assets 31,644 28,745 -------- -------- $905,308 $720,478 ======== ========
33 34
DECEMBER 31 1996 1995 ----------------------------- (DOLLAR AMOUNTS IN THOUSANDS) LIABILITIES, MINORITY INTERESTS AND STOCKHOLDERS' EQUITY Liabilities: Policy liabilities and accruals: Reserve for losses and loss adjustment expenses $ 548,742 $ 432,945 Unearned premiums 54,920 47,319 Reinsurance premiums payable 31,789 18,339 --------- --------- Total policy liabilities 635,451 498,603 Income taxes payable 2,852 2,090 Other liabilities 22,440 11,772 --------- --------- Total liabilities 660,743 512,465 Commitments and contingencies -- -- Minority interests -- 1,983 Stockholders' equity: Common stock, par value $1 per share; 100,000,000 shares authorized; 10,339,245 and 9,376,956 shares issued, respectively 10,339 9,377 Additional paid-in capital 123,218 92,013 Net unrealized gains on securities available for sale, net of deferred taxes of $4,392 and $7,196, respectively 8,157 13,363 Retained earnings 103,027 91,415 --------- --------- 244,741 206,168 Less treasury stock at cost, 57,214 and 7,124 shares, respectively (176) (138) --------- --------- Total stockholders' equity 244,565 206,030 --------- --------- $ 905,308 $ 720,478 ========= =========
See accompanying notes. 34 35 MAIC Holdings, Inc., and Subsidiaries Consolidated Statements of Changes in Capital (dollar amounts in thousands)
NET ADDITIONAL UNREALIZED COMMON PAID-IN GAINS RETAINED TREASURY STOCK CAPITAL (LOSSES) EARNINGS STOCK TOTAL -------- ---------- ---------- --------- -------- --------- Balance at December 31, 1993 $ 8,546 $ 66,519 $ 12,369 $ 65,933 $ (228) $ 153,139 5% stock dividend ($35,805 paid in cash in lieu of fractional shares) 426 10,969 -- (11,431) -- (36) Change in market value of securities available for sale, net of deferred taxes -- -- (15,735) -- -- (15,735) Common stock issued for service awards 2 49 -- -- -- 51 Purchase of treasury stock -- -- -- -- (2,538) (2,538) Net income -- -- -- 24,767 -- 24,767 -------- --------- -------- --------- ------- --------- Balance at December 31, 1994 8,974 77,537 (3,366) 79,269 (2,766) 159,648 6% stock dividend ($22,530 paid in cash in lieu of fractional shares) 530 16,964 -- (17,517) -- (23) Change in market value of securities available for sale, net of deferred taxes -- -- 16,729 -- -- 16,729 Common stock issued for service awards 1 12 -- -- -- 13 Retirement of common stock (128) (2,500) -- -- 2,628 -- Net income -- -- -- 29,663 -- 29,663 -------- --------- -------- --------- ------- --------- Balance at December 31, 1995 9,377 92,013 13,363 91,415 (138) 206,030 6% stock dividend ($33,795 paid in cash in lieu of fractional shares) 584 18,919 -- (19,537) -- (34) Change in market value of securities available for sale, net of deferred taxes -- -- (5,206) -- -- (5,206) Common stock issued for service awards 1 34 -- -- -- 35 Common stock issued for compensation 1 20 -- -- -- 21 Common stock issued for acquisition 376 12,232 -- -- (38) 12,570 Net income -- -- -- 31,149 -- 31,149 -------- --------- -------- --------- ------- --------- Balance at December 31, 1996 $ 10,339 $ 123,218 $ 8,157 $ 103,027 $ (176) $ 244,565 ======== ========= ======== ========= ======= =========
See accompanying notes. 35 36 MAIC Holdings, Inc., and Subsidiaries Consolidated Statements of Income
YEAR ENDED DECEMBER 31 1996 1995 1994 ------------------------------------------------ (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) Direct and assumed premiums written $ 137,840 $ 108,442 $ 74,275 ========= ========= ======== Revenues: Premiums earned $ 134,162 $ 94,517 $ 73,282 Premiums ceded (29,644) (18,564) (11,856) --------- --------- -------- Net premiums earned 104,518 75,953 61,426 Net investment income 32,114 29,582 23,072 Other income 2,728 4,738 1,109 --------- --------- -------- Total revenues 139,360 110,273 85,607 Expenses: Losses and loss adjustment expenses 104,025 73,325 56,777 Reinsurance recoveries (31,266) (19,683) (12,890) --------- --------- -------- Net losses and loss adjustment expenses 72,759 53,642 43,887 Underwriting, acquisition, and insurance expenses 25,729 17,896 10,462 --------- --------- -------- Total expenses 98,488 71,538 54,349 --------- --------- -------- Income before income taxes and minority interests 40,872 38,735 31,258 Provision for income taxes: Current expense 11,330 12,694 8,853 Deferred expense (benefit) (1,693) (3,702) (2,494) --------- --------- -------- 9,637 8,992 6,359 --------- --------- -------- Income before minority interests 31,235 29,743 24,899 Minority interests (86) (80) (132) --------- --------- -------- Net income $ 31,149 $ 29,663 $ 24,767 ========= ========= ======== Earnings per share: Net income $ 3.14 $ 2.99 $ 2.48 ========= ========= ======== Weighted average number of common shares outstanding 9,931 9,931 9,979 ========= ========= ========
See accompanying notes. 36 37 MAIC Holdings, Inc., and Subsidiaries Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31 1996 1995 1994 ------------------------------------------------- (DOLLAR AMOUNTS IN THOUSANDS) OPERATING ACTIVITIES Net income $ 31,149 $ 29,663 $ 24,767 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation 1,236 1,062 860 Amortization (1,011) 972 2,146 Net realized (gain) on sale of investments (1,532) (3,397) (226) Deferred income taxes (benefit) (1,693) (3,702) (2,494) Other (68) (312) 112 Changes in assets and liabilities, net of effects of business combinations: Premiums receivable (13,152) (11,902) (1,708) Income taxes receivable/payable 952 2,105 (1,503) Receivable from reinsurers (16,765) (19,129) (12,850) Prepaid reinsurance premiums (356) (8,179) (1,002) Other assets (1,212) (3,640) (2,770) Reserve for losses and loss adjustment expenses 58,695 40,912 29,416 Unearned premiums 5,045 17,552 1,501 Reinsurance premiums payable 4,377 3,988 2,929 Other liabilities 9,171 1,242 (1,189) --------- --------- --------- Net cash provided by operating activities 74,836 47,235 37,989 INVESTING ACTIVITIES Purchases of fixed maturities available for sale (155,606) (195,716) (114,684) Purchases of equity securities available for sale (23,159) (6,565) -- Proceeds from sale or maturities of fixed maturities available for sale 133,145 156,615 32,888 Proceeds from sale of equity securities available for sale 2,084 746 -- Net (increase) decrease in short-term investments (16,675) 3,608 51,160 Purchase of subsidiaries (7,263) (4,160) (1,109) Distribution from subsidiaries 3,628 -- -- Other (1,161) (2,524) (672) --------- --------- --------- Net cash (used) by investing activities (65,007) (47,996) (32,417)
37 38
YEAR ENDED DECEMBER 31 1996 1995 1994 --------------------------------------- FINANCING ACTIVITIES Dividends paid $ (34) $ (23) $ (36) Purchase of treasury stock -- -- (2,538) -------- -------- -------- Net cash (used) by financing activities (34) (23) (2,574) -------- -------- -------- Increase (decrease) in cash and and cash equivalents 9,795 (784) 2,998 Cash and cash equivalents at beginning of year 4,238 5,022 2,024 -------- -------- -------- Cash and cash equivalents at end of year $ 14,033 $ 4,238 $ 5,022 ======== ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for: Income taxes $ 11,075 $ 10,522 $ 10,868 ======== ======== ========
See accompanying notes. 38 39 MAIC Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 1996 1. ACCOUNTING POLICIES PLAN OF EXCHANGE AND REORGANIZATION MAIC Holdings, Inc. is a Delaware corporation formed by Mutual Assurance, Inc. (Mutual Assurance) to serve as a holding company for Mutual Assurance and other subsidiaries. On August 31, 1995, Mutual Assurance and MAIC Holdings, Inc. consummated an Agreement and Plan of Exchange which was accounted for in a manner similar to a pooling of interests. Under the terms of the agreement, Mutual Assurance shareholders exchanged their common shares, par value $1 per share, for an equal amount of shares of the common stock of MAIC Holdings, Inc., par value $1 per share. The plan of exchange and combination of the companies had no effect on the net assets, total stockholders' equity or net income reported previously by the consolidated companies. Prior to the reorganization, MAIC Holdings, Inc. had no revenues or net income. At December 31, 1996, MAIC Holdings, Inc. had 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 December 31, 1996, the Board of Directors had not authorized the issuance of any preferred stock nor determined any provisions for the preferred stock. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of MAIC Holdings, Inc. and its subsidiaries. All significant intercompany accounts and transactions between consolidated companies have been eliminated. BASIS OF PRESENTATION The preparation of financial statements in accordance with generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expense during the reporting period. Actual results could differ from those estimates. The significant accounting policies followed by the Company that materially affect financial reporting are summarized in these notes to the financial statements. The Company adopted a new accounting standard in 1995, the effects of which are disclosed in Note 2. 39 40 MAIC Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. ACCOUNTING POLICIES (CONTINUED) 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. CASH AND CASH EQUIVALENTS For purposes of the consolidated statements of cash flows, the Company considers all demand deposits and overnight investments to be cash equivalents. REINSURANCE Certain premiums are assumed from and ceded to other insurance companies under various reinsurance agreements. 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 additional capacity for growth. A significant portion of the reinsurance is effected under reinsurance contracts known as treaties and, in some instances, by negotiation on individual risks. Reinsurance expense is 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. INCOME TAXES MAIC Holdings, Inc. and its subsidiaries, excluding PROActive Insurance Corporation (PROActive), file a consolidated federal income tax return. PROActive files a separate federal income tax return. Deferred income taxes are provided for temporary differences between financial and income tax reporting relating primarily to unrealized gains on securities, discounting of losses and loss adjustment expenses for income tax reporting and the limitation of the unearned premiums deduction for income tax reporting. INVESTMENTS The Company invests only in investment grade securities with the intent at the time of purchase that such securities will be held until maturity. However, recognizing the need for the ability to respond to changes in tax position and in market conditions, management has designated the debt and equity securities included in its investment portfolio as available-for-sale. Securities classified as available-for-sale are carried at market value, and unrealized gains and losses on such available-for-sale securities are excluded from earnings and reported, net of tax effect, in a separate component of stockholders' equity until realized. Real estate is reported at cost, less allowances for depreciation. Short-term investments are reported at cost, which approximates market value. 40 41 MAIC Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. ACCOUNTING POLICIES (CONTINUED) INVESTMENTS (CONTINUED) Investment income includes amortization of premium and accretion of discount related to debt securities acquired at other than par value. Debt securities with maturities beyond one year, when purchased, are classified as fixed maturities. Short-term investments, primarily composed of investments in United States Treasury obligations, are stated at cost which approximates market. Realized gains and losses on sales of investments, and declines in value judged to be other-than-temporary, are recognized on the specific identification basis. Market values for fixed maturity and equity securities are based on quoted market prices, where available. For fixed maturity and equity securities not actively traded, market values are estimated using values obtained from independent pricing services. The carrying amounts reported in the balance sheet for cash and cash equivalents and short-term investments approximate their market values. INVESTMENT IN UNCONSOLIDATED AFFILIATE The Company owns a twenty-five percent minority interest in Specialty Underwriters Reinsurance Facility, LTD. (SURF), a foreign corporation. SURF ceased operations during 1996 and distributed the majority of its surplus to its owners. The Company received an earnings distribution of approximately $3,628,000. The Company's investment in SURF is recorded at cost plus the Company's percentage of SURF's undistributed earnings less actual earnings distributions. REAL ESTATE Property and leasehold improvements are classified as investment real estate. All balances are stated on the basis of cost. Depreciation is computed over their estimated useful lives using the straight-line method. Accumulated depreciation was approximately $3,234,000 and $2,523,000 at December 31, 1996 and 1995, respectively. Rental income and expenses are included in net investment income. 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. Unamortized deferred acquisition costs are included in other assets on the consolidated balance sheets and amounted to approximately $4,590,000 and $1,891,000 at December 31, 1996, and 1995, respectively. Amortization of deferred acquisition costs amounted to approximately $11,065,000, $5,450,000, and $1,647,000 for the years ended December 31, 1996, 1995 and 1994, respectively. 41 42 MAIC Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. ACCOUNTING POLICIES (CONTINUED) RECOGNITION OF REVENUES Insurance premiums are recognized as revenues pro rata over the terms of the policies. RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES The reserve for losses and loss adjustment expenses represents management's best estimates of the ultimate cost of all losses incurred but unpaid. The estimated liability is continually reviewed and any adjustments which become necessary are included in current operations. PENSION PLANS The Company has a defined contribution pension plan for employees who are at least 21 years of age and have one or more years of service. The Company funds the plan by contributing an amount equal to 10% of each participant's eligible wages. Pension plan expense for the years ended December 31, 1996, 1995 and 1994 was approximately $834,000, $518,000, and $499,000, respectively. EMPLOYEE STOCK PURCHASE PLAN The Company has a stock purchase plan (the "Plan") for full-time employees who have completed at least one year of employment. The Plan allows each eligible employee to purchase shares of the Company's common stock in the public market and the Company will loan to each participant $.35 for each $.65 deposited in the Plan. The stock purchased with the loaned proceeds vests with the employee at the end of four years. These loans are amortized to expense over the four year vesting period. MINORITY INTERESTS During July 1996, MAI Corporation, a wholly-owned subsidiary, purchased 100% of the minority-owned interest of LifeSouth, Inc. (LifeSouth). The purchase resulted in LifeSouth becoming the wholly-owned subsidiary of MAI Corporation. For the year ended December 31, 1995, the equity of minority shareholders in LifeSouth is reported on the consolidated balance sheet as minority interests. Minority interests reflect changes for the respective share of income or loss of LifeSouth attributable to the minority shareholders, the effect of which is also removed from the results of operations of the Company. EARNINGS PER SHARE Earnings per share data for 1995 and 1994 have been stated giving retroactive effect for the 6% stock dividends declared in both December of 1996 and 1995 and for the 5% stock dividend declared in December 1994. Weighted average shares for the years ending December 31, 1996 and 1995 were 9,931,276 and 9,930,607, respectively. 42 43 MAIC Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. ACCOUNTING POLICIES (CONTINUED) CAPITAL RESOURCES As of December 31, 1996, the Company did not have any material commitments for capital expenditures. 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 additional capital requirements. RECLASSIFICATIONS The accompanying 1995 and 1994 financial statements have been reclassified to conform with the 1996 presentation. Such reclassifications had no material effect on previously reported financial position, results of operations or cash flows. LONG-LIVED ASSETS The Company has considered the effects of FASB Statement 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, in accounting for its long-lived assets. The adoption of Statement 121 had no material impact on the consolidated financial statements of the Company. 2. INVESTMENTS The amortized cost and estimated market value of fixed maturities and equity securities are as follows:
DECEMBER 31, 1996 ------------------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE ------------------------------------------------------- (IN THOUSANDS) U. S. Treasury securities $ 56,773 $ 908 $ 86 $ 57,595 State and municipal bonds 306,905 8,986 242 315,649 Corporate bonds 120,691 2,179 101 122,769 Mortgage-backed securities 67,819 581 145 68,255 Certificates of deposit 670 -- -- 670 -------- ------- -------- -------- Subtotal 552,858 12,654 574 564,938 Equity Securities 32,567 651 182 33,036 -------- ------- -------- -------- $585,425 $13,305 $ 756 $597,974 ======== ======= ======== ========
43 44 MAIC Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. INVESTMENTS (CONTINUED)
December 31, 1995 ------------------------------------------------------ Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ------------------------------------------------------ (in thousands) U. S. Treasury securities $ 35,981 $ 3,549 $ 95 $ 39,435 State and municipal bonds 301,676 12,477 756 313,397 Corporate bonds 53,618 3,476 5 57,089 Mortgage-backed securities 71,732 2,040 129 73,643 Certificates of deposit 170 -- -- 170 -------- ------- -------- -------- Subtotal 463,177 21,542 985 483,734 Equity Securities 6,612 3 -- 6,615 -------- ------- -------- -------- $469,789 $21,545 $ 985 $490,349 ======== ======= ======== ========
The amortized cost and estimated market value of fixed maturities at December 31, 1996, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The Company uses the call date as the contractual maturity for prerefunded state and municipal bonds which are 100% backed by U.S. Treasury obligations.
AMORTIZED ESTIMATED COST MARKET VALUE -------------------------- (IN THOUSANDS) Due in one year or less $ 18,768 $ 18,924 Due after one year through five years 174,483 177,659 Due after five years through ten years 181,483 187,119 Due after ten years 110,305 112,981 Mortgage-backed securities 67,819 68,255 -------- -------- $552,858 $564,938 ======== ========
44 45 MAIC Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. INVESTMENTS (CONTINUED) Excluding investments in bonds and notes of the United States Government, United States Government agency or prerefunded state and municipal bonds which are 100% backed by U.S. Treasury obligations, no investment in any person or its affiliates exceeded 10% of stockholders' equity at December 31, 1996. Amounts of investment income by investment category are as follows:
YEAR ENDED DECEMBER 31 1996 1995 1994 --------------------------------------- (IN THOUSANDS) Fixed maturities $ 30,437 $ 29,452 $ 20,562 Real estate 1,330 1,214 1,280 Short-term investments 1,581 372 2,609 Other 836 564 333 -------- -------- -------- 34,184 31,602 24,784 Investment expenses (2,070) (2,020) (1,712) -------- -------- -------- Net investment income $ 32,114 $ 29,582 $ 23,072 ======== ======== ========
Gross gains and losses from sales of available for sale securities are included in other income as follows:
YEAR ENDED DECEMBER 31 1996 1995 1994 --------------------------- (IN THOUSANDS) Gross gains $ 2,082 $ 3,722 $ 236 Gross losses (550) (325) (10) ------- ------- ----- Net gains from sales of available for sale securities $ 1,532 $ 3,397 $ 226 ======= ======= =====
Proceeds from sales of investments in available for sale securities were $83,396,000, $92,994,000 and $18,730,000, during 1996, 1995 and 1994, respectively. Realized investments gains and losses are determined using the specific identification basis. 3. STATUTORY ACCOUNTING AND DIVIDEND RESTRICTIONS The Company's insurance subsidiaries are required to file statutory financial statements with state insurance regulatory authorities. GAAP differs from statutory accounting practices prescribed or permitted by regulatory authorities. Differences between financial statement net income and statutory net income are principally due to: (a) policy acquisition costs which are deferred under generally accepted accounting principles, but expensed for statutory purposes; (b) subsidiaries which are consolidated for generally accepted accounting principles, but are accounted for using the equity method for statutory purposes with the annual change in the equity charged or credited directly to capital rather than entering into the determination of net income; and (c) deferred income taxes which are recorded under generally accepted accounting principles but not for statutory purposes. 45 46 MAIC Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. STATUTORY ACCOUNTING AND DIVIDEND RESTRICTIONS (CONTINUED) At December 31, 1996 and 1995, statutory capital for each company was sufficient to satisfy regulatory requirements. Amounts of statutory capital by insurance subsidiary are as follows:
DECEMBER 31 1996 1995 --------------------- (IN THOUSANDS) Mutual Assurance, Inc. $145,181 $107,835 Medical Assurance of West Virginia, Inc. 5,108 16,817 Physicians Insurance Company of Indiana, Inc. 13,179 9,908 PROActive Insurance Corporation 3,698 3,555 Missouri Medical Insurance Company 20,589 --
Amounts of statutory net income (loss) for the twelve months ended December 31, 1996, 1995 and 1994 by insurance subsidiary are as follows:
YEAR ENDED DECEMBER 31 1996 1995 1994 ----------------------------- (IN THOUSANDS) Mutual Assurance, Inc. $ 25,809 $18,468 $22,000 Medical Assurance of West Virginia, Inc. 1,932 584 290 Physicians Insurance Company of Indiana, Inc. (410) 833 -- PROActive Insurance Corporation 167 224 469 Missouri Medical Insurance Company 3,886 -- --
Consolidated retained earnings is composed primarily of subsidiaries' retained earnings. Each insurance company is restricted under the applicable State Insurance Code as to the amount of dividends it may pay without regulatory consent. In 1997, the insurance subsidiaries can pay dividends in the aggregate up to approximately $30 million without regulatory consent. 4. REINSURANCE The effect of reinsurance on premiums written and earned in 1996 was as follows:
PREMIUMS WRITTEN EARNED ---------------------------- (IN THOUSANDS) Direct $126,159 $118,211 Assumed 11,681 15,951 Ceded 31,879) (29,644) -------- -------- Net premiums $105,961 $104,518 ======== ========
46 47 MAIC Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 4. REINSURANCE (CONTINUED) Reinsurance contracts do not relieve the Company from its obligations to policyholders. A contingent liability exists with respect to reinsurance ceded to the extent that any reinsurer does not meet the obligations assumed under the reinsurance agreements. The Company continually monitors its reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. The Company only cedes risks to reinsurers whom the Company believes to be financially sound. At December 31, 1996, all reinsurance recoverables are considered collectible; the amounts as shown in the accompanying consolidated balance sheets approximate the fair value of the amounts recoverable from reinsurers. As required by the various state insurance laws, reinsurance recoverables totaling approximately $21 million are collateralized by letters of credit or funds withheld. 5. INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets are as follows:
DECEMBER 31 1996 1995 ------------------- (IN THOUSANDS) Deferred tax liabilities: Adjustment to net unrealized gains on investments $ 4,392 $ 7,196 Deferred acquisition costs 1,544 364 Other 1,171 336 ------- ------- Total deferred tax liabilities 7,107 7,896 Deferred tax assets: Unpaid loss discount 38,618 33,424 Unearned premium adjustment 3,136 2,335 Other 1,485 1,477 ------- ------- Total deferred tax assets 43,239 37,236 ------- ------- Net deferred tax assets $36,132 $29,340 ======= =======
The Company is required to establish a "valuation allowance" for any portion of the deferred tax asset that management believes will not be realized. In the opinion of management, it is more likely than not that the Company will realize the benefit of the deferred tax assets, and therefore, no such valuation allowance has been established. 47 48 MAIC Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 5. INCOME TAXES (CONTINUED) Differences between income tax computed by applying the federal income tax rate of 35% to income before income taxes and income tax expense in the financial statements are as follows:
YEAR ENDED DECEMBER 31 1996 1995 1994 --------------------------------- (IN THOUSANDS) Computed "expected" tax expense $ 14,305 $ 13,560 $ 10,940 Tax-exempt municipal and state bond income (4,766) (4,611) (4,569) Other 98 43 (12) -------- -------- -------- Total $ 9,637 $ 8,992 $ 6,359 ======== ======== ========
6. COMMITMENTS AND CONTINGENCIES The Company is involved in various legal actions arising primarily from claims made under insurance policies. The legal actions arising from claims made under insurance policies 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. 7. STOCK TRANSACTIONS On December 4, 1996 and December 14, 1995, the Board of Directors declared 6% stock dividends. On December 15, 1994, the Board of Directors declared a 5% stock dividend. Cash was paid to shareholders for fractional shares. Earnings per share data for 1996, 1995 and 1994 have been stated as if all of the above dividends had been declared on January 1, 1994. The Board of Directors of MAIC Holdings, Inc. has reserved 750,000 shares of common stock for issuance in accordance with the Mutual Assurance Stock Award Plan assumed by MAIC Holdings, Inc. Under the terms of the Plan, shares of MAIC Holdings, Inc. stock are available to be awarded to key employees of MAIC Holdings, Inc. and its subsidiaries. As of December 31, 1996, there were 1,645 shares issued under the Plan. There were no shares issued under the plan as of December 31, 1995. 48 49 MAIC Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 8. BUSINESS EXPANSION During 1996, 1995 and 1994, the Company completed the following business combinations:
Accounting Date Company Location Treatment - ------------------------------------------------------------------------------------------------ January 1994 Medical Assurance of West Virginia, Inc. West Virginia Purchase January 1995 Physicians Insurance Company of Indiana, Inc. Indiana Purchase December 1996 MOMED Holding Company Missouri Purchase
The purchase price paid for the acquisition of Physicians Insurance Company of Indiana, Inc. after eight years, may be modified by an amount up to $1,000,000 to be paid by the purchaser or the seller based on the loss experience of Physicians Insurance Company of Indiana, Inc. During July 1995 the Company acquired the recurring medical professional insurance business of Physicians Insurance Company of Ohio and its subsidiary. The value of the business acquired is included in other assets. During July 1996, MAI Corporation, a wholly-owned subsidiary, purchased 100% of the minority-owned interest of LifeSouth, resulting in LifeSouth becoming a wholly-owned subsidiary of MAI Corporation. Total consideration paid for the 1996, 1995 and 1994 business expansion transactions was approximately $33,600,000, including 376,359 shares of the Company's stock issued as part of the 1996 purchase of MOMED Holding Company (MOMED). The transactions were not material individually or in the aggregate to the assets, stockholders' equity or operations of the Company. Intangible assets recorded in connection with the above transactions totaled $6,535,000 and are being amortized over periods ranging from 10 to 20 years. The related accumulated amortization at December 31, 1996, is approximately $1,397,000. The business combination of MOMED was effective December 20, 1996; however, MOMED operations for the period December 20, 1996 through December 31, 1996 were considered immaterial for inclusion in the Company's consolidated statement of income. The following summary information presents the consolidated results of MOMED and its subsidiaries, including its primary subsidiary Missouri Medical Insurance Company, for the years ending December 31, 1996 and 1995. The summary information does not necessarily reflect the results of operations as they actually would have been if the acquisition had occurred at the beginning of the periods presented or of results which may occur in the future. 49 50 MAIC Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 8. BUSINESS EXPANSION (CONTINUED)
YEAR ENDED DECEMBER 31 ---------------------- 1996 1995 (IN THOUSANDS) Revenues: Net premiums earned $ 11,208 $ 11,666 Net investment income 4,336 4,236 Other income 217 785 -------- -------- Total revenues 15,761 16,687 Expenses: Net losses and loss adjustment expenses 6,720 10,734 Underwriting, acquisition and insurance expenses 2,818 2,682 -------- -------- Total expenses 9,538 13,416 -------- -------- Income before income taxes 6,223 3,271 Provision for income taxes: Current expense 1,721 483 Deferred expense (benefit) 169 (1,289) -------- -------- 1,890 (806) -------- -------- Net Income $ 4,333 $ 4,077 ======== ========
Selected balance sheet information for MOMED at December 31, 1996 and 1995 is as follows:
DECEMBER 31 1996 1995 --------------------- (IN THOUSANDS) Total investments $73,616 $72,504 Other assets 18,280 8,771 ------- ------- Total assets 91,896 81,275 ======= ======= Total policy liabilities 68,730 61,679 Other liabilities 3,729 1,981 ------- ------- Total liabilities 72,459 63,660 Stockholders' equity 19,437 17,615 ------- ------- Total liabilities and stockholders' equity $91,896 $81,275 ======= =======
50 51 MAIC Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 9. RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES Activity in the reserve for losses and loss adjustment expenses (reserves) is summarized as follows:
YEAR ENDED DECEMBER 31 ---------------------------------------- 1996 1995 1994 (IN THOUSANDS) Balance at January 1 $ 432,945 $ 356,000 $ 312,333 Less reinsurance recoverables 80,468 60,245 39,012 --------- --------- --------- Net balance at January 1 352,477 295,755 273,321 Incurred related to: Current year 100,186 81,152 64,931 Prior years (27,427) (27,510) (21,044) --------- --------- --------- Total Incurred 72,759 53,642 43,887 Paid related to: Current year (3,468) (7,706) (4,655) Prior years (27,361) (24,185) (22,417) --------- --------- --------- Total paid (30,829) (31,891) (27,072) Reserves of entity acquired 45,643 34,971 5,619 --------- --------- --------- Net balance at December 31 440,050 352,477 295,755 Plus reinsurance recoverables 108,692 80,468 60,245 --------- --------- --------- Balance at December 31 $ 548,742 $ 432,945 $ 356,000 ========= ========= =========
The reserves were evaluated by independent consulting actuaries 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. However, the Company's management believes its actual incurred losses and loss adjustment expenses will not vary significantly from estimated amounts included in the accompanying financial statements. 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. 51 52 MAIC Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 10. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of unaudited quarterly results of operations for 1996 and 1995:
1996 (THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS) 1ST 2ND 3RD 4TH ------------------------------------------------ Net premiums earned $21,078 $20,833 $29,514 $33,093 Net investment income 8,723 7,196 7,869 8,326 Other income 459 865 332 1,053 Net income 6,856 7,661 7,831 8,801 Earnings per share .69 .77 .79 .89
1995 (Thousands of dollars, except per share amounts) ------------------------------------------------ 1st 2nd 3rd 4th Net premiums earned $17,835 $18,442 $19,210 $20,466 Net investment income 6,998 7,610 7,380 7,595 Other income 515 1,508 1,415 1,300 Net income 6,034 7,231 8,070 8,327 Earnings per share .61 .73 .81 .84
Quarterly earnings per share data for 1996 and 1995 have been restated giving retroactive effect as if the 1996 and 1995 dividends had been declared on January 1, 1995. The sum of the above amounts may vary from the annual amounts because of rounding. 52 53 MAIC HOLDINGS, INC. AND SUBSIDIARIES SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES December 31, 1996 (dollars in thousands)
Cost or Amount at Which Amortized Market Shown in the Type of Investment Cost Value Balance Sheet - ------------------------------------------------------------------------------------- Fixed Maturities: Bonds: U.S. Treasury Securities ................. $ 56,773 $ 57,595 $ 57,595 State and municipal bonds ................ 306,905 315,649 315,649 Corporate bonds .......................... 120,691 122,769 122,769 Mortgage-backed securities ............... 67,819 68,255 68,255 Certificates of deposit .................. 670 670 670 -------- -------- -------- Total fixed maturities ................. 552,858 $564,938 564,938 -------- ======== -------- Equity securities .......................... 32,567 $ 33,036 33,036 ======== Investment in unconsolidated affiliate ..... 30 30 (a) Real estate, net ........................... 12,352 12,352 Short-term investments ..................... 56,403 56,403 -------- -------- Total investments ...................... $654,210 $666,759 ======== ========
(a) Represents equity in undistributed net income. 53 54 MAIC HOLDINGS, INC. AND SUBSIDIARIES SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT December 31, 1996 and 1995 (dollars in thousands) CONDENSED BALANCE SHEET
December 31 1996 1995 -------- -------- Assets Short-term investments $ 5,141 $ 10,000 Investment in subsidiaries -- at equity 238,925 193,912 Receivable from subsidiaries 17,318 5,092 Cash 635 -- Other assets 619 26 -------- -------- $262,638 $209,030 ======== ======== Liabilities and stockholders' equity Capital contribution payable to subsidiary $ 17,243 $ 3,000 Other liabilities 830 -- -------- -------- 18,073 3,000 Stockholders' equity Common stock 10,339 9,377 Other stockholders' equity, including unrealized gains or losses on securities of subsidiaries 234,226 196,653 -------- -------- Total stockholders' equity $244,565 $206,030 -------- -------- $262,638 $209,030 ======== ========
CONDENSED STATEMENT OF INCOME
Period September 1, 1995 (date operations Year Ended began) through December 31, 1996 December 31, 1995 ----------------- ----------------- Revenues: Investment income $ 549 $ 25 Other income 13 -- -------- ------- 562 25 Expenses: Other expenses 948 -- -------- ------- 948 -- -------- ------- Income (loss) before income taxes and equity in undistributed net income of subsidiaries (386) 25 Federal and state income tax 22 -- -------- ------- Income (loss) before equity in undistributed net income of subsidiaries (408) 25 Equity in undistributed net income of subsidiaries 31,557 13,837 -------- ------- Net income $ 31,149 $13,862 ======== =======
54 55 MAIC HOLDINGS, INC. AND SUBSIDIARIES SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT December 31, 1996 and 1995 (dollars in thousands) CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31 1996 1995 --------- -------- Cash from Operating Activities $ (53) $ -- Investing activities Cash received from subsidiaries 3,628 10,000 Purchases of short-term investments (143,076) (10,000) Proceeds from sale of short-term investments 147,935 -- Purchase of subsidiary (6,306) -- Capital contribution to subsidiaries (3,600) -- Other 2,141 -- --------- -------- 722 -- Financing activities Dividends paid (34) -- --------- -------- (34) -- --------- -------- Increase in cash $ 635 $ -- ========= ========
NOTES TO CONDENSED FINANCIAL STATEMENTS 1. Basis of Presentation In the parent-only financial statements, the Company's investment in subsidiaries is stated at cost plus in undistributed earnings of subsidiaries since the date of acquisition. The Company's share of net inc unconsolidated subsidiaries is included in consolidated income using the equity method. The parent-only statements should be read in conjunction with the Company's consolidated financial statements. 2. Related Party Transactions As part of the 1995 plan of exchange and reorganization, Mutual Assurance transferred all of its ownersh Medical Assurance of West Virginia, Inc., SURF and Physicians Insurance Company of Indiana, Inc. to the Company. Additionally, Mutual Assurance committed to transfer approximately $15 million of cash to the Company, of which $10 million was transferred during 1995 and $5 million during 1996. The Company has re the following capital contributions receivable (payable) with related parties:
December 31 December 31 1996 1995 ------------ ----------- Physicians Insurance Company of Indiana, Inc. $ (3,600,000) $(3,000,000) Medical Assurance of West Virginia, Inc. 13,643,000 -- Mutual Assurance, Inc. (13,643,000) -- ------------ ----------- $ (3,600,000) $(3,000,000) ============ ===========
The 1995 capital contribution to Physicians Insurance Company of Indiana, Inc. was paid during 1996. Dur SURF distributed approximately $3,628,000 in earnings to the Company. 55 56 MAIC HOLDINGS, INC. AND SUBSIDIARIES SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION Years ended December 31, 1996, 1995, and 1994. (dollars in thousands)
1996 1995 1994 ------------------------------ Deferred policy acquisition costs ................... $ 4,590 $ 1,891 $ 641 Reserve for losses and loss adjustment expense ...... 548,742 432,945 356,000 Unearned premiums ................................... 54,920 47,319 25,572 Net premiums earned ................................. 104,518 75,953 61,426 Premiums assumed from other companies ............... 11,681 6,646 562 Net investment income ............................... 32,114 29,582 23,072 Net losses and loss adjustment expenses ............. 72,759 53,642 43,887 Underwriting, acquisition and insurance expenses: Amortization of deferred policy acquisition costs.. 11,065 5,450 1,647 Other underwriting, acquisition and insurance expenses .......................... 14,664 12,446 8,815 Net premiums written ................................ 105,961 85,101 61,878
56 57 MAIC HOLDINGS, INC. AND SUBSIDIARIES SCHEDULE IV -- REINSURANCE Years ended December 31, 1996, 1995, and 1994 (dollars in thousands)
1996 1995 1994 ---------------------------------------- PROPERTY & CASUALTY Earned premiums before reinsurance $ 118,211 $ 87,870 $ 69,748 Reinsurance expense (29,644) (18,561) (11,845) Assumed from other companies 15,951 6,646 562 --------- -------- -------- Net premiums earned $ 104,518 $ 75,955 $ 58,465 ========= ======== ======== Percentage of amount assumed to net 15.26% 8.75% 0.96% ========= ======== ======== ACCIDENT AND HEALTH Gross premiums earned $ 0 (b) $ 1 (b) $ 2,972 (a) Ceded to other companies 0 (3) (10) Assumed from other companies 0 0 0 --------- -------- -------- Net premiums earned $ 0 $ (2) $ 2,962 ========= ======== ======== Percentage of amount assumed to net 0.00% 0.00% 0.00% ========= ======== ======== OTHER Gross premiums earned 0 0 0 Ceded to other companies 0 0 0 Assumed from other companies 0 0 0 --------- -------- -------- Net premiums earned $ 0 $ 0 $ 0 ========= ======== ======== Percentage of amount assumed to be net 0.00% 0.00% 0.00% ========= ======== ======== Total net premiums earned $ 104,518 $ 75,953 $ 61,427 ========= ======== ========
(a) Intercompany premiums of $816,763 for the year ended December 31, 1994 have been eliminated. (b) During first quarter 1995, PROActive Insurance Corporation discontinued its operations. 57 58 MAIC HOLDINGS, INC. AND SUBSIDIARIES SCHEDULE VI -- SUPPLEMENTARY PROPERTY AND CASUALTY INSURANCE INFORMATION Years ended December 31, 1996, 1995, and 1994 (dollars in thousands)
1996 1995 1994 ------------------------------------ Deferred policy acquisition costs ...................... $ 4,590 $ 1,891 $ 641 Reserve for losses and loss adjustment expenses ........ 548,732 432,937 355,735 Unearned premiums ...................................... 54,920 47,319 25,572 Net premiums earned .................................... 104,518 75,955 58,585 Net investment income .................................. 31,129 29,317 23,255 Losses and loss adjustment expenses incurred related to current year, net of reinsurance .......... 100,186 81,087 62,389 Losses and loss adjustment expenses incurred related to prior year, net of reinsurance ............ (27,427) (27,389) (20,948) Amortization of deferred policy acquisition costs ...... 11,065 5,450 1,647 Paid losses and loss adjustment expenses related to current year losses, net of reinsurance .............. 3,468 7,589 2,866 Paid losses and loss adjustment expenses related to prior year losses, net of reinsurance ................ 27,415 24,102 21,295
58 59 EXHIBIT INDEX
Exhibit Number Description Page - ------ ----------- ---- 3.1 Certificate of Incorporation of MAIC Holdings, Inc. (3) 3.2 Bylaws of MAIC Holdings, Inc. (3) 4 Specimen of Common Stock Certificate of MAIC Holdings, Inc. (3) 4.1 Agreement and Plan of Exchange by and between Mutual Assurance, Inc. and MAIC Holdings, Inc., a Delaware corporation, dated February 21, 1995 (3) 4.2 Certificate of Adoption of the Plan of Exchange as approved by the Commissioner of Insurance of Alabama and filed with the Secretary of State of Alabama on August 31, 1995 (6) 10.1 Employment Agreement between A. Derrill Crowe, M.D. and Mutual Assurance, Inc., including amendments (1) 10.2 Employment Agreement between Bradley DeMonbrun, Ltd. and MOMED Holding Co., including amendments (8) 10.3 MAIC Holdings, Inc. Incentive Compensation Plan (formerly known as the Mutual Assurance, Inc. 1995 Stock Award Plan) (3) 10.4 MOMED Holding Co. Principal Financial Group Defined Benefit Plan (8) 10.5 MOMED Holding Co. Principal Financial Group 401(k) Plan (8) 10.6 Agreement between the Medical Association of the State of Alabama and Mutual Assurance Society of Alabama dated July 1, 1977 (1)
59 60
Exhibit Number Description Page - ------ ----------- ---- 10.7 Endorsement and Marketing Agreement by and between Mutual Assurance, Inc., West Virginia Health Services, Inc., a West Virginia corporation wholly-owned by West Virginia Hospital Association, a West Virginia non-profit corporation, and West Virginia Hospital Insurance Company, a West Virginia insurance company, dated January 1, 1994 (2) 10.8 Endorsement and Marketing Agreement by and between Medical Assurance of West Virginia, Inc., a West Virginia insurance corporation and subsidiary of Mutual Assurance, Inc., and the West Virginia State Medical Association, a West Virginia non-profit corporation dated December 1, 1994 (2) 10.9 Stock Purchase Agreement by and between Mutual Assurance, Inc. and Indiana State Medical Association, an Indiana non-profit corporation and Physicians Insurance Company of Indiana, an Indiana insurance company effective as of January 1, 1995 (2) 10.10 The Agreement for Purchase and Sale of Assets among Physicians Insurance Company of Ohio and The Professionals Insurance Company, as sellers, and Mutual Assurance, Inc., as purchaser, dated July 14, 1995 (4) 10.11 Reinsurance Treaty between Physicians Insurance Company of Ohio and Mutual Assurance, Inc., effective as of July 16, 1995 (4) 10.12 Management Agreement between Physicians Insurance Company of Ohio and Mutual Assurance, Inc., dated July 16, 1995 (4) 10.13 Escrow Agreement among Physicians Insurance Company of Ohio, Mutual Assurance, Inc., and SouthTrust Bank of Alabama, National Association effective as of July 16, 1995 (5)
60 61
Exhibit Number Description Page - ------ ----------- ---- 10.14 Endorsement, Marketing and Sponsorship Agreement effective as of January 1, 1995 between Physicians Insurance Company of Indiana and The Indiana State Medical Association (6) 10.15 Stock Purchase Agreement between Mutual Assurance, Inc. and Physicians Insurance Company of Michigan effective as of May 2, 1995 (6) 10.16 Stock Purchase Agreement between Mutual Assurance, Inc. and Physicians Insurance Company of Ohio effective as of May 12, 1995 (6) 10.17 Credit Agreement dated as of December 15, 1995, between MAIC Holdings, Inc. and SouthTrust Bank of Alabama, National Association (6) 10.18 Amendment and Assumption Agreement by and between Mutual Assurance, Inc. and MAIC Holdings, Inc. dated April 8, 1996 (7) 10.19 Agreement and Plan of Merger between MOMED Holding Co., MAIC Holdings, Inc., and MOMED Acquisition, Inc., dated June 11, 1996 (8) 10.20 Nomination Agreement between MOMED Holding Co. and Missouri State Medical Association dated July 21, 1994 (8) 10.21 Reciprocal Assistance Agreement between Missouri Medical Insurance Company, a Missouri corporation and the Missouri State Medical Association, a Missouri non-profit corporation, dated July 21, 1994 (8) 10.22 License Agreement between Missouri Medical Insurance Company, a Missouri corporation, and the Missouri State Medical Association, a Missouri non-profit corporation, dated July 21, 1994 (8)
61 62
Exhibit Number Description Page - ------ ----------- ---- 10.23 First Amended and Restated MOMED Holding Co. Self-Insured Directors and Officers Liability Trust Agreement between MOMED Holding Co., a Missouri corporation; its subsidiaries; and Boatmen's Trust Company, a trust company organized under the laws of Missouri, dated May 7, 1993 (8) 10.24 Nomination Agreement between MOMED Holding Co. and MAIC Holdings, Inc. dated December 10, 1996 21 Subsidiaries of MAIC Holdings, Inc. 23 Consent of Ernst & Young LLP 27 Financial Data Schedule (for SEC use only)
62 63 (1) Filed as an exhibit to Mutual Assurance's Registration Statement on Form S-1 (Commission File No. 33-35223) and incorporated herein by the reference pursuant to Rule 12b-32 of the Securities and Exchange Commission. (2) Filed as an exhibit to Mutual Assurance's Form 10-K for the year ended December 31, 1994 (Commission File No. 0-19439) and incorporated herein by reference pursuant to Rule 12b-32 of the Securities and Exchange Commission. (3) Filed as an exhibit to MAIC Holdings' Registration Statement on Form S-4 (Commission File No. 33-91508) and incorporated herein by reference pursuant to Rule 12b-32 of the Securities and Exchange Commission. (4) Filed as an exhibit to Mutual Assurance's Form 8-K for event occurring July 14, 1995, and incorporated herein by this reference pursuant to Rule 12b-32 of the Securities and Exchange Commission. (5) Filed as an exhibit to Mutual Assurance's Form 8-K for event occurring August 28, 1995, and incorporated herein by this reference pursuant to Rule 12b-32 of the Securities and Exchange Commission. (6) Filed as an exhibit to MAIC Holdings' Form 10-K for the year ended December 31, 1995 (Commission File No. 0-19439) and incorporated herein by reference pursuant to Rule 12b-32 of the Securities and Exchange Commission. (7) Filed as an exhibit to MAIC Holdings' Proxy Statement for the 1996 Annual Meeting (Commission File No. 0-19439) and incorporated herein by reference pursuant to Rule 12b-32 of the Securities and Exchange Commission. (8) Filed as an exhibit to MAIC Holdings Registration Statement on Form S-4 (Commission File No. 333-13465) and incorporated herein by reference pursuant to Rule 12b-32 of the Securities and Exchange Commission. 63 EX-10.24 2 NOMINATION AGREEMENT 1 EXHIBIT 10.24 NOMINATION AGREEMENT THIS NOMINATION AGREEMENT is made and entered into as of the 10th day of December, 1996, by and between MOMED HOLDING CO., a Missouri corporation ("MOMED"), and MAIC HOLDINGS, INC., a Delaware corporation ("MAIC"). WHEREAS, MOMED and MAIC entered into the Agreement and Plan of Merger ("Merger Agreement") dated June 11, 1996 (the "Merger"), wherein MAIC has acquired MOMED. WHEREAS, in connection with the Merger, MAIC desires to assist MOMED in directly participating in the management of MAIC through the representation of one (1) MOMED representative on the Board of Directors of MAIC. WHEREAS, the Board of Directors of MAIC has determined that it is in the best interest of MAIC to include on the MAIC Board of Directors a qualified representative of MOMED ("MOMED Representative"), all on the terms and conditions set forth in this Nomination Agreement consistent with the Merger Agreement. NOW THEREFORE, in consideration of the premises and the mutual terms and provisions set forth in this Nomination Agreement, the parties hereto agree as follows: 1. Appointment of MOMED Representative to MAIC Board. Upon entering into the Merger Agreement, MAIC's Board of Directors shall appoint Dr. Richard V. Bradley as the MOMED Representative on the MAIC Board of Directors until the next MAIC annual meeting where the MOMED Representative will be nominated for and elected to the MAIC Board of Directors in accordance with the terms of this Nomination Agreement. 2. Nomination Covenants. During the term of this Nomination Agreement, the MOMED Board of Directors shall submit in writing, on or before January 1 of the year in which the MOMED Representative is to be elected to the MAIC Board of Directors, the name of the candidate (the "MOMED Candidate") to the MAIC Nominating Committee for election to the MAIC Board of Directors. The MOMED Candidate must be, or must have been, an active officer or member of the MOMED Board of Directors or other person reasonably acceptable to MAIC. Subject to the good faith exercise of its responsibilities to MAIC and its shareholders while giving due consideration to MAIC's relationship with MOMED and the intent of this Nomination Agreement, the MAIC Nominating Committee shall include the name of the MOMED Candidate so submitted as one of its nominees for election to the MAIC Board of Directors that year, and shall, in each such year, nominate only that number of candidates for election to the MAIC Board of Directors as shall equal the total number of Directors to be elected for such year. The MAIC Nominating Committee shall place no name in opposition to the MOMED Candidate. 1 2 3. Board Recommendation and Certain Shareholders' Votes. Subject to the good faith exercise of its responsibilities to MAIC and its shareholders while giving due consideration to MAIC's relationship with MOMED and the intent of this Nomination Agreement, the MAIC Board of Directors shall recommend and support the election of the MOMED Candidate for election to the MAIC Board of Directors during the term of this Agreement. It is further agreed by the below listed shareholders of MAIC, that they will cote all of their respective MAIC shares for the election of the MOMED Candidate to the MAIC Board of Directors during the term of this Agreement: A. Derrill Crowe, M.D. Paul R. Butrus James J. Morello 4. Proxy Materials. The name of the MOMED Candidate shall be included as a management nominee in the Proxy Statement circulated in advance of the annual meeting of the MAIC shareholders (the "Annual Meeting"). During the Term of this Nomination Agreement, all proxies relating to the election of MAIC Directors that are distributed to the MAIC shareholders in connection with each Annual Meeting shall contain a statement notifying the MAIC shareholders that if a proxy is returned without express directions from the shareholder to the contrary, MAIC management will vote the proxy "For" all named nominees in such manner as MAIC management shall determine. MAIC management shall vote such proxies in such manner as in the opinion of MAIC management will assure the election of the MOMED Candidate. 5. Term. The term of this Nomination Agreement shall be for an initial period of five (5) years beginning on the closing of the Merger Agreement and shall be automatically renewed and extended for succeeding one (1) year terms unless wither MAIC or MOMED notifies the other, in writing, at least six (6) months prior to the end of the current term of this Nomination Agreement, that it terminates this Nomination Agreement at the end of the current term. 6. Severability. Any provision of this Nomination Agreement which is prohibited, unenforceable or not authorized in any jurisdiction is, as to such jurisdiction, ineffective to the extent of any prohibition, unenforceability, or nonauthorization without invalidating the remaining provisions hereof, or affecting the validity, enforceability, or legality of such provision in any other jurisdiction, unless the ineffectiveness of such provision would result in such a material change as to cause completion of the transactions contemplated hereby to be unreasonable. 7. Entire Agreement. The Nomination Agreement constitutes the entire agreement between the parties and supersedes and cancels any and all prior discussion, negotiations, undertakings and agreements between the parties relating to the subject matter hereof. 8. Captions. The captions used herein are for convenience only and shall not control or affect the meaning or construction of any of the provisions of this Nomination Agreement. 2 3 9. Waiver, Amendment or Modification. The conditions of this Nomination Agreement which may only be waived by duly authorized, written notice to the other party waiving such condition. The failure of any party at any time or times to require performance of any provision hereof (other than by written waiver) shall in no matter affect the right at a later time to enforce the same. This Nomination Agreement may not be amended or modified except by a written document duly executed by all of the parties hereto. 10. Counterparts. This Nomination Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which shall be deemed one and the same instrument. 11. Successors and Assigns. This Nomination Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. There shall be no third party beneficiaries hereof. 12. Governing Law; Assignment. This Nomination Agreement shall be governed by the laws of the State of Missouri. This Nomination Agreement may not be assigned by any of the parties hereto. IN WITNESS WHEREOF, the parties hereto have duly executed this Nomination Agreement as of the date first written above. MOMED HOLDING CO. /s/ Richard V. Bradley ----------------------------------- Richard V. Bradley, M.D., President and Chief Executive Officer MAIC HOLDINGS, INC. /s/ A. Derrill Crowe ----------------------------------- A. Derrill Crowe, M.D., President and Chief Executive Officer /s/ A. Derrill Crowe ----------------------------------- A. Derrill Crowe, M.D. /s/ Paul R. Butrus ----------------------------------- Paul R. Butrus /s/ James J. Morello ----------------------------------- James J. Morello 3 EX-21 3 SUBSIDIARIES OF MAIC 1 EXHIBIT 21 SUBSIDIARIES OF MAIC HOLDINGS, INC. Mutual Assurance, Inc. (Alabama) Mutual Assurance Agency of Ohio, Inc. (Ohio) MAI Corporation (Delaware) Mutual Assurance Agency, Inc. (Alabama) PROActive Insurance Corporation (Alabama) Educational Services Institute, Inc. (Alabama) Medical Assurance of West Virginia, Inc. (West Virginia) Physicians Insurance Company of Indiana (Indiana) MOMED Holding Co. (Missouri) Missouri Medical Insurance Company (Missouri) Professional Liability Associates, Inc. (Missouri) Momedico Professional Services, Inc. (Missouri) EX-23 4 CONSENT OF ERNST & YOUNG 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-55276 and Form S-8 No. 333-08267) pertaining to the Open Market Stock Purchase Plan of MAIC Holdings, Inc. of our report dated February 6, 1997, with respect to the consolidated financial statements and schedules of MAIC Holdings, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 1996. Ernst & Young LLP Birmingham, Alabama March 19, 1997 EX-27 5 FDS
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF MAIC HOLDINGS, INC. AND SUBSIDIARIES FOR THE YEAR ENDED DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. DOLLARS YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 1 564,938 0 0 33,036 0 12,352 666,759 14,033 108,692 0 905,308 548,742 54,920 31,789 0 0 0 0 10,339 234,226 905,308 104,518 32,114 1,532 1,197 72,759 0 25,729 40,872 9,637 31,235 0 0 0 31,149 3.14 0 432,945 100,186 (27,427) (3,468) (27,361) 548,742 27,309 DEFERRED POLICY ACQUISITION COSTS, AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS AND MORTGAGE NOTES PAYABLE ARE NOT SEPARATELY DISCLOSED IN FORM 10-K BECAUSE ITEMS ARE IMMATERIAL FOR INDIVIDUAL DISCLOSURE. DEFERRED POLICY ACQUISITION COSTS ARE INCLUDED AS A COMPONENT OF OTHER ASSETS; AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS ARE INCLUDED AS A COMPONENT OF OTHER UNDERWRITING EXPENSES; MORTGAGE NOTES PAYABLE ARE INCLUDED AS A COMPONENT OF OTHER LIABILITIES. THE ENDING RESERVE BALANCE CONTAINS $45,643 OF RESERVES OF AN ENTITY ACQUIRED DURING 1996.
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