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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (Fee Required)
For the Fiscal year ended December 31,1996
[ ] 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 0-21230
Midwest Medical Insurance Holding Company
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Minnesota 41-1625287
- -------------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6600 France Avenue So., Suite 245
Minneapolis, Minnesota 55435-1891
- ------------------------------------- ---------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 922-5445
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------ -----------------------------------------
Class A Common Stock $.01 par value N/A
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 periods 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 (Section 229.405 of this chapter) 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 (based on December 31, 1996 Net Redemption Value per
share) of the voting stock held by non-affiliates of the registrant as of March
30, 1997 was $7,534,994.
The number of shares outstanding of the issuer's classes of common stock, as of
March 30, 1997:
Class A Common Stock $.01 par Value - 118,209 shares
Class B Common Stock $1,000 par value - 1 share
DOCUMENTS INCORPORATED BY REFERENCE
None.
1
PART I
ITEM 1. BUSINESS
BACKGROUND
Midwest Medical Insurance Holding Company (MMIHC) is an insurance holding
company organized under the laws of the State of Minnesota. Midwest Medical
Insurance Company (MMIC) is a wholly-owned subsidiary of MMIHC and is MMIHC's
primary operating asset.
MMIC's primary business is selling and issuing policies of medical professional
liability insurance to: (1) individual physicians, (2) partnerships or
professional corporations comprised of physicians and (3) clinics. In addition,
MMIC writes business liability insurance providing coverage for claims against a
medical business entity resulting from acts by the employees who work for the
entity, and office premises liability insurance providing coverage for claims
arising out of the ownership, maintenance or use of office premises of the
insured.
MMIC originally was organized in 1980 under the auspices of the Minnesota
Medical Association (the "MMA") to provide professional liability (malpractice)
insurance to Minnesota physicians who are members of the MMA. The business was
reorganized on November 30, 1988 into a stock insurance company (MMIC), wholly
owned by a holding company (MMIHC), which could pursue other business
opportunities. MMIHC has not engaged in any such activities to any material
extent. The reorganization also was effected to give physicians a limited equity
interest in their malpractice insurer while preserving MMIC's capital and
surplus. As of July 1, 1993, the Iowa physician-owned malpractice insurer, Iowa
Physicians Mutual Insurance Trust (IPMIT), was merged with and into MMIC. As of
June 5, 1996, the Nebraska physician-owned malpractice insurer, Medical
Liability Mutual Insurance Company of Nebraska (MLM) was merged with and into
MMIC. MMIC now provides malpractice insurance to physicians and physician groups
in Minnesota, Iowa, North Dakota, South Dakota, Nebraska, Illinois and Wisconsin
on a claims-made basis. MMIC has had the sponsorship of the MMA since inception
and also has the sponsorship of the Iowa Medical Society (IMS) and North Dakota
Medical Association. Professional liability, general liability, and umbrella
excess liability insurance is also available to hospitals, nursing homes and
extended care facilities through MMIC.
MMIC has no employees. Instead, MMIHC provides all management and administrative
services to MMIC for a fee based upon the cost of providing services. For
insurance operational expenses, a ten percent administrative surcharge is added.
Hereafter, MMIHC and MMIC shall be collectively referred to as the Company
unless the reference pertains to a specific entity. Further, due to the nature
of the relationship between MMIHC and MMIC, the insurance operations of MMIC
will be discussed as though they are the operations of the registrant.
2
ITEM 1. BUSINESS (CONTINUED)
ELIGIBLE PHYSICIANS
An individual physician must meet the following criteria in order to be eligible
to obtain insurance coverage from MMIC:
1. An applicant must be licensed to practice medicine, surgery or osteopathy
in Minnesota, Iowa, Nebraska, North Dakota, South Dakota, Nebraska,
Illinois, or Wisconsin;
2. An applicant must conduct a majority of his or her practice in Minnesota,
Iowa, Nebraska, North Dakota, South Dakota, Nebraska, Illinois or
Wisconsin.
ELIGIBLE GROUPS
MMIC also provides professional liability insurance to entities including
partnerships, professional corporations and other associations through which
qualifying physicians practice medicine, surgery or osteopathy.
A group must meet the following criteria in order to be eligible to be insured
by MMIC:
1. The entity must have its principal place of business in Minnesota, Iowa,
Nebraska, North Dakota, South Dakota, Nebraska, Illinois or Wisconsin;
and
2. The group must demonstrate that all of the individual physicians
practicing medicine, surgery or osteopathy on a full-time basis
through such clinic are, or intend to be, insured by MMIC.
ELIGIBLE HOSPITALS, NURSING HOMES AND OTHER EXTENDED CARE FACILITIES
MMIC also provides professional liability, general liability and umbrella excess
liability to hospitals, nursing homes and other extended care facilities which
provide medical services to patients on more than an outpatient basis.
A business must meet the following criteria in order to be eligible to be
insured by MMIC:
1. The entity must have its principal place of business in Minnesota, Iowa,
Nebraska, North Dakota, South Dakota, Illinois or Wisconsin; and
2. The facility must be a licensed hospital, nursing home, hospice or other
extended care facility.
3
ITEM 1. BUSINESS (CONTINUED)
POLICY FORMS
MMIC offers a "claims-made" medical malpractice liability insurance policy.
Under a claims-made policy, coverage is provided for claims asserted and
reported to MMIC while the policy is in effect relating to occurrences which
took place during the period in which the policyholder had coverage with MMIC.
For purposes of policy coverage, a claim includes any lawsuit, allegation of
liability or other notice of patient dissatisfaction with services performed
that is communicated to MMIC as required by the policy. The policy also covers
prior acts (i.e., claims first made during the policy period with respect to
occurrences which took place prior to the date the insured initially secured
coverage from MMIC) for physicians previously insured under a claims-made policy
with another professional liability insurer. Prior acts coverage is not
available from MMIC for physicians who have not been continuously insured prior
to obtaining coverage from MMIC.
MMIC also offers reporting endorsements ("tails") which provide coverage of
subsequent claims (i.e., claims first made subsequent to the date the insured
terminates basic insurance coverage with MMIC, but with respect to occurrences
which took place while the insurance coverage was in effect prior to such
termination date) made against its former insureds who have voluntarily
terminated insurance coverage with MMIC. In the event of death, permanent
disability, or retirement at age 55 or older after five years of coverage with
MMIC, the reporting endorsement is provided at no additional premium.
MMIC offers basic limits of coverage from $100,000 for each claim, subject to
$300,000 annual aggregate, up to $5,000,000 for each claim, subject to
$5,000,000 annual aggregate. Excess coverage above the basic limits is available
from MMIC's reinsurers on a facultative basis.
The basic office premises liability limits offered are $100,000 for each
occurrence for bodily injury and $100,000 for each occurrence for property
damage. Limits up to $1,000,000 for each occurrence are also available.
The basic liability limits for coverage of employees and assistants cannot
exceed the limits purchased by the insured physician or clinic.
4
ITEM 1. BUSINESS (CONTINUED)
MARKETING AND DISTRIBUTION
Marketing of MMIC policies in Minnesota, South Dakota, Nebraska, Illinois and
Wisconsin is handled principally by MMIC through salaried marketing
representatives. MMIC has also made marketing arrangements with a select group
of large national brokers to assist MMIC in the production of large accounts and
in the production of new coverages as they are developed. These brokers will
work primarily in Minnesota. MMIC has appointed an exclusive independent agent
in Iowa and in North Dakota in order to enhance marketing efforts there. MMIC
does not believe that the loss of any exclusive agent would have a material
adverse effect on its business because other agents are available and MMIC has
the in-house capacity to market directly in any of these areas. MMIC approves
all policies (and their terms) sold by agents prior to their becoming effective,
and no commissions are earned by agents until such approval has been granted.
Distribution of policies is handled through a processing system which MMIC has
utilized for several years. Since most policies have a common expiration date,
it is essential that MMIC's policy processing operations be highly efficient.
MMIC consistently has been able to provide policy processing on a timely basis.
REINSURANCE
MMIC purchases reinsurance in order to reduce its liability on individual risks.
A reinsurance transaction takes place when an insurance company transfers or
"cedes" to another insurer a portion of its exposure on insurance it writes. The
reinsurer assumes the exposure in return for a portion of the premium. The
reinsurer's liability is limited to losses it assumes that are in excess of the
portion retained by MMIC. However, in the event the reinsurer is unable or
otherwise fails to pay, MMIC remains primarily liable for the loss.
Historically, entering into reinsurance agreements permitted MMIC to issue
policies having greater liability limits than otherwise would have been allowed
under Minnesota insurance law, which prohibits an insurer from retaining a risk
on any one claim that is greater than 10 percent of its surplus. As MMIC's
surplus has grown, MMIC now utilizes reinsurance primarily to limit its risk on
any single claim. Such limits of risk assumed by MMIC for physician coverage
have increased from $150,000 in the first year of operations to $750,000 as of
January 1, 1995. The single claim limit of risk assumed is $500,000 for hospital
coverage. The reinsurer will pay losses in excess of the amount of risk retained
by MMIC, not to exceed the limits of liability of the policies issued by MMIC.
5
ITEM 1. BUSINESS (CONTINUED)
MMIC currently operates under an excess-of-loss reinsurance treaty with General
Reinsurance Corporation of Stamford, Connecticut (85%) and Hanover Reinsurance
Company of Hanover, Germany (15%), whereby the reinsurers insure against losses
in excess of the of loss limit retained by MMIC. General Reinsurance Corporation
is the largest reinsurer of medical professional liability in the United States
and one of the largest in the world and has received the highest rating of A++
by A.M. Best & Company, Inc. Hanover Reinsurance Company is rated A+ by A.M.
Best & Company, Inc. Coverage under the treaty was initially issued on October
1, 1986, and is continuous until canceled by either party. Previous reinsurance
treaties, which remain in effect for pre-1986 incidents, were with various
domestic and foreign reinsurers, all of whom have maintained their obligations
to MMIC and appear to be financially sound. MMIC currently cedes about
$7,200,000 of premium per year under the reinsurance treaty.
INVESTMENTS
MMIC's investment portfolio is under the direction of the Board of Directors
acting through the Investment Committee. The Investment Committee establishes
MMIC's investment policy which, in summary, is to assist in maintaining MMIC's
financial stability through the preservation of assets and the maximizing of
after-tax investment income. Adequate liquidity is maintained to assure that
MMIC has the ability to meet its insurance operational requirements, in
particular the payment of claims. MMIC employs outside investment managers who
manage the portfolio on a discretionary basis consistent with the policies set
by MMIC. In addition, the Investment Committee utilizes the services of a
separate outside consultant who calculates performance measures and provides an
independent opinion on the overall results being obtained by the investment
managers.
MMIC's investment portfolio consists primarily of fixed income instruments,
including United States Government and governmental agency bonds and other
public and municipal bonds. MMIC's investment policy permits the inclusion of
equity securities of up to 15 percent of the portfolio. In accordance with
this policy, equity securities currently comprised approximately 12.3 percent
of the portfolio at December 31, 1995. Due to the 1996 increase in market
values, with no new funds committed to equities, equities comprise 16.6% of
the portfolio at December 31, 1996.
RATING
A.M. Best & Company, Inc. ("Best's"), publisher of BEST'S INSURANCE REPORTS,
PROPERTY-CASUALTY, 1996 Edition, has assigned MMIC an "A", or excellent, rating
in 1996. Best's ratings are based on an analysis of the financial condition and
operation of an insurance company as compared with the industry in general.
MMIHC believes that a favorable rating has a positive effect since customers and
their advisors often review Best's ratings when selecting an insurer and are
more apt to purchase insurance from a company with a positive rating because of
the greater security and stability associated with a positive rating. A positive
rating relates to the ability of an insurer to meet its insurance obligations
and does not directly relate to the value of the insurer's securities.
6
ITEM 1. BUSINESS (CONTINUED)
GOVERNMENT REGULATION
MMIC is subject to governmental regulation in the states in which it conducts
its business (Minnesota, Iowa, North Dakota, South Dakota, Nebraska, Illinois,
and Wisconsin). Such regulation is conducted by state agencies having broad
administrative power dealing with all aspects of MMIC's business, including
policy terms, rates, dividends and retrospective premium credits to
policyholders, and dividends to the parent corporation, MMIHC.
Without prior approval from the Minnesota Commissioner of Commerce, annual
dividends to MMIHC cannot exceed 10 percent of unassigned surplus of MMIC or the
prior year's net income from operations of MMIC, whichever is greater. MMIC is
also subject to statutes that require it to file periodic information with state
regulatory authorities and is subject to periodic financial and business conduct
examinations. MMIHC is also subject to statutes governing insurance holding
company systems in Minnesota, which relate primarily to the acquisition of
control of insurance companies directly or through a holding company.
COMPETITION
MMIC's major competitor in all states in which it conducts its business is
The St. Paul Companies. The St. Paul Companies is a major national
property-casualty insurance company, the largest writer of medical
professional liability insurance in the United States, and is many times
larger than MMIC. In addition to The St. Paul Companies, several other
national companies have become active competitors in the last several years,
including Medical Protective Insurance Company, CNA Insurance Company, Zurich
Insurance Company, and Fireman's Fund Insurance Company. At this time they
have achieved limited market penetration, but represent an increasing
competitive pressure for the future. In addition several other
physician-owned specialty carriers have entered the market, but have yet to
be a significant factor in MMIC's area. Finally, over the past three years
several large self-insured hospitals in Minneapolis and Des Moines have
purchased MMIC insured clinics, and other physician practices have been
purchased by large, self-insured clinics such as the Mayo Clinic. This trend
decreased significantly in 1996. The trends are causing a contraction in the
available market for MMIC's primary malpractice insurance. MMIC is the only
carrier endorsed by local medical societies in Minnesota, Iowa and North
Dakota and owned by its physician-insureds, which management believes gives
MMIC a competitive advantage in marketing to physicians.
The market for medical professional liability insurance is changing, especially
with the dramatic changes proposed and occurring in the broader health care
industry. Various changes in the market for medical professional liability
insurance are possible as a result of developments such as practice
consolidation and integration, physician-hospital organizations, various forms
of managed health care, various forms of alliances between providers, proposals
for enterprise liability, and many others. Management of MMIC believes it is
developing new programs and products which will allow it to remain an industry
leader as such change occurs, although no assurance can be given to that effect.
7
ITEM 1. BUSINESS (CONTINUED)
EMPLOYEES
As of December 31, 1996, MMIHC employed 64 persons, of whom 5 were executives,
44 were supervisory employees or specialists, and 15 were clerical employees.
None of the employees of MMIHC is covered by a collective bargaining agreement
and management believes that relations with employees are good.
8
ITEM 2. PROPERTIES
MMIHC owns the following fixed assets, all of which are used in the conduct of
its business:
NET BOOK VALUE
DECEMBER 31,
1996
---------------
Office furniture and equipment $308,758
Leasehold improvements at leased premises,
6600 France Avenue South, Minneapolis, MN 35,127
Computer hardware 166,348
Computer system software 61,476
---------------
Total $571,709
---------------
---------------
The Company owns no real estate. MMIHC leases approximately 15,765 square feet
of office space in Edina, Minnesota under a 10-year lease that expires in 2001,
subject to the option for MMIHC to renew the lease for an additional five years
after the original term. Four-thousand and sixty square feet of office space is
leased in West Des Moines, Iowa under a 10-year lease that expires in 2000, with
an option for MMIHC to extend the term for an additional five years after the
original term. An additional 2,398 square feet of office space is leased in
Omaha, Nebraska under a three year lease that expires November 30, 1997. Annual
rent expense was $392,282 for 1996 and $379,699 for 1995.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any pending or threatened legal proceedings which
could have a material adverse effect on its operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At a meeting held on February 14, 1996, MMIHC shareholders approved an amendment
to eliminate from its Articles of Incorporation the requirement that only
physicians who are members of their respective state medical societies may own
MMIHC Class A Common Stock. This amendment was effective immediately as to
Nebraska physicians, and is effective on January 1, 1997 as to physicians in all
other states.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
(a) There is no market for the Company's Class A or Class B Common Stock. Class
A shares are issued only to insured individual physicians or individual
physicians jointly with the legal entities in which they practice. The
shares are restricted and cannot be sold to any person other than MMIHC and
are subject to mandatory redemption at the time that the physician
terminates his or her insurance coverage for any reason.
(b) As of March 30, 1997, there were 118,209 shares of Class A Common stock
outstanding held by 3,445 physicians and 1 share of Class B Common Stock
held by the Minnesota Medical Association.
(c) MMIHC has never paid a shareholder dividend nor does it intend to within
the foreseeable future. Without prior approval from the Minnesota
Commissioner of Commerce, annual dividends to MMIHC from MMIC cannot exceed
10% of unassigned surplus of MMIC or the prior year's net income from
operations of MMIC, whichever is greater.
ITEM 6. SELECTED FINANCIAL DATA
Following is the selected financial data of MMIHC for the five years ended
December 31, 1996. This data should be read in conjunction with the consolidated
financial statements and notes thereto appearing under Item 8 of this Form 10-K.
YEAR ENDED DECEMBER 31
OPERATIONS DATA 1996 (1) 1995 (1) 1994 (1) 1993 (1) 1992 (3)
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net premiums earned $32,046 $29,798 $26,246 $40,183 $36,317
Net investment and other income 14,840 14,191 11,509 14,773 14,859
-----------------------------------------------
Total revenue 46,886 43,989 37,755 54,956 51,176
Loss and loss adjustment expense 32,257 37,560 11,334 30,693 19,707
Other underwriting expenses 5,690 6,415 5,509 5,807 6,480
-----------------------------------------------
37,947 43,975 16,843 36,500 26,187
-----------------------------------------------
Income before income taxes 8,939 14 20,912 18,456 24,989
Income taxes (benefit) 1,458 (1,711) 6,417 6,156 8,528
-----------------------------------------------
Net income $ 7,481 $ 1,725 $14,495 $12,300 $16,461
-----------------------------------------------
-----------------------------------------------
10
ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)
YEAR ENDED DECEMBER 31
1996 (1) 1995 (1) 1994 (1) 1993 (1) 1992 (3)
------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income per common share
and common share equivalent $58.33 $13.74 $114.84 $99.53 $142.20
Number of shares used in per
share calculation 128,259 125,536(4) 126,222(4) 123,575(4) 115,758(4)
Net income/total revenue 16.0% 3.9% 38.4% 22.4% 32.2%
Return on average equity 6.5% 1.7% 15.8% 9.0% 12.9%
DECEMBER 31
FINANCIAL CONDITION 1996 (1) 1995 (1) 1994 (1) 1993 (2) 1992 (3)
- -------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
Fixed maturities at
fair value $183,561 $182,817 $174,203 $ - $ -
Fixed maturities at
amortized cost - - - 181,526 164,878
Equity securities at
fair value 38,001 28,311 19,782 19,580 17,782
Short-term investments 7,898 15,015 9,755 7,429 5,674
--------------------------------------------------
Total investments 229,460 226,143 203,740 208,535 188,334
Reinsurance recoverable 22,174 25,112 23,637 18,310 19,839
Other assets 10,359 13,329 19,100 16,335 15,954
--------------------------------------------------
Total assets $261,993 $264,584 $246,477 $243,180 $224,127
--------------------------------------------------
--------------------------------------------------
LIABILITIES
Unpaid losses and loss
adjustment expenses $110,037 $120,264 $110,967 $123,420 $118,171
Other liabilities 33,074 34,053 38,358 33,904 32,006
--------------------------------------------------
143,111 154,317 149,325 157,324 150,177
REDEEMABLE STOCK
Class A and Class B Common
Stock at redemption value 7,604 6,975 7,712 7,605 7,230
111,278 103,292 89,440 78,251 66,720
--------------------------------------------------
OTHER SHAREHOLDERS' EQUITY
Total liabilities, redeemable
stock and shareholders'
equity $261,993 $264,584 $246,477 $243,180 $224,127
--------------------------------------------------
--------------------------------------------------
11
ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)
DECEMBER 31
1996 (1) 1995 (1) 1994 (1) 1993 (2) 1992 (2)
-------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Midwest Medical Insurance
Holding Company:
Class A Common Shares
issued and outstanding 118,209 116,251 116,855 115,230 110,333
Redemption value per share $64.33 $60.00 $66.00 $66.00 $65.53
Class A Common Shares
redeemed 10,272 12,424 12,640 6,426 2,953
Amount paid to terminating
policyholders upon redemption $ 608 $ 829 $ 840 $ 415 $ 233
_______________________________________
(1) Amounts derived from audited consolidated financial statements of MMIHC
included in Item 8 of this Form 10-K.
(2) Amounts derived from audited consolidated financial statements of MMIHC.
(3) Amounts derived from post-pooling financial statements of MMIHC which have
been audited as to combination only.
(4) Includes pro forma shares computed to give retroactive effect to the merger
of MMIHC/MMIC with MLM. See Note 2 to the consolidated financial statements
included in Item 8 of this Form 10-K.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MANNER OF PRESENTATION
The financial statements of MMIHC and MMIC are presented on a consolidated
basis. In future references in this analysis, which should be read together with
the 1996 consolidated financial statements and notes thereto appearing under
Item 8 in this Form 10-K, MMIHC and MMIC are referred to collectively as the
"Company".
CAPITAL RESOURCES AND LIQUIDITY
The majority of the Company's assets are invested in bonds, stocks and
short-term instruments. These investments totaled $229,460,000 and $226,143,000
at December 31, 1996 and 1995, respectively, which represented 87.5% and 85.7%
of total assets. The primary objective of the Company's investment policy is
preservation of assets while securing the highest after-tax return consistent
with asset conservation. The investment in U.S. Government bonds assists in
assuring adequate liquidity for payment of losses. Stocks are carried at fair
value on the balance sheet. The Company adopted SFAS No. 115 effective January
1, 1994. Fixed maturity investments are classified as available for sale by
management and therefore, in accordance with SFAS No. 115, are also carried at
fair value effective January 1, 1994. Prior to January 1, 1994, bonds were
carried at the lower of aggregate amortized cost or market. Equity securities
are also classified as available for sale. This caused no change in the
accounting for these investments. See Note 1 of the notes to the consolidated
financial statements for additional detail concerning the impact of adopting
SFAS No. 115. Partially taxable state and other political subdivision bonds are
utilized in the portfolio to reduce federal income taxes and to secure a higher
after-tax return than fully taxable investments.
The Company's cash flow from operations has been essentially breakeven for the
years 1996, 1995 and 1994. Premium rates have remained level for several years
causing cash receipts from operations to be relatively level. In addition, in
recent years MMIC has returned substantial amounts of premiums to policyholders
in the form of retrospective premium credits. Loss and operating expense
payments during all three years have generally been met from current year's
premium receipts with any excess cash allocated to the investment portfolio. The
Company regularly analyzes loss liabilities to project cash flow required in
future years. Bond maturities by year approximate this loss payment pattern.
Since the overall portfolio is highly liquid, exact matching is not a goal.
Maturities are selected to maximize total return rather than to achieve exact
matching of liabilities. While operating cash flow was basically breakeven in
1996, 1995 and 1994, given the Company's December 31, 1996 shareholders' equity
of $111,278,000, investments of $229,460,000 and gross loss liabilities of
$110,037,000, the Company anticipates no cash flow problems in the near future.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The Company's bylaws require that MMIHC Class A Common Stock issued to MMIC
policyholders be redeemed when a physician ceases to be insured by MMIC for any
reason. The redemption value per share is calculated by dividing the net book
value of the Company, excluding the net book value of MMIC (other shareholders'
equity) from the calculation, by the number of MMIHC Class A Common Shares
outstanding. More detail about the redeemable stock and the actual redemptions
during the years 1996, 1995 and 1994 are found in Note 3 to the consolidated
financial statements. This limited redemption value preserves the capital of
MMIC as shareholders' equity. The consolidated statements of changes in other
shareholders' equity found in the accompanying financial statements provide the
details of additions to and reductions in other shareholders' equity.
From time to time the Board of Directors of MMIC declares dividends payable to
MMIHC to maintain the redemption value of the Company's Class A Common Stock.
The $1,181,000 dividend declared in November 1994 and the $260,000 dividend in
November 1995 were declared in accordance with that principle and paid in
February of 1994 and 1995, respectively. In July 1996, a dividend of $327,000
was paid to MMIHC as required by a provision of the MMIC/MLM merger agreement.
Per the merger agreement, the amount was sufficient to maintain the per share
redemption value of MMIHC's Class A Common Stock at the same per share value
immediately after the merger as immediately before the merger.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LOSS AND LOSS ADJUSTMENT EXPENSE
RECONCILIATION OF LIABILITY FOR LOSS
AND LOSS ADJUSTMENT EXPENSE
(THOUSANDS OF DOLLARS)
1996 1995 1994
-------------------------------
Liability for loss and loss adjustment expense
at beginning of year $ 96,424 $ 88,227 $105,589
Plus:
Incurred loss and loss adjustment expense:
Provision for current year 41,101 39,847 36,275
(Decrease) in provision for prior years (8,844) (2,287) (24,941)
--------------------------------
Total incurred loss and loss adjustment expense 32,257 37,560 11,334
Less:
Incurred loss and loss adjustment expense
payments:
Payment attributable to current year 4,885 2,484 3,445
Payment attributable to prior years 33,454 26,879 25,251
--------------------------------
Total payments 38,339 29,363 28,696
--------------------------------
Liability for loss and loss adjustment expense
at end of year 90,342 96,424 88,227
Reinsurance recoverables on unpaid losses at
end of year 19,695 23,840 22,740
--------------------------------
Liability for loss and loss adjustment expense,
gross of reinsurance recoverables on unpaid
losses at end of year $110,037 $120,264 $110,967
--------------------------------
--------------------------------
The second to the last line on the preceding reconciliation reports the amount
of reinsurance recoverables for unpaid losses which are included in the 1996,
1995 and 1994 balance sheet liability "Unpaid losses and loss adjustment
expenses". Except for adding the reinsurance recoverables, the reconciliation is
presented net of reinsurance which coincides with the manner of presentation of
the income statements.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The current year's provision for loss and loss adjustment expense, which is
based upon policyholder exposure, expected frequency of losses, and severity of
losses, was fairly stable for 1996 and 1995. The 1994 current year provision was
approximately $4,000,000 less than the 1996 and 1995 amounts primarily because
the Company increased its retention from $500,000 per claim to $750,000 per
claim effective January 1, 1995. The loss and loss adjustment expenses reflected
in the consolidated financial statements, and shown in the Reconciliation of
Liability for Loss and Loss Adjustment Expense as total incurred loss and loss
adjustment expense, include adjustments of prior years' estimates.
Incurred loss and loss adjustment expenses for 1996 and 1995 of $32,257,000 and
$37,560,000, respectively, are significantly greater than the $11,334,000 in
1994. During 1994, the liability for loss and loss adjustment expenses was
extensively reevaluated by management which resulted in a significant reduction,
$24,941,000, in these liabilities for years prior to 1994. That reduction was
supported by outside actuarial evaluation. There were smaller reversals of prior
years' liabilities in 1996 and 1995. Following the 1994 extensive review and
liability reduction, management does not expect prior year liability reductions
of similar significance in future years.
The schedule which follows summarizes the development of the liability for loss
and loss adjustment expense from 1986 through 1996. This schedule is also
presented net of reinsurance which the Company believes best explains the
development as it affects operating results. The Company has a conservative loss
reserving policy which, when coupled with a moderation of malpractice insurance
losses which began in approximately 1986 for the Company and across the
industry, has resulted in redundancies in liabilities larger than expected. The
table indicates that the redundancy in loss liabilities, which developed when
more actual results were known, has been significantly reduced from the high at
December 31, 1990. Loss and loss adjustment expense liabilities have not been
discounted in the Company's financial statements.
16
Development of Liability for Loss and Loss Adjustment Expense
(THOUSANDS OF DOLLARS)
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
-------------------------------------------------------------------------------------------------
Liability for unpaid loss
and loss adjustment expense $45,105 $60,133 $74,577 $89,630 $97,375 $100,167 $98,617 $105,589 $88,227 $96,424 $90,342
Liability reestimated as of:
1 year later 41,123 53,358 65,928 73,244 83,359 83,991 94,633 80,960 85,595 87,589
2 years later 36,346 46,297 51,379 62,056 64,876 74,883 69,490 75,364 76,365
3 years later 30,325 35,881 43,516 52,010 56,351 53,538 65,568 64,586
4 years later 24,378 33,448 35,753 44,582 42,075 52,833 56,426
5 years later 24,767 30,345 31,052 37,872 41,771 45,892
6 years later 23,722 26,818 29,052 37,617 39,519
7 years later 22,379 26,613 29,002 35,882
8 years later 22,176 26,620 28,724
9 years later 22,179 26,611
10 years later 22,176
Cumulative redundancy 22,929 33,522 45,853 53,748 57,856 54,275 42,191 41,003 11,862 8,844
Cumulative amount of
liability paid through:
1 year later 7,103 13,421 12,067 10,585 13,973 19,112 21,422 25,251 26,879 33,454
2 years later 16,443 19,787 19,043 21,890 28,643 32,798 37,498 42,685 46,925
3 years later 19,189 23,184 24,143 30,869 35,305 39,906 45,227 51,087
4 years later 20,817 25,238 26,241 35,015 37,624 42,752 46,226
5 years later 21,790 26,240 27,561 35,115 38,298 43,994
6 years later 21,902 26,555 27,660 35,187 39,505
7 years later 22,121 26,610 27,695 35,295
8 years later 22,176 26,610 27,695
9 years later 22,176 26,610
10 years later 22,176
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
NET PREMIUMS EARNED increased $2,248,000 in 1996 from 1995 while the number of
insured policyholders and rate levels were relatively the same. The primary
reasons for this increase are:
1. In 1996, $2,194,000 was received from the commutation of a reinsurance
treaty covering the years 1989 and 1990. This increases 1996 net
premiums. There was no similar item in 1995.
2. Several other reinsurance treaty adjustments involving prior years
retrospective reinsurance treaties resulted in reducing 1996 reinsurance
costs by $1,740,000, thereby increasing net premium earned. The years
involved ranged from 1987-1995. Most of these treaties originated with
IPMIT prior to its merger into MMIC on July 1, 1993.
3. Offsetting these two major reasons for the increase in 1996 net premiums
was one significant item which caused a decrease. The Company recorded an
increase of $2,901,000 in an Iowa development experience liability
account in 1996. A similar increase of $646,000 was recorded in 1995. The
difference between the 1996 and 1995 amounts decreased net premium
$2,255,000. Under terms of the MMIC/IPMIT July 1, 1993 merger agreement,
if the financial results for the years prior to 1993 are more favorable
than expected at December 31, 1992, that favorable development must be
returned to the prior IPMIT policyholders who renew coverage with MMIC.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
NET PREMIUMS EARNED increased $3,552,000 in 1995 from 1994 even though
policyholder rate levels remained the same and the number of policyholders
insured also remained stable. The primary reasons for this increase are:
1. A $5,200,000 retrospective premium credit was declared in 1995 for
Minnesota policyholders who were insured during 1992, 1993 and 1994 and
renew with the Company on January 1, 1996. A similar premium credit of
$6,000,000 was declared in 1994. The 1995 credit was lower by $800,000
and caused 1995 net premium to be higher by this amount. These premium
credits were paid to policyholders in early March of 1995 and 1996,
respectively.
2. The Company recorded an increase of $646,000 in an Iowa development
experience liability account in 1995. Under terms of the MMIC/IPMIT July
1, 1993 merger agreement, if the financial results for years prior to
1993 are more favorable than expected at December 31, 1992, that
favorable development must be returned to the prior IPMIT policyholders
who renew coverage with MMIC. The establishment of this liability reduces
earned premiums. A similar increase of $7,227,000 was recorded in 1994.
The difference between 1995 and 1994 increased net premium from 1994 to
1995 by $6,581,000.
3. Offsetting the two major reasons for the increase in 1995 net premiums,
which total $7,381,000, is one item which caused a decrease. In 1994, the
Company reduced its estimated unearned premium liability for free death,
disability and retirement reporting endorsements by $2,903,000 which
increases net premium. A further small decrease in this liability,
$310,000, was recorded in 1995. The difference, $2,593,000, causes 1995
net premium to be lower by that amount.
INVESTMENT INCOME has remained level during the last three years. Invested
assets as shown in the Balance Sheet at fair value increased by $3,317,000 from
December 31, 1995 to December 31, 1996. On a cost basis, the amount of
investments increased by $885,000.
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
REALIZED CAPITAL GAINS of $1,771,000 in 1996 and $1,646,000 in 1995 were due to
active management of both the bond and equity sections of the portfolio. During
1994, the same investment management philosophy, preservation of assets while
securing the highest total return possible, resulted in a net capital loss of
$455,000. The Company employs two outside professional advisors to manage the
portfolio, one to manage fixed income securities and a separate manager for
equities. The managers operate within the Company's adopted investment policy.
The Investment Committee meets with the outside managers approximately four
times per year.
OTHER UNDERWRITING EXPENSES decreased by $725,000 from 1995 to 1996. This
decrease was primarily due to a reallocation of costs under the Company's
amended management agreement for 1996 filed herein. In 1995 the majority of this
expense was included in other underwriting expense. The increase from 1994 to
1995 was primarily due to a $520,000 reduction in reinsurance ceding commission
received. The reduction occurred in connection with the Company increasing its
retention from $500,000 per claim to $750,000 per claim and changing the method
by which final reinsurance premium is determined for coverage up to $2,000,000
per claim.
INCOME TAXES. In 1996 the Company's book net income before taxes was $8,939,000.
Deductions from book income, primarily tax exempt interest income from municipal
bonds reduces income subject to tax. This current year's tax based on taxable
earnings was increased by a reduction in deferred taxes of $298,000 to arrive at
the income tax charged to operations as shown in the financial statements.
Deferred tax effects are provided whenever expense items are recorded in the
accompanying financial statements in a time period different from those in the
Company's tax returns.
NET INCOME for the Company during the last three years totaled $23,701,000 which
was added to retained earnings. As indicated in the discussion of loss and loss
adjustment expenses, a significant portion of net income for these years
resulted from the reversal of loss liabilities established in prior years.
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of Midwest Medical Insurance Holding
Company and Subsidiary are presented on pages 22 through 49 of this Annual
Report on Form 10-K following.
21
Midwest Medical Insurance Holding Company and Subsidiaries
Consolidated Financial Statements
Years ended December 31, 1996, 1995 and 1994
CONTENTS
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . .23
Consolidated Financial Statements
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . . .24
Consolidated Statements of Income. . . . . . . . . . . . . . . . . . . . . .25
Consolidated Statements of Changes in Other Shareholders' Equity . . . . . .26
Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . . . .28
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . 29
22
Report of Independent Auditors
Board of Directors
Midwest Medical Insurance Holding Company
and Subsidiaries
We have audited the accompanying consolidated balance sheets of Midwest Medical
Insurance Holding Company and Subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of income, changes in other shareholders'
equity, 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 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 provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Midwest Medical
Insurance Holding Company 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. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
In 1994, as discussed in Note 1 to the financial statements, the Company changed
its method of accounting for certain investments in debt and equity securities.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
January 31, 1997
23
Midwest Medical Insurance Holding Company and Subsidiaries
Consolidated Balance Sheets
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
DECEMBER 31
1996 1995
--------------------------
ASSETS
Investments (NOTE 4):
Fixed maturities at fair value
(cost: 1996--$179,979;
1995--$174,544) $183,561 $182,817
Equity securities at fair value
(cost: 1996--$20,237;
1995--$17,670) 38,001 28,311
Short-term 7,898 15,015
--------------------------
229,460 226,143
Cash - 704
Accrued investment income 2,778 2,875
Reinsurance recoverable (NOTE 8) 22,174 25,112
Other assets 6,451 7,446
Deferred income taxes (NOTE 7) 1,130 2,304
--------------------------
Total assets $261,993 $264,584
--------------------------
--------------------------
LIABILITIES, REDEEMABLE STOCK AND OTHER
SHAREHOLDERS' EQUITY
Liabilities:
Unpaid losses and loss adjustment expenses $110,037 $120,264
Unearned premiums 6,860 7,033
Retrospective premiums (NOTE 5) 10,838 10,864
Amounts due reinsurers 7,274 7,818
Other liabilities 8,102 8,338
--------------------------
Total liabilities 143,111 154,317
Redeemable stock (NOTES 3 AND 12):
Class A Common Stock--authorized 300,000 shares,
issued and outstanding 118,209 shares in 1996 and
116,251 shares in 1995 7,603 6,974
Class B Common Stock--authorized, issued
and outstanding 1 share 1 1
--------------------------
7,604 6,975
Other shareholders' equity (NOTES 3 AND 11) 111,278 103,292
--------------------------
Total liabilities, redeemable stock and other
shareholders' equity $261,993 $264,584
--------------------------
--------------------------
SEE ACCOMPANYING NOTES.
24
Midwest Medical Insurance Holding Company and Subsidiaries
Consolidated Statements of Income
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31
1996 1995 1994
--------------------------------------
Revenues:
Net premiums earned (NOTE 8) $32,046 $29,798 $26,246
Net investment income (NOTE 4) 12,212 12,211 11,995
Realized capital gains (losses) 1,771 1,646 (455)
Other 857 334 (31)
--------------------------------------
46,886 43,989 37,755
Losses and expenses:
Losses and loss adjustment
expenses (NOTES 6 AND 8) 32,257 37,560 11,334
Other underwriting expenses 5,690 6,415 5,509
--------------------------------------
37,947 43,975 16,843
--------------------------------------
Income before income taxes 8,939 14 20,912
Income taxes (benefit) (NOTE 7) 1,458 (1,711) 6,417
Net income $ 7,481 $ 1,725 $14,495
--------------------------------------
--------------------------------------
Income per common share and common
share equivalent $ 58.33 $ 13.74 $114.84
--------------------------------------
--------------------------------------
Number of shares used in per share
calculation 128,259 125,536 126,222
--------------------------------------
--------------------------------------
SEE ACCOMPANYING NOTES.
25
Midwest Medical Insurance Holding Company and Subsidiaries
Consolidated Statements of Changes in Other Shareholders' Equity
(IN THOUSANDS)
UNREALIZED
APPRECIATION
ON INVESTMENTS,
PAID-IN RETAINED NET OF
CAPITAL EARNINGS INCOME TAXES TOTAL
--------------------------------------------------------------------------------------
Balance at December 31, 1993,
as originally reported $12,770 $58,523 $ 2,690 $73,983
Adjustments for pooling of interests:
Equity of Medical Liability
Mutual Insurance Company 346 4,054 283 4,683
Pro forma distribution to holding
company from subsidiary for assumed
issuance of Class A Common Stock (415) - - (415)
--------------------------------------------------------------------------------------
Balance at December 31, 1993, restated 12,701 62,577 2,973 78,251
Increase in unrealized appreciation,
net of income tax, resulting from
initial adoption of SFAS No. 115 (NOTE 1) - - 7,762 7,762
Net income - 14,495 - 14,495
Net loss of Midwest Medical Insurance
Holding Company includable in Class A
Common Stock redemption value - 487 - 487
Dividend declared by subsidiary
payable to Midwest Medical Insurance
Holding Company - (1,181) - (1,181)
Decrease in unrealized appreciation,
net of income tax - - (10,379) (10,379)
Adjustment to pro forma distribution
to holding company from subsidiary to
reflect change in number of Class A
common shares issued and net redemption
value per share 33 - - 33
--------------------------------------------------------------------------------------
Balance at December 31, 1994 (carried
forward) 12,734 76,378 356 89,468
26
Midwest Medical Insurance Holding Company and Subsidiaries
Consolidated Statements of Changes in Other Shareholders' Equity (continued)
(IN THOUSANDS)
UNREALIZED
APPRECIATION
ON INVESTMENTS,
PAID-IN RETAINED NET OF
CAPITAL EARNINGS INCOME TAXES TOTAL
----------------------------------------------
Balance at December 31, 1994 (brought forward) $12,734 $76,378 $ 356 $ 89,468
Net income - 1,725 - 1,725
Net loss of Midwest Medical Insurance Holding
Company includable in Class A Common Stock
redemption value - 387 - 387
Dividend declared by subsidiary payable to
Midwest Medical Insurance Holding Company - (260) - (260)
Increase in unrealized appreciation, net of
income tax - - 11,936 11,936
Adjustment to pro forma combination of
Midwest Medical Insurance Holding Company
and Medical Liability Mutual Insurance
Company - (26) 7 (19)
Adjustment to pro forma distribution to holding
company from subsidiary to reflect change in
number of Class A common shares issued and
net redemption value per share 55 - - 55
----------------------------------------------
Balance at December 31, 1995 12,789 78,204 12,299 103,292
Net income - 7,481 - 7,481
Net income of Midwest Medical Insurance
Holding Company includable in Class A
Common Stock redemption value - (1,070) - (1,070)
Increase in unrealized appreciation, net of
income tax - - 1,575 1,575
----------------------------------------------
Balance at December 31, 1996 $12,789 $84,615 $13,874 $111,278
----------------------------------------------
----------------------------------------------
SEE ACCOMPANYING NOTES.
27
Midwest Medical Insurance Holding Company and Subsidiaries
Consolidated Statements of Cash Flows
(IN THOUSANDS)
YEAR ENDED DECEMBER 31
1996 1995 1994
----------------------------------
OPERATING ACTIVITIES
Net income $ 7,481 $ 1,725 $14,495
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Decrease (increase) in accrued investment income 97 (50) (76)
Decrease (increase) in reinsurance recoverable 2,938 (1,475) (5,324)
Decrease (increase) in other assets 1,015 (1,898) (1,690)
Deferred tax provision 298 482 426
(Decrease) increase in unpaid losses and loss
adjustment expenses (10,227) 9,297 (12,454)
Decrease in unearned premiums (173) (281) (3,917)
(Decrease) increase in retrospective premiums (26) (3,171) 11,255
Decrease in amounts due reinsurers (544) (1,287) (1,316)
(Decrease) increase in other liabilities (236) 469 (1,359)
Accretion of bond discount, net of premium
amortization (1,080) (1,087) (1,160)
Realized capital (gains) losses (1,771) (1,646) 455
Compensation expense for vested Class A
common shares 156 193 310
----------------------------------
(2,072) 1,271 (355)
INVESTING ACTIVITIES
Purchases of fixed maturity investments and equity
securities (75,684) (56,345) (51,445)
Sales of fixed maturity investments and equity
securities 54,293 52,545 44,616
Calls and maturities of fixed maturity investments 16,250 7,535 10,859
Net sales (purchases) of short-term investments 7,117 (5,261) (2,326)
----------------------------------
1,976 (1,526) 1,704
FINANCING ACTIVITIES
Redemption of Class A Common Stock (608) (829) (840)
----------------------------------
(Decrease) increase in cash (704) (1,084) 509
Cash at beginning of year 704 1,788 1,279
----------------------------------
Cash at end of year $ - $ 704 $ 1,788
----------------------------------
----------------------------------
SEE ACCOMPANYING NOTES.
28
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1996
1. ACCOUNTING POLICIES
ORGANIZATION AND OPERATIONS
The Minnesota Medical Insurance Exchange (Exchange) began operations in October
1980 as a reciprocal or inter-insurance exchange organized under Chapter 71A of
the Minnesota Statutes. Minnesota Medical Management, Inc. (MMMI) was the
Exchange's attorney-in-fact and was responsible for management of the Exchange.
On November 30, 1988, the Exchange was reorganized into a stock insurance
company, Midwest Medical Insurance Company (MMIC), under the statutes of the
State of Minnesota. Concurrently, MMMI merged with the Midwest Medical Insurance
Holding Company (MMIHC) which then acquired all outstanding shares of the
reorganized stock company.
Effective July 1, 1993, MMIC merged with Iowa Physicians Mutual Insurance Trust
(IPMIT), a physician-owned professional liability insurance company providing
insurance coverage to Iowa physicians. As provided for in the agreement and plan
of merger, IPMIT was merged into MMIC. The merger was accounted for as a
pooling-of-interests and, accordingly, the consolidated financial statements
include the combined financial position and results of operations of MMIHC and
IPMIT for all periods presented.
During 1995, MMIHC formed MMIHC Services, Inc. to provide agency services for
the distribution of complementary insurance products and services to physicians,
clinics and hospitals.
Effective June 5, 1996, MMIC merged with Medical Liability Mutual Insurance
Company of Nebraska (MLM), a physician-owned professional liability insurance
company providing insurance coverage to Nebraska physicians. As provided for in
the agreement and plan of merger, MLM was merged into MMIC. The merger was
accounted for as a pooling-of-interests and, accordingly, the consolidated
financial statements include the combined financial position and results of
operations of MMIHC and MLM for all periods presented (see Note 2).
29
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
The holding company provides management and administrative services to the
insurance company for a fee generally equal to the cost of services provided
plus ten percent. The insurance company provides professional liability
insurance to physicians in Minnesota, Iowa, Nebraska, North Dakota and South
Dakota.
Insurance policies issued by MMIC are on a "claims made" basis and provide
coverage for the policyholder for claims first made against the policyholder and
reported to MMIC during the policy period for claims which occurred on or after
the retroactive date stated in the policy.
MMIC provides, upon payment of an additional premium, a reporting endorsement
which extends the period in which claims otherwise covered by the "claims made"
policy may be reported to MMIC. In the event of death or permanent disability of
a policyholder, the reporting endorsement is issued without additional premium.
Upon retirement, as defined in the policy, a policyholder with at least five
years of consecutive coverage with MMIC is eligible for a credit toward the
additional premium for the reporting endorsement.
Prior acts coverage may be purchased by policyholders who were previously
insured under a "claims made" policy with another professional liability insurer
for an additional premium at the option of the insured in lieu of purchasing
reporting endorsement coverage from the previous insurer.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of MMIHC and its
wholly-owned subsidiaries, MMIC and MMIHC Services, Inc. All transactions
between MMIHC and its subsidiaries have been eliminated in consolidation with
the exception of the distribution of capital to MMIHC by MMIC in the form of
dividends. From time to time the Board of Directors of MMIC may declare
dividends payable to MMIHC in lieu of adjusting the management fee rate.
Hereafter, MMIHC, MMIC and MMIHC Services, Inc. shall be collectively referred
to as the Company unless the reference pertains to a specific entity.
30
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
BASIS OF PRESENTATION
The consolidated financial statements have been presented in conformity with
generally accepted accounting principles, which differ in certain respects from
statutory accounting practices followed by MMIC in reporting to the Department
of Commerce of the State of Minnesota (see Note 11).
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses, as
well as disclosure of contingent assets and liabilities at the date of the
financial statements. Actual results could differ from those estimates.
INVESTMENTS
The Company manages its investment portfolio to achieve its long-term investment
objective of providing for the financial stability of the Company through
preservation of assets and maximization of total portfolio return. Although
management believes the Company has the ability to hold its fixed maturity
investment portfolio to maturity, these investments are classified as "available
for sale" as management may take advantage of opportunities to increase total
return through sales of selected securities in response to changing market
conditions.
On January 1, 1994, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". Consistent with management's classification of its investments in
debt and equity securities as available for sale, such investments are carried
at fair value with unrealized holding gains and losses reflected as a separate
component of equity, net of applicable deferred taxes. As a result of the
initial adoption of SFAS No. 115, the balance of redeemable stock and other
shareholders' equity increased by $8,000 and $7,762,000, respectively, on
January 1, 1994.
31
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
Prior to January 1, 1994, fixed maturity investments were carried at the lower
of aggregate amortized cost or market. Unrealized losses on the fixed maturity
portfolio are recorded as a component of equity, net of applicable deferred
taxes. Equity securities are recorded at market. Unrealized gains and losses are
reported as a component of equity, net of applicable deferred taxes.
Fair values are based on quoted market prices, where available. For fixed
maturity investments not actively traded, fair values are estimated using values
obtained from independent pricing services. Short-term investments are
principally money market funds backed by U.S. government securities and are
recorded at cost which approximates fair value.
Realized gains and losses on sales of investments are reported on a pre-tax
basis as a component of income and are determined on the specific identification
basis.
LOSSES AND LOSS ADJUSTMENT EXPENSES
The liability for losses and loss adjustment expenses represents an estimate of
the ultimate cost of all such amounts which are unpaid at the balance sheet
dates. The liability is based on both case-by-case estimates and statistical
analysis and projections using the historical loss experience of MMIC, and gives
effect to estimates of trends in claim severity and frequency. These estimates
are continually reviewed and, as adjustments become necessary, such adjustments
are included in current operations. MMIC believes that the estimate of the
liability for losses and loss adjustment expenses is reasonable.
PREMIUMS
Premiums received are recorded as earned ratably over the lives of the policies
to which they apply. A portion of premiums received is deferred to recognize the
Company's obligation to provide reporting endorsement coverage without
additional premium upon the death, disability or retirement of policyholders.
This amount is recorded as an unearned premium reserve and represents the
actuarially determined present value of future benefits to be provided less the
present value of future revenues to be received.
32
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
The Company has a retro premium program whereby physicians may receive credits
against future premiums based upon loss experience of the Company. Amounts to be
returned under the program are accrued when approved by the Board of Directors
and reflected as a reduction in net premium earned.
REINSURANCE
The Company cedes reinsurance in order to reduce its liability on individual
risks and to enable it to write business at limits it otherwise would be unable
to accept. All reinsurance contracts are excess-of-loss contracts which
indemnify the Company for losses in excess of a stated retention limit up to the
policy limits.
Reinsurance receivables and recoverables and prepaid reinsurance premiums are
reported as assets and reserve liabilities are reported gross of reinsurance
credits.
UNDERWRITING EXPENSES
Underwriting costs are expensed when incurred. Due to the nature of its
operations, MMIC does not pay significant amounts in commissions.
INCOME TAXES
The Company uses the asset and liability method of accounting for income taxes.
Deferred income tax assets or liabilities are recognized for the temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and amounts used for income tax purposes.
EARNINGS PER SHARE
Earnings per share is computed using weighted average issued and outstanding
Class A common shares as well as Class A common share equivalents. All earned
but unissued shares of Class A Common Stock (see Note 3) are considered common
share equivalents for purposes of the earnings per share computation.
33
MIDWEST MEDICAL INSURANCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain amounts in the prior years' financial statements have been reclassified
to conform with the 1996 presentation.
2. BUSINESS COMBINATION
Effective June 5, 1996, MLM policyholders received, in exchange for their
ownership interests, 5,447 shares of MMIHC Class A Common Shares which was
computed by dividing the December 31, 1995 GAAP basis capital and surplus of
MLM by the net book value per share of MMIHC. These shares were distributed
to the MLM policyholders ratably in proportion to their ownership of shares
of MLM Common Stock. To maintain the net redemption value of the Class A
Common Shares (see Note 3), a dividend in the amount of $327,000 was paid by
MMIC to MMIHC at the time of the merger. Net premiums earned, losses and loss
adjustment expenses and net income for the individual entities for the period
ended December 31, 1995 were as follows (in thousands):
MMIHC MLM ADJUSTMENTS COMBINED
----------------------------------------
Net premium earned $27,981 $1,817 $ - $29,798
Losses and loss adjustment expenses 35,472 2,088 - 37,560
Net income 1,425 (172) 472 1,725
In order to restate the components of shareholders' equity and determine the
restated income per common share and common share equivalent, management
computed the number of shares that would have been issued to MLM
policyholders as of December 31, 1995, 1994 and 1993 as if the effective date
of the merger had been as of those dates, respectively. Following is that
computation (dollars in thousands, except for share and per share amounts).
DECEMBER 31
1995 1994 1993
----------------------------
Redeemable stock and other shareholders'
equity of MMIHC and subsidiaries $104,667 $92,365 $81,173
Divided by MMIHC Class A Common Shares outstanding 110,804 111,067 108,945
----------------------------
Net book value per share $944.61 $831.62 $745.08
----------------------------
----------------------------
34
MIDWEST MEDICAL INSURANCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. BUSINESS COMBINATION (CONTINUED)
DECEMBER 31
1995 1994 1993
----------------------------
Capital and surplus of MLM $5,145 $4,814 $4,683
Divided by MMIHC net book value per share $944.61 $831.62 $745.08
----------------------------
Shares to be issued to MLM policyholders 5,447 5,788 6,285
Multiplied by net redemption value of MMIHC
Class A Shares $60.00 $66.00 $66.00
----------------------------
Dividend from MMIC to MMIHC to maintain
pre-merger net redemption value $327 $382 $415
----------------------------
----------------------------
A provision of the agreement and plan of merger requires that any favorable
development of certain pre-merger liabilities of MLM be paid to the former MLM
policyholders who remain active MMIC insureds as of the date of payment through
a retrospective premium credit. The agreement further stipulates that any
amounts due under this provision must be settled no later than June 5, 2001. As
of December 31, 1996, there has been no favorable development and therefore
there is no accrual related to this provision.
3. REDEEMABLE STOCK
Effective November 30, 1988, MMIC policyholders earn Class A Common Shares for
each month of service pursuant to a stock allocation formula based on
underwriting risk classification. Shares earned by new policyholders are not
issued until the end of five years of continuous coverage under an MMIC policy
(the vesting date). The Company does not record any amounts related to unissued
Class A Common Shares. At the vesting date, the issued shares are recorded at
the then current redemption value (see Note 12).
The Company accounts for these shares by increasing Common Stock by the par
value ($.01 per share) of the newly issued shares, increasing paid-in capital by
the excess of the redemption value over par and charging stock compensation
expense for the full redemption value. Once vested, policyholders will continue
to earn shares for each month they remain insured with MMIC according to the
stock allocation formula. The Company accounts for additional shares issued to
vested policyholders by increasing Common Stock for the par value of the shares
and decreasing retained earnings by the same amount.
35
MIDWEST MEDICAL INSURANCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. REDEEMABLE STOCK (CONTINUED)
MMIC policyholders whose initial effective date was on or before the November
30, 1988 reorganization, IPMIT policyholders whose initial effective date was on
or before December 31, 1992 and MLM policyholders whose initial effective date
was on or before December 31, 1995 became fully vested upon initial receipt of
their shares without regard to their length of coverage. These policyholders
will continue to earn and receive additional Class A shares for each month they
remain insured with MMIC. The Company accounts for these shares similar to
additional shares issued to other fully vested shareholders.
In accordance with the Articles of Incorporation and By-laws of MMIHC, only
active policyholders of MMIC may own shares of Class A Common Stock of MMIHC. At
each meeting of the shareholders, every Class A shareholder having the right to
vote shall be entitled to one vote, either in person or by proxy, regardless of
the number of Class A shares held by the individual.
Class A shareholders are required to redeem their shares with MMIHC upon
termination as policyholders of MMIC. The net redemption value (NRV) of the
shares is equal to the net book value of MMIHC, excluding the amount of net book
value that is attributable to MMIC, divided by the number of outstanding Class
A Common Shares of MMIHC at the semi-annual valuation dates of June 30 and
December 31 of each year. The amount paid upon redemption is the redemption
value determined at the most recent semi-annual valuation.
MMIHC has issued one share of Class B voting stock which carries with it the
right to elect the Board of Directors of MMIHC. The voting rights are currently
exercised by the Minnesota Medical Association and the Iowa Medical Society. A
majority of the Class A shareholders may at any time, by a two-thirds vote,
elect to redeem the Class B share at cost.
The schedule which follows has been restated for the merger of MMIC with MLM.
The schedule was further restated in that redemption of shares due to
policyholder termination has been changed for all periods to reclassify a pro
rata portion of each redemption to paid-in capital with the remainder to
retained earnings. As originally presented in prior years, each redemption was
charged entirely to retained earnings.
36
MIDWEST MEDICAL INSURANCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. REDEEMABLE STOCK (CONTINUED)
Following is the detail of changes in redeemable stock for the three years ended
December 31, 1996 (in thousands, except for share and
per share amounts):
UNREALIZED
APPRECIATION
(DEPRECIATION)
CLASS A COMMON STOCK CLASS B MMIHC MMIHC ON INVESTMENTS,
-------------------- COMMON PAID-IN RETAINED NET OF INCOME
SHARES AMOUNT STOCK CAPITAL EARNINGS TAXES TOTAL
----------------------------------------------------------------------------------
Balance at January 1, 1994, as originally
reported with redemptions reclassified 108,945 $1 $1 $3,380 $3,808 $- $7,190
Pro forma issuance of shares to MLM
policyholders as if the merger with MMIC
became effective on January 1, 1994 (NOTE 2) 6,285 415 415
----------------------------------------------------------------------------------
Balance at January 1, 1994, restated 115,230 1 1 3,795 3,808 - 7,605
Unrealized appreciation, net of income tax,
resulting from initial adoption of
SFAS No. 115 (NOTE 1) 8 8
Redemption of shares due to policyholder
terminations by effective date:
January 1, 1994 to June 30, 1994;
NRV of $66.00 (7,974) (247) (279) (526)
July 1, 1994 to December 31, 1994;
NRV of $67.04 (4,666) (1) (148) (165) (314)
Issuance of shares to vested policyholders 10,140 1 (1) -
Initial issuance of shares to policyholders
upon vesting 4,622 310 310
Dividend receivable from Midwest Medical
Insurance Company 1,181 1,181
Net loss of Midwest Medical Insurance
Holding Company includable in Class A
Common Stock redemption value (487) (487)
Change in unrealized appreciation,
net of income tax (32) (32)
Adjustment to pro forma issuance of shares
to MLM policyholders to adjust
effective date to December 31, 1994 (497) (33) (33)
----------------------------------------------------------------------------------
Balance at December 31, 1994 (carried forward) 116,855 1 1 4,858 2,876 (24) 7,712
37
MIDWEST MEDICAL INSURANCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. REDEEMABLE STOCK (CONTINUED)
UNREALIZED
APPRECIATION
(DEPRECIATION)
CLASS A COMMON STOCK CLASS B MMIHC MMIHC ON INVESTMENTS,
-------------------- COMMON PAID-IN RETAINED NET OF INCOME
SHARES AMOUNT STOCK CAPITAL EARNINGS TAXES TOTAL
----------------------------------------------------------------------------------
Balance at December 31, 1994 (brought forward) 116,855 $1 $1 $4,858 $2,876 $(24) $7,712
Redemption of shares due to policyholder
terminations by effective date:
January 1, 1995 to June 30, 1995;
NRV of $66.00 (8,017) (323) (207) (530)
July 1, 1995 to December 31, 1995;
NRV of $67.65 (4,407) (1) (181) (117) (299)
Issuance of shares to vested policyholders 9,271 1 (1) -
Initial issuance of shares to policyholders
upon vesting 2,890 193 193
Dividend receivable from Midwest Medical
Insurance Company 260 260
Net loss of Midwest Medical Insurance
Holding Company includable in Class A
Common Stock redemption value (387) (387)
Change in unrealized appreciation,
net of income tax 81 81
Adjustment to pro forma issuance of shares
to MLM policyholders to adjust effective
date to December 31, 1995 (341) (55) (55)
----------------------------------------------------------------------------------
Balance at December 31, 1995 116,251 1 1 4,752 2,164 57 6,975
Redemption of shares due to policyholder
terminations by effective date:
January 1, 1996 to June 30, 1996;
NRV of $60.00 (6,277) (1) (259) (117) (377)
July 1, 1996 to December 31, 1996;
NRV of $57.84 (3,995) (159) (72) (231)
Issuance of shares to vested policyholders 9,540 1 (1) -
Initial issuance of shares to policyholders
upon vesting 2,690 156 156
Net income of Midwest Medical Insurance
Holding Company includable in Class A
Common Stock redemption value 1,070 1,070
Change in unrealized appreciation,
net of income tax 11 11
----------------------------------------------------------------------------------
Balance at December 31, 1996 118,209 $1 $1 $4,490 $3,044 $68 $7,604
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
38
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. INVESTMENTS
Components of net investment income are summarized as follows (in thousands):
1996 1995 1994
--------------------------------
Fixed maturities $11,561 $11,716 $11,953
Equity securities 380 338 288
Short-term investments 904 923 487
--------------------------------
12,845 12,977 12,728
Investment expenses (633) (766) (733)
--------------------------------
$12,212 $12,211 $11,995
--------------------------------
--------------------------------
The cost (amortized cost for fixed maturities) and fair value of available for
sale investments are as follows (in thousands):
DECEMBER 31, 1996
-----------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-----------------------------------------------
Fixed maturities:
MMIHC:
Industrial and other $ 1,031 $ 4 $ (2) $ 1,033
MMIC:
United States Government 92,365 2,075 (797) 93,643
State and other
political subdivisions 57,968 1,885 (45) 59,808
Industrial and other 28,615 648 (186) 29,077
-----------------------------------------------
Total $179,979 $ 4,612 $(1,030) $183,561
-----------------------------------------------
-----------------------------------------------
Equity securities $ 20,237 $ 18,183 $ (419) $ 38,001
-----------------------------------------------
-----------------------------------------------
39
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. INVESTMENTS (CONTINUED)
DECEMBER 31, 1995
---------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------------------------------------------------
Fixed maturities:
MMIHC:
Industrial and other $ 847 $ 4 $ - $ 851
MMIC:
United States
Government 96,826 4,933 (179) 101,580
State and other political
subdivisions 64,894 2,795 (41) 67,648
Industrial and other 11,977 761 - 12,738
---------------------------------------------------
Total $174,544 $ 8,493 $ (220) $182,817
---------------------------------------------------
---------------------------------------------------
Equity securities $ 17,670 $ 10,825 $ (184) $ 28,311
---------------------------------------------------
---------------------------------------------------
The components of the unrealized appreciation on available for sale securities
as of December 31 are as follows (in thousands):
1996 1995
---------------------------------------------
MMIHC MMIC MMIHC MMIC
---------------------------------------------
Fixed maturities:
Gross unrealized gain $4 $ 4,608 $4 $ 8,489
Gross unrealized losses (2) (1,028) - (220)
Equity securities:
Gross unrealized gains - 18,183 - 10,825
Gross unrealized losses - (419) - (184)
---------------------------------------------
2 21,344 4 18,910
Deferred income taxes - (7,470) - (6,611)
---------------------------------------------
$2 $13,874 $4 $12,299
---------------------------------------------
---------------------------------------------
40
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. INVESTMENTS (CONTINUED)
In addition to the unrealized gains and losses per the above schedule, MMIHC
has unrealized gains on certain investments in mutual funds. The mutual fund
assets are classified as other assets in the consolidated balance sheet and
are held to coordinate with the Supplemental Executive Retirement Plan
obligation (Note 10). At December 31, 1996 and 1995, respectively, gross
unrealized gains related to these assets were $103,000 and $84,000. Deferred
taxes related to these unrealized gains were $37,000 and $31,000,
respectively.
The amortized cost and market value of fixed maturities at December 31, 1996, by
contractual maturity, are shown below (in thousands). 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.
AMORTIZED MARKET
COST VALUE
-----------------------------
Due in one year or less $ 7,477 $ 7,514
Due after one year through five years 79,456 81,736
Due after five years through ten years 65,380 66,576
Due after ten years 27,666 27,735
-----------------------------
$ 179,979 $ 183,561
-----------------------------
-----------------------------
Proceeds from sales of available for sale investments and the related gross
realized gains and losses are as follows (in thousands):
GROSS GROSS
PROCEEDS REALIZED REALIZED
FROM SALES GAINS LOSSES
--------------------------------------
Year ended December 31, 1996:
Fixed maturities $46,735 $ 803 $(214)
Equity securities 7,558 1,347 (165)
Year ended December 31, 1995:
Fixed maturities 43,387 1,012 (254)
Equity securities 9,158 1,356 (468)
Year ended December 31, 1994:
Fixed maturities 37,647 509 (652)
Equity securities 6,969 472 (784)
41
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. INVESTMENTS (CONTINUED)
Net unrealized appreciation of fixed maturities (decreased) increased by
$(4,691,000), $11,630 and $(15,610,000) and net unrealized appreciation of
equity securities increased by $7,123,000, $6,078,000 and $232,000 for the
years ended December 31, 1996, 1995 and 1994, respectively.
5. RETROSPECTIVE PREMIUMS
The components of retrospective premiums at December 31 are as follows (in
thousands):
1996 1995
-------------------------------
Retrospective premium credits declared:
Minnesota policyholders $ 4,603 $ 5,200
Iowa policyholders active at date of merger
and renewing in 1995 2,500 2,300
Favorable development on pre-merger IPMIT
liabilities not yet approved for credit 3,735 3,364
-------------------------------
$ 10,838 $ 10,864
-------------------------------
-------------------------------
A provision of the agreement and plan of merger between IPMIT and the Company
requires that any favorable development of certain pre-merger liabilities of
IPMIT be paid to the former IPMIT policyholders who remain active MMIC
insureds as of the date of payment through a retrospective premium credit.
The agreement further stipulates that any amounts due under this provision
must be settled no later than December 31, 1998. Actual payments of
$2,330,000 and $3,017,000 were made to former IPMIT policyholders in 1996 and
1995, respectively. Actual retrospective premium credits applied to Minnesota
policyholder accounts in 1996 and 1995 were $5,198,000 and $6,076,000,
respectively.
42
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
The reconciliation of the liability for unpaid losses and loss adjustment
expenses is as follows (in thousands):
1996 1995 1994
---------------------------------------
Balance as of January 1, net of
reinsurance recoverables $ 96,424 $ 88,227 $105,589
Incurred related to:
Current year 41,101 39,847 36,275
Prior years (8,844) (2,287) (24,941)
---------------------------------------
Total incurred 32,257 37,560 11,334
Paid related to:
Current year 4,885 2,484 3,445
Prior years 33,454 26,879 25,251
---------------------------------------
Total paid 38,339 29,363 28,696
---------------------------------------
Balance as of December 31, net of
reinsurance recoverables 90,342 96,424 88,227
Reinsurance recoverables at December 31 19,695 23,840 22,740
---------------------------------------
Balance as of December 31, gross $110,037 $120,264 $110,967
---------------------------------------
---------------------------------------
The Company continually evaluates emerging trends in the development of loss
liabilities including the trends related to the pre-merger IPMIT business. Based
on this analysis, management periodically adjusts their estimates of ultimate
losses. See Note 5 regarding retrospective premium credits paid and accrued.
43
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. INCOME TAXES
Components of income taxes are as follows (in thousands):
1996 1995 1994
---------------------------------------
Current provision (benefit) $1,160 $(2,193) $5,991
Deferred tax provision 298 482 426
---------------------------------------
$1,458 $(1,711) $6,417
---------------------------------------
---------------------------------------
The Company's income taxes differ from the federal statutory rate applied to
income before tax as follows (in thousands):
1996 1995 1994
---------------------------------------
Income before tax at the federal
statutory rate of 35% $3,129 $ 5 $7,319
Tax-exempt income (net of proration
adjustment) (1,452) (1,090) (1,104)
State income taxes, net of federal tax
benefit 50 (42) 603
Proceeds on life insurance (368) - -
Benefit for prior year income taxes - (660) (316)
Other 99 76 (85)
---------------------------------------
$1,458 $(1,711) $6,417
---------------------------------------
---------------------------------------
The deferred income tax (benefit) provision includes the following differences
between financial and income tax reporting (in thousands):
1996 1995 1994
---------------------------------------
Discounting of post-1986 unpaid losses
and loss adjustment expenses $1,190 $232 $1,540
Liabilities not currently deductible (274) 481 (1,571)
Unearned premiums 6 22 277
Alternative minimum tax carryforwards (496) - -
Other (128) (253) 180
---------------------------------------
$ 298 $482 $ 426
---------------------------------------
---------------------------------------
44
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. INCOME TAXES (CONTINUED)
The Company made income tax payments of $3,260,000, $832,000 and $8,065,000, in
1996, 1995 and 1994, respectively.
The components of the net deferred income tax asset as of December 31 are as
follows (in thousands):
1996 1995
-------------------------
Deferred tax assets:
Unpaid losses and loss adjustment expenses $5,319 $6,509
Liabilities not currently deductible 2,311 2,037
Unearned premiums 534 540
Alternative minimum tax credit 496 -
Other 510 442
-------------------------
9,170 9,528
Deferred tax liabilities:
Unrealized gains (7,507) (6,642)
Other (533) (582)
-------------------------
(8,040) (7,224)
-------------------------
$1,130 $2,304
-------------------------
-------------------------
Management has determined that no valuation allowances were necessary for
unrealizable portions of deferred tax assets. This was supported primarily
through the presence of taxable income in carryback years and reversals of
existing temporary differences which provide taxable income in future years. A
portion of the deferred tax assets was supported through reliance on available
tax planning strategies which could be implemented at no cost.
8. REINSURANCE
To reduce overall risk, including exposure to large losses, the Company
participates in various reinsurance programs. MMIC would only become liable for
losses in excess of stipulated amounts in the event that any reinsuring company
were unable to meet its obligations under the existing agreement. Management is
not aware of any such default at December 31, 1996. Reinsurance recoverables on
paid and unpaid losses of $17,485,000 and $18,967,000 are associated with a
single reinsurer at December 31, 1996 and 1995, respectively.
45
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. REINSURANCE (CONTINUED)
MMIC is authorized to issue policies with limits not to exceed $5,000,000 for
each claim and $5,000,000 in the aggregate under each policy in any one policy
year. Limits in excess of $5,000,000 for each claim and $5,000,000 annual
aggregate are available to physicians and clinics through reinsurance handled by
MMIC. The Company generally retains the first $750,000 of each claim and
reinsures the remainder. In years prior to 1995, retention levels for a portion
of MMIC's business varied from $200,000 to $500,000.
Total ceded reinsurance premiums, before the effects of treaty commutations, for
the years ended December 31, 1996, 1995 and 1994 were $6,416,000, $7,544,000 and
$8,704,000, respectively. Loss and loss adjustment expenses incurred are net of
applicable reinsurance of $2,459,000, $7,873,000 and $8,025,000 for the years
ended December 31, 1996, 1995 and 1994, respectively.
In 1996, the Company commuted reinsurance treaties covering the period January
1, 1989 through December 31, 1990. Net premiums recovered as a result of these
commutations of $2,194,000 have been included in net premiums earned in 1996.
9. OTHER COMMITMENTS
In the normal course of claim settlement, MMIC negotiates structured settlements
including the purchase of annuities from life insurance companies with an A+
rating from A.M. Best (an industry rating organization) at the date of issue and
a minimum of $100 million in surplus. These annuities guarantee a stream of
payments to the claimant holding the annuity. The majority of these settlements
have been assigned to the life insurance company which releases MMIC from any
future contractual liability to the claimant. MMIC and its reinsurers could only
become liable for ultimate settlement of those claims which have not been
assigned. At December 31, 1996 and 1995, respectively, non-assigned structured
settlements guaranteed $5,926,000 and $4,087,000 of payments under annuity
contracts for which MMIC and its reinsurers paid $3,208,000 and $1,833,000. In
the event that the insurance company issuing the annuity was unable to meet its
obligation under the terms provided, MMIC would be liable for the ultimate
settlement.
46
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. BENEFIT PLANS
The Company has a non-contributory defined contribution pension plan covering
substantially all employees. Contributions to the plan are based upon each
covered employee's salary. The Company also sponsors a 401(k) plan covering
substantially all employees and provides a fifty percent match on employee
contributions subject to certain limitations. Total contributions charged to
expense for the years ended December 31, 1996, 1995 and 1994 were $371,000,
$294,000 and $283,000, respectively.
The Company provides an unfunded Supplemental Executive Retirement Plan (SERP)
which is a non-qualified, defined benefit retirement plan covering certain
Company officers. Benefits are based upon years of service and compensation.
Although the plan is technically unfunded, the Company has purchased life
insurance contracts for each officer, the cash value of which is designed to
coordinate with the projected benefit payments under the SERP. The cash value of
these contracts is included in other assets. The net periodic pension cost for
this plan was $323,000, $292,000 and $266,000 for the years ended December 31,
1996, 1995 and 1994, respectively. The liability recognized in the consolidated
balance sheets at December 31, 1996 and 1995 related to this plan was $1,909,000
and $1,643,000, respectively.
The Company also provides medical benefits to retirees through a defined benefit
post-retirement plan which covers substantially all employees. The net periodic
post-retirement benefit cost for the years ended December 31, 1996, 1995 and
1994 was $30,000, $25,000 and $38,000, respectively. As of December 31, 1996 and
1995, the net post-retirement benefit plan asset recognized in the consolidated
balance sheets was $12,000 and $116,000, respectively. The plan is funded
through contributions to mutual funds.
47
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. RECONCILIATION WITH STATUTORY ACCOUNTING PRINCIPLES
The following is a reconciliation of net income and shareholders' equity under
generally accepted accounting principles with that reported for MMIC on a
statutory basis (in thousands):
Net Income
YEAR ENDED DECEMBER 31
1996 1995 1994
----------------------------
As reported under generally
accepted accounting principles $7,481 $1,725 $14,495
MMIHC (income) loss (1,070) 387 487
-----------------------------
On the basis of generally
accepted accounting principles, MMIC only 6,411 2,112 14,982
Additions (deductions):
Deferred income taxes 445 442 524
Other 123 (215) -
-----------------------------
On the basis of statutory accounting
principles $6,979 $2,339 $15,506
-----------------------------
-----------------------------
Shareholders' Equity
DECEMBER 31
1996 1995 1994
----------------------------------
As reported under generally accepted
accounting principles $111,278 $103,292 $89,468
Additions (deductions):
Deferred income taxes (590) (2,015) (8,875)
Unrealized (gain) loss on fixed
maturities (3,580) (8,269) 3,771
Pro forma equity distributed to MMIHC
in connection with pooling - 327 382
Other (41) (14) 157
----------------------------------
On the basis of statutory accounting
principles $107,067 $ 93,321 $84,903
----------------------------------
----------------------------------
48
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. RECONCILIATION WITH STATUTORY ACCOUNTING PRINCIPLES (CONTINUED)
The equity of MMIHC, exclusive of the carrying value of its investment in MMIC,
is subject to redemption and therefore reported outside of shareholders' equity
under the caption redeemable stock. As a result, consolidated other
shareholders' equity as reported on the balance sheets represents equity of MMIC
only under generally accepted accounting principles.
Under Minnesota insurance statutes, MMIC is required to maintain statutory
surplus in excess of ten times its per occurrence reinsurance retention limit.
The minimum level is $7,500,000 for 1996 and 1995.
12. NET REDEMPTION VALUE
The net redemption value per share of the Class A common shares was as follows:
CLASS A NET REDEMPTION
MMIHC COMMON SHARES VALUE PER
NET EQUITY OUTSTANDING SHARE
---------------------------------------------
(000'S)
December 31, 1992 $7,230 110,333* $65.53
---------- ----------
---------- ----------
December 31, 1993 $7,605 115,230* $66.00
---------- ----------
---------- ----------
December 31, 1994 $7,712 116,855* $66.00
---------- ----------
---------- ----------
December 31, 1995 $6,975 116,251* $60.00
---------- ----------
---------- ----------
December 31, 1996 $7,604 118,209* $64.33
---------- ----------
---------- ----------
* Includes pro forma shares related to merger.
49
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
50
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The names and ages of the directors of MMIHC and MMIC, the year each first
became a director, and the number of Class A Common Shares owned by each as of
December 31, 1996, are as follows:
CLASS A
COMMON
DIRECTOR PRINCIPAL SHARES
NAME AGE SINCE OCCUPATION OWNED
- -------------------------------------------------------------------------------
Michael Abrams 35 1996 Exec V.P. Iowa Medical Society -
John R. Balfanz, M.D. 51 1995 Physician 12
Gail P. Bender 49 1996 Physician 20
James R. Bishop, M.D. 50 1994 Physician -
David P. Bounk 50 1995 President and CEO -
E. Duane Engstrom, M.D.
Secretary 65 1986 Family Physician 33
William W. Eversman, M. 58 1993 Physician 51
Roger L. Frerichs, M.D. 57 1988 Surgeon 80
Richard Geier, Jr., M.D. 56 1995 Physician -
Anthony C. Jaspers, M.D. 49 1996 Physician 47
Wayne F. Leebaw, M.D. 53 1994 Physician 22
Steven A. McCue, M.D. 55 1995 Physician 113
Harold W. Miller, M.D. 49 1996 Physician 25
Anton S. Nesse, M.D. 58 1989 Radiologist 51
Mark D. Odlund, M.D. 44 1996 Physician 75
G. William Orr, M.D. 61 1996 Physician 43
Norman Rinderknecht, M.D.62 1993 Physician 87
Paul S. Sanders, M.D. 52 1984 CEO-MN Medical Assoc. -
Richard D. Schmidt, M.D. 53 1990 Physician 139
Mark B. Siegel, M.D. 49 1989 Surgeon 64
Andrew J. K. Smith, M.D. 54 1990 Neurological Surgeon 181
G. David Spoelhof, M.D. 43 1989 Physician 43
R. Bruce Trimble, M.D.
Vice Chair of Board 56 1993 Physician 20
The Bylaws of MMIHC provide that MMIHC's Board of Directors shall include the
following: (1) up to 20 physicians divided into three classes and elected for
staggered three-year terms; (2) for as long as the Class B Common Share is
outstanding, the Chief Executive Officer of the MMA and the Executive Vice
President of the IMS, both of whom shall be ex-officio directors;(3) the
President of MMIHC as an ex-officiodirector; and (4) such additional
ex-officio and
51
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(CONTINUED)
advisory members as the Board of Directors may determine. At least two-thirds of
the voting members of the Board of Directors must be physician directors. All
physician directors must be members of a state medical association and insured
by MMIC. The MMA, which has the exclusive right to elect directors, has agreed
to elect the directors nominated by a committee of the Board of Directors.
The Bylaws of MMIC provide that the directors of MMIHC shall also serve as the
directors of MMIC, with the exception of any outside directors of MMIHC. Outside
directors are persons who are not policyholders of MMIC or members of any state
medical society. There are currently no outside directors of MMIHC so the Boards
of MMIHC and MMIC are identical at this time.
Pursuant to the merger with IPMIT, the Bylaws of MMIHC were amended to provide
for the election of directors who are members of the IMS in a number, when
compared to the total number of directors, which is proportionate to the number
of Iowa insureds compared to the total number of MMIC insureds, subject to a
minimum of two Iowa directors, one of whom shall be the Executive Vice President
of the IMS, for as long as the Class B Common Share is outstanding. The MMA has
placed the Class B Voting Share in a voting trust which requires the trustee to
vote the share for the election of the Iowa directors nominated by the IMS.
Directors serve until their successors are elected and qualified, or until their
prior resignation, removal, death or disqualification.
As of December 31, 1996, the directors of MMIHC, as a group, owned 1,106 Class A
Common Shares or 1.0 percent of the total Class A Common Shares outstanding as
of such date. No executive officer owned any Class A Common Shares as of such
date.
All of the directors have been principally engaged in the practice of medicine
for more than five years, except for Dr. Sanders who has been the Executive Vice
President of the MMA since 1990, Michael Abrams who has been the Executive Vice
President of the Iowa Medical Society beginning in 1996 and David P. Bounk who
has been the President and CEO of MMIHC since 1991. Prior to 1990, Dr. Sanders
was principally engaged in the practice of medicine. Prior to 1996 Michael
Abrams was Director, Government Relations of the Indiana Medical Association for
nine years.
The Chairman of the Board of Directors (currently Dr. Smith) is paid an annual
fee of $31,500. All members of the Board of Directors currently are paid $750
for each meeting of the Board of Directors they attend. In addition, members of
the Executive Committee currently are paid $750 for each meeting of the
Executive Committee they attend, and committee chairmen are paid $600 for each
meeting of the standing committee they chair. Other members of standing
committees currently are paid between $300 and $500, depending upon distance
traveled, for each committee meeting they attend.
52
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(CONTINUED)
EXECUTIVE OFFICERS
The names, ages and positions of the executive officers of MMIHC and MMIC are as
follows:
PERIOD OF
POSITION SERVICE AS PRINCIPAL
NAME AGE WITH COMPANY AN OFFICER OCCUPATION
- -------------------------------------------------------------------------------
David P. Bounk 50 President and 8/1/90 to date President and
Chief Executive Chief Executive
Officer Officer
Merlin R. Bretzman 62 Vice President- 1986 to date Vice President-
Finance and Finance and Treasurer
Treasurer
Jack L. Kleven 50 Vice President- 1986 to date Vice President-
Claims Claims
Elizabeth S. Lincoln 43 Vice President- 1990 to date Vice President-
Risk Management Risk Management
Michael Rutz 43 Vice President- 5/15/95 to date Vice President-
Underwriting Underwriting
Mr. Bounk has over 28 years experience in the insurance industry and joined
MMIHC and MMIC as President and Chief Executive Officer in August 1990. From
July 1982 through July 1990, he was Executive Vice President and Chief Operating
Officer of Missouri Medical Insurance Company, a corporation providing
malpractice insurance to physicians in Missouri. Mr. Bounk has an MBA degree in
finance.
Mr. Bounk has an employment agreement which continues until December 31, 1995
and then renews for successive calendar-year terms unless it is terminated by
either party at least 60 days prior to any renewal date. The agreement provides
that Mr. Bounk's base salary will be adjusted annually by the Executive
Committee. If the agreement is terminated by MMIHC for cause or by Mr. Bounk
voluntarily, he is entitled to receive his base salary for 30 days thereafter.
If the agreement is terminated by MMIHC without cause, Mr. Bounk is entitled to
receive his base salary for six months thereafter, plus one additional month for
each year of service, subject to a
53
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(CONTINUED)
maximum of 12 additional months, and then only until he commences new
employment or self-employment. The agreement also prohibits Mr. Bounk from
competing with MMIHC for one year following his termination of employment.
Effective January 1, 1997, the Company entered into termination agreements
with the executive officers. These agreements provide a severance package to
these executives in the event of termination of employment without cause.
Mr. Bretzman has over 39 years experience in the insurance industry,
including 23 years with Blue Cross/Blue Shield of Minnesota prior to joining
the Exchange (MMIC's predecessor) in 1983. He has been in his current
position since March 1986. He has a BA degree in accounting.
Mr. Kleven has over 24 years experience in medical malpractice claims
adjusting and management. He joined the Exchange in 1983, and has held his
current position since March 1986. Prior to joining the Exchange, he was a
liability manager at The St. Paul Companies for six years. He has a BS degree
in business.
Ms. Lincoln has over 14 years experience in medical professional liability
risk management. She joined the Exchange in 1982, and has held her current
position since January 1990. She has a law degree.
Mr. Rutz has over 18 years experience in the insurance industry, including 10
years in medical malpractice. From June 1986 through April 1994, he was
Senior Regional Underwriting Manager with St. Paul Fire and Marine Insurance
Company. From May 1994 through April 1995, he was Vice President with
Alexander and Alexander, insurance brokers. He joined the Company in May 1995
as Vice President-Underwriting. He has a BS degree in resource management.
Officers serve until their successors are appointed by the Board of
Directors, or until their prior resignation, removal or death.
BENEFICIAL OWNERSHIP REPORTING
Section 16 of the Securities Exchange Act of 1934 requires officers and
directors of reporting companies to file reports disclosing ownership of, and
transactions in, securities of the Company. During 1996, required forms were
not filed for the new directors. This failure was cured by filings made after
the end of the year.
54
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table summarizes compensation paid by MMIHC to its five most
highly compensated executive officers for services rendered in all capacities
during the last three years.
CASH COMPENSATION
NAME OF INDIVIDUAL CAPACITIES IN ----------------- ALL OTHER
OR NUMBER IN GROUP WHICH SERVED SALARY BONUS COMPENSATION(A)
- ------------------------------------------ -------------------------------------
David P. Bounk President and Chief 1996 $170,080 $51,024 $17,687
Executive Officer 1995 162,760 47,200 22,620
1994 153,540 53,062 22,012
Merlin R. Bretzman Vice President-Finance 1996 133,240 39,972 18,478
and Treasurer 1995 127,500 36,975 19,899
1994 122,160 40,148 19,351
Jack L. Kleven Vice President-Claims 1996 132,420 39,796 17,384
1995 126,720 36,749 18,512
1994 121,716 40,015 18,112
Elizabeth S. Lincoln Vice President-Risk 1996 97,020 29,106 14,319
Management 1995 88,690 25,720 13,677
1994 78,240 26,972 12,159
Michael G. Rutz Vice President- 1996 108,680 32,604 14,980
Underwriting 1995 65,000 7,250 8,658
(A) Includes employer contributions to qualified retirement plans
and the term and cash surrender value of supplemental life insurance
premiums.
MMIHC also maintains a Supplemental Executive Retirement Plan ("SERP") which
provides an annual retirement benefit for an executive officer who retires at
age 65 with 20 years of service of 65% (70% for the Chief Executive Officer)
of the officer's final average salary. Benefits are reduced for years of
service less than 20 and retirement prior to age 65. The annual benefit
payable under the SERP is reduced by 50% of the officer's primary Social
Security benefit and
55
ITEM 11. EXECUTIVE COMPENSATION (CONTINUED)
by the annual benefit (expressed in the form of an annuity) of the officer's
accrued benefits under MMIHC's current money purchase pension plan and a
predecessor plan. The estimated annual benefits payable upon retirement at
normal retirement age for the executive officers in the Summary Compensation
table are as follows: Mr. Bounk--$133,300; Mr. Bretzman--$69,500; Mr.
Kleven--$66,200; Ms. Lincoln--$51,800; and Mr. Rutz--$71,600. The estimated
annual retirement benefits were calculated assuming salary increases of six
percent per year, discounted four percent per year for future inflation to
express the estimated benefits in today's dollars.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The response to this item is contained in Item 10.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
56
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(a)(1) The following consolidated financial statements of Midwest Medical
Insurance Holding Company, Inc. for the year ended December 31, 1996
are included in this annual report (Form 10-K) in Item 8:
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Income for the years ended December 31,
1996, 1995 and 1994
Consolidated Statements of Changes in Other Shareholders' Equity for
the years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994
Notes to Consolidated Financial Statements
(a)(2) The following consolidated financial statement schedules of Midwest
Medical Insurance Holding Company, Inc. required by Item 14(d) are
included in a separate section of this report:
II Condensed Financial Information of Registrant
IV Reinsurance
VI Supplemental Information Concerning Property/Casualty Insurance
Operations
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.
(a)(3) LISTING OF EXHIBITS
The Exhibits required to be a part of this report are listed in the
Index to Exhibits which follows the financial statement schedules.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter of 1996.
57
SIGNATURES
Pursuant to the requirements of Section 13 or 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.
Midwest Medical Insurance Holding Company
-----------------------------------------
(Registrant)
By: /s/ David P. Bounk March 20, 1997
------------------ --------------
David P. Bounk Date
President and Chief
Executive Officer
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.
/s/ David P. Bounk
- ------------------------------- Principal Executive Officer March 20, 1997
David P. Bounk
/s/ Merlin R. Bretzman
- ------------------------------- Principal Financial Officer and March 20, 1997
Merlin R. Bretzman Principal Accounting Officer
*
- ------------------------------ Director, Chairman of the Board March 20, 1997
Andrew J.K. Smith, M.D.
*
- ------------------------------ Director March 20, 1997
Michael Abrams, M.D.
*
- ------------------------------ Director March 20, 1997
John R. Balfanz, M.D.
*
- ------------------------------ Director March 20, 1997
Gail P. Bender, M.D.
58
*
- ------------------------------ Director March 20, 1997
James R. Bishop, M.D.
*
- ------------------------------ Director, Secretary March 20, 1997
E. Duane Engstrom, M.D.
*
- ------------------------------ Director March 20, 1997
William E. Eversman, M.D.
*
- ------------------------------ Director March 20, 1997
Roger L. Frerichs, M.D.
*
- ------------------------------ Director March 20, 1997
Richard Geier, Jr., M.D.
*
- ------------------------------ Director March 20, 1997
Anthony C. Jaspers, M.D.
*
- ------------------------------ Director March 20, 1997
Wayne F. Leebaw, M.D.
*
- ------------------------------ Director March 20, 1997
Steven A. McCue, M.D.
*
- ------------------------------ Director March 20, 1997
Harold W. Miller, M.D.
- -
- ------------------------------ Director March 20, 1997
Anton S. Nesse, M.D.
- -
- ------------------------------ Director March 20, 1997
Mark D. Odlund, M.D.
- -
- ------------------------------ Director March 20, 1997
G. William Orr, M.D.
59
*
- ------------------------------ Director March 20, 1997
Norman Rinderknecht, M.D.
*
- ------------------------------ Director March 20, 1997
Paul S. Sanders, M.D.
*
- ------------------------------ Director March 20, 1997
Richard D. Schmidt, M.D.
*
- ------------------------------ Director March 20, 1997
Mark B. Siegel, M.D.
*
- ------------------------------ Director March 20, 1997
G. David Spoelhof, M.D.
*
- ------------------------------ Director, Vice Chairman March 20, 1997
R. Bruce Trimble, M.D.
* By: /s/ David P Bounk March 20, 1997
-------------------------
David P. Bounk pursuant to
power of attorney
* David P. Bounk, on his own behalf and pursuant to Powers of Attorney, dated
prior to the date hereof, attested by the officers and directors listed above
and filed with the Securities and Exchange Commission, by signing his name
hereto does hereby sign and execute this Report of Midwest Medical Insurance
Holding Company on behalf of each of the officers and directors named above,
in the capacities in which the name of each appears above. The above persons
signing as directors constitute a majority of the directors.
60
Midwest Medical Insurance Holding Company and Subsidiaries
(Parent Company)
Schedule II--Condensed Financial Information of Registrant
Balance Sheets
DECEMBER 31
1996 1995
------------------------------
(IN THOUSANDS)
ASSETS
Fixed maturities $ 1,032 $ 851
Short-term investments 4,183 5,521
Investment in subsidiary 111,278 103,292
Accrued investment income 45 57
Dividend receivable - 587
Other 5,399 3,787
------------------------------
Total assets $121,937 $114,095
------------------------------
------------------------------
LIABILITIES, REDEEMABLE STOCK AND
OTHER SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable $ 22 $ 986
Accrued expenses and other liabilities 3,033 2,842
------------------------------
3,055 3,828
REDEEMABLE STOCK
Class A Common Stock 7,603 6,674
Class B Common Stock 1 1
------------------------------
7,604 6,975
OTHER SHAREHOLDERS' EQUITY
Additional paid-in capital 12,789 12,789
Retained earnings, comprised of
undistributed earnings of subsidiary 84,615 78,204
Unrealized appreciation on investments,
net of income taxes 13,874 12,299
------------------------------
111,27 103,292
------------------------------
$121,93 $114,095
------------------------------
------------------------------
SEE ACCOMPANYING NOTE.
61
Midwest Medical Insurance Holding Company and Subsidiaries
(Parent Company)
Schedule II--Condensed Financial Information of Registrant (continued)
Statements of Income
YEAR ENDED DECEMBER 31
1996 1995 1994
-------------------------------
(IN THOUSANDS)
REVENUES
Management fee from subsidiary $8,706 $5,405 $ 4,931
Investment income 726 704 238
Other income (loss) 4 17 (49)
-------------------------------
9,436 6,126 5,120
EXPENSES
Operating and administrative 8,357 6,783 5,968
-------------------------------
Income (loss) before income taxes and
other items 1,079 (657) (848)
Income tax expense (benefit) 9 (270) (361)
-------------------------------
Income (loss) before equity in undis-
tributed income of subsidiary 1,070 (387) (487)
Equity in undistributed income of
subsidiary 6,411 2,112 14,982
-------------------------------
Net income $7,481 $1,725 $14,495
-------------------------------
-------------------------------
SEE ACCOMPANYING NOTE.
62
Midwest Medical Insurance Holding Company and Subsidiaries
(Parent Company)
Schedule II--Condensed Financial Information of Registrant (continued)
Statements of Cash Flows
YEAR ENDED DECEMBER 31
1996 1995 1994
-------------------------------------
(IN THOUSANDS)
Net cash (used in) provided by
operating activities $ (877) $ 1,184 $ (155)
INVESTING ACTIVITIES
Purchase of fixed maturities (20,469) (670) (2,200)
Sales of fixed maturities 20,289 1,833 3,642
Calls and maturities of fixed maturities - 240 -
Sales purchases of short-term
investments, net 1,338 (1,758) (447)
FINANCING ACTIVITIES
Redemption of Class A Common Stock (608) (829) (840)
Dividend from MMIC in connection with merger 327 - -
-------------------------------------
Decrease in cash - - -
Cash at beginning of year - - -
-------------------------------------
Cash at end of year $ - $ - $ -
-------------------------------------
-------------------------------------
SEE ACCOMPANYING NOTE.
63
Midwest Medical Insurance Holding Company and Subsidiaries
(Parent Company)
Schedule II--Condensed Financial Information of Registrant (continued)
Note to Condensed Financial Statements
December 31, 1996
The accompanying condensed financial statements should be read in conjunction
with the consolidated financial statements and notes thereto of Midwest Medical
Insurance Holding Company and Subsidiaries.
See Note 3 to the consolidated financial statements of Midwest Medical Insurance
Holding Company and Subsidiaries for a description of the redeemable stock.
64
Midwest Medical Insurance Holding Company and Subsidiaries
Schedule IV--Reinsurance
COL. A COL. B COL. C COL. D COL. E COL. F
- ----------------------------------------------------------------------------------------------------------
PERCENTAGE OF
CEDED TO ASSUMED AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
- ---------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
Year ended December 31, 1996:
Insurance premiums:
Property/casualty insurance $34,875 $2,829 $ - $32,046 N/A
Year ended December 31, 1995:
Insurance premiums:
Property/casualty insurance 37,342 7,544 - 29,798 N/A
Year ended December 31, 1994:
Insurance premiums:
Property/casualty insurance 34,950 8,704 - 26,246 N/A
NOTE TO SCHEDULE IV:
Ceded premiums for the years ended December 31, 1996, 1995 and 1994 are net of
reductions (additions) in ceded premiums related to swing rated reinsurance
treaties of $748,000, $(260,000), and $(346,000), respectively. Ceded premiums
in 1996 are also net of proceeds from commutations of reinsurance covering the
period January 1, 1987 through December 31, 1990 of $2,194,000.
65
Midwest Medical Insurance Holding Company and Subsidiaries
Schedule VI--Supplemental Information Concerning Property/Casualty
Insurance Operations
DECEMBER 31 YEAR ENDED DECEMBER 31
------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E COL. F COL. G COL. H COL. I COL. J COL. K
- -----------------------------------------------------------------------------------------------------------------------------------
LOSSES AND LOSS
ADJUSTMENT EXPENSES
RESERVES FOR INCURRED RELATED TO AMORTIZATION PAID
DEFERRED UNPAID LOSSES DISCOUNT, --------------------- OF DEFERRED LOSSES
AFFILIATION POLICY AND LOSS IF ANY, NET (1) (2) POLICY AND LOSS
WITH ACQUISITION ADJUSTMENT DEDUCTED IN UNEARNED EARNED INVESTMENT CURRENT PRIOR ACQUISITION ADJUSTMENT PREMIUMS
REGISTRANT COSTS EXPENSES COLUMN C PREMIUMS PREMIUM INCOME YEAR YEAR COSTS EXPENSES WRITTEN
- -----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
Consolidated
property/
casualty
entities
1996 N/A $110,037 N/A $6,860 $32,046 $12,212 $41,101 $ (8,844) N/A $38,339 $32,036
1995 N/A 120,264 N/A 7,033 29,798 12,211 39,847 (2,287) N/A 29,363 35,519
1994 N/A 110,967 N/A 7,314 26,246 11,995 36,275 (24,941) N/A 28,696 28,462
66
ANNUAL REPORT ON FORM 10-K
ITEM 14(a)(3) AND 14(c)
EXHIBITS
Midwest Medical Insurance Holding Company
Index to Exhibits
REGULATION
S-K
EXHIBIT TABLE SEQUENTIAL
ITEM REFERENCE PAGE NO.
- ---------------------------------------------------------------------------------------------
Restated Articles of Incorporation of the registrant
(Form S-4, Exhibit 3C). 3A.(1)
Bylaws of the registrant (Form S-4, Exhibit 3D). 3B.(1)
Voting Trust Agreement. 9.(1)
Governance Agreement between the registrant and the 10A.(1)
Minnesota Medical Association, holder of the registrant's
Class B Common Share, dated November 30,1988.
Lease for office space between the registrant and Lexington 10B.(1)
Property Fund, L.P. Limited Partnership, dated March 26,
1991.
Management Agreement between the registrant and 10C.(4) 69
Midwest Medical Insurance Company, dated
November 30, 1988, as amended January 1, 1990,
January 1, 1991, and January 1, 1996.
Agency Agreement with Vaaler Insurance, Inc. pursuant 10D.(1)
to which Vaaler acts as agent of the registrant in
North Dakota, dated April 21, 1989.
Agreement of Reinsurance between Midwest Medical 10F.(1)
Insurance Company and General Reinsurance
Corporation, dated March 3, 1992.
Letter Employment Agreement between the registrant and 10G.(2)
David P. Bounk, President and Chief Executive Officer of
the registrant and Midwest Medical Insurance Company,
dated January 1, 1993.
67
Index to Exhibits (continued)
REGULATION
S-K
EXHIBIT TABLE SEQUENTIAL
ITEM REFERENCE PAGE NO.
- ---------------------------------------------------------------------------------------------
Executive Bonus Plan of the registrant. 10H.(1)
Supplemental Executive Retirement Plan of the registrant. 10I.(1)
Reinsurance Agreement pursuant to which commutation for the 10J.(1)
period October 1, 1986 to December 31, 1987 occurred.
Financial (catastrophic) reinsurance agreement in effect 10K.(1)
during 1990 and 1991 policy periods.
Plan and Agreement of Merger, without exhibits. 10L.(1)
Agency Agreement with IMS Services pursuant to which IMS 10M.(3)
Services acts as agent of the registrant in Iowa, dated
July 1, 1993
Subsidiaries of the registrant. 22.(1)
Powers of Attorney. 24.(4)
_________________________________
(1) Filed with the Company's Registration Statement on Form S-4, as amended,
SEC File No. 33-55062 and incorporated herein by reference.
(2) Filed with the Company's Registration Statement Form S-1 SEC File No.
33-70182 and incorporated herein by reference.
(3) Filed with 1993 Annual Report on Form 10-K.
(4) Filed with this Annual Report on Form 10-K.
68