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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, 1999
[ ] 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
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Commission file number 0-21230
Midwest Medical Insurance Holding Company
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(Exact name of registrant as specified in its charter)
Minnesota 41-1625287
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
7650 Edinborough Way, Suite 400
Minneapolis, Minnesota 55435-5978
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 838-6700
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
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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 (ss.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, 1999 Net Redemption Value per
share) of the voting stock held by non-affiliates of the registrant as of March
16, 2000 was $7,740,976.
The number of shares outstanding of the issuer's classes of common stock, as of
March 16, 2000:
Class A Common Stock $.01 par value - 123,509 shares
Class B Common Stock $1,000 par value - 1 share
DOCUMENTS INCORPORATED BY REFERENCE
None.
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PART I
ITEM 1. BUSINESS
BACKGROUND
Midwest Medical Insurance Holding Company (MMIHC) is a holding company organized
under the laws of the State of Minnesota. Midwest Medical Insurance Company
(MMIC), Midwest Medical Solutions, Inc. (Solutions), which includes its
wholly-owned subsidiary, MedPower Information Resources, Inc. (MedPower), and
MMIHC Insurance Services, Inc. (Services) are wholly-owned subsidiaries of
MMIHC. MMIHC and its subsidiaries are referred to collectively as the Company
unless the reference pertains to a specific entity.
The Company's principal business operation is MMIC. MMIC's primary business is
selling and issuing policies of medical professional liability insurance to: (1)
individual physicians, (2) partnerships or professional corporations composed of
physicians, (3) clinics, (4) hospitals, and (5) health plans.
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 were 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. Another purpose of the reorganization was 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 the
North Dakota Medical Association. Professional liability, general liability, and
umbrella excess liability insurance is also available to hospitals and other
healthcare facilities throughout MMIC's territory.
During 1997, MMIHC formed Solutions as a business development company to
strengthen and promote the independence and interdependencies of physicians,
clinics and hospitals that MMIC serves. Business development opportunities being
considered include practice enhancement, strategic consulting, and technology
services and support.
Effective January 1, 1998, Solutions purchased the assets and operations of
MedPower. MedPower processes and electronically submits medical claims for over
100 healthcare providers in the Upper Midwest. MedPower also provides various
information consulting and network support services.
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ITEM 1. BUSINESS (CONTINUED)
Services was incorporated in 1995 and began active operations in January 1999
with the acquisition of a book of business from Johnson-McCann Benefits, Inc.
Services is an insurance agency specializing in providing Upper Midwest clients
with group insurance products such as health, dental, life, disability and
workers' compensation.
MMIHC provides management and administrative services to MMIC, Solutions and
MedPower for a fee generally equal to the cost of services provided plus a
surcharge of 10%. Services operates independently with its own management and
administrative staff and therefore does not have a management agreement with
MMIHC.
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, North Dakota, South Dakota, Nebraska, Illinois, or
Wisconsin;
2. An applicant must conduct a majority of his or her practice in Minnesota,
Iowa, 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,
North Dakota, South Dakota, Nebraska, Illinois or Wisconsin; and
2. The group must demonstrate that a majority 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 AND OTHER HEALTHCARE FACILITIES
MMIC also provides professional liability, general liability and umbrella excess
liability to hospitals and other healthcare facilities.
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ITEM 1. BUSINESS (CONTINUED)
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,
North Dakota, South Dakota, Nebraska, Illinois or Wisconsin; and
2. The facility must be a licensed hospital or other healthcare facility.
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 continuous
coverage with MMIC, the reporting endorsement is provided at no additional
premium.
MMIC offers basic limits of coverage from $1,000,000 for each claim, subject to
$3,000,000 annual aggregate, up to $12,000,000 for each claim, subject to
$14,000,000 annual aggregate. Excess coverage above the basic limits is
available from MMIC's reinsurers on a facultative basis.
MARKETING AND DISTRIBUTION
Marketing of MMIC policies is handled principally by MMIC through salaried
marketing representatives. MMIC has also made marketing arrangements with a
select group of brokers to assist MMIC in the production of large accounts and
in the production of new coverages as they are developed. 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.
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ITEM 1. BUSINESS (CONTINUED)
Distribution of policies is handled through a processing system which MMIC
updated in 1998. 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
currently. 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.
MMIC's current reinsurance contract is in effect over the three-year period of
1998 through 2000. The primary layer of coverage provides $1,250,000 of coverage
in excess of $750,000 of retention per insured. The premium ceded for this
coverage is based upon the losses paid under the contract limited to a minimum
of 1.27% and a maximum of 9.21% of the underlying MMIC subject premium. MMIC has
utilized this "swing-rated" treaty mechanism since 1992. These treaties do not
include a commutation clause, but rather develop over time as claims are
handled. There are no claims outstanding from years prior to 1992. All contracts
for years prior to 1992 have been commuted. For limits of liability greater than
$2,000,000 MMIC "cedes" all premium and exposure to the reinsurers and collects
a ceding commission of 25%. The reinsurers, their participation percentages, and
their A.M. Best rating are listed below.
- General Reinsurance Corporation, (80%), A++
- Hannover Reinsurance Company, (7%), A+
- Transatlantic Reinsurance Company, (6.5%), A+
- CNA Re, UK, (6.5%), A
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ITEM 1. BUSINESS (CONTINUED)
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
pre-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 investment grade fixed income
instruments, including United States Government, governmental agency, and
corporate bonds. Fixed income investments comprised approximately 55% of total
invested assets at December 31, 1999 compared to 62% at December 31, 1998.
MMIC's investment policy also permits the inclusion of equity securities. Equity
securities comprised approximately 37% of total invested assets at December 31,
1999 compared to 33% at December 31, 1998. The increase in the proportion of
equity securities was due to an increase in equity market values and a decrease
in market values of fixed-income securities. The remainder of MMIC's investment
portfolio, 8% and 5% at December 31, 1999 and 1998, respectively, was invested
in a real estate investment trust and short-term instruments.
RATING
A.M. Best & Company, Inc. ("Best's"), publisher of Best's Insurance Reports,
Property-Casualty, 1998 Edition, has assigned MMIC an "A", or excellent, rating
in 1999. This is the highest rating currently assigned to any company that
specializes in medical malpractice insurance. 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.
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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 policyholder surplus of MMIC or
the prior year's net income from operations of MMIC excluding realized capital
gains, 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, Fireman's Fund
Insurance Company, and American Continental Insurance Company (commonly referred
to as MMI). 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 market area. Finally, in the mid-nineties
several large self-insured hospitals in Minneapolis and Des Moines purchased
MMIC insured clinics, and other physician practices were purchased by large,
self-insured clinics such as the Mayo Clinic. In response to the consolidation
occurring among healthcare providers, MMIC expanded its underwriting capability
by partnering with its reinsurers to provide the types of coverages needed by
larger healthcare organizations. MMIC is also 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 healthcare
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, and various
forms of
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ITEM 1. BUSINESS (CONTINUED)
managed care. 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.
EMPLOYEES
As of December 31, 1999, MMIHC employed 83 persons, of whom 9 were executives,
51 were supervisory employees or specialists, and 23 were clerical employees. As
of December 31, 1999, Services employed 10 persons, of whom 1 was an executive,
8 were supervisory employees or specialists, and 1 was a clerical employee. No
employees of MMIHC and Services are covered by a collective bargaining agreement
and management believes that relations with employees are good.
ITEM 2. PROPERTIES
The Company owns the following fixed assets, all of which are used in the
conduct of its business:
NET BOOK VALUE
DECEMBER 31,
1999
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Office furniture and equipment $ 726,517
Leasehold improvements at leased premises 156,043
Computer hardware 465,033
Computer system software 1,453,310
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Total $2,800,903
==========
The Company owns no real estate. Prior to October 1, 1999, MMIHC leased
approximately 15,765 square feet of office space in Edina, Minnesota under a
10-year lease that expires in 2001. Effective October 1, 1999, the Company moved
to new offices in Edina, Minnesota with total square feet of 26,069. The Company
sublet the former office space effective December 1, 1999 for the duration of
that lease. The new leased space has a term of 6 years, 2 months. 4,060 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 1,249 square feet
of office space is leased in Omaha, Nebraska under a three year lease that
expires November 30, 2000. Solutions and MedPower operate out of a separate
3,149 square foot facility also located in Edina, Minnesota. This lease is set
to expire in 2001. Services operates out of a separate 4,000 square foot
facility located in Shoreview, Minnesota. This lease expires in 2000. Annual
rent expense was $637,585 in 1999 and $501,032 in 1998.
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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
There were no matters submitted to a vote of security holders.
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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 16, 2000, there were 123,509 shares of Class A Common Stock
outstanding held by 3,481 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 policyholder surplus of MMIC or the prior year's net income
from operations of MMIC excluding realized capital gains, whichever is
greater.
ITEM 6. SELECTED FINANCIAL DATA
Following is the selected financial data of the Company for the five years ended
December 31, 1999. 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 1999(1) 1998(1) 1997(1) 1996(2) 1995(2)
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(Amounts in thousands, except per share data)
Net premiums earned $46,583 $35,014 $32,916 $31,177 $29,798
Net investment and other income 21,006 21,404 19,276 15,558 14,258
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Total revenue 67,589 56,418 52,192 46,735 44,056
Loss and loss adjustment expenses 41,468 37,494 31,834 32,257 37,560
Policyholder dividends 10,175 - - - -
Underwriting and other operating expenses 13,394 10,287 6,595 5,539 6,482
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65,037 47,781 38,429 37,796 44,042
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Income before income taxes 2,552 8,637 13,763 8,939 14
Income taxes (benefit) 816 2,689 4,463 1,458 (1,711)
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Net income $ 1,736 $ 5,948 $ 9,300 $ 7,481 $ 1,725
===================================================================
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ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)
YEAR ENDED DECEMBER 31
1999(1) 1998(1) 1997(1) 1996(2) 1995(2)
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(Amounts in thousands, except per share data)
Net income per common share - assuming
dilution $12.53 $43.65 $70.23 $58.33 $13.74
Number of shares used in per share
calculation 138,517 136,251 132,427 128,259 125,536(3)
Net income/total revenue 2.6% 10.5% 17.8% 16.0% 3.9%
Return on average equity 1.1% 4.2% 7.4% 6.5% 1.7%
DECEMBER 31
FINANCIAL CONDITION 1999(1) 1998(1) 1997(2) 1996(2) 1995(2)
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(Amounts in thousands, except per share data)
ASSETS
Fixed maturities at fair value $153,950 $164,652 $171,975 $183,561 $182,817
Equity securities at fair value 104,898 86,553 49,759 38,001 28,311
Short-term investments 9,128 3,556 13,909 7,898 15,015
Other 10,000 10,000 10,000 - -
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Total investments 277,976 264,761 245,643 229,460 226,143
Reinsurance recoverable on paid and
unpaid losses 19,285 16,499 19,117 22,174 25,112
Other assets 22,915 14,223 10,755 10,359 13,329
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Total assets $320,176 $295,483 $275,515 $261,993 $264,584
===================================================================
LIABILITIES
Unpaid losses and loss adjustment
expenses $119,141 $110,964 $107,806 $110,037 $120,264
Other liabilities 45,432 33,926 33,942 33,074 34,053
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164,573 144,890 141,748 143,111 154,317
REDEEMABLE STOCK
Class A and Class B Common Stock at
redemption value 7,803 8,147 7,477 7,604 6,975
OTHER SHAREHOLDERS' EQUITY 147,800 142,446 126,290 111,278 103,292
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Total liabilities, redeemable stock
and shareholders' equity $320,176 $295,483 $275,515 $261,993 $264,584
===================================================================
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ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)
DECEMBER 31
1999(1) 1998(1) 1997(1) 1996(2) 1995(2)
------------------------------------------------------------------------
(Amounts in thousands, except per share data)
Midwest Medical Insurance Holding Company:
Class A Common Shares issued and
outstanding 123,509 125,682 121,322 118,209 116,251(3)
Redemption value per share $ 63.18 $ 64.81 $ 61.63 $ 64.33 $ 60.00
Class A Common Shares redeemed 15,024 9,005 10,306 10,272 12,424
Amount paid to terminating
policyholders upon redemption $ 954 $ 523 $ 648 $ 608 $ 829
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(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) Includes pro forma shares computed to give retroactive effect to the merger
of MMIHC/MMIC with MLM. See Note 1 to the consolidated financial statements
included in Item 8 of this Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MANNER OF PRESENTATION
The financial statements of MMIHC and its subsidiaries are presented on a
consolidated basis. In future references in this analysis, which should be read
together with the 1999 consolidated financial statements and notes thereto
appearing under Item 8 in this Form 10-K, MMIHC and its subsidiaries are
referred to collectively as the Company unless the reference pertains to a
separate entity.
LIQUIDITY AND CAPITAL RESOURCES
The majority of the Company's assets are invested in investment-grade bonds,
stocks, a real estate investment trust and short-term instruments. These
investments totaled $277,976,000 and $264,761,000 at December 31, 1999 and 1998,
respectively, which represented 86.8% and 89.6% of total assets. The main
objectives of the Company's investment policy established by the
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Investment Committee of the Board of Directors are the preservation of assets,
maximizing pre-tax total portfolio return, and assuring adequate liquidity to
meet operational requirements primarily the payment of insurance claims. Fixed
maturity investments and equity securities are classified as available for sale
and therefore are carried at fair value. The real estate investment trust and
short-term instruments are recorded at cost which approximates fair value.
During 1997, the Company adopted a revised Investment Policy resulting in a
portfolio restructuring designed to increase the pre-tax total return from
investments. The benchmark total return goal set for the fixed portfolio manager
was increased. This resulted in a turnover of most of the fixed income portfolio
which included selling all municipal bonds. To further diversify the portfolio
and maximize total return, the Company invested $10 million in a private
placement real estate investment trust in September of 1997 and invested $15
million in international equities in January of 1998. These changes reflect the
Company's strong capital position relative to the risks inherent in its business
operations.
The Company's cash flow from operations was $2,187,000 in 1999 versus
$(9,605,000) in 1998 and $4,002,000 in 1997. The 1999 cash flow from operations
was favorably impacted by premium adjustments received from reinsurers on
reinsurance contracts for prior years and greater premium received at the end of
1999 due to earlier billing of policies with January 2000 effective dates. The
1998 cash flow from operations was unfavorably impacted by premium adjustments
paid to reinsurers on reinsurance contracts for prior years and less premium
received at the end of 1998 due to later billing of policies with January 1999
effective dates. Also contributing to the unfavorable 1998 cash flow were
increases in underwriting and other operating expenses. 1998 underwriting
expenses increased primarily from additional staff needed to manage insurance
business growth and added costs from the conversion to a new insurance company
operating system. 1998 other operating expenses increased primarily from
launching the operations of Solutions including the acquisition of MedPower. The
positive 1997 cash flow from operations was primarily the result of a decrease
in claim payments.
Premium rates in general have trended lower with rate decreases in regions where
claims have developed favorably offset partially by rate increases in regions
where claims have developed unfavorably. Increases in new premium written,
however, have helped to keep cash receipts from policyholder premiums relatively
level. Substantial amounts of premiums have also been returned to policyholders
in the form of retrospective premium credits. In 1999, a policyholder dividend
program replaced the previous retrospective premium program. While the
retrospective premium credits were paid to policyholders in the first quarter of
the year following approval by the Board of Directors, the majority of the
policyholder dividends will be paid in four equal installments in February, May,
August and November of the year following their declaration by the Board of
Directors. Loss and operating expense payments have generally been met from
policyholder premium receipts with any excess cash allocated to the investment
portfolio. Management regularly analyzes loss liabilities to project the cash
flow required in future years. Since the overall portfolio is highly liquid,
exact matching of bond maturities and loss liabilities
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
is not a goal. Bond maturities are primarily selected to maximize total return.
The Company believes that its cash and investments combined with its internally
generated funds will be sufficient to meet its present and reasonably
foreseeable operating and capital requirements and therefore will not need to
borrow funds from external sources. The Company does maintain a $5,000,000
secured line of credit with its bank in the event of an urgent cash need. The
Company had no material capital expenditure commitments as of December 31, 1999.
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 details about the redeemable stock and the actual redemptions
during the years 1999, 1998 and 1997 are found in Note 2 to the consolidated
financial statements. This limited redemption value preserves the capital of
MMIC which is separately disclosed as other shareholders' equity in the
consolidated financial statements. The consolidated statements of changes in
other shareholders' equity found in the accompanying consolidated financial
statements provide the details of the increases and decreases in other
shareholders' equity.
Periodically, the Board of Directors of MMIC declares dividends payable to MMIHC
to maintain the redemption value of the Company's Class A Common Stock and to
provide capital for non-insurance business operations including new business
ventures. Dividends totaling $2,050,000 were declared and paid in 1999. A
dividend of $2,000,000 was declared and paid in 1998. No dividends were declared
or paid by MMIC to MMIHC in 1997.
RESULTS OF OPERATIONS
Net premiums earned increased $11,569,000 in 1999 from 1998. New business
generated approximately $5,700,000 of additional earned premium. The remaining
increase was the result of the following significant factors:
1. Effective 1999, a policyholder dividend program replaced the previous
retrospective premium program. In 1998, retrospective premium credits of
$6,719,000 were recorded for Minnesota, North Dakota and Iowa
policyholders. The retrospective premium credits of $317,000 recorded in
1999 represented actual payments made that were greater than what had been
previously estimated and accrued. The difference between years resulted in
a $6,402,000 increase in 1999 net premiums earned.
2. The estimated reinsurance premium applicable to the treaty years 1992-1994
and 1995-1997, which is based in part on reinsured claims experience, was
reduced $5,920,000 on a net basis in 1999. This compares to a net reduction
for those treaty years of $2,550,000 in 1998 resulting in a net increase in
premium between years of $3,370,000.
14
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
3. Due to the increase in premium volume and policyholders purchasing higher
limits, reinsurance costs on the current year were $2,115,000 greater in
1999 compared to 1998. This decreased 1999 net premiums earned.
4. A 5% rate decrease in regions with favorable claims experience resulted in
a decrease of approximately $1,250,000 in 1999 net premiums earned.
5. Accounts that did not renew in 1999 resulted in a decrease of approximately
$538,000 in 1999 net premiums earned.
Net premiums earned increased $2,098,000 in 1998 from 1997. Although
policyholder rates remained relatively level, new business generated
approximately $1,263,000 of additional earned premium. The remaining increase
was the result of the following significant factors:
1. The estimated reinsurance premium applicable to the treaty years 1992-1994
and 1995-1997, which is based in part on reinsured claims experience, was
reduced $2,550,000 on a net basis in 1998. This compares to a net reduction
for those treaty years of $2,950,000 in 1997 resulting in a net decrease in
premium between years of $400,000.
2. The Company negotiated lower rates on its 1998 reinsurance contract that
reduced ceded premiums by $1,031,000 compared to 1997. This increased 1998
net premiums earned.
3. In 1998, $789,000 was received from the commutation of a reinsurance treaty
covering the 1991 year. Since no reinsurance commutation occurred in 1997,
premiums increased from 1997 to 1998 by $789,000.
4. Retrospective premiums credits of $5,200,000 for Minnesota policyholders
and $280,000 for North Dakota policyholders were recorded in 1998. The
premium credits for 1997 were $5,000,000 for Minnesota policyholders only.
The difference between years resulted in a $480,000 decrease in 1998 net
premiums earned.
Net investment income decreased $8,000 in 1999 from 1998 and $632,000 in 1998
from 1997. The decrease in 1999 was primarily driven by additional fees paid to
equity managers due to the appreciation in the Company's equity securities. The
decrease in 1998 was primarily due to the decrease in the fixed maturity
component of invested assets due to the Company's efforts to maximize total
return and diversify the portfolio as referred to earlier under the Liquidity
and Capital Resources section. Since it is the largest contributor to the
Company's investment income, the decrease in fixed maturity investments in 1998
drove the decline in investment income.
15
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Realized capital gains decreased $1,861,000 to $7,220,000 in 1999 and increased
$2,552,000 to $9,081,000 in 1998. During 1999, sales of equity securities
realized $10,312,000 of net capital gains while sales of bonds realized
$(3,092,000) of net capital losses. Approximately $(1,757,000) of the net
realized capital losses on bonds came from the repositioning of the bond
portfolio during the last two months of 1999. The Company's new fixed income
manager, who assumed management of the portfolio on November 2, 1999,
recommended repositioning the bond portfolio primarily to shorten its duration.
All other 1999 realized capital gains and losses resulted from the management of
the portfolio on a pre-tax total return basis within the parameters set by the
Investment Committee of the Board of Directors. During 1998, approximately
$1,175,000 of net capital gains were realized through the allocation of
$15,000,000 to international equities in January of 1998. The remaining
$7,906,000 of 1998 net realized capital gains resulted from the management of
the portfolio on a pre-tax total return basis. During 1997, the fixed income
portfolio was restructured to pursue the newly adopted pre-tax total return
objective resulting in net realized capital gains of $4,916,000. An additional
$1,613,000 of net capital gains were realized in 1997 in the normal course of
managing the investment portfolio. The Company employs three outside
professional advisors to manage the portfolio: one to manage investment-grade
fixed income securities, one to manage large-cap domestic equities, and one to
manage international equities. The managers operate within the Company's adopted
investment policy as approved by the Investment Committee of the Board of
Directors. This policy was revised in 1997 as previously discussed under the
Liquidity and Capital Resources section. The Investment Committee meets with
outside investment managers approximately four times per year.
Other revenues increased $1,471,000 from $1,352,000 in 1998 to $2,823,000 in
1999. The increase was due to Services beginning active operations in January of
1999. 1999 other revenues includes $1,661,000 of commission income received by
Services from insurance carriers. The commission income from Services was
partially offset by a decline in finance charges on premiums owed to MMIC.
Other revenues increased $208,000 from $1,144,000 in 1997 to $1,352,000 in 1998.
The increase was primarily due to the acquisition of MedPower by Solutions in
January of 1998. MedPower's main source of revenues is electronic claims
processing fees received from healthcare providers.
Losses and loss adjustment expenses are the costs associated with the settlement
of insurance claims and are the Company's principal expense. Incurred loss and
loss adjustment expenses were $41,468,000 for 1999 compared to $37,494,000 in
1998 and $31,834,000 in 1997. This resulted in an increase of 10.6% in 1999 and
an increase of 17.8% in 1998. As shown in Note 6 of the consolidated financial
statements, 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, increased by $4,015,000 in 1999 and $1,741,000 in 1998. The
increase in 1999 was primarily driven by additional policyholder exposure from
the increase in premium volume particularly from the newer business lines such
as large, healthcare systems and hospitals. Loss
16
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
and loss adjustment expenses also include adjustments of prior years' estimates.
These adjustments to the liability for loss and loss adjustment expense are
evaluated by management and supported by an outside actuarial review performed
at the conclusion of the year. As shown in Note 6 of the consolidated financial
statements, these evaluations resulted in a reduction in estimated liabilities
applicable to prior years of $4,474,000, $4,433,000 and $8,352,000, respectively
in 1999, 1998 and 1997. The less favorable development on prior years is the
primary reason for the greater incurred loss and loss adjustment expenses in
1998.
The following schedule summarizes the development of the liability for loss and
loss adjustment expense from 1989 through 1999. This schedule is 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 beginning
approximately in 1986 for the Company and across the industry, has resulted in
redundancies in liabilities greater than expected. The table indicates that the
redundancy in loss liabilities, which develop as actual results become known,
has significantly decreased from the high at December 31, 1990. Loss and loss
adjustment expense liabilities have not been discounted in the Company's
financial statements.
17
18
Development of Liability for Loss and Loss Adjustment Expense
(Thousands of Dollars)
1989 1990 1991 1992 1993 1994 1995 1996
---------------------------------------------------------------------------------------------
Liability for unpaid loss and
loss adjustment expense $ 89,630 $ 97,375 $100,167 $ 98,617 $105,589 $ 88,227 $ 96,424 $ 90,342
Cumulative amount of liability
paid through:
1 year later 10,585 13,973 19,112 21,422 25,251 26,879 33,454 30,097
2 years later 21,890 28,643 32,798 37,498 42,685 46,925 53,132 44,562
3 years later 30,869 35,305 39,906 45,227 51,087 55,534 59,568 54,411
4 years later 35,015 37,624 42,752 46,226 53,594 57,129 63,915
5 years later 35,115 38,298 43,994 46,823 53,288 58,856
6 years later 35,187 39,505 44,370 46,810 54,709
7 years later 35,295 39,861 44,420 47,218
8 years later 35,295 39,862 44,634
9 years later 35,295 39,923
10 years later 35,297
Liability re-estimated as of:
1 year later 73,244 83,359 83,991 94,633 80,960 85,595 87,580 81,990
2 years later 62,056 64,876 74,883 69,490 75,364 76,365 79,665 76,542
3 years later 52,010 56,351 53,538 65,568 64,586 67,891 77,294 70,228
4 years later 44,582 42,075 52,833 56,426 57,851 65,794 73,979
5 years later 37,872 41,771 45,892 52,388 56,785 63,958
6 years later 37,617 39,519 43,760 53,014 55,358
7 years later 35,882 38,929 43,563 52,469
8 years later 35,882 38,929 43,633
9 years later 35,882 38,967
10 years later 35,884
Cumulative redundancy 53,746 58,408 56,534 46,148 50,231 24,269 22,445 20,114
1997 1998 1999
------------------------------------------
Liability for unpaid loss and
loss adjustment expense $ 89,394 $ 94,467 $ 99,894
Cumulative amount of liability
paid through:
1 year later 28,755 33,787
2 years later 48,437
3 years later
4 years later
5 years later
6 years later
7 years later
8 years later
9 years later
10 years later
Liability re-estimated as of:
1 year later 84,961 89,992
2 years later 78,679
3 years later
4 years later
5 years later
6 years later
7 years later
8 years later
9 years later
10 years later
Cumulative redundancy 10,715 4,475
18
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Policyholder dividends of $10,175,000 were declared by the Board of Directors of
MMIC in 1999 and will be paid to physician, clinic and hospital policyholders in
2000. As described in Note 4 of the consolidated financial statements, the
policyholder dividend program was instituted in 1999 and replaced the previous
retrospective premium program for physicians. The primary reasons MMIC switched
to a policyholder dividend program were to allow greater flexibility in
determining amounts to be refunded to policyholders and to more closely resemble
programs of peer companies thus making the financial statement impact similar.
The latter reason helps to eliminate confusion in the marketplace when comparing
the financial performance of MMIC to its competitors.
Underwriting, acquisition and insurance expenses increased $499,000 from
$6,698,000 in 1998 to $7,197,000 in 1999. Approximately $706,000 of the increase
came from additional management fees for staff additions, maintenance of and
enhancements to the new operating system and moving the Company's main office.
An additional $311,000 of payments to medical societies for license and
endorsement agreements also contributed to the increase. A portion of these
payments are tied to premium volume thus causing the increase. These increases
were offset partially by additional ceding commissions earned by MMIC resulting
from the increase in premiums ceded to the current year reinsurance contract on
higher limit policies.
Underwriting, acquisition and insurance expenses increased $1,189,000 from
$5,509,000 in 1997 to $6,698,000 in 1998. Approximately $469,000 of the increase
came from increases in variable expenses such as commissions and premiums taxes.
The remaining increase was largely due to additional management fees for staff
needed to expand MMIC market share and added costs from the conversion to a new
insurance company operating system.
Other operating expenses increased $2,608,000 from $3,589,000 in 1998 to
$6,197,000 in 1999. Approximately $1,648,000 of the increase was from the
Services subsidiary that began active operations in January 1999 as described in
Item 1 of this Form 10-K. Services primary expenses are commissions and salaries
paid to its staff. The remaining increase resulted largely from greater salary
expenses incurred by Solutions, added equipment and depreciation costs incurred
by MedPower and new product development costs incurred by MMIHC.
Other operating expenses increased $2,503,000 from $1,086,000 in 1997 to
$3,589,000 in 1998. Approximately $2,344,000 of the increase was from operating
two new, non-insurance companies, Solutions and MedPower, as described in Item 1
of this Form 10-K. Salaries, benefits, outside consulting, and equipment costs
are the main operating expenses charged to Solutions and MedPower by MMIHC in
the form of management fees. The remaining increase resulted primarily from
greater salary and benefits costs of operating the holding company MMIHC.
19
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Income before income taxes decreased to $2,552,000 in 1999 compared to
$8,637,000 in 1998. The decrease resulted primarily from greater loss
liabilities estimated for the current year, 1999 policyholder dividends that
were greater than the 1998 retrospective premium credits and lower realized
capital gains due to the capital losses sustained on the repositioning of the
bond portfolio at the end of 1999.
Income before income taxes decreased to $8,637,000 in 1998 compared to
$13,763,000 in 1997. The decrease resulted primarily from less favorable
development on loss liabilities estimated in prior years and added expenses from
operating two non-insurance companies newly formed at the beginning of 1998.
Income taxes decreased to $816,000 for 1999 compared to $2,689,000 for 1998. The
effective tax rates for 1999 and 1998 were 32.0% and 31.1%, respectively. The
principal factor in the increase in the effective tax rate was a lower recovery
of prior year taxes recorded in 1999 compared to 1998.
Income taxes decreased to $2,689,000 for 1998 compared to $4,463,000 for 1997.
The effective tax rates for 1998 and 1997 were 31.1% and 32.4%, respectively.
The principal factor in the decline in the effective tax rate was a recovery of
prior year taxes recorded in 1998.
Net income earned by the Company decreased to $1,736,000 for 1999 compared to
$5,948,000 for 1998 due to the factors discussed above. Basic net income per
share decreased to $13.92 for 1999 from $48.36 per share for 1998. Diluted net
income per share decreased to $12.53 for 1999 from $43.65 per share for 1998.
Also due to the factors discussed above, the Company recorded net income of
$5,948,000 for 1998 compared to $9,300,000 for 1997. Basic net income per share
decreased to $48.36 for 1998 from $77.79 per share for 1997. Diluted net income
per share decreased to $43.65 for 1998 from $70.23 per share for 1997.
YEAR 2000 ISSUE
No significant Year 2000 problems have been encountered with respect to the
Company's internal computer hardware and software, key business partners and
vendors and insurance policy exposure. The Company's Year 2000 Task Force,
however, continues to monitor the potential for insurance policy exposure
relative to Year 2000 issues.
A multi-departmental management team carefully studied and assessed the exposure
that might exist in the policies issued by MMIC. The majority of the exposure is
related to medical equipment that contains computer chips that could be affected
by the Year 2000. This is primarily an exposure for the products liability
carrier which insures the medical equipment manufacturer. All hospital
policyholders were surveyed in 1999 and were found to be in
20
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
compliance with MMIC guidelines on medical equipment. No coverage change or
exclusion was enacted for the medical malpractice professional liability policy.
A Year 2000 exclusion became effective January 1, 1999 on all premises and
general liability policies issued by MMIC. This exclusion will continue through
the 2000 policy year. MMIC communicated its Year 2000 exposure preparedness to
its reinsurers and they have fully supported the Company's plan and actions to
date.
Based on the due diligence performed above, the overall success of businesses in
dealing with Year 2000 issues, and no Year 2000 claims reported as of the date
of this report, the Company believes it has little, if any, exposure to Year
2000 claims. The potential does still exist, however, in a worst case scenario
for claims to be made by MMIC policyholders for Year 2000 failures they
experience. In the event Year 2000 claims are made on policies written by MMIC,
the Company believes these claims will be without merit and will vigorously
defend its position. Depending on whether such claims are deemed to have merit
and to the extent these claims are awarded compensation, such claims could have
a material adverse effect on the Company's business, financial condition and
results of operations.
Readers are reminded that forward-looking statements contained in this
description of the Company's treatment of the Year 2000 issue should be read in
conjunction with the Company's following disclosures under the heading
"Cautionary Note Regarding Forward-Looking Statements."
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements other than historical information contained in this Form 10-K are
considered to be "forward-looking statements" within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities Act
of 1934, as amended.
All forward-looking statements address matters that involve risks and
uncertainties. Accordingly, in addition to the factors discussed in this Form
10-K, there are or will be other important factors that could cause actual
results to differ materially from those indicated in such statements. These
factors include but are not limited to:
1. the impact of changing market conditions on the Company's business
strategy;
2. the effects of increased competition on pricing, coverage terms, retention
of customers and ability to attract new customers;
3. greater severity or frequency of the types of losses that the Company
insure;
4. faster or more adverse loss development experience than that on which the
Company based its underwriting, reserving, and investment practices;
21
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
5. developments in global financial markets which could adversely affect the
performance of the Company's investment portfolio;
6. litigation, regulatory or tax developments which could adversely affect the
Company's business;
7. risks associated with the introduction of new products and services;
8. dependence on key personnel;
9. the impact of mergers and acquisitions; and
10. material claim payments awarded policyholders of the Company for Year 2000
failures they experienced.
The facts set forth above should be considered in connection with any
forward-looking statement contained in this Form 10-K. The important factors
that could affect such forward-looking statements are subject to change, and the
Company does not intend to update any forward-looking statement or the foregoing
list of important factors. By this cautionary note, the Company intends to avail
itself of the safe harbor from liability with respect to forward-looking
statements provided by Section 27A and Section 21E referred to above.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT
MARKET RISK
Market risk is the risk of loss that may occur when fluctuations in interest and
foreign currency exchange rates and equity and commodity prices change the value
of a financial instrument. Both derivative and nonderivative financial
instruments have market risk. The Company is primarily exposed to interest rate
risk on its investment in fixed maturities, equity price risk on its investment
in equity securities and foreign currency exchange rate risk on its investment
in international equity securities.
As disclosed in Items 1 and 7 of this Form 10-K, the Company's fixed maturity
and equity investments are classified as available for sale and are managed to
preserve assets, maximize pre-tax total return, and assure adequate liquidity to
meet the funding needs of the Company. Professional outside investment firms
manage the Company's investment portfolios according to the above objectives and
within parameters set by the Company's investment policy as approved by the
Investment Committee of the Board of Directors. Under the current investment
policy, the only derivative instrument the Company uses is covered call options.
A call option gives the purchaser a right to buy a stock at a specified price
within a specified time. In the fourth quarter of 1999, the Company began
writing call options on a limited basis on equity securities it owns
22
23
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT
MARKET RISK (CONTINUED)
(a "covered" call option) to manage exposure to equity price risk and enhance
investment returns. Two covered call options were written on highly appreciated
technology equity securities. One option expired in November and the other
option was settled in November thus no call options were outstanding as of
December 31, 1999. The two covered call options written resulted in a net
realized capital loss of $16,000.
Based on the effective duration of the fixed maturity investment portfolio, an
abrupt 100 basis point increase in interest rates along the entire interest rate
yield curve would adversely affect the fair value of fixed maturity investments
by approximately $7,900,000 at December 31, 1999 and $8,500,000 at December 31,
1998.
Based primarily on past annual performance relative to the Standard & Poors 500
Market Index (S&P 500), an abrupt ten percent decrease in the S&P 500 would
adversely affect the fair value of equity securities by approximately
$12,400,000 at December 31, 1999 and $10,000,000 at December 31, 1998.
A hypothetical ten percent weakening of all foreign currencies relative to the
U.S. dollar would adversely affect the fair value of the Company's investment in
international equity securities by approximately $1,900,000 at December 31, 1999
and $1,600,000 at December 31, 1998.
The Company believes that there would be no material effect on its net income
and cash flows in any of the above scenarios. This effect on net income and cash
flows does not consider the possible effects a change in economic activity could
have in such an environment. Investors, customers, regulators and legislators
could respond to these fluctuations in ways the Company cannot foresee. Because
the Company cannot be certain what specific actions would be taken and their
effects, the above sensitivity analyses assume no significant changes in the
Company's financial structure.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of Midwest Medical Insurance Holding
Company and Subsidiaries are presented on the following pages 24 through 57 of
this Annual Report on Form 10-K.
23
24
Midwest Medical Insurance Holding Company and Subsidiaries
Consolidated Financial Statements
Years ended December 31, 1999, 1998 and 1997
CONTENTS
Report of Independent Auditors ............................................. 25
Consolidated Financial Statements
Consolidated Balance Sheets ................................................ 26
Consolidated Statements of Income .......................................... 27
Consolidated Statements of Changes in Other Shareholders' Equity ........... 28
Consolidated Statements of Cash Flows ...................................... 29
Notes to Consolidated Financial Statements ................................. 30
24
25
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, 1999 and 1998, 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, 1999. 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 auditing standards generally accepted
in the United States. 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, 1999 and 1998, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. 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.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February 1, 2000
25
26
Midwest Medical Insurance Holding Company and Subsidiaries
Consolidated Balance Sheets
(In Thousands, Except for Share Amounts)
DECEMBER 31
1999 1998
---------------------------------
ASSETS
Investments:
Fixed maturities at fair value (cost: 1999--$159,464;
1998--$161,430) $153,950 $164,652
Equity securities at fair value (cost: 1999--$46,216; 1998--$41,907) 104,898 86,553
Short-term 9,128 3,556
Other 10,000 10,000
---------------------------------
277,976 264,761
Cash 1,821 647
Accrued investment income 2,317 1,739
Premiums receivable 7,143 2,023
Reinsurance recoverable on paid and unpaid losses 19,285 16,499
Amounts due from reinsurers 3,833 3,191
Other assets 7,801 6,623
---------------------------------
Total assets $320,176 $295,483
=================================
LIABILITIES, REDEEMABLE STOCK AND OTHER SHAREHOLDERS' EQUITY
Liabilities:
Unpaid losses and loss adjustment expenses $119,141 $110,964
Unearned premiums 12,797 8,173
Policyholder dividends 10,175 -
Retrospective premiums - 8,543
Deferred income taxes 12,201 10,966
Other liabilities 10,259 6,244
---------------------------------
Total liabilities 164,573 144,890
Redeemable stock:
Class A Common Stock--authorized 300,000 shares, issued and outstanding 123,509
shares in 1999 and 125,682 shares in 1998 7,802 8,146
Class B Common Stock--authorized, issued and outstanding 1 share 1 1
---------------------------------
7,803 8,147
Other shareholders' equity 147,800 142,446
---------------------------------
Total liabilities, redeemable stock and other shareholders' equity $320,176 $295,483
=================================
See accompanying notes.
26
27
Midwest Medical Insurance Holding Company and Subsidiaries
Consolidated Statements of Income
(In Thousands, Except for Per Share Amounts)
YEAR ENDED DECEMBER 31
1999 1998 1997
------------------------------------------------------
Revenues:
Net premiums earned $46,583 $35,014 $32,916
Net investment income 10,963 10,971 11,603
Realized capital gains 7,220 9,081 6,529
Other 2,823 1,352 1,144
------------------------------------------------------
67,589 56,418 52,192
Losses and expenses:
Losses and loss adjustment expenses 41,468 37,494 31,834
Policyholder dividends 10,175 - -
Underwriting, acquisition and insurance expenses 7,197 6,698 5,509
Other operating expenses 6,197 3,589 1,086
------------------------------------------------------
65,037 47,781 38,429
------------------------------------------------------
Income before income taxes 2,552 8,637 13,763
Income taxes 816 2,689 4,463
------------------------------------------------------
Net income $ 1,736 $ 5,948 $ 9,300
======================================================
Income per common share $ 13.92 $ 48.36 $ 77.79
======================================================
Income per common share--assuming dilution $ 12.53 $ 43.65 $ 70.23
======================================================
See accompanying notes.
27
28
Midwest Medical Insurance Holding Company and Subsidiaries
Consolidated Statements of Changes in Other Shareholders' Equity
(In Thousands)
ACCUMULATED
OTHER
PAID-IN RETAINED COMPREHENSIVE
TOTAL CAPITAL EARNINGS INCOME
----------------------------------------------------------
Balance at December 31, 1996 $111,278 $12,789 $ 84,615 $13,874
Comprehensive income:
Net income 9,300 - 9,300 -
Other comprehensive income:
Unrealized gains on securities net of $5,491 in
taxes 10,199 - - 10,199
Reclassification adjustment for gains included in
net income net of $2,269 in taxes (4,215) - - (4,215)
--------------
Total comprehensive income 15,284
Net income of non-insurance entities includable in
Class A Common Stock redemption value (272) - (272) -
---------------------------------------------------------
Balance at December 31, 1997 126,290 12,789 93,643 19,858
Comprehensive income:
Net income 5,948 - 5,948 -
Other comprehensive income:
Unrealized gains on securities net of $9,111 in
taxes 16,921 - - 16,921
Reclassification adjustment for gains included in
net income net of $3,132 in taxes (5,817) - - (5,817)
--------------
Total comprehensive income 17,052
Dividend paid by Midwest Medical Insurance Company to
Midwest Medical Insurance Holding Company (2,000) - (2,000) -
Net loss of non-insurance entities includable in Class
A Common Stock redemption value 1,104 - 1,104 -
---------------------------------------------------------
Balance at December 31, 1998 142,446 12,789 98,695 30,962
Comprehensive income:
Net income 1,736 - 1,736 -
Other comprehensive income:
Unrealized gains on securities net of $3,708 in
taxes 8,600 - - 8,600
Reclassification adjustment for gains included in
net income net of $2,394 in taxes (4,646) - - (4,646)
--------------
Total comprehensive income 5,690
Dividend paid by Midwest Medical Insurance Company to
Midwest Medical Insurance Holding Company (2,050) - (2,050) -
Net loss of non-insurance entities includable in Class
A Common Stock redemption value 1,714 - 1,714 -
---------------------------------------------------------
Balance at December 31, 1999 $147,800 $12,789 $100,095 $34,916
=========================================================
See accompanying notes.
28
29
Midwest Medical Insurance Holding Company and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
YEAR ENDED DECEMBER 31
1999 1998 1997
--------------------------------------------
OPERATING ACTIVITIES
Net income $ 1,736 $ 5,948 $ 9,300
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
(Increase) decrease in accrued investment income (578) 602 437
(Increase) decrease in premiums receivable (5,120) (1,489) 50
(Increase) decrease in reinsurance recoverable (2,786) 2,618 3,057
Increase in amounts due from reinsurers (642) (3,191) -
(Increase) decrease in other assets (1,178) (2,224) 1,468
Deferred tax provision (90) 1,354 1,494
Increase (decrease) in unpaid losses and loss adjustment expenses 8,177 3,158 (2,231)
Increase (decrease) in unearned premiums 4,624 2,101 (788)
Increase in policyholder dividends 10,175 - -
Decrease in retrospective premiums (8,543) (1,362) (933)
Decrease in amounts due reinsurers - (2,984) (4,290)
Increase (decrease) in other liabilities 4,015 (5,145) 3,287
Accretion of bond discount, net of premium amortization (636) (134) (573)
Realized capital gains (7,220) (9,081) (6,529)
Compensation expense for vested Class A common shares 253 224 253
--------------------------------------------
2,187 (9,605) 4,002
INVESTING ACTIVITIES
Purchases of fixed maturity investments and equity securities (171,139) (401,922) (311,947)
Sales of fixed maturity investments and equity securities 174,651 398,717 316,982
Calls and maturities of fixed maturity investments 2,000 1,250 -
Net sales (purchases) of short-term investments (5,572) 10,352 (6,011)
--------------------------------------------
(60) 8,397 (976)
FINANCING ACTIVITIES
Redemption of Class A Common Stock (953) (523) (648)
--------------------------------------------
Increase (decrease) in cash 1,174 (1,731) 2,378
Cash at beginning of year 647 2,378 -
--------------------------------------------
Cash at end of year $ 1,821 $ 647 $ 2,378
============================================
See accompanying notes.
29
30
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999
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.
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.
During 1997, MMIHC formed Midwest Medical Solutions, Inc. (Solutions) as a
business development company to strengthen and promote the independence and
interdependencies of physicians, clinics and hospitals that MMIC serves.
Business development opportunities being pursued include practice enhancement,
strategic consulting and technology services and support.
Effective January 1, 1998, Solutions purchased the assets and operations of
MedPower Information Resources, Inc. (MedPower). MedPower processes and
electronically submits medical claims for a network of over 100 provider
entities. MedPower also provides various information consulting and network
support services.
30
31
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
MMIHC Insurance Services, Inc. (Services) was incorporated in 1995 and began
active operations in January 1999 with the acquisition of a book of business
from Johnson-McCann Benefits, Inc. Services is an insurance agency specializing
in providing clients with group insurance products such as health, dental, life,
disability and workers' compensation.
MMIHC provides management and administrative services to MMIC, Solutions and
MedPower for a fee generally equal to the cost of services provided plus 10%.
Services operates independently with its own management and administrative staff
and therefore does not have a management agreement with MMIHC.
MMIC provides professional liability insurance to physicians, clinics, hospitals
and healthcare systems in Minnesota, Iowa, Nebraska, Wisconsin, Illinois, 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.
31
32
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of MMIHC and its
wholly-owned subsidiaries, MMIC, Services and Solutions, which includes
Solution's wholly-owned subsidiary, MedPower. 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.
Hereafter, MMIHC, MMIC, Services, Solutions and MedPower shall be collectively
referred to as the Company unless the reference pertains to a specific entity.
BASIS OF PRESENTATION
The consolidated financial statements have been presented in conformity with
accounting principles generally accepted in the United States, 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 12).
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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.
32
33
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
Consistent with management's classification of its investment 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 component of other
comprehensive income, 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.
Other investments are less than 20% equity interests in non-traded real estate
investment trusts 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 unpaid 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.
33
34
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
PREMIUMS AND POLICYHOLDER DIVIDENDS
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
MMIC'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.
Prior to 1999, MMIC had a retrospective premium program whereby physicians may
have received credits against future premiums based upon the loss experience of
MMIC. Amounts returned under the program were accrued when approved by the Board
of Directors and reflected as a reduction in net premiums earned. Beginning in
1999, the retrospective premium program was replaced by a policyholder dividend
program. Policyholder dividends are accrued when approved by the Board of
Directors and are recorded as a separate component of losses and expenses in the
consolidated statements of income.
REINSURANCE
MMIC 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 MMIC 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.
ACQUISITION COSTS
Acquisition costs are expensed when incurred. Due to the nature of its
operations, MMIC does not pay significant amounts in commissions.
34
35
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
OTHER REVENUES
Other revenues are primarily comprised of commission income from insurance
carriers for Services and electronic claims processing fees from healthcare
providers for MedPower. Generally, such revenues are earned as the related
services are provided or performed.
INCOME TAXES
The Company files a consolidated tax return with its subsidiaries. Income tax
expense is allocated to the subsidiaries based upon separate company taxable
income under a tax-sharing agreement. 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
Basic earnings per share (EPS) is computed by dividing income available to
common shareholders by the weighted-average number of common shares outstanding
for the year. Diluted EPS reflects the potential dilution that could occur if
earned but unissued shares of Class A common stock were issued.
RECLASSIFICATIONS
Certain amounts in the prior years' financial statements have been reclassified
to conform with the current year presentation.
2. 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 14).
35
36
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. REDEEMABLE STOCK (CONTINUED)
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.
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.
36
37
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. REDEEMABLE STOCK (CONTINUED)
Following is the detail of changes in redeemable stock for each of the three
years in the period ended December 31, 1999 (in thousands, except for share and
per share amounts):
CLASS A COMMON STOCK CLASS B MMIHC
-------------------------- COMMON PAID-IN
TOTAL SHARES AMOUNT STOCK CAPITAL
----------------------------------------------------------------
Balance at December 31, 1996 $ 7,604 118,209 $1 $1 $4,490
Comprehensive income:
Net income of non-insurance entities includable in
Class A Common Stock redemption value 272 - - - -
Other comprehensive income:
Unrealized gains on securities net of $6 in taxes 11 - - - -
-------
Total comprehensive income 283
Redemption of shares due to policyholder terminations
by effective date:
January 1, 1997 to June 30, 1997; NRV of $64.33 (278) (4,363) - - (165)
July 1, 1997 to December 31, 1997; NRV of $62.12 (370) (5,943) (1) - (220)
Issuance of shares to vested policyholders - 9,406 1 - -
Initial issuance of shares to policyholders upon vesting 253 4,013 - - 253
Other (15) - - - -
----------------------------------------------------------------
Balance at December 31, 1997 (carried forward) 7,477 121,322 1 1 4,358
ACCUMULATED
MMIHC OTHER
RETAINED COMPREHENSIVE
EARNINGS INCOME
------------------------------------
Balance at December 31, 1996 $3,044 $ 68
Comprehensive income:
Net income of non-insurance entities includable in
Class A Common Stock redemption value 272 -
Other comprehensive income:
Unrealized gains on securities net of $6 in taxes - 11
Total comprehensive income
Redemption of shares due to policyholder terminations
by effective date:
January 1, 1997 to June 30, 1997; NRV of $64.33 (113) -
July 1, 1997 to December 31, 1997; NRV of $62.12 (149) -
Issuance of shares to vested policyholders (1) -
Initial issuance of shares to policyholders upon vesting - -
Other (15) -
------------------------------------
Balance at December 31, 1997 (carried forward) 3,038 79
37
38
2. REDEEMABLE STOCK (CONTINUED)
CLASS A COMMON STOCK CLASS B MMIHC
-------------------------- COMMON PAID-IN
TOTAL SHARES AMOUNT STOCK CAPITAL
--------------------------------------------------------------
Balance at December 31, 1997 (brought forward) $ 7,477 121,322 $1 $1 $4,358
Comprehensive income:
Net loss of non-insurance entities includable in
Class A Common Stock redemption value (1,104) - - - -
Other comprehensive income:
Unrealized gains on securities net of $39 in taxes 73 - - - -
-------
Total comprehensive income (1,031)
Redemption of shares due to policyholder terminations
by effective date:
January 1, 1998 to June 30, 1998; NRV of $61.63 (251) (4,070) - - (147)
July 1, 1998 to December 31, 1998; NRV of $54.70 (272) (4,935) (1) - (160)
Issuance of shares to vested policyholders - 9,437 1 - -
Initial issuance of shares to policyholders upon vesting 224 3,928 - - 224
Dividend from MMIC 2,000 - - - 2,000
--------------------------------------------------------------
Balance at December 31, 1998 (carried forward) 8,147 125,682 1 1 6,275
ACCUMULATED
MMIHC OTHER
RETAINED COMPREHENSIVE
EARNINGS INCOME
--------------------------------------
Balance at December 31, 1997 (brought forward) $3,038 $ 79
Comprehensive income:
Net loss of non-insurance entities includable in
Class A Common Stock redemption value (1,104) -
Other comprehensive income:
Unrealized gains on securities net of $39 in taxes - 73
Total comprehensive income
Redemption of shares due to policyholder terminations
by effective date:
January 1, 1998 to June 30, 1998; NRV of $61.63 (104) -
July 1, 1998 to December 31, 1998; NRV of $54.70 (111) -
Issuance of shares to vested policyholders (1) -
Initial issuance of shares to policyholders upon vesting - -
Dividend from MMIC - -
--------------------------------------
Balance at December 31, 1998 (carried forward) 1,718 152
38
39
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Redeemable Stock (continued)
CLASS A COMMON STOCK CLASS B MMIHC
-------------------------- COMMON PAID-IN
TOTAL SHARES AMOUNT STOCK CAPITAL
----------------------------------------------------------------
Balance at December 31, 1998 (brought forward) $8,147 125,682 $1 $1 $6,275
Comprehensive income:
Net loss of non-insurance entities includable in
Class A Common Stock redemption value (1,714) - - - -
Other comprehensive income:
Unrealized gains on securities net of $11 in taxes 20 - - - -
--------
Total comprehensive income (1,694)
Redemption of shares due to policyholder
terminations by effective date:
January 1, 1999 to June 30, 1999; NRV of $64.81 (504) (7,784) - - (341)
July 1, 1999 to December 31, 1999; NRV of $60.10 (450) (7,240) (1) - (304)
Issuance of shares to vested policyholders 1 8,702 1 - -
Initial issuance of shares to policyholders upon vesting 253 4,149 - - 253
Dividend from MMIC 2,050 - - - 2,050
----------------------------------------------------------------
Balance at December 31, 1999 $7,803 123,509 $1 $1 $7,933
================================================================
ACCUMULATED
MMIHC OTHER
RETAINED COMPREHENSIVE
EARNINGS INCOME
------------------------------------
Balance at December 31, 1998 (brought forward) $ 1,718 $152
Comprehensive income:
Net loss of non-insurance entities includable in
Class A Common Stock redemption value (1,714) -
Other comprehensive income:
Unrealized gains on securities net of $11 in taxes - 20
Total comprehensive income
Redemption of shares due to policyholder
terminations by effective date:
January 1, 1999 to June 30, 1999; NRV of $64.81 (163) -
July 1, 1999 to December 31, 1999; NRV of $60.10 (145) -
Issuance of shares to vested policyholders - -
Initial issuance of shares to policyholders upon vesting - -
Dividend from MMIC - -
------------------------------------
Balance at December 31, 1999 $ (304) $172
====================================
39
40
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS
Components of net investment income are summarized as follows (in thousands):
1999 1998 1997
------------------------------------------------------
Fixed maturities $ 9,836 $ 9,340 $10,901
Equity securities 866 820 523
Short-term investments 466 926 939
Other investments 1,015 907 94
------------------------------------------------------
12,183 11,993 12,457
Investment expenses (1,220) (1,022) (854)
------------------------------------------------------
$10,963 $10,971 $11,603
======================================================
The cost (amortized cost for fixed maturities) and fair value of available for
sale investments are as follows (in thousands):
DECEMBER 31, 1999
------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------------------------------------------------------
Fixed maturities:
MMIC:
United States Government $ 74,387 $ 25 $(2,717) $ 71,695
Public utilities 1,450 - (205) 1,245
Industrial and other 83,627 31 (2,648) 81,010
------------------------------------------------------------
Total $ 159,464 $ 56 $(5,570) $153,950
============================================================
Equity securities:
MMIHC:
Common stock:
Industrial, miscellaneous and other $ 282 $ 266 $ - $ 548
MMIC:
Common stock:
Banks, trusts and insurance companies 3,375 4,703 - 8,078
Industrial, miscellaneous and other 42,559 55,504 (1,791) 96,272
------------------------------------------------------------
Total $ 46,216 $ 60,473 $(1,791) $104,898
============================================================
40
41
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
DECEMBER 31, 1998
------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------------------------------------------------------
Fixed maturities:
MMIC:
United States Government $110,729 $ 2,729 $ (70) $113,388
Public utilities 1,609 5 - 1,614
Industrial and other 49,092 651 (93) 49,650
------------------------------------------------------------
Total $161,430 $ 3,385 $(163) $164,652
============================================================
Equity securities:
MMIHC:
Common stock:
Industrial, miscellaneous and other $ 520 $ 234 $ - $ 754
MMIC:
Common stock:
Banks, trusts and insurance companies 3,749 3,873 - 7,622
Industrial, miscellaneous and other 37,638 41,424 (885) 78,177
------------------------------------------------------------
Total $41,907 $45,531 $(885) $ 86,553
============================================================
The components of the unrealized appreciation on available for sale securities
as of December 31 are as follows (in thousands):
1999 1998
---------------------------------- -----------------------------
MMIHC MMIC MMIHC MMIC
---------------------------------- -----------------------------
Fixed maturities:
Gross unrealized gains $ - $ 56 $ - $ 3,385
Gross unrealized losses - (5,570) - (163)
Equity securities:
Gross unrealized gains 266 60,207 234 45,297
Gross unrealized losses - (1,791) - (885)
---------------------------------- -----------------------------
266 52,902 234 47,634
Deferred income taxes (94) (17,986) (82) (16,672)
---------------------------------- ----------------------------
$172 $34,916 $152 $30,962
================================== =============================
41
42
\ Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
The amortized cost and market value of fixed maturities at December 31, 1999, 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 $ 4,822 $ 4,821
Due after one year through five years 31,224 30,596
Due after five years through ten years 45,090 43,274
Due after ten years 78,328 75,259
====================================
$159,464 $153,950
====================================
Proceeds from sales of available for sale investments and the related gross
realized gains and losses are as follows (in thousands):
GROSS GROSS
PROCEEDS FROM REALIZED REALIZED
SALES GAINS LOSSES
-----------------------------------------------------
Year ended December 31, 1999:
Fixed maturities $154,388 $ 608 $(3,700)
Equity securities 20,263 11,292 (980)
Year ended December 31, 1998:
Fixed maturities 382,048 3,600 (769)
Equity securities 16,669 6,536 (286)
Year ended December 31, 1997:
Fixed maturities 310,235 5,806 (884)
Equity securities 6,747 2,168 (561)
42
43
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
Net unrealized appreciation of fixed maturities increased (decreased) by
$(8,736,000), $1,837,000 and $(2,197,000) and net unrealized appreciation of
equity securities increased by $14,036,000, $15,360,000 and $11,417,000 for the
years ended December 31, 1999, 1998 and 1997, respectively.
4. POLICYHOLDER DIVIDENDS
In 1999, MMIC instituted a policyholder dividend program which replaced the
previous retrospective premium credit program for physicians.
To implement the physician and clinic policyholder dividend program, MMIC issued
participating policy endorsements to all active physician and clinic accounts
during 1999. To implement the hospital policyholder dividend program, MMIC will
issue participating policy endorsements to all active hospital accounts during
2000. Participating policies represented 91% of total premiums in force and
premium income at December 31, 1999.
In the third quarter of 1999, MMIC's Board of Directors declared a $10,100,000
dividend to be paid to physician and clinic policyholders in four equal
installments in February, May, August and November 2000. The dividend will be
awarded proportionately based on annual premiums for physician and clinic
policyholders that were insured by MMIC in 1995 and remain insured throughout
2000.
In the fourth quarter of 1999, MMIC's Board of Directors declared a $75,000
dividend to be paid to hospital policyholders for policies that were written
from 1995 through 1998 and that renew in 2000. The dividend will be awarded
based on the number of years insured with MMIC and will be paid within two
months after the hospital policy renews in 2000.
43
44
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. POLICYHOLDER DIVIDENDS (CONTINUED)
Prior to 1999, retrospective premium credits were deducted from net premiums
earned. Under the new policyholder dividend program, dividends are recorded as a
component of losses and expenses. The following illustrates what net premiums
earned would have been had retrospective premium credits been issued as
policyholder dividends.
1999 1998 1997
----------------------------------------------
Net premiums earned per consolidated
statements of income $46,583 $35,014 $32,916
Retrospective premium credits 317 6,719 6,371
----------------------------------------------
Pro forma net premiums earned $46,900 $41,733 $39,287
==============================================
5. RETROSPECTIVE PREMIUMS
Effective January 1, 1999, MMIC replaced its retrospective premium program with
a policyholder dividend arrangement as discussed in Note 4. As of December 31,
1998, MMIC had accrued retrospective premium credits of $5,200,000, $280,000 and
$3,063,000 related to Minnesota, North Dakota and Iowa policyholders,
respectively.
A provision of the agreement and plan of merger between IPMIT and MMIC required
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. This agreement
stipulated that any amounts due under this provision be finalized using
financial information as of December 31, 1998. During 1999, final payments of
$3,058,000 were made to former IPMIT policyholders under the terms of the
agreement. During 1998, retrospective premium payments of $3,073,000 were made
to former IPMIT policyholders. Actual retrospective premium payments made to
Minnesota and North Dakota policyholders in 1999 and 1998 were $5,802,000 and
$5,008,000, respectively.
44
45
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. RETROSPECTIVE PREMIUMS (CONTINUED)
A provision of the agreement and plan of merger between MLM and MMIC 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, 1999, there has been no favorable
development and, therefore, there is no accrual related to this provision.
6. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
The reconciliation of the liability for unpaid losses and loss adjustment
expenses is as follows (in thousands):
1999 1998 1997
--------------------------------------------
Balance as of January 1, net of reinsurance
recoverables $ 94,467 $ 89,394 $ 90,342
Incurred related to:
Current year 45,942 41,927 40,186
Prior years (4,474) (4,433) (8,352)
--------------------------------------------
Total incurred 41,468 37,494 31,834
Paid related to:
Current year 2,253 3,666 2,685
Prior years 33,788 28,755 30,097
--------------------------------------------
Total paid 36,041 32,421 32,782
--------------------------------------------
Balance as of December 31, net of reinsurance
recoverables 99,894 94,467 89,394
Reinsurance recoverables at December 31 19,247 16,497 18,412
--------------------------------------------
Balance as of December 31, gross $ 119,141 $ 110,964 $ 107,806
============================================
45
46
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES (CONTINUED)
The Company continually evaluates emerging trends in the development of loss
liabilities including the trends related to the pre-merger IPMIT and MLM
business. Based on this analysis, management periodically adjusts their
estimates of ultimate losses.
7. SEGMENT INFORMATION
The Company is organized into five legal entity business segments consisting of
MMIHC, MMIC, Services, Solutions and MedPower. The business and accounting
policies of the reportable segments are described in Note 1 to the Consolidated
Financial Statements. Management evaluates the performance of each business
segment based primarily on profit or loss from operations. With the exception of
foreign stocks and bonds held as investments by MMIC, all business transactions
are conducted in the United States. The following financial information
summarizes the results of operations and total assets reported by the five
business segments for the years ended 1999, 1998 and 1997 (in thousands).
46
47
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. SEGMENT INFORMATION (CONTINUED)
1999
---------------------------------------------------------------------------------------------
MMIHC MMIC SERVICES SOLUTIONS MEDPOWER ELIMINATIONS (1) CONSOLIDATED
---------------------------------------------------------------------------------------------
Revenues:
External customers $ - $ 47,181 $ 1,661 $ - $ 410 $ - $ 49,252
Intersegment 16,273 - - - 13 (16,286) -
Net investment income (696) 10,780 21 17 13 828 10,963
Other (2) 185 7,041 - - - 148 7,374
---------------------------------------------------------------------------------------------
15,762 65,002 1,682 17 436 (15,310) 67,589
Total expenses 15,584 59,904 1,648 1,408 1,803 (15,310) 65,037
---------------------------------------------------------------------------------------------
Income (loss) before income taxes 178 5,098 34 (1,391) (1,367) - 2,552
Income taxes 91 1,648 15 (473) (465) - 816
---------------------------------------------------------------------------------------------
Net income (loss) $ 87 $ 3,450 $ 19 $ (918) $ (902) $ - $ 1,736
=============================================================================================
Total assets $160,848 $311,367 $ 1,634 $ 1,539 $ 1,123 $(156,335) $320,176
=============================================================================================
(1) Intersegment eliminations for revenues and expenses are primarily for
management, administrative and investment services provided by MMIHC.
Eliminations for assets consist primarily of investments in wholly-owned
subsidiaries, intersegment receivables for management fees and
reclassifications between assets and liabilities for taxes and reinsurance.
(2) Other revenues consist primarily of net realized capital gains.
47
48
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. SEGMENT INFORMATION (CONTINUED)
1998
---------------------------------------------------------------------------------------------
MMIHC MMIC SERVICES SOLUTIONS MEDPOWER ELIMINATIONS (1) CONSOLIDATED
---------------------------------------------------------------------------------------------
Revenues:
External customers $ - $ 35,771 $ - $ - $ 387 $ - $ 36,158
Intersegment 14,038 - - - - (14,038) -
Net investment income (429) 10,731 - 3 2 664 10,971
Other (2) 139 8,944 - - - 206 9,289
---------------------------------------------------------------------------------------------
13,748 55,446 - 3 389 (13,168) 56,418
Total expenses 13,481 45,126 - 916 1,426 (13,168) 47,781
---------------------------------------------------------------------------------------------
Income (loss) before income taxes 267 10,320 - (913) (1,037) - 8,637
Income taxes 104 3,268 - (320) (363) - 2,689
---------------------------------------------------------------------------------------------
Net income (loss) $ 163 $ 7,052 $ - $ (593) $ (674) $ - $ 5,948
=============================================================================================
Total assets $154,727 $287,639 $ 3 $ 2,728 $ 1,693 $(151,307) $295,483
=============================================================================================
(1) Intersegment eliminations for revenues and expenses are primarily for
management, administrative and investment services provided by MMIHC.
Eliminations for assets consist primarily of investments in wholly-owned
subsidiaries, intersegment receivables for management fees and
reclassifications between assets and liabilities for taxes and reinsurance.
(2) Other revenues consist primarily of net realized capital gains.
48
49
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. SEGMENT INFORMATION (CONTINUED)
1997
------------------------------------------------------------------------------------------------
MMIHC MMIC SERVICES SOLUTIONS MEDPOWER ELIMINATIONS (1) CONSOLIDATED
------------------------------------------------------------------------------------------------
Revenues:
External customers $ - $ 33,795 $- $- $- $ - $ 33,795
Intersegment 9,901 - - - - (9,901) -
Net investment income 19 11,160 - - - 424 11,603
Other (2) 47 6,482 2 - - 263 6,794
--------------------------------------------------------------------------------------------
9,967 51,437 2 - - (9,214) 52,192
Total expenses 9,535 38,108 - - - (9,214) 38,429
--------------------------------------------------------------------------------------------
Income before income taxes 432 13,329 2 - - - 13,763
Income taxes 162 4,301 - - - - 4,463
--------------------------------------------------------------------------------------------
Net income $ 270 $ 9,028 $2 $- $- $ - $ 9,300
============================================================================================
Total assets $ 137,247 $261,780 $5 $- $- $(123,517) $275,515
============================================================================================
(1) Intersegment eliminations for revenues and expenses are primarily for
management, administrative and investment services provided by MMIHC.
Eliminations for assets consist primarily of investments in wholly-owned
subsidiaries, intersegment receivables for management fees and
reclassifications between assets and liabilities for taxes and reinsurance.
(2) Other revenues consist primarily of net realized capital gains.
49
50
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES
Components of income taxes are as follows (in thousands):
1999 1998 1997
-----------------------------------------
Current provision $906 $1,335 $2,969
Deferred tax provision (90) 1,354 1,494
-----------------------------------------
$816 $2,689 $4,463
=========================================
The Company's income taxes differ from the federal statutory rate applied to
income before tax as follows (in thousands):
1999 1998 1997
--------------------------------
Income before tax at the federal statutory rate
(34% - 1999, 35% - 1998 and 1997) $868 $3,023 $4,817
Tax-exempt income (net of proration adjustment) - - (775)
Dividends received deductions (net of proration adjustment) (81) (99) (89)
State income taxes, net of federal tax benefit 86 37 198
Payment of prior year taxes - - 300
Recovery of prior year taxes (59) (267) -
Other 2 (5) 12
--------------------------------
$816 $2,689 $4,463
================================
The deferred income tax provision includes the following differences between
financial and income tax reporting (in thousands):
1999 1998 1997
---------------------------------
Discounting of post-1986 unpaid losses and loss adjustment
expenses $ 167 $ 842 $ 323
Liabilities not currently deductible (121) 596 636
Unearned premiums (256) (151) 57
Investment income not currently taxable 156 - -
Utilization of alternative minimum tax carryforwards - - 496
Other (36) 67 (18)
---------------------------------
$ (90) $1,354 $1,494
=================================
50
51
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
The Company made income tax payments of $1,751,000, $3,041,000 and $1,518,000 in
1999, 1998 and 1997, respectively.
The components of the net deferred income tax (liability) asset as of December
31 are as follows (in thousands):
1999 1998
--------------------------
Deferred tax assets:
Unpaid losses and loss adjustment expenses $ 3,990 $ 4,154
Liabilities not currently deductible 1,200 1,079
Unearned premiums 884 628
Other 730 550
--------------------------
6,804 6,411
Deferred tax liabilities:
Unrealized gains (18,077) (16,754)
Other (928) (623)
--------------------------
(19,005) (17,377)
--------------------------
$ (12,201) $(10,966)
==========================
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.
51
52
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. 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, 1999. The Company evaluates the
financial condition of its reinsurers and monitors concentration of credit risk
arising from similar geographic regions, activities or economic characteristics
of the reinsurers to minimize its exposure to significant losses from reinsurer
insolvencies. Reinsurance recoverables on paid and unpaid losses of $15,648,000
and $13,215,000 are associated with a single reinsurer, General Reinsurance
Corporation, at December 31, 1999 and 1998, respectively. The Company also holds
collateral under related reinsurance agreements in the form of letters of credit
totaling $2,612,000 that can be drawn upon in the event the applicable
reinsuring company is unable to pay its obligation to MMIC.
MMIC is authorized to issue policies with limits not to exceed $12,000,000 for
each claim and $14,000,000 in the aggregate under each policy in any one policy
year. Limits in excess of $12,000,000 for each claim and $14,000,000 annual
aggregate are available to physicians and clinics through reinsurance placed on
a facultative basis by MMIC. The Company generally retains the first $750,000 of
each claim and reinsures the remainder through a treaty under which premiums are
subject to adjustment based on experience.
The effect of reinsurance on premiums written and earned for 1999, 1998 and 1997
is as follows (in thousands):
1999 1998 1997
----------------------------- ----------------------------- -----------------------------
WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED
----------------------------- ----------------------------- -----------------------------
Direct $51,672 $47,048 $39,431 $37,329 $35,722 $36,511
Assumed 48 48 97 97 - -
Ceded (1,897) (513) (2,601) (2,412) (3,595) (3,595)
----------------------------- ----------------------------- -----------------------------
Net $49,823 $46,583 $36,927 $35,014 $32,127 $32,916
============================= ============================= =============================
Loss and loss adjustment expenses incurred are net of applicable reinsurance of
$5,204,000, $2,240,000 and $2,455,000 for the years ended December 31, 1999,
1998 and 1997, respectively.
52
53
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. REINSURANCE (CONTINUED)
In 1998, the Company commuted reinsurance treaties covering the period January
1, 1991 through December 31, 1991. Net premiums recovered as a result of these
commutations of $789,000 have been included in net premiums earned in 1998. As a
result of this and prior treaty commutations, the Company has no reinsurance
coverage for the exposure period October 1, 1986 through December 31, 1991. Due
to the nature of the Company's policies, there is no risk of incurring future
losses related to this time period.
10. 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, 1999 and 1998, respectively, non-assigned structured
settlements guaranteed $3,489,000 and $5,820,000 of payments under annuity
contracts for which MMIC and its reinsurers paid $2,241,000 and $2,627,000. 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.
11. BENEFIT PLANS
Substantially all employees at MMIHC are covered by a non-contributory defined
contribution pension plan. Contributions to the plan are based upon each covered
employee's salary. Substantially all employees at MMIHC are also covered by a
401(k) plan that provides a 50% match on employee contributions subject to
certain limitations. Total contributions charged to expense for the years ended
December 31, 1999, 1998 and 1997 were $581,000, $521,000 and $393,000,
respectively.
53
54
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. BENEFIT PLANS (CONTINUED)
MMIHC 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 invests in specified assets which
are designed to coordinate with the projected obligation under the SERP. The net
periodic pension cost for this plan was $441,000, $404,000 and $363,000 for the
years ended December 31, 1999, 1998 and 1997, respectively. The liability
recognized in the consolidated balance sheets at December 31, 1999 and 1998
related to this plan was $2,704,000 and $2,439,000, respectively.
MMIHC 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, 1999, 1998 and
1997 was $23,000, $41,000 and $27,000, respectively. As of December 31, 1999,
the net post-retirement benefit plan liability was $19,000. As of December 31,
1998, the plan was fully funded.
12. RECONCILIATION WITH STATUTORY ACCOUNTING PRINCIPLES
The following is a reconciliation of net income and shareholders' equity under
accounting principles generally accepted in the United States (US GAAP) with
that reported for MMIC on a statutory basis (in thousands):
Net Income
YEAR ENDED DECEMBER 31
1999 1998 1997
-------------------------------------
As reported under US GAAP $1,736 $5,948 $ 9,300
Loss (income) of non-insurance entities 1,714 1,104 (272)
-------------------------------------
On the basis of US GAAP, MMIC only 3,450 7,052 9,028
Additions (deductions):
Deferred income taxes 37 1,390 1,525
-------------------------------------
On the basis of statutory accounting principles $3,487 $8,442 $10,553
=====================================
54
55
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. RECONCILIATION WITH STATUTORY ACCOUNTING PRINCIPLES (CONTINUED)
Shareholders' Equity
DECEMBER 31
1999 1998 1997
----------------------------------------
As reported under US GAAP $147,800 $142,446 $126,290
Additions (deductions):
Deferred income taxes 12,878 11,526 4,158
Unrealized (gain) loss on fixed maturities 5,514 (3,222) (1,385)
Non-admitted assets (1,000) - -
Prescribed market value differences (253) - -
Other (179) (34) (3)
----------------------------------------
On the basis of statutory accounting principles $164,760 $150,716 $129,060
========================================
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 accounting principles generally accepted in the United States.
Under Minnesota insurance statutes, MMIC is required to maintain statutory
surplus in excess of ten times its per risk reinsurance retention limit. Since
MMIC limited its retention to $750,000 on any single risk, the minimum statutory
surplus level was $7,500,000 for 1999 and 1998.
Dividends that exceed the greater of 10% of MMIC's prior year-end policyholder
surplus or MMIC's prior year net income excluding realized capital gains are
considered extraordinary under Minnesota insurance statutes. Payment of
extraordinary dividends are subject to the approval of the Commissioner of the
Department of Commerce of the State of Minnesota. At December 31, 1999, the
maximum dividend that may be paid by MMIC in 2000 without regulatory approval is
approximately $16,476,000. MMIC paid cash dividends to MMIHC of $2,050,000 and
$2,000,000 in 1999 and 1998, respectively.
55
56
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except for share and per share amounts):
1999 1998 1997
----------------------------------------------
Numerator for basic and dilutive earnings per share
available to common shareholders $ 1,736 $ 5,948 $ 9,300
==============================================
Denominator:
Denominator for basic earnings per share--
weighted average shares 124,725 123,004 119,554
Effect of dilutive securities:
Unvested shares 13,792 13,247 12,873
----------------------------------------------
Denominator for dilutive earnings per share--
adjusted weighted-average shares and
assumed conversions 138,517 136,251 132,427
==============================================
Basic earnings per share $ 13.92 $ 48.36 $ 77.79
==============================================
Diluted earnings per share $ 12.53 $ 43.65 $ 70.23
==============================================
56
57
14. 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
----------------------------------------------------------------
(000s)
December 31, 1995 $6,975 116,251* $60.00
===================== ======================
December 31, 1996 $7,604 118,209 $64.33
===================== ======================
December 31, 1997 $7,477 121,322 $61.63
===================== ======================
December 31, 1998 $8,147 125,682 $64.81
===================== ======================
December 31, 1999 $7,803 123,509 $63.18
===================== ======================
* Includes pro forma shares related to merger.
57
58
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
58
59
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, 1999, are as follows:
CLASS A
COMMON
DIRECTOR PRINCIPAL SHARES
NAME AGE SINCE OCCUPATION OWNED
- -------------------------------------------------------------------------------------------------
Michael Abrams 38 1996 Exec V.P. Iowa Medical Society -
John R. Balfanz, M.D. 54 1995 Physician 16
Gail P. Bender, M.D. 52 1996 Physician 25
James R. Bishop, M.D. 58 1994 Physician -
David P. Bounk 53 1995 President and CEO -
Thomas C. Evans, M.D. 44 1999 Physician 30
Roger L. Frerichs, M.D. 60 1988 Surgeon 92
Richard Geier, Jr., M.D. 59 1995 Physician 28
Anthony C. Jaspers, M.D. 52 1996 Physician 54
Russel J. Kuzel, M.D. 47 1997 Physician 29
Wayne F. Leebaw, M.D. 56 1994 Physician 26
Mark O. Liaboe, M.D. 46 1999 Physician 7
Steven A. McCue, M.D. 58 1995 Physician 133
Harold W. Miller, M.D. 52 1996 Physician 29
Anton S. Nesse, M.D. 61 1989 Radiologist 56
Mark D. Odlund, M.D. 47 1996 Physician 94
G. William Orr, M.D. 64 1996 Physician 57
Paul S. Sanders, M.D. 55 1984 CEO-MN Medical Assoc. -
Richard D. Schmidt, M.D.
Secretary 56 1990 Physician 158
Judith F. Shank, M.D. 57 1999 Physician 16
Andrew J. K. Smith, M.D.
Chairman of Board 57 1990 Neurological Surgeon -
G. David Spoelhof, M.D. 46 1989 Physician 51
Tom D. Throckmorton, M.D. 54 1997 Physician 76
R. Bruce Trimble, M.D.
Vice Chair of Board 59 1993 Physician -
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-officio director; and
(4) such additional ex-officio and
59
60
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, 1999, the directors of MMIHC, as a group, owned 977 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 $41,707. 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.
60
61
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 SERVICE
POSITION AS PRINCIPAL
NAME AGE WITH COMPANY AN OFFICER OCCUPATION
- -------------------------------------------------------------------------------------------------------------------
David P. Bounk 53 President and Chief Executive 8/1/90 to date President and Chief Executive
Officer - MMIHC Officer - MMIHC
Niles A. Cole 38 Vice President-Finance, 1998 to date Vice President-Finance,
Treasurer and Chief Financial Treasurer and Chief Financial
Officer Officer
Jack L. Kleven 53 President - MMIC and Chief 1986 to date President - MMIC and Chief
Operating Officer Operating Officer
Elizabeth S. Lincoln 46 Vice President-Law and Health 1990 to date Vice President-Law and Health
Policy Policy
Thomas H. Lee 56 Vice President - Information 7/99 to date Vice President - Information
Systems Systems
Gerald M. O'Connell 45 Vice President - Marketing 1998 to date Vice President - Marketing
Michael G. Rutz 46 Vice President-Underwriting 5/15/95 to date Vice President-Underwriting
Jerry A. Zeitlin 49 Vice President - Claims 7/99 to date Vice President - Claims
Mr. Bounk has over 30 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.
61
62
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(CONTINUED)
Mr. Bounk has an employment agreement which renews annually 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 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. Cole has over 16 years experience in the insurance industry, including 6
years as Vice President and Controller of Washington State Physician's Insurance
Association. He has been in his current position since March 1998. He has BS
degrees in accounting and finance.
Mr. Kleven has over 25 years experience in medical malpractice claims adjusting
and management. He joined the Exchange in 1983, and was Vice President, Claims
since March 1986. He was promoted to Chief Operating Officer on January 1, 1998.
He was promoted to CEO/President of MMIC effective September 1, 1999. 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 16 years experience in medical professional liability risk
management. She joined the Exchange in 1982, and was Vice President, Risk
Management since January 1990. She transferred to Vice President, Law and Health
Policy, effective January 1, 1998. She has a law degree.
Mr. Lee has over 25 years experience in the insurance industry. Prior to joining
MMIHC in 1998 he owned an insurance related technology consulting business. From
1971 to 1989 he was Senior Vice President - Administration of American Hardware
Mutual Insurance Company. He has BA degrees in mathematics and statistics.
Mr. Rutz has over 21 years experience in the insurance industry, including 11
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.
62
63
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(CONTINUED)
Mr. O'Connell has over 23 years in the medical malpractice segment of the
insurance industry. From 1977 to 1995, he was with St. Paul Fire and Marine
Insurance Company holding various marketing and underwriting management
positions. He joined the Company in October 1996. He has a BS in Agriculture
Business Management with an emphasis in Insurance.
Mr. Zeitlin has over 26 years of claims experience in the property-casualty
insurance industry. Prior to joining MMIHC in 1993 he was Liability Supervisor
for The St. Paul Companies from 1979 to 1993. He has a BS degree in Liberal
Arts.
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 1999, required Forms 3 were
not filed for the new directors and officers. This failure was cured by filings
of Forms 5 made after the end of the year.
63
64
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 ALL OTHER
NAME OF INDIVIDUAL CAPACITIES IN ---------------------------
OR NUMBER IN GROUP WHICH SERVED SALARY BONUS COMPENSATION(A)
- -------------------------------------------------------------- ------------------------------------------------
David P. Bounk President and Chief 1999 $213,981 $85,830 $34,348
Executive Officer - 1998 200,187 56,126 32,272
MMIHC 1997 187,088 51,024 20,963
Jack L. Kleven President - MMIC and 1999 177,624 61,636 32,066
Chief Operating Officer 1998 167,716 43,752 30,847
1997 145,840 39,796 17,193
Michael G. Rutz Vice President- 1999 125,000 36,694 31,377
Underwriting 1998 119,816 34,233 31,406
1997 114,110 32,604 14,113
Gerald M. O'Connell Vice President-Marketing 1999 117,196 34,749 29,864
1998 109,000 11,530 21,739
1997 95,077 2,423 17,850
Elizabeth S. Lincoln Vice President-Law 1999 113,332 33,080 26,826
and Health Policy 1998 108,015 30,861 29,242
1997 102,871 29,106 13,286
(A) Includes employer contributions to qualified retirement plans, car
allowances 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 62 with 10 years of service of 70% (55% for new officers after 1997) of the
officer's final average salary. Benefits are reduced for years of service less
than 10 and retirement prior to age 62. The annual benefit payable under the
SERP is reduced by 50% of the officer's primary Social Security benefit and 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--$201,500; Mr. Kleven--$125,900; Mr.
Rutz--$147,100; Mr. O'Connell--$96,400 and Ms. Lincoln--$82,000. The estimated
annual retirement benefits were calculated assuming salary increases of five
percent per year, discounted four percent per year for future inflation to
express the estimated benefits in today's dollars.
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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.
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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 for the year ended December 31, 1999 are
included in this annual report (Form 10-K) in Item 8:
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Income for the years ended December 31,
1999, 1998 and 1997
Consolidated Statements of Changes in Other Shareholders' Equity for
the years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended December
31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
(a)(2) The following consolidated financial statement schedules of Midwest
Medical Insurance Holding Company 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 1999.
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67
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 15, 2000
------------------------------ ------------------
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 15, 2000
- ---------------------------------------
David P. Bounk
/s/ Niles Cole Principal Financial Officer and March 15, 2000
- ---------------------------------------
Niles Cole Principal Accounting Officer
* Director, Chairman of the Board March 15, 2000
- ---------------------------------------
Andrew J.K. Smith, M.D.
* Director March 15, 2000
- ---------------------------------------
Michael Abrams
* Director March 15, 2000
- ---------------------------------------
John R. Balfanz, M.D.
* Director March 15, 2000
- ---------------------------------------
Gail P. Bender, M.D.
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68
* Director March 15, 2000
- ---------------------------------------
James R. Bishop, M.D.
* Director March 15, 2000
- ---------------------------------------
Thomas C. Evans, M.D.
* Director March 15, 2000
- ---------------------------------------
Roger L. Frerichs, M.D.
* Director March 15, 2000
- ---------------------------------------
Richard Geier, Jr., M.D.
* Director March 15, 2000
- ---------------------------------------
Anthony C. Jaspers, M.D.
* Director March 15, 2000
- ---------------------------------------
Russel J. Kuzel, M.D.
* Director March 15, 2000
- ---------------------------------------
Wayne F. Leebaw, M.D.
* Director March 15, 2000
- ---------------------------------------
Mark O. Liaboe, M.D.
* Director March 15, 2000
- ---------------------------------------
Steven A. McCue, M.D.
* Director March 15, 2000
- ---------------------------------------
Harold W. Miller, M.D.
* Director March 15, 2000
- ---------------------------------------
Anton S. Nesse, M.D.
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* Director March 15, 2000
- ---------------------------------------
Mark D. Odland, M.D.
* Director March 15, 2000
- ---------------------------------------
G. William Orr, M.D.
* Director March 15, 2000
- ---------------------------------------
Paul S. Sanders, M.D.
* Director, Secretary March 15, 2000
- ---------------------------------------
Richard D. Schmidt, M.D.
* Director March 15, 2000
- ---------------------------------------
Judith F. Shank, M.D.
* Director March 15, 2000
- ---------------------------------------
G. David Spoelhof, M.D.
* Director March 15, 2000
- ---------------------------------------
Tom D. Throckmorton, M.D.
* Director, Vice Chairman March 15, 2000
- ---------------------------------------
R. Bruce Trimble, M.D.
* By: /s/ David P Bounk March 15, 2000
-----------------------------------
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.
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Midwest Medical Insurance Holding Company and Subsidiaries
(Parent Company)
Schedule II--Condensed Financial Information of Registrant
Balance Sheets
DECEMBER 31
1999 1998
--------------------------------
(In Thousands)
ASSETS
Short-term investments $ 1,107 $ 1,310
Cash 6 -
Investment in subsidiaries 150,734 145,032
Other 9,001 8,385
--------------------------------
Total assets $160,848 $154,727
================================
LIABILITIES, REDEEMABLE STOCK AND
OTHER SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable $ 214 $ 43
Accrued expenses and other liabilities 5,031 4,091
--------------------------------
5,245 4,134
REDEEMABLE STOCK
Class A Common Stock 7,802 8,146
Class B Common Stock 1 1
--------------------------------
7,803 8,147
OTHER SHAREHOLDERS' EQUITY
Additional paid-in capital 12,789 12,789
Retained earnings, comprised of undistributed
earnings of subsidiaries 100,095 98,695
Unrealized appreciation on investments, net of income
taxes 34,916 30,962
--------------------------------
147,800 142,446
--------------------------------
Total liabilities, redeemable stock and
other shareholders' equity $160,848 $154,727
================================
See accompanying note.
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Midwest Medical Insurance Holding Company and Subsidiaries
(Parent Company)
Schedule II--Condensed Financial Information of Registrant (continued)
Statements of Income
YEAR ENDED DECEMBER 31
1999 1998 1997
---------------------------------------------
(In Thousands)
REVENUES
Management fee from subsidiaries $16,273 $14,038 $9,901
Net investment income (696) (429) 19
Realized capital gains 179 137 47
Other income 6 2 -
---------------------------------------------
15,762 13,748 9,967
EXPENSES
Operating and administrative 15,584 13,481 9,535
---------------------------------------------
Income before income taxes and other items 178 267 432
Income tax expense 91 104 162
---------------------------------------------
Income before equity in undistributed income
of subsidiaries 87 163 270
Equity in undistributed income of subsidiaries 1,649 5,785 9,030
---------------------------------------------
Net income $1,736 $ 5,948 $9,300
=============================================
See accompanying note.
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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
1999 1998 1997
---------------------------------------------
(In Thousands)
Net cash (used in) provided by operating
activities $ 856 $ (366) $ (527)
INVESTING ACTIVITIES
Purchase of fixed maturities - (21,758) (38,979)
Sales of fixed maturities - 22,826 38,701
Calls and maturities of fixed maturities - 250 -
Sales of short-term investments, net 203 1,420 1,453
Capitalization of Services (1,500) - -
Capitalization of Solutions (650) (3,850) -
FINANCING ACTIVITIES
Redemption of Class A Common Stock (953) (522) (648)
Dividend from MMIC 2,050 2,000 -
---------------------------------------------
Increase in cash 6 - -
Cash at beginning of year - - -
---------------------------------------------
Cash at end of year $ 6 $ - $ -
=============================================
See accompanying note.
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Midwest Medical Insurance Holding Company and Subsidiaries
(Parent Company)
Schedule II--Condensed Financial Information of Registrant (continued)
Note to Condensed Financial Statements
December 31, 1999
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 2 to the consolidated financial statements of Midwest Medical Insurance
Holding Company and Subsidiaries for a description of the redeemable stock.
Certain amounts in the prior year's financial statements have been reclassified
to conform to the current year presentation.
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Midwest Medical Insurance Holding Company and Subsidiaries
Schedule IV--Reinsurance
COL. A COL. B COL. C COL. D COL. E COL. F
- --------------------------------------------------------------------------------------------------------------------
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED TO
AMOUNT COMPANIES COMPANIES AMOUNT NET
- --------------------------------------------------------------------------------------------------------------------
(In Thousands)
Year ended December 31, 1999:
Insurance premiums:
Property/casualty insurance $47,048 $ 513 $48 $46,583 0.1%
Year ended December 31, 1998:
Insurance premiums:
Property/casualty insurance 37,329 2,412 97 35,014 0.3%
Year ended December 31, 1997:
Insurance premiums:
Property/casualty insurance 36,511 3,595 - 32,916 N/A
NOTE TO SCHEDULE IV:
Ceded premiums for the years ended December 31, 1999, 1998 and 1997 are net of
reductions (additions) in ceded premiums related to swing rated reinsurance
treaties of $5,205,000, $2,550,000 and $2,950,000, respectively. Ceded premiums
in 1999 are also net of proceeds from contingent commission on reinsurance
covering the period January 1, 1992 through December 31, 1994 of $715,000. Ceded
premiums in 1998 are also net of proceeds from commutations of reinsurance
covering the period January 1, 1991 through December 31, 1991 of $789,000.
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Midwest Medical Insurance Holding Company and Subsidiaries
Schedule VI--Supplemental Information Concerning Property/Casualty Insurance
Operations
DECEMBER 31
-------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- -----------------------------------------------------------------------------
RESERVES FOR
DEFERRED UNPAID LOSSES DISCOUNT,
AFFILIATION POLICY AND LOSS IF ANY,
WITH ACQUISITION ADJUSTMENT DEDUCTED IN UNEARNED
REGISTRANT COSTS EXPENSES COLUMN C PREMIUMS
- -----------------------------------------------------------------------------
(In Thousands)
Consolidated
property/ casualty
entities
1999 N/A $119,141 N/A $12,797
1998 N/A 110,964 N/A 8,173
1997 N/A 107,806 N/A 6,072
YEAR ENDED DECEMBER 31
---------------------------------------------------------------------------------------------
COL. F COL. G COL. H COL. I COL. J COL. K
---------------------------------------------------------------------------------------------
LOSSES AND LOSS
ADJUSTMENT EXPENSES
INCURRED RELATED TO AMORTIZATION PAID
------------------------ OF DEFERRED LOSSES
NET (1) (2) POLICY AND LOSS
EARNED INVESTMENT CURRENT PRIOR ACQUISITION ADJUSTMENT PREMIUMS
PREMIUMS INCOME YEAR YEAR COSTS EXPENSES WRITTEN
--------------------------------------------------------------------------------------------
Consolidated
property/ casualty
entities
1999 $46,583 $10,886 $45,942 $(4,474) N/A $36,041 $51,672
1998 35,014 10,828 41,927 (4,433) N/A 32,421 39,431
1997 32,916 11,430 40,186 (8,352) N/A 32,782 35,722
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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 3A.(1)
(Form S-4, Exhibit 3C).
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 registrant and Centennial 10B.(4)
Lakes IV, L.L.C., dated July 30, 1999
Amended and Restated Management Agreement between 10C.(4)
the registrant and Midwest Medical Insurance Company,
dated July 1, 1999
Agreement of Reinsurance between Midwest Medical 10D.(3)
Insurance Company and General Reinsurance
Corporation, effective January 1, 1998.
Letter of Employment Agreement between the registrant 10E.(2)
and David P. Bounk, President and Chief Executive
Officer of the registrant and Midwest Medical Insurance
Company, dated January 1, 1993.
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Index to Exhibits (continued)
REGULATION
S-K
EXHIBIT TABLE SEQUENTIAL
ITEM REFERENCE PAGE NO.
- -----------------------------------------------------------------------------------------------------------
1999 Officers Short-term Incentive Plan of the registrant. 10F.(4)
Supplemental Executive Retirement Plan of the registrant. 10G.(1)
Amended and Restated Endorsement Agreement between Midwest Medical 10H.(4)
Insurance Company and Iowa Medical Society, dated January 1, 1999
Subsidiaries of the registrant. 21.(4)
Power of attorney. 24.(4)
Financial Data Schedule 27.(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 1998 Annual Report on Form 10-K.
(4) Filed with this Annual Report on Form 10-K.
77