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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, 2000
[ ] 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
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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: (952) 838-6700
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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 C Common Stock no 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, 2000 Net Redemption Value per
share) of the voting stock held by non-affiliates of the registrant as of March
16, 2001 was $-0-.
The number of shares outstanding of the issuer's classes of common stock, as of
March 16, 2001:
Class A Common Stock, $.01 par value -- 0 shares
Class B Common Stock, $1,000 par value -- 1 share
Class C Common Stock, no par value -- 7,961 shares
DOCUMENTS INCORPORATED BY REFERENCE
None.
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PART I
ITEM 1. BUSINESS
BACKGROUND
Midwest Medical Insurance Holding Company is a holding company organized under
the laws of the State of Minnesota. Midwest Medical Insurance Company, Midwest
Medical Solutions, Inc., which includes its wholly-owned subsidiary, MedPower
Information Resources, Inc., and MMIHC Insurance Services, Inc. are wholly-owned
subsidiaries of Midwest Holding. Midwest Holding 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 Midwest Medical. Midwest Medical'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.
Midwest Medical originally was organized in 1980 under the auspices of the
Minnesota Medical Association to provide professional liability (malpractice)
insurance to Minnesota physicians who were members of the Minnesota Medical
Association. The business was reorganized on November 30, 1988 into a stock
insurance company, Midwest Medical, wholly owned by a holding company, Midwest
Holding, 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 Midwest Medical's capital and surplus. As
of July 1, 1993, the Iowa physician-owned malpractice insurer, Iowa Physicians
Mutual Insurance Trust, was merged with and into Midwest Medical. As of June 5,
1996, the Nebraska physician-owned malpractice insurer, Medical Liability Mutual
Insurance Company of Nebraska, was merged with and into Midwest Medical. Midwest
Medical 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. Midwest Medical has had the sponsorship of the Minnesota
Medical Association since inception and also has the sponsorship of the Iowa
Medical Society 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 Midwest
Medical's territory.
During 1997, Midwest Holding formed Solutions as a business development company
to strengthen and promote the independence and interdependencies of physicians,
clinics and hospitals that Midwest Medical serves. Business development
opportunities being developed include practice enhancement, strategic
consulting, and technology services and support.
Effective January 1, 1998, Solutions purchased the assets of MedPower
Information Services, Inc. Solutions then contributed those assets to its newly
formed, wholly-owned subsidiary, MedPower Information Resources, Inc. MedPower
processes and electronically submits medical claims for over 100 healthcare
providers in the Upper Midwest.
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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.
Midwest Holding provides management and administrative services to Midwest
Medical, Solutions and MedPower for a fee equal to the cost of services
provided. Services operates independently with its own management and
administrative staff and therefore does not have a management agreement with
Midwest Holding.
ELIGIBLE PHYSICIANS
An individual physician must meet the following criteria in order to be eligible
to obtain insurance coverage from Midwest Medical:
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
Midwest Medical 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 Midwest Medical:
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 Midwest
Medical.
ELIGIBLE HOSPITALS AND OTHER HEALTHCARE FACILITIES
Midwest Medical 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 Midwest Medical:
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
Midwest Medical offers a "claims-made" medical malpractice liability insurance
policy. Under a claims-made policy, coverage is provided for claims asserted and
reported to Midwest Medical while the policy is in effect relating to
occurrences which took place during the period in which the policyholder had
coverage with Midwest Medical. 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 Midwest Medical 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 Midwest Medical) for physicians
previously insured under a claims-made policy with another professional
liability insurer. Prior acts coverage is not available from Midwest Medical for
physicians who have not been continuously insured prior to obtaining coverage
from Midwest Medical.
Midwest Medical 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 Midwest Medical, 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 Midwest Medical. In the event of
death, permanent disability or retirement at age 55 or older after five years of
continuous coverage with Midwest Medical, the reporting endorsement is provided
at no additional premium.
Midwest Medical 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 Midwest Medical's reinsurers on a facultative basis.
MARKETING AND DISTRIBUTION
Marketing of Midwest Medical policies is handled principally by Midwest Medical
through salaried marketing representatives. Midwest Medical has also made
marketing arrangements with a select group of agents to assist Midwest Medical
in the production of large accounts and in the production of new coverages as
they are developed. Midwest Medical 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 Midwest
Medical updated in 1998. Since most policies have a common expiration date, it
is essential that Midwest Medical's policy processing operations be highly
efficient. Midwest Medical consistently has been able to provide policy
processing on a timely basis.
REINSURANCE
Midwest Medical 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 Midwest Medical. However, in the event
the reinsurer is unable or otherwise fails to pay, Midwest Medical remains
primarily liable for the loss.
Historically, entering into reinsurance agreements permitted Midwest Medical 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% of its surplus. As Midwest
Medical's surplus has grown, Midwest Medical now utilizes reinsurance primarily
to limit its risk on any single claim. Such limits of risk assumed by Midwest
Medical for physician coverage have increased from $150,000 in the first year of
operations to $1,000,000 currently. The reinsurer will pay losses in excess of
the amount of risk retained by Midwest Medical, not to exceed the limits of
liability of the policies issued by Midwest Medical.
Midwest Medical's reinsurance contract in effect for the three-year period of
1998 through 2000 provided a primary layer of coverage of $1,250,000 in excess
of $750,000 of retention per insured. The premium ceded for this coverage was
based upon the losses paid under the contract limited to a minimum of 1.27% and
a maximum of 9.21% of the underlying Midwest Medical subject premium. Midwest
Medical utilized this "swing-rated" treaty mechanism from 1992 through 2000.
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, Midwest Medical "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)
Midwest Medical entered into a new three-year reinsurance agreement effective
January 1, 2001. The retention on the primary layer of coverage under the new
reinsurance agreement was increased to $1,000,000 per insured. The premium ceded
for this coverage is based on a "flat" rate of 8.75% of net written premium and
includes a profit-sharing provision. The reinsurers on the new agreement, their
participation percentages and their A.M. Best rating are listed below:
- Hannover Reinsurance Company, (35%), A+
- Transatlantic Reinsurance Company, (35%), A+
- CNA Re, UK, (15%), A
- Gerling Global Reinsurance Corporation of America, (15%), A
INVESTMENTS
Midwest Medical's investment portfolio is under the direction of the Board of
Directors acting through the Investment Committee. The Investment Committee
establishes Midwest Medical's investment policy which, in summary, is to assist
in maintaining Midwest Medical's financial stability through the preservation of
assets and the maximizing of pre-tax investment income. Adequate liquidity is
maintained to assure that Midwest Medical has the ability to meet its insurance
operational requirements, in particular, the payment of claims. Midwest Medical
employs outside investment managers who manage the portfolio on a discretionary
basis consistent with the policies set by Midwest Medical. 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.
Midwest Medical'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 56%
of total invested assets at December 31, 2000 compared to 55% at December 31,
1999. Midwest Medical's investment policy also permits the inclusion of equity
securities. Equity securities comprised approximately 33% of total invested
assets at December 31, 2000 compared to 37% at December 31, 1999. The decrease
in the proportion of equity securities was due to sales of equity securities to
provide capital for other corporate purposes and a decrease in equity market
values. The remainder of Midwest Medical's investment portfolio, 11% and 8% at
December 31, 2000 and 1999, respectively, was invested in real estate investment
trusts and short-term investments.
RATING
A.M. Best & Company, Inc., publisher of Best's Insurance Reports,
Property-Casualty, 1999 Edition, has assigned Midwest Medical an "A," or
excellent, rating in 2000. 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
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ITEM 1. BUSINESS (CONTINUED)
company as compared with the industry in general. Midwest Medical 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 it. 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.
GOVERNMENT REGULATION
Midwest Medical 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 Midwest Medical's
business, including policy terms, rates, dividends and retrospective premium
credits to policyholders, and dividends to the parent corporation, Midwest
Holding.
Without prior approval from the Minnesota Commissioner of Commerce, annual
dividends to Midwest Holding cannot exceed 10% of policyholder surplus of
Midwest Medical or the prior year's net income from operations of Midwest
Medical, excluding realized capital gains, whichever is greater. Midwest Medical
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. Midwest Holding is also subject to statutes governing
insurance holding company systems in Minnesota, which relate primarily to the
acquisition or control of insurance companies directly or through a holding
company.
COMPETITION
Midwest Medical'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, one of the largest writers of medical
professional liability insurance in the United States, and is many times larger
than Midwest Medical. In addition to The St. Paul Companies, several other
national companies have become active competitors in the last several years,
including Medical Protective Insurance Company, CNA Insurance Company, Zurich
Insurance Company and Fireman's Fund Insurance Company. At this time, they have
achieved limited market penetration, but represent an increasing competitive
pressure for the future. In addition, several other physician-owned specialty
carriers have entered the market, but have yet to be a significant factor in
Midwest Medical's market area. Midwest Medical is the only carrier endorsed by
local medical societies in Minnesota, Iowa and North Dakota and owned by its
physician-insureds, which management believes gives Midwest Medical a
competitive advantage in marketing to physicians.
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ITEM 1. BUSINESS (CONTINUED)
EMPLOYEES
As of December 31, 2000, Midwest Holding employed 95 persons, of whom 9 were
executives, 64 were supervisory employees or specialists and 22 were clerical
employees. As of December 31, 2000, Services employed 11 persons, of whom 1 was
an executive, 8 were supervisory employees or specialists and 2 were clerical
employees. No employees of Midwest Holding 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,
2000
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Office furniture and equipment $ 615,300
Leasehold improvements at leased premises 177,387
Computer hardware 499,277
Computer system software 1,008,790
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Total $2,300,754
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Midwest Holding owns no real estate. Prior to October 1, 1999, Midwest Holding
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, Midwest
Holding moved to new offices in Edina, Minnesota, with total square feet of
26,069. Midwest Holding 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 an exercised option that extended the term an additional five years after
the original 10-year lease term expired in 2000. An additional 2,014 square feet
of office space is leased in Omaha, Nebraska under a three-year lease that
expires January 31, 2002. MedPower operates 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 was extended until 2001. Annual rent expense
was $895,431 in 2000 and $637,585 in 1999.
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.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) A special meeting of the Class A shareholders of Midwest Holding was
held on Thursday, June 29, 2000.
(b) The special meeting of June 29, 2000 considered the adoption of a new
Article 4.c to the Articles of Incorporation of Midwest Holding. Under
the new Article 4.c, the Board of Directors is authorized to establish
one or more additional series and classes of common or preferred
stock, setting forth the designation of each such series or class, and
fixing the relative rights and preferences of each such series or
class. Class A shareholders of Midwest Holding approved the adoption
of Article 4.c by the following vote:
Yes 1,747
No 12
Abstain 15
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Total 1,774
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
(a) There is no market for Midwest Holding's Class A, Class B or Class C Common
Stock. Class A shares are no longer issued and the class has been canceled.
Class C 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 Midwest Holding and are subject to mandatory redemption at the time
that the physician terminates their insurance coverage with Midwest Medical
for any reason.
(b) As of March 16, 2001, there were 0 shares of Class A Common Stock
outstanding, 1 share of Class B Common Stock held by the Minnesota Medical
Association and 7,961 shares of Class C Common Stock outstanding held by
7,961 physicians.
(c) Midwest Holding 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 Midwest Holding from Midwest
Medical cannot exceed 10% of policyholder surplus of Midwest Medical or the
prior year's net income from operations of Midwest Medical, 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, 2000. This data should be read in conjunction with the audited
consolidated financial statements and notes thereto appearing under Item 8 of
this Form 10-K.
YEAR ENDED DECEMBER 31
OPERATIONS DATA 2000(1) 1999(1) 1998(1) 1997(2) 1996(2)
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(Amounts in thousands, except percentage data)
Net premiums earned $41,344 $46,583 $35,014 $32,916 $31,177
Net investment and other income 27,102 21,006 21,404 19,276 15,558
---------------------------------------------------
Total revenue 68,446 67,589 56,418 52,192 46,735
Loss and loss adjustment expenses 39,587 41,468 37,494 31,834 32,257
Policyholder dividends 8,108 10,175 - - -
Underwriting and other operating expenses 15,182 13,394 10,287 6,595 5,539
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62,877 65,037 47,781 38,429 37,796
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Income before income taxes 5,569 2,552 8,637 13,763 8,939
Income taxes 283 816 2,689 4,463 1,458
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Net income $ 5,286 $ 1,736 $ 5,948 $ 9,300 $ 7,481
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ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)
YEAR ENDED DECEMBER 31
2000(1) 1999(1) 1998(1) 1997(2) 1996(2)
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(Amounts in thousands, except percentage data)
Net income/total revenue 7.7% 2.6% 10.5% 17.8% 16.0%
Return on average equity 3.7% 1.2% 4.4% 7.8% 6.9%
DECEMBER 31
FINANCIAL CONDITION 2000(1) 1999(1) 1998(2) 1997(2) 1996(2)
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(Amounts in thousands, except per share data)
ASSETS
Fixed maturities at fair value $146,516 $153,950 $164,652 $171,975 $183,561
Equity securities at fair value 86,418 104,898 86,553 49,759 38,001
Short-term investments 19,587 9,128 3,556 13,909 7,898
Other 10,915 10,000 10,000 10,000 -
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Total investments 263,436 277,976 264,761 245,643 229,460
Reinsurance recoverable on paid and unpaid
losses 18,833 19,285 16,499 19,117 22,174
Other assets 19,472 22,915 14,223 10,755 10,359
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Total assets $301,741 $320,176 $295,483 $275,515 $261,993
===================================================
LIABILITIES
Unpaid losses and loss adjustment expenses $118,478 $119,141 $110,964 $107,806 $110,037
Other liabilities 42,665 45,432 33,926 33,942 33,074
Class A Redeemable Common Stock - 7,802 8,146 7,476 7,603
---------------------------------------------------
161,143 172,375 153,036 149,224 150,714
SHAREHOLDERS' EQUITY 140,598 147,801 142,447 126,291 111,279
---------------------------------------------------
Total liabilities and shareholders' equity $301,741 $320,176 $295,483 $275,515 $261,993
===================================================
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ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)
DECEMBER 31
2000(1) 1999(1) 1998(1) 1997(2) 1996(2)
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(Amounts in thousands, except per share data)
Midwest Holding:
Class A Common Shares issued and
outstanding -(3) 123,509 125,682 121,322 118,209
Redemption value per share $ 66.00(3) $ 63.18 $ 64.81 $ 61.63 $ 64.33
Class A Common Shares redeemed 148,677(3) 15,024 9,005 10,306 10,272
Amount paid to Class A shareholders
upon redemption $ 9,798(3) $ 954 $ 523 $ 648 $ 608
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(1) Amounts derived from audited consolidated financial statements of Midwest
Holding included in Item 8 of this Form 10-K.
(2) Amounts derived from audited consolidated financial statements of Midwest
Holding.
(3) Pursuant to a tender offer completed in 2000, all outstanding Class A
Common Shares of Midwest Holding were exchanged and redeemed as of December
31, 2000. See Notes 2 and 11 to the audited 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 Midwest Holding and its subsidiaries are presented
on a consolidated basis. In future references in this analysis, which should be
read together with the 2000 audited consolidated financial statements and notes
thereto appearing under Item 8 of this Form 10-K, Midwest Holding and its
subsidiaries are referred to collectively as the Company unless the reference
pertains to a specific entity.
LIQUIDITY AND CAPITAL RESOURCES
The majority of the Company's assets are invested in investment-grade bonds,
common stocks, real estate investment trusts and short-term investments. These
investments totaled $263,436,000 and $277,976,000 at December 31, 2000 and 1999,
respectively, which represented 87.3% and 86.8% 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 trusts are
recorded at appraised value and short-term investments are recorded at cost
which approximates fair value.
The Company's cash flow from operations was $1,544,000 in 2000 versus $2,187,000
in 1999 and $(9,605,000) in 1998. The 2000 cash flow from operations was
favorably impacted by premium adjustments received from reinsurers on
reinsurance contracts for prior years and federal tax refunds, including
interest received from the Internal Revenue Service for the 1992 to 1996 tax
years. These positive cash flows were partially offset by the payment of
policyholder dividends. 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. Underwriting expenses in 1998
increased primarily from additional staff needed to manage insurance business
growth and added costs from the conversion to a new insurance company operating
system. Other operating expenses increased in 1998 primarily from launching the
operations of Solutions, including the acquisition of MedPower.
Premium rates in general have trended lower with rate decreases in regions where
claim frequency has dropped, offset partially by rate increases in regions where
claim severity has risen. Increases in new premium written, however, have helped
to keep cash receipts from policyholder premium relatively level. Substantial
amounts of premium have been returned to policyholders through policyholder
dividends or retrospective premium credits. In 1999, a policyholder dividend
program replaced the retrospective premium credit program. While retrospective
premium credits were paid to policyholders in the first quarter of the year
following approval by the Board of Directors, the majority of 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.
As discussed under the reinsurance section of Item 1 of this Form 10-K, a new
three-year reinsurance agreement became effective January 1, 2001. Under this
new agreement, Midwest Medical increased its retention from $750,000 to
$1,000,000 per insured for the primary layer of coverage. Several factors
entered into the decision to increase the retention. One significant factor was
the reinsurance cost for the layer of coverage from $750,000 to $1,000,000 had
increased dramatically in the marketplace. Another significant factor was
management's belief that Midwest Medical could reasonably assume the added loss
exposure due to its strong capital position and historical analysis that
indicated the additional reinsurance cost for that layer
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
of coverage exceeded the anticipated additional losses on that layer. Although
the premiums ceded on the new reinsurance agreement should be roughly the same
as the prior reinsurance agreement, the added loss exposure from the increase in
Midwest Medical's retention could potentially lead to greater losses incurred.
Another change in the new reinsurance agreement is the use of a "flat" ceded
premium rate. A flat rate contract lessens the volatility of reinsurance premium
payments compared to the previous swing-rated contract based upon losses paid.
This allows Midwest Medical to estimate future ceded premium payments with
greater certainty.
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 investment portfolio is highly liquid, exact
matching of bond maturities and loss liabilities is not a goal. Bond maturities
are primarily selected to maximize total return.
The Company believes that its cash and investments combined with internally
generated funds will be sufficient to meet its present and reasonably
foreseeable operating and capital requirements. Therefore, the Company does not
expect 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, 2000.
During 2000, Midwest Holding completed a tender offer resulting in the exchange
and redemption of all outstanding Class A Common Stock. Under the terms of the
tender offer, Class A shareholders received $66 for each Class A share owned,
plus one Class C share. Prior to the tender offer, Class A Common Stock issued
by Midwest Holding to Midwest Medical policyholders were required to be redeemed
when a physician ceased to be insured by Midwest Medical for any reason. The
redemption value per Class A share was calculated by dividing the net book value
of Midwest Holding, excluding the net book value of Midwest Medical from the
calculation, by the number of Midwest Holding Class A Common Shares outstanding.
More details about the tender offer, Class A and Class C Common Stock and the
actual Class A share redemptions during the years 2000, 1999 and 1998 are found
in Note 2 to the audited consolidated financial statements. The increases and
decreases in shareholders' equity are described in the consolidated statements
of changes in shareholders' equity found in the accompanying audited
consolidated financial statements.
Approximately $9,541,000 was paid to Class A shareholders pursuant to the tender
offer. An $8,500,000 loan from Midwest Medical to Midwest Holding largely funded
these payments. Midwest Medical primarily used proceeds from sales of domestic
equity securities to provide the loan. The loan is a non-interest-bearing note
that will be retired in 2001 by Midwest Holding through dividends received from
Midwest Medical.
14
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Periodically, the Board of Directors of Midwest Medical declares dividends
payable to Midwest Holding to provide capital for non-insurance business
operations, including new business ventures. Prior to the stock restructure in
2000, dividends from Midwest Medical were also used to support the redemption
value of Midwest Holding's Class A Common Stock. Midwest Medical declared and
paid dividends to Midwest Holding of $3,000,000, $2,050,000 and $2,000,000 in
2000, 1999 and 1998, respectively.
RESULTS OF OPERATIONS
Net premiums earned decreased $5,239,000 in 2000 from 1999. The decrease 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, increased $634,000 on a net basis in 2000. This compares to
a net reduction for those treaty years of $5,920,000 in 1999, resulting
in a net decrease in premium between years of $6,554,000.
2. New 2000 business increased earned premium by approximately $2,600,000.
3. Due primarily to the new reinsurance program for fraud and abuse
provided at no additional cost to Midwest Medical policyholders,
current year reinsurance costs were $968,000 greater in 2000 compared
to 1999. This decreased 2000 net premiums earned.
4. Accounts that did not renew in 2000 resulted in a decrease of
approximately $317,000 in 2000 net premiums earned.
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 in 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.
15
16
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 investment income increased $1,305,000 in 2000 from 1999 and decreased
$8,000 in 1999 from 1998. Increasing yields on bonds and short-term investments
from the upward movement in interest rates during 1999 and 2000 primarily caused
the increase in net investment income in 2000. Also contributing to the increase
were proceeds from the sales of equity securities used to pay Class A
shareholders for stock restructure redemptions. The proceeds earned interest
while held in short-term investments until stock restructure payments were made.
The decrease in 1999 was largely driven by additional fees paid to equity
managers due to the appreciation in the Company's equity securities.
Realized capital gains increased $3,282,000 to $10,502,000 in 2000 and decreased
$1,861,000 to $7,220,000 in 1999. During 2000, sales of equity securities
realized $12,245,000 of net capital gains while sales of bonds realized
$(1,743,000) of net capital losses. Approximately $7,000,000 of the net realized
capital gains on equity securities resulted from the sale of appreciated
technology common stocks in the first quarter, as holdings in the technology
sector were trimmed in order to maintain appropriate portfolio diversification.
Sales of equity securities in the latter part of 2000 to provide for stock
restructure redemption payments to Class A shareholders resulted in another
$3,000,000 of net realized capital gains. All other 2000 realized capital gains
and losses resulted from the management of the portfolio on a pre-tax total
return basis. 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. 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. The Investment Committee
meets with outside investment managers approximately four times per year.
16
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Other revenues increased $1,509,000 from $2,823,000 in 1999 to $4,332,000 in
2000. Interest on federal tax refunds of $1,716,000 recorded by Midwest Medical
in 2000 primarily caused the increase. Revenues from the new information
technology consulting division of Solutions also contributed to the increase.
Decreases in operating revenues from MedPower and income from Midwest Holding's
officer life insurance policies partially offset the above increases.
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 Midwest
Medical.
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 $39,587,000 in 2000 compared to $41,468,000 in
1999 and $37,494,000 in 1998. This resulted in a decrease of 4.5% in 2000 versus
an increase of 10.6% in 1999. As shown in Note 5 to the audited 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 $1,521,000 in 2000 and $4,015,000 in 1999.
The increases in both 2000 and 1999 were primarily driven by additional
policyholder exposure from the increase in premium volume particularly from
newer business lines such as large, healthcare systems and hospitals. Loss 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 5 of the audited consolidated
financial statements, these evaluations resulted in a reduction in estimated
liabilities applicable to prior years of $7,876,000 and $4,474,000 in 2000 and
1999, respectively. The more favorable development on prior years is the primary
reason for the decrease in incurred loss and loss adjustment expenses in 2000,
while less favorable development on prior years is the primary reason for the
increase in incurred loss and loss adjustment expenses in 1999.
The following schedule summarizes the development of the liability for loss and
loss adjustment expense from 1990 through 2000. This schedule is presented net
of reinsurance which the Company believes best explains the development as it
affects operating results. Midwest Medical has a conservative loss reserving
policy that when coupled with a decline in medical malpractice insurance claim
frequency since the early 1990s has resulted in redundancies in the liability
for loss and loss adjustment expenses greater than expected. The table indicates
that the redundancy in loss liabilities, which develop as actual results become
known, has significantly decreased since 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)
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
----------------------------------------------------------------------------------------------------
Liability for unpaid loss and
loss adjustment expense $97,375 $100,167 $98,617 $105,589 $88,227 $96,424 $90,342 $89,394 $94,467 $99,894 $100,264
Cumulative amount of liability
paid through:
1 year later 13,973 19,112 21,422 25,251 26,879 33,454 30,097 28,755 33,787 35,891
2 years later 28,643 32,798 37,498 42,685 46,925 53,132 44,562 48,437 54,319
3 years later 35,305 39,906 45,227 51,087 55,534 59,568 54,411 60,582
4 years later 37,624 42,752 46,226 53,594 57,129 63,915 60,708
5 years later 38,298 43,994 46,823 53,288 58,856 67,291
6 years later 39,505 44,370 46,810 54,709 60,701
7 years later 39,861 44,420 47,218 55,281
8 years later 39,862 44,634 47,249
9 years later 39,923 44,646
10 years later 39,923
Liability re-estimated as of:
1 year later 83,359 83,991 94,633 80,960 85,595 87,580 81,990 84,961 89,992 92,022
2 years later 64,876 74,883 69,490 75,364 76,365 79,665 76,542 78,679 85,205
3 years later 56,351 53,538 65,568 64,586 67,891 77,294 70,228 74,909
4 years later 42,075 52,833 56,426 57,851 65,794 73,979 65,691
5 years later 41,771 45,892 52,388 56,785 63,958 70,601
6 years later 39,519 44,370 53,014 55,358 63,037
7 years later 39,861 44,420 52,469 55,790
8 years later 39,862 44,634 52,342
9 years later 39,923 44,646
10 years later 39,923
Cumulative redundancy 57,452 55,521 46,275 49,799 25,190 25,823 24,651 14,485 9,262 7,872
18
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Policyholder dividends of $8,108,000 were declared by the Board of Directors of
Midwest Medical in 2000 and will be paid to physician, clinic and hospital
policyholders in 2001. Policyholder dividends of $10,175,000 were declared by
the Board of Directors of Midwest Medical in 1999 and were paid to physician,
clinic and hospital policyholders in 2000. As described in Note 4 of the audited
consolidated financial statements, the policyholder dividend program was
instituted in 1999 and replaced the previous retrospective premium credit
program for physicians. The primary reasons Midwest Medical 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 Midwest Medical to its competitors.
Underwriting, acquisition and insurance expenses increased $373,000 from
$7,197,000 in 1999 to $7,570,000 in 2000. Less ceding commissions earned by
Midwest Medical due to a decline in the premiums ceded to the treaty reinsurance
contract for the current year drove approximately $216,000 of the increase.
Greater commissions paid in 2000 due to enhanced agent incentives contributed an
additional $215,000. These increases were partially offset by lower premium
taxes. Lower written premium volume in 2000 and the $10,175,000 of policyholder
dividends paid during the year, which is deductible for premium tax purposes,
caused the decline in premium taxes.
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 and
enhancement costs related to the new operating system and expenses related to
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. Since a portion of these payments are tied to premium volume, the
increase in premium caused an increase in payments to the medical societies.
These increases were offset partially by additional ceding commissions earned by
Midwest Medical, resulting from the increase in premiums ceded to the treaty
reinsurance contract for the 1999 year compared to the 1998 year.
Other operating expenses increased $1,415,000 from $6,197,000 in 1999 to
$7,612,000 in 2000. The stock restructure of Midwest Holding drove most of the
increase, as an additional $1,057,000 of compensation expense was recognized in
2000 for the vesting of all previously unvested Class A shares. Legal and
accounting fees related to the restructure contributed another $201,000. The
remaining increase resulted primarily from greater salary and benefit expenses
incurred by Midwest Holding, Services and Solutions. These increases were
partially offset by lower operating costs incurred by MedPower in 2000 due to
aggressive cost reduction efforts.
19
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 Midwest
Holding.
Income before income taxes increased to $5,569,000 in 2000 compared to
$2,552,000 in 1999. Greater realized capital gains from sales of domestic equity
securities to maintain appropriate portfolio diversification and to fund the
stock restructure primarily drove the increase. Interest on federal tax refunds,
favorable development on prior years' loss liabilities and lower policyholder
dividends also contributed to the increase.
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 1999, policyholder dividends that were greater in 1999
than the retrospective premium credits in 1998 and lower realized capital gains
due to the capital losses sustained on the repositioning of the bond portfolio
at the end of 1999.
Income taxes decreased to $283,000 for 2000 compared to $816,000 for 1999. The
effective tax rates for 2000 and 1999 were 5.1% and 32.0%, respectively. The
principal factor in the decrease in the effective tax rate was a greater
recovery of prior year taxes recorded in 2000 compared to 1999. The greater tax
recovery in 2000 was primarily due to federal tax refunds received by Midwest
Medical from the Internal Revenue Service for the 1992 to 1996 tax years.
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.
Net income earned by the Company increased $3,550,000 to $5,286,000 in 2000 and
decreased $4,212,000 to $1,736,000 in 1999 due to the factors discussed above.
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.
20
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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
insures;
4. faster or more adverse loss development experience than that on which
the Company based its underwriting, reserving and investment
practices;
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; and
9. the impact of mergers and acquisitions.
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.
21
22
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 may use is covered call
options. A call option gives the purchaser a right to buy a stock at a specified
price within a specified time. The Company's domestic equity investment manager
may write call options on equity securities the Company owns (a "covered" call
option) to manage exposure to equity price risk and enhance investment returns.
No covered call options were written or outstanding in 2000. Two covered call
options were written in 1999 and none were outstanding as of December 31, 1999.
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 $6,500,000 at December 31, 2000 and $7,900,000 at December 31,
1999.
Based primarily on past annual performance relative to the Standard & Poors 500
Market Index (S&P 500), an abrupt 10% decrease in the S&P 500 would adversely
affect the fair value of equity securities by approximately $10,400,000 at
December 31, 2000 and $12,400,000 at December 31, 1999.
A hypothetical 10% 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 $2,000,000 at December 31, 2000
and $1,900,000 at December 31, 1999.
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.
22
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The audited consolidated financial statements of Midwest Medical Insurance
Holding Company and Subsidiaries are presented on the following pages 24 through
58 of this Annual Report on Form 10-K.
23
24
Midwest Medical Insurance Holding Company and Subsidiaries
Consolidated Financial Statements
Years ended December 31, 2000, 1999 and 1998
CONTENTS
Report of Independent Auditors.............................................25
Consolidated Financial Statements
Consolidated Balance Sheets................................................26
Consolidated Statements of Income..........................................27
Consolidated Statements of Changes in 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, 2000 and 1999, and
the related consolidated statements of income, changes in shareholders' equity
and cash flows for each of the three years in the period ended December 31,
2000. 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, 2000 and 1999, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 2000, 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 2, 2001
25
26
Midwest Medical Insurance Holding Company and Subsidiaries
Consolidated Balance Sheets
(In Thousands, Except for Share Amounts)
DECEMBER 31
2000 1999
------------------------------------
ASSETS
Investments:
Fixed maturities at fair value (cost: 2000--$148,832;
1999--$159,464) $146,516 $153,950
Equity securities at fair value (cost: 2000--$49,739;
1999--$46,216) 86,418 104,898
Short-term 19,587 9,128
Other 10,915 10,000
------------------------------------
263,436 277,976
Cash 976 1,821
Accrued investment income 2,286 2,317
Premiums receivable 6,214 7,143
Reinsurance recoverable on paid and unpaid losses 18,833 19,285
Amounts due from reinsurers 1,390 3,833
Other assets 8,606 7,801
------------------------------------
Total assets $301,741 $320,176
====================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Unpaid losses and loss adjustment expenses $118,478 $119,141
Unearned premiums 12,050 12,797
Policyholder dividends 8,108 10,175
Deferred income taxes 6,635 12,201
Amounts due to reinsurers 5,248 -
Other liabilities 10,624 10,259
Class A Redeemable Common Stock - 7,802
------------------------------------
Total liabilities 161,143 172,375
Shareholders' equity:
Class B Common Stock--authorized, issued and outstanding, 1 share 1 1
Class C Common Stock--authorized, 300,000 shares; issued and
outstanding, 7,961 shares in 2000 and
no shares in 1999; no par value - -
Paid-in capital 12,789 12,789
Retained earnings 104,524 100,095
Net unrealized appreciation of investments 23,284 34,916
------------------------------------
140,598 147,801
------------------------------------
Total liabilities and shareholders' equity $301,741 $320,176
====================================
See accompanying notes.
26
27
Midwest Medical Insurance Holding Company and Subsidiaries
Consolidated Statements of Income
(In Thousands)
YEAR ENDED DECEMBER 31
2000 1999 1998
-------------------------------
Revenues:
Net premiums earned $41,344 $46,583 $35,014
Net investment income 12,268 10,963 10,971
Realized capital gains 10,502 7,220 9,081
Other 4,332 2,823 1,352
-------------------------------
68,446 67,589 56,418
Losses and expenses:
Losses and loss adjustment expenses 39,587 41,468 37,494
Policyholder dividends 8,108 10,175 -
Underwriting, acquisition and insurance expenses 7,570 7,197 6,698
Other operating expenses 7,612 6,197 3,589
-------------------------------
62,877 65,037 47,781
-------------------------------
Income before income taxes 5,569 2,552 8,637
Income taxes 283 816 2,689
-------------------------------
Net income $ 5,286 $ 1,736 $ 5,948
===============================
See accompanying notes.
27
28
Midwest Medical Insurance Holding Company and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
(In Thousands)
ACCUMULATED
OTHER
CLASS B PAID-IN RETAINED COMPREHENSIVE
TOTAL COMMON STOCK CAPITAL EARNINGS INCOME
----------------------------------------------------------------------
Balance at December 31, 1997 $126,291 $1 $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 142,447 1 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 147,801 1 12,789 100,095 34,916
Reclassification of equity components related to
stock restructure 172 - - - 172
Comprehensive income:
Net income 5,286 - - 5,286 -
Other comprehensive income:
Unrealized losses on securities net of $2,515
in tax benefits (4,873) - - - (4,873)
Reclassification adjustment for gains included
in net income net of $3,571 in taxes (6,931) - - - (6,931)
-----------
Total comprehensive income (6,518)
Dividend paid by Midwest Medical Insurance Company
to Midwest Medical Insurance Holding Company (3,000) - - (3,000) -
Net loss of non-insurance entities includable in
Class A Common Stock redemption value 3,496 - - 3,496 -
Excess of tender price over redemption value
related to stock restructure (1,353) - - (1,353) -
----------------------------------------------------------------------
Balance at December 31, 2000 $140,598 $1 $12,789 $104,524 $23,284
======================================================================
See accompanying notes.
28
29
Midwest Medical Insurance Holding Company and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
YEAR ENDED DECEMBER 31
2000 1999 1998
-----------------------------------------------------
OPERATING ACTIVITIES
Net income $ 5,286 $ 1,736 $ 5,948
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Decrease (increase) in accrued investment income 31 (578) 602
Decrease (increase) in premiums receivable 929 (5,120) (1,489)
Decrease (increase) in reinsurance recoverable 452 (2,786) 2,618
Decrease (increase) in amounts due from reinsurers 2,443 (642) (3,191)
Increase in other assets (805) (1,178) (2,224)
Deferred tax provision 516 (90) 1,354
(Decrease) increase in unpaid losses and loss adjustment expenses (663) 8,177 3,158
(Decrease) increase in unearned premiums (747) 4,624 2,101
(Decrease) increase in policyholder dividends (2,067) 10,175 -
Decrease in retrospective premiums - (8,543) (1,362)
Increase (decrease) in amounts due to reinsurers 5,248 - (2,984)
Increase (decrease) in other liabilities 365 4,015 (5,145)
Accretion of bond discount, net of premium amortization (253) (636) (134)
Realized capital gains (10,502) (7,220) (9,081)
Compensation expense for vested Class A Common Shares 1,311 253 224
-----------------------------------------------------
1,544 2,187 (9,605)
INVESTING ACTIVITIES
Purchases of fixed maturity investments and equity securities (106,361) (171,139) (401,922)
Sales of fixed maturity investments and equity securities 120,049 174,651 398,717
Calls and maturities of fixed maturity investments 4,180 2,000 1,250
Net (purchases) sales of short-term investments (10,459) (5,572) 10,352
-----------------------------------------------------
7,409 (60) 8,397
FINANCING ACTIVITIES
Redemption of Class A Common Shares (9,798) (953) (523)
-----------------------------------------------------
(Decrease) increase in cash (845) 1,174 (1,731)
Cash at beginning of year 1,821 647 2,378
-----------------------------------------------------
Cash at end of year $ 976 $ 1,821 $ 647
=====================================================
See accompanying notes.
29
30
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2000
1. ACCOUNTING POLICIES
ORGANIZATION AND OPERATIONS
The Minnesota Medical Insurance 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. was the Insurance
Exchange's attorney-in-fact and was responsible for management of the Insurance
Exchange.
On November 30, 1988, the Insurance Exchange was reorganized into a stock
insurance company, Midwest Medical Insurance Company, under the statutes of the
State of Minnesota. Concurrently, Medical Management merged with the Midwest
Medical Insurance Holding Company, which then acquired all outstanding shares of
the reorganized stock company.
Effective July 1, 1993, Midwest Medical merged with Iowa Physicians Mutual
Insurance Trust, a physician-owned professional liability insurance company
providing insurance coverage to Iowa physicians. As provided for in the
agreement and plan of merger, Iowa Physicians was merged into Midwest Medical.
The merger was accounted for as a pooling-of-interests.
Effective June 5, 1996, Midwest Medical merged with Medical Liability Mutual
Insurance Company of Nebraska, a physician-owned professional liability
insurance company providing insurance coverage to Nebraska physicians. As
provided for in the agreement and plan of merger, Medical Liability Mutual was
merged into Midwest Medical. The merger was accounted for as a
pooling-of-interests.
During 1997, Midwest Holding formed Midwest Medical Solutions, Inc. as a
business development company to strengthen and promote the independence and
interdependencies of physicians, clinics and hospitals that Midwest Medical
serves. Business development opportunities being pursued include practice
enhancement, strategic consulting and technology services and support.
Effective January 1, 1998, Solutions purchased the assets of MedPower
Information Services, Inc. Solutions then contributed those assets to its newly
formed, wholly-owned subsidiary, Medpower Information Resources, Inc. MedPower
processes and electronically submits medical claims for a network of over 100
provider entities.
30
31
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
MMIHC Insurance Services, Inc. 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.
Midwest Holding provides management and administrative services to Midwest
Medical, Solutions and MedPower for a fee generally equal to the cost of
services provided. Services operates independently with its own management and
administrative staff and therefore does not have a management agreement with
Midwest Holding.
Midwest Medical 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
Midwest Medical are on a "claims made" basis and provide coverage for the
policyholder for claims first made against the policyholder and reported to
Midwest Medical during the policy period for claims which occurred on or after
the retroactive date stated in the policy.
Midwest Medical 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 Midwest Medical. 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 Midwest
Medical 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 Midwest Holding
and its wholly-owned subsidiaries, Midwest Medical, Services and Solutions,
which includes Solution's wholly-owned subsidiary, MedPower. All transactions
between Midwest Holding and its subsidiaries have been eliminated in
consolidation with the exception of the distribution of capital to Midwest
Holding by Midwest Medical in the form of dividends.
Hereafter, Midwest Holding, Midwest Medical, 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 Midwest Medical
in reporting to the Department of Commerce of the State of Minnesota (see Note
10).
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
32
33
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
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.
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 appraised 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
Midwest Medical, 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. Midwest Medical
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
Midwest Medical'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, Midwest Medical had a retrospective premium program whereby
physicians may have received credits against future premiums based upon the loss
experience of Midwest Medical. 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
Midwest Medical 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. Reinsurance contracts are principally excess-of-loss contracts which
indemnify Midwest Medical 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. Reserve liabilities are reported gross of reinsurance
credits.
ACQUISITION COSTS
Acquisition costs are expensed when incurred. As most of its premium is written
without the use of intermediaries, Midwest Medical 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 include commission income from insurance carriers for Services,
technology consulting fees from healthcare providers for Solutions 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.
RECLASSIFICATIONS
Certain amounts in the prior years' financial statements have been reclassified
to conform with the current year presentation.
2. CAPITAL STRUCTURE
Effective November 30, 1988, Midwest Medical policyholders earned 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 were not
issued until the end of five years of continuous coverage under a Midwest
Medical policy (the vesting date). At the vesting date, the issued shares were
recorded at the then current redemption value (see Note 11).
35
36
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. CAPITAL STRUCTURE (CONTINUED)
Midwest Holding accounted 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 continued to
earn shares for each month they remained insured with Midwest Medical according
to the stock allocation formula. Midwest Holding accounted 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.
In accordance with the Articles of Incorporation and By-laws of Midwest Holding,
only active policyholders of Midwest Medical owned shares of Class A Common
Stock of Midwest Holding. At each meeting of the shareholders, every Class A
shareholder having the right to vote was 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 were required to redeem their shares with Midwest Holding
upon termination as policyholders of Midwest Medical. The net redemption value
(NRV) of the shares was equal to the net book value of Midwest Holding,
excluding the amount of net book value that was attributable to Midwest Medical,
divided by the number of outstanding Class A Common Shares of Midwest Holding at
the semi-annual valuation dates of June 30 and December 31 of each year. The
amount paid upon redemption was the redemption value determined at the most
recent semi-annual valuation.
The Board of Directors of Midwest Holding approved a tender offer for the
exchange and redemption of substantially all Class A shares owned by Class A
shareholders of record on April 30, 2000. Pursuant to the offer, Class A
shareholders who tendered their shares received $66 for each Class A share
owned, plus one Class C share. The tender offer was conducted during the summer
of 2000 and was closed effective July 31, 2000. Remaining shares outstanding
after closing of the tender offer were subsequently acquired pursuant to
individual offers under identical terms. All outstanding Class A Common Shares
of Midwest Holding were exchanged and redeemed as of December 31, 2000. During
2000, payments of $9,541,000 were made to Class A shareholders for stock
redemptions related to these offers.
36
37
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. CAPITAL STRUCTURE (CONTINUED)
Like the Class A shares, Class C shares are not publicly or privately traded.
The Class C shares provide all shareholders with the same voting rights as the
Class A shares. Class C shareholders, however, do not accrue additional shares
and the Class C shares have no redemption value. Issuance of Class C shares will
not be subject to any vesting requirements. In the event of a liquidation, sale
or similar transaction, Class C shareholders would participate in the proceeds
according to a distribution formula developed by the Board of Directors. This
formula takes into account the underwriting risk classification and years of
coverage of each shareholder. As this is the same distribution formula that was
previously applicable to Class A shares, Class C shareholders will retain the
same percentage ownership after the exchange as they had before the exchange.
Class C shares are returned to Midwest Holding upon termination of the
shareholder's insurance coverage with Midwest Medical.
Midwest Holding has issued one share of Class B voting stock that carries with
it the right to elect the Board of Directors of Midwest Holding. The Minnesota
Medical Association and the Iowa Medical Society currently exercise the voting
rights. A majority of the Class C shareholders may at any time, by a two-thirds
vote, elect to redeem the Class B share at cost.
37
38
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. CAPITAL STRUCTURE (CONTINUED)
Following is the detail of changes in redeemable stock for each of the three
years in the period ended December 31, 2000 (in thousands, except for share and
per share amounts):
MIDWEST MIDWEST ACCUMULATED
CLASS A COMMON STOCK HOLDING HOLDING OTHER
-------------------- PAID-IN RETAINED COMPREHENSIVE
TOTAL SHARES AMOUNT CAPITAL EARNINGS INCOME
----------------------------------------------------------------------
Balance at January 1, 1998 $7,476 121,322 $1 $4,358 $3,038 $ 79
Comprehensive income:
Net loss of non-insurance entities includable in
Class A Common Stock redemption value (1,104) - - - (1,104) -
Other comprehensive income:
Unrealized gains on securities net of $39 in taxes 73 - - - - 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) (104) -
July 1, 1998 to December 31, 1998; NRV of $54.70 (272) (4,935) (1) (160) (111) -
Issuance of shares to vested policyholders - 9,437 1 - (1) -
Initial issuance of shares to policyholders upon vesting 224 3,928 - 224 - -
Dividends from Midwest Medical 2,000 - - 2,000 - -
----------------------------------------------------------------------
Balance at December 31, 1998 (carried forward) 8,146 125,682 1 6,275 1,718 152
38
39
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. CAPITAL STRUCTURE (CONTINUED)
MIDWEST MIDWEST ACCUMULATED
CLASS A COMMON STOCK HOLDING HOLDING OTHER
------------------------ PAID-IN RETAINED COMPREHENSIVE
TOTAL SHARES AMOUNT CAPITAL EARNINGS INCOME
----------------------------------------------------------------------
Balance at December 31, 1998 (brought forward) $8,146 125,682 $1 $6,275 $1,718 $152
Comprehensive income:
Net loss of non-insurance entities includable in
Class A Common Stock redemption value (1,714) - - - (1,714) -
Other comprehensive income:
Unrealized gains on securities net of $11 in taxes 20 - - - - 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) (163) -
July 1, 1999 to December 31, 1999; NRV of $60.10 (450) (7,240) (1) (304) (145) -
Issuance of shares to vested policyholders 1 8,702 1 - - -
Initial issuance of shares to policyholders upon
vesting 253 4,149 - 253 - -
Dividends from Midwest Medical 2,050 - - 2,050 - -
----------------------------------------------------------------------
Balance at December 31, 1999 (carried forward) 7,802 123,509 1 7,933 (304) 172
39
40
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. CAPITAL STRUCTURE (CONTINUED)
MIDWEST MIDWEST ACCUMULATED
CLASS A COMMON STOCK HOLDING HOLDING OTHER
-------------------- PAID-IN RETAINED COMPREHENSIVE
TOTAL SHARES AMOUNT CAPITAL EARNINGS INCOME
-----------------------------------------------------------------------
Balance at December 31, 1999 (brought forward) $7,802 123,509 $1 $7,933 $ (304) $172
Reclassification of equity components related to stock
restructure (172) - - - - (172)
Comprehensive income:
Net loss of non-insurance entities includable in
Class A Common Stock redemption value (3,496) - - - (3,496) -
Redemption of shares due to policyholder terminations
by effective date:
January 1, 2000 to April 30, 2000; NRV of $63.18 (257) (4,125) - (257) - -
Issuance of shares to vested policyholders - 5,272 - - - -
Initial issuance of shares to policyholders upon
vesting 1,311 19,896 - 1,311 - -
Redemption of shares related to stock restructure (9,541) (144,552) (1) (9,540) - -
Dividends from Midwest Medical 3,000 - - 3,000 - -
Excess of tender price over redemption value related
to stock restructure 1,353 - - (2,447) 3,800 -
-----------------------------------------------------------------------
Balance at December 31, 2000 $ - - $- $ - $ - $ -
=======================================================================
40
41
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):
2000 1999 1998
---------------------------------
Fixed maturities $10,722 $ 9,836 $ 9,339
Equity securities 878 870 872
Short-term investments 1,030 518 930
Other investments 857 854 855
---------------------------------
13,487 12,078 11,996
Investment expenses (1,219) (1,115) (1,025)
---------------------------------
$12,268 $10,963 $10,971
=================================
The cost (amortized cost for fixed maturities) and fair value of available for
sale investments are as follows (in thousands):
DECEMBER 31, 2000
----------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------------------------------------------
Fixed maturities:
Midwest Medical:
United States Government $ 59,756 $ 549 $ (493) $ 59,812
Public utilities 1,451 - (219) 1,232
Industrial and other 87,625 1,225 (3,378) 85,472
----------------------------------------------
Total $148,832 $ 1,774 $(4,090) $146,516
==============================================
Equity securities:
Midwest Holding:
Common stock:
Industrial, miscellaneous and other $ 59 $ 22 $ - $ 81
Midwest Medical:
Common stock:
Banks, trusts and insurance companies 4,383 4,556 - 8,939
Industrial, miscellaneous and other 45,297 37,133 (5,032) 77,398
----------------------------------------------
Total $ 49,739 $41,711 $(5,032) $ 86,418
==============================================
Other long-term investments:
Midwest Medical:
Real estate investment trusts $ 10,000 $ 915 $ - $ 10,915
==============================================
41
42
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
DECEMBER 31, 1999
---------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------------------------------------------------------
Fixed maturities:
Midwest Medical:
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:
Midwest Holding:
Common stock:
Industrial, miscellaneous and other $ 282 $ 266 $ - $ 548
Midwest Medical:
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
=========================================================
Other long-term investments:
Midwest Medical:
Real estate investment trusts $ 10,000 $ - $ - $ 10,000
=========================================================
42
43
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
The components of the unrealized appreciation on available for sale securities
as of December 31 are as follows (in thousands):
2000 1999
--------------------------------- ------------------------------------
MIDWEST MIDWEST MIDWEST MIDWEST
HOLDING MEDICAL HOLDING MEDICAL
--------------------------------- ------------------------------------
Fixed maturities:
Gross unrealized gains $ - $ 1,774 $ - $ 56
Gross unrealized losses - (4,090) - (5,570)
Equity securities:
Gross unrealized gains 22 41,689 266 60,207
Gross unrealized losses - (5,032) - (1,791)
Other long-term investments:
Gross unrealized gains - 915 - -
--------------------------------- ------------------------------------
22 35,256 266 52,902
Deferred income taxes (8) (11,986) (94) (17,986)
--------------------------------- ------------------------------------
$14 $23,270 $172 $34,916
================================= ====================================
The amortized cost and market value of fixed maturities at December 31, 2000, 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 $ 3,370 $ 3,370
Due after one year through five years 17,671 16,916
Due after five years through ten years 53,131 52,296
Due after ten years 74,660 73,934
------------------------------------
$148,832 $146,516
====================================
43
44
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
Proceeds from sales of available for sale investments and the related gross
realized gains and losses are as follows (in thousands):
PROCEEDS FROM GROSS REALIZED GROSS REALIZED
SALES GAINS LOSSES
------------------------------------------------------
Year ended December 31, 2000:
Fixed maturities $ 70,372 $ 364 $(2,107)
Equity securities 49,677 17,817 (5,572)
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)
Net unrealized appreciation of fixed maturities increased (decreased) by
$3,198,000, $(8,736,000) and $1,837,000 and net unrealized appreciation of
equity securities (decreased) increased by $(22,003,000), $14,036,000 and
$15,360,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
Net unrealized appreciation of other long-term investments increased by $915,000
for the year ended December 31, 2000 as a result of an initial, independent
appraisal of the non-traded real estate investment trusts.
4. POLICYHOLDER DIVIDENDS AND RETROSPECTIVE PREMIUMS
In 1999, Midwest Medical instituted a policyholder dividend program that
replaced the previous retrospective premium credit program for physicians. To
implement the program, Midwest Medical issued participating policy endorsements
to all active physician, clinic and hospital accounts during 1999 and 2000.
Participating policies represented 96% and 91% of total premiums in force and
premium income at December 31, 2000 and December 31, 1999, respectively.
44
45
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. POLICYHOLDER DIVIDENDS AND RETROSPECTIVE PREMIUMS (CONTINUED)
In the third quarter of 2000, Midwest Medical's Board of Directors declared an
$8,000,000 dividend to be paid to physician and clinic policyholders in four
equal installments in February, May, August and November 2001. The dividend will
be awarded proportionately based on annual premiums for physician and clinic
policyholders that were insured by Midwest Medical in 1996 and remain insured
throughout 2001.
In the fourth quarter of 2000, Midwest Medical's Board of Directors declared an
$108,000 dividend to be paid to hospital policyholders for policies that were
written from 1995 through 1999 and that renew in 2001. The dividend will be
awarded based on the number of years insured with Midwest Medical and will be
paid within two months after the hospital policy renews in 2001.
In the third quarter of 1999, Midwest Medical's Board of Directors declared a
$10,100,000 dividend that was paid to physician and clinic policyholders in four
equal installments in February, May, August and November 2000. The dividend was
awarded proportionately based on annual premiums for physician and clinic
policyholders that were insured by Midwest Medical in 1995 and remain insured
throughout 2000.
In the fourth quarter of 1999, Midwest Medical's Board of Directors declared a
$75,000 dividend that was paid to hospital policyholders for policies that were
written from 1995 through 1998 and that renewed in 2000. The dividend was
awarded based on the number of years insured with Midwest Medical and was paid
within two months after the hospital policy renewed in 2000.
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.
2000 1999 1998
------------------------------------------------------
Net premiums earned per consolidated statements
of income $41,344 $46,583 $35,014
Retrospective premium credits - 317 6,719
------------------------------------------------------
Pro forma net premiums earned $41,344 $46,900 $41,733
======================================================
45
46
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. POLICYHOLDER DIVIDENDS AND RETROSPECTIVE PREMIUMS (CONTINUED)
Retrospective premium payments of $5,802,000 and $5,008,000 were made to
Minnesota and North Dakota policyholders in 1999 and 1998, respectively.
A provision of the agreement and plan of merger between Iowa Physicians and
Midwest Medical required that any favorable development of certain pre-merger
liabilities of Iowa Physicians be paid to the former Iowa Physicians
policyholders who remain active Midwest Medical 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 Iowa Physicians policyholders under the terms of the agreement. During
1998, retrospective premium payments of $3,073,000 were made to former Iowa
Physicians policyholders.
A provision of the agreement and plan of merger between Medical Liability Mutual
and Midwest Medical requires that any favorable development of certain
pre-merger liabilities of Medical Liability Mutual be paid to the former Medical
Liability Mutual policyholders who remain active Midwest Medical 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, 2000, there has been no favorable
development and, therefore, no accrual or payments have been made related to
this provision.
46
47
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
The reconciliation of the liability for unpaid losses and loss adjustment
expenses is as follows (in thousands):
2000 1999
-------------------------
Balance as of January 1, net of reinsurance recoverables $ 99,894 $ 94,467
Incurred related to:
Current year 47,463 45,942
Prior years (7,876) (4,474)
-------------------------
Total incurred 39,587 41,468
Paid related to:
Current year 3,331 2,253
Prior years 35,886 33,788
-------------------------
Total paid 39,217 36,041
-------------------------
Balance as of December 31, net of reinsurance recoverables 100,264 99,894
Reinsurance recoverables at December 31 18,214 19,247
-------------------------
Balance as of December 31, gross $118,478 $119,141
=========================
Midwest Medical continually evaluates emerging trends in the development of loss
liabilities, including the trends related to the pre-merger Iowa Physicians and
Medical Liability Mutual business. Based on this analysis, management
periodically adjusts their estimates of ultimate losses.
47
48
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. SEGMENT INFORMATION
The Company is organized into five legal entity business segments consisting of
Midwest Holding, Midwest Medical, 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 Midwest
Medical, 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 2000, 1999 and
1998 (in thousands).
48
49
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. SEGMENT INFORMATION (CONTINUED)
2000
-----------------------------------------------------------
MIDWEST MIDWEST
HOLDING MEDICAL SERVICES SOLUTIONS
-----------------------------------------------------------
Revenues:
External customers $ - $ 41,900 $1,717 $ 267
Intersegment 15,372 - - 14
Net investment income (1,138) 12,166 9 15
Other (2) 214 12,006 - -
-----------------------------------------------------------
14,448 66,072 1,726 296
Total expenses 17,306 55,264 1,836 2,114
-----------------------------------------------------------
(Loss) income before income taxes (2,858) 10,808 (110) (1,818)
Income tax (benefit) expense (939) 2,026 (32) (618)
-----------------------------------------------------------
Net (loss) income $ (1,919) $ 8,782 $ (78) $(1,200)
===========================================================
Total assets $154,133 $304,932 $2,192 $ 2,116
===========================================================
2000
--------------------------------------------------
MEDPOWER ELIMINATIONS (1) CONSOLIDATED
--------------------------------------------------
Revenues:
External customers $ 308 $ - $ 44,192
Intersegment - (15,386) -
Net investment income 28 1,188 12,268
Other (2) - (234) 11,986
--------------------------------------------------
336 (14,432) 68,446
Total expenses 789 (14,432) 62,877
--------------------------------------------------
(Loss) income before income taxes (453) - 5,569
Income tax (benefit) expense (154) - 283
--------------------------------------------------
Net (loss) income $ (299) $ - $ 5,286
==================================================
Total assets $1,188 $(162,820) $301,741
==================================================
(1) Intersegment eliminations for revenues and expenses are primarily for
management, administrative and investment services provided by Midwest
Holding. Eliminations for assets consist primarily of investments in
wholly-owned subsidiaries, intersegment receivables for management fees and
reclassifications between assets and liabilities for taxes.
(2) Other revenues consist primarily of net realized capital gains and interest
received on federal income tax refunds.
49
50
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. SEGMENT INFORMATION (CONTINUED)
1999
---------------------------------------------------------------
MIDWEST MIDWEST
HOLDING MEDICAL SERVICES SOLUTIONS
---------------------------------------------------------------
Revenues:
External customers $ - $ 47,181 $ 1,661 $ -
Intersegment 16,273 - - -
Net investment income (696) 10,780 21 17
Other (2) 185 7,041 - -
---------------------------------------------------------------
15,762 65,002 1,682 17
Total expenses 15,584 59,904 1,648 1,408
---------------------------------------------------------------
Income (loss) before income taxes 178 5,098 34 (1,391)
Income tax expense (benefit) 91 1,648 15 (473)
---------------------------------------------------------------
Net income (loss) $ 87 $ 3,450 $ 19 $ (918)
===============================================================
Total assets $160,848 $311,367 $1,634 $1,539
===============================================================
1999
-------------------------------------------------
MEDPOWER ELIMINATIONS (1) CONSOLIDATED
-------------------------------------------------
Revenues:
External customers $ 410 $ - $ 49,252
Intersegment 13 (16,286) -
Net investment income 13 828 10,963
Other (2) - 148 7,374
-------------------------------------------------
436 (15,310) 67,589
Total expenses 1,803 (15,310) 65,037
-------------------------------------------------
Income (loss) before income taxes (1,367) - 2,552
Income tax expense (benefit) (465) - 816
-------------------------------------------------
Net income (loss) $ (902) $ - $ 1,736
=================================================
Total assets $1,123 $(156,335) $320,176
=================================================
(1) Intersegment eliminations for revenues and expenses are primarily for
management, administrative and investment services provided by Midwest
Holding. 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.
50
51
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. SEGMENT INFORMATION (CONTINUED)
1998
-------------------------------------------------------------
MIDWEST MIDWEST
HOLDING MEDICAL SERVICES SOLUTIONS
-------------------------------------------------------------
Revenues:
External customers $ - $ 35,771 $- $ -
Intersegment 14,038 - - -
Net investment income (429) 10,731 - 3
Other (2) 139 8,944 - -
-------------------------------------------------------------
13,748 55,446 - 3
Total expenses 13,481 45,126 - 916
-------------------------------------------------------------
Income (loss) before income taxes 267 10,320 - (913)
Income tax expense (benefit) 104 3,268 - (320)
-------------------------------------------------------------
Net income (loss) $ 163 $ 7,052 $- $ (593)
=============================================================
Total assets $154,727 $287,639 $3 $2,728
=============================================================
1998
--------------------------------------------------
MEDPOWER ELIMINATIONS (1) CONSOLIDATED
--------------------------------------------------
Revenues:
External customers $ 387 $ - $ 36,158
Intersegment - (14,038) -
Net investment income 2 664 10,971
Other (2) - 206 9,289
--------------------------------------------------
389 (13,168) 56,418
Total expenses 1,426 (13,168) 47,781
--------------------------------------------------
Income (loss) before income taxes (1,037) - 8,637
Income tax expense (benefit) (363) - 2,689
--------------------------------------------------
Net income (loss) $ (674) $ - $ 5,948
==================================================
Total assets $ 1,693 $(151,307) $295,483
==================================================
(1) Intersegment eliminations for revenues and expenses are primarily for
management, administrative and investment services provided by Midwest
Holding. 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.
51
52
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. INCOME TAXES
Components of income taxes are as follows (in thousands):
2000 1999 1998
---------------------------
Current provision $(233) $906 $1,335
Deferred tax provision 516 (90) 1,354
---------------------------
$ 283 $816 $2,689
===========================
The Company's income taxes differ from the federal statutory rate applied to
income before tax as follows (in thousands):
2000 1999 1998
----------------------------
Income before tax at the federal statutory rate
(34% - 2000 and 1999,
35% - 1998) $ 1,894 $868 $3,023
Dividends received deductions (net of proration
adjustment) (77) (81) (99)
State income taxes, net of federal tax benefit
155 86 37
Benefit for prior year income taxes (1,697) (59) (267)
Other 8 2 (5)
----------------------------
$ 283 $816 $2,689
============================
The deferred income tax provision includes the following differences between
financial and income tax reporting (in thousands):
2000 1999 1998
-----------------------------
Discounting of post-1986 unpaid losses and loss
adjustment expenses $290 $ 167 $ 842
Liabilities not currently deductible 12 (121) 596
Unearned and advanced premiums 87 (256) (151)
Investment income not currently taxable 34 156 -
Other 93 (36) 67
-----------------------------
$516 $ (90) $1,354
=============================
52
53
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. INCOME TAXES (CONTINUED)
The Company made income tax payments of $2,298,000, $1,751,000 and $3,041,000 in
2000, 1999 and 1998, respectively.
The components of the net deferred income tax (liability) asset as of December
31 are as follows (in thousands):
2000 1999
-----------------------
Deferred tax assets:
Unpaid losses and loss adjustment expenses $ 3,700 $ 3,990
Liabilities not currently deductible 1,188 1,200
Unearned and advanced premiums 797 884
Other 587 730
-----------------------
6,272 6,804
Deferred tax liabilities:
Unrealized gains (11,995) (18,077)
Other (912) (928)
-----------------------
(12,907) (19,005)
-----------------------
$ (6,635) $(12,201)
=======================
53
54
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. REINSURANCE
To reduce overall risk, including exposure to large losses, Midwest Medical
participates in various reinsurance programs. Midwest Medical 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, 2000.
Midwest Medical 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 $15,117,000 and $15,648,000 are associated with a single
reinsurer, General Reinsurance Corporation, at December 31, 2000 and 1999,
respectively. Midwest Medical also holds collateral under related reinsurance
agreements in the form of letters of credit totaling $2,267,000 that can be
drawn upon in the event the applicable reinsuring company is unable to pay its
obligation to Midwest Medical.
Midwest Medical 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 Midwest Medical. Midwest Medical
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 2000, 1999 and 1998
is as follows (in thousands):
2000 1999 1998
-------------------- -------------------- -------------------------
WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED
-------------------- -------------------- -------------------------
Direct $48,554 $49,302 $51,672 $47,048 $39,431 $37,329
Assumed 76 76 48 48 97 97
Ceded (7,851) (8,034) (1,897) (513) (2,601) (2,412)
-------------------- -------------------- -------------------------
Net $40,779 $41,344 $49,823 $46,583 $36,927 $35,014
==================== ==================== =========================
54
55
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. REINSURANCE (CONTINUED)
Loss and loss adjustment expenses incurred are net of applicable reinsurance of
$5,315,000, $5,204,000 and $2,240,000 for the years ended December 31, 2000,
1999 and 1998, respectively.
In 1998, Midwest Medical 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, Midwest Medical has no
reinsurance coverage for the exposure period October 1, 1986 through December
31, 1991. Due to the nature of Midwest Medical's policies, there is no risk of
incurring future losses related to this time period.
9. BENEFIT PLANS
Substantially all employees of Midwest Holding 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 Midwest Holding 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, 2000, 1999 and 1998 were $583,000,
$581,000 and $521,000, respectively.
Midwest Holding provides an unfunded Supplemental Executive Retirement Plan
(SERP) which is a non-qualified, defined benefit retirement plan covering
certain Midwest Holding officers. Benefits are based upon years of service and
compensation. Although the plan is technically unfunded, Midwest Holding 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
$574,000, $441,000 and $404,000 for the years ended December 31, 2000, 1999 and
1998, respectively. The liability recognized in the consolidated balance sheets
at December 31, 2000 and 1999 related to this plan was $3,101,000 and
$2,704,000, respectively.
55
56
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. BENEFIT PLANS (CONTINUED)
Midwest Holding 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, 2000,
1999 and 1998 was $36,000, $23,000 and $41,000, respectively. As of December 31,
2000 and 1999, the net post-retirement benefit plan liability was $51,000 and
$19,000, respectively.
10. RECONCILIATION WITH STATUTORY ACCOUNTING PRINCIPLES
Accounting principles generally accepted in the United States differ in certain
respects from the accounting practices prescribed or permitted by insurance
regulatory authorities (statutory basis).
The following is a reconciliation of net income and shareholders' equity under
US GAAP with that reported for Midwest Medical on a statutory basis (in
thousands):
Net Income
YEAR ENDED DECEMBER 31
2000 1999 1998
-----------------------------
On the basis of US GAAP, Midwest Medical
only $8,782 $3,450 $7,052
Additions:
Deferred income taxes 836 37 1,390
-----------------------------
On the basis of statutory accounting principles $9,618 $3,487 $8,442
=============================
56
57
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. RECONCILIATION WITH STATUTORY ACCOUNTING PRINCIPLES (CONTINUED)
Shareholders' Equity
DECEMBER 31
2000 1999 1998
-------------------------------------------------
On the basis of US GAAP, Midwest Medical
only $141,935 $147,800 $142,446
Additions (deductions):
Deferred income taxes 7,714 12,878 11,526
Unrealized loss (gain) on fixed maturities 2,316 5,514 (3,222)
Non-admitted assets (11,564) (1,000) -
Prescribed market value differences (16) (253) -
Other 1 (179) (34)
-------------------------------------------------
On the basis of statutory accounting principles $140,386 $164,760 $150,716
=================================================
Under Minnesota insurance statutes, Midwest Medical is required to maintain
statutory surplus in excess of ten times its per risk reinsurance retention
limit. Since Midwest Medical limited its retention to $750,000 on any single
risk, the minimum statutory surplus level was $7,500,000 for 2000, 1999 and
1998.
Dividends that exceed the greater of 10% of Midwest Medical's prior year-end
policyholder surplus or Midwest Medical's prior year net income excluding
realized capital gains are considered extraordinary under Minnesota insurance
statutes. Payment of extraordinary dividends is subject to the approval of the
Commissioner of the Department of Commerce of the State of Minnesota. At
December 31, 2000, the maximum dividend that may be paid by Midwest Medical in
2001 without regulatory approval is approximately $14,039,000. Cash dividends
paid to Midwest Holding by Midwest Medical in 2000, 1999 and 1998 were
$3,000,000, $2,050,000 and $2,000,000, respectively.
57
58
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. RECONCILIATION WITH STATUTORY ACCOUNTING PRINCIPLES (CONTINUED)
The National Association of Insurance Commissioners (NAIC) revised the
Accounting Practices and Procedures Manual in a process referred to as
Codification. The revised manual will be effective January 1, 2001. Midwest
Medical's domiciliary state of Minnesota has adopted the provisions of the
revised manual. The revised manual has changed, to some extent, prescribed
statutory accounting practices and will result in changes to the accounting
practices that Midwest Medical uses to prepare its statutory-basis financial
statements. Management believes that although the implementation of Codification
will have a negative impact on Midwest Medical's statutory-basis capital and
surplus primarily from the recording of a net deferred tax liability, Midwest
Medical will remain in compliance with all regulatory and contractual
obligations.
11. NET REDEMPTION VALUE
The net redemption value per share of the Class A Common Shares was as follows:
MIDWEST CLASS A NET REDEMPTION
HOLDING COMMON SHARES VALUE PER
NET EQUITY OUTSTANDING SHARE
------------------------------------------------
(000s)
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
============= ===========
Due to the stock restructure discussed in Note 2, all outstanding Class A Common
Shares of Midwest Holding were exchanged and redeemed as of December 31, 2000.
Under the terms of the stock restructure, Class A shareholders received $66.00
for each Class A share owned, plus one Class C share.
58
59
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
59
60
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The names and ages of the directors of Midwest Holding, the year each first
became a director and the number of Class C Common Shares owned by each as of
December 31, 2000 are as follows:
CLASS C
COMMON
DIRECTOR PRINCIPAL SHARES
NAME AGE SINCE OCCUPATION OWNED
- ---------------------------------------------------------------------------------------------
Michael D. Abrams 39 1996 Exec V.P. Iowa Medical Society -
John R. Balfanz, M.D. 55 1995 Physician 1
Gail P. Bender, M.D. 53 1996 Physician 1
James R. Bishop, M.D. 59 1994 Physician 1
David P. Bounk 54 1995 President/CEO - Midwest Holding -
Terence P. Cahill, M.D. 44 2000 Physician 1
Thomas C. Evans, M.D. 45 1999 Physician 1
G. Richard Geier, Jr., M.D. 60 1995 Physician 1
Anthony C. Jaspers, M.D. 53 1996 Physician 1
Russel J. Kuzel, M.D. 48 1997 Physician 1
Wayne F. Leebaw, M.D. 57 1994 Physician 1
Mark O. Liaboe, M.D. 47 1999 Physician 1
Patricia J. Lindholm, M.D. 44 2000 Physician 1
Steven A. McCue, M.D. 59 1995 Physician 1
Roger H. Meyer, M.D. 62 2000 Physician 1
Harold W. Miller, M.D. 53 1996 Physician 1
Anton S. Nesse, M.D. 62 1989 Radiologist 1
Mark D. Odlund, M.D. 48 1996 Physician 1
Paul S. Sanders, M.D. 56 1984 CEO-MN Medical Assoc. -
Richard D. Schmidt, M.D.
Secretary 57 1990 Physician 1
Andrew J. K. Smith, M.D.
Chairman of Board 58 1990 Neurological Surgeon -
Tom D. Throckmorton, M.D. 55 1997 Physician 1
R. Bruce Trimble, M.D.
Vice Chair of Board 60 1993 Physician 1
60
61
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(CONTINUED)
The Bylaws of Midwest Holding provide that Midwest Holding'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 Minnesota
Medical Association and the Executive Vice President of the Iowa Medical
Society, both of whom shall be ex-officio directors; (3) the President of
Midwest Holding as an ex-officio director; and (4) such additional ex-officio
and 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 Midwest Medical. The Minnesota Medical Association,
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 Midwest Medical provide that the directors of Midwest Holding
shall also serve as the directors of Midwest Medical, with the exception of any
outside directors of Midwest Holding. Outside directors are persons who are not
policyholders of Midwest Medical or members of any state medical society. There
are currently no outside directors of Midwest Holding so the Boards of Midwest
Holding and Midwest Medical are identical with the exception of Jack L. Kleven,
COO and President of Midwest Medical, who is a member of Midwest Medical's Board
of Directors as the result of Midwest Medical's Bylaws.
Pursuant to the merger with Iowa Physician's, the Bylaws of Midwest Holding were
amended to provide for the election of directors who are members of the Iowa
Medical Society 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 Midwest Medical insureds, subject to a minimum of two Iowa directors,
one of whom shall be the Executive Vice President of the Iowa Medical Society,
for as long as the Class B Common Share is outstanding. The Minnesota Medical
Association 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 Iowa Medical Society.
Directors serve until their successors are elected and qualified, or until their
prior resignation, removal, death or disqualification.
As of December 31, 2000, the directors of Midwest Holding, as a group, owned 19
Class C Common Shares or less than 1.0 percent of the total Class C Common
Shares outstanding as of that date. No executive officer owned any Class C
Common Shares as of that date.
All of the directors have been principally engaged in the practice of medicine
for more than five years except for Dr. Paul S. Sanders, who has been the
President of the Minnesota Medical Association since 1990, Michael D. Abrams,
who has been the Executive Vice President of the Iowa Medical Society since
1996, David P. Bounk, who has been the President and CEO of Midwest Holding
since 1990, and Jack L. Kleven, who has been the COO and President of
61
62
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(CONTINUED)
Midwest Medical since 1999. Prior to 1990, Dr. Sanders was principally engaged
in the practice of medicine. Prior to 1996, Mr. 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 $53,097. All members of the Board of Directors currently are paid $1,250
for each meeting of the Board of Directors they attend. In addition, members of
the Executive Committee currently are paid $1,250 for each meeting of the
Executive Committee they attend, and committee chairmen are paid $1,000 for each
meeting of the standing committee they chair. Other members of standing
committees currently are paid between $500 and $800, depending upon distance
traveled, for each committee meeting they attend.
EXECUTIVE OFFICERS
The names, ages and positions of the executive officers of Midwest Holding and
Midwest Medical are as follows:
PERIOD OF SERVICE
POSITION AS PRINCIPAL
NAME AGE WITH COMPANY AN OFFICER OCCUPATION
- -------------------------------------------------------------------------------------------------------------------
David P. Bounk 54 President and Chief Executive 1990 to date President and Chief Executive
Officer - Midwest Holding Officer - Midwest Holding
Niles A. Cole 39 Vice President - Finance, 1998 to date Vice President - Finance,
Treasurer and Chief Financial Treasurer and Chief Financial
Officer Officer
Jack L. Kleven 54 President - Midwest Medical 1986 to date President - Midwest Medical
and Chief Operating Officer and Chief Operating Officer
Thomas H. Lee 57 Vice President - Information 1999 to date Vice President - Information
Systems Systems
Elizabeth S. Lincoln 47 Vice President - Law and 1990 to date Vice President - Law and
Health Policy Health Policy
Debra L. McBride 46 Vice President - Risk 2000 to date Vice President - Risk
Management Management
Gerald M. O'Connell 46 Vice President - Sales and 1998 to date Vice President - Sales and
Marketing Marketing
Michael G. Rutz 47 Vice President - Underwriting 1995 to date Vice President - Underwriting
Jerry A. Zeitlin 50 Vice President - Claims 1999 to date Vice President - Claims
62
63
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(CONTINUED)
Mr. Bounk has over 30 years' experience in the insurance industry and joined
Midwest Holding and Midwest Medical 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
M.B.A. degree in finance.
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 Midwest Holding 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 Midwest Holding 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 Midwest Holding for one year following
his termination of employment.
Effective January 1, 1997, Midwest Holding 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 17 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 B.S.
degrees in accounting and finance.
Mr. Kleven has over 26 years' experience in medical malpractice claims adjusting
and management. He joined the Insurance 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 President of Midwest Medical effective
September 1, 1999. Prior to joining the Insurance Exchange, he was a liability
manager at The St. Paul Companies for six years. He has a B.S. degree in
business.
Mr. Lee has over 26 years' experience in the insurance industry. Prior to
joining Midwest Holding 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 B.A.
degrees in mathematics and statistics.
Ms. Lincoln has over 17 years' experience in medical professional liability risk
management. She joined the Insurance 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.
63
64
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(CONTINUED)
Ms. McBride has over 13 years' experience in the insurance industry. Prior to
joining Midwest Holding in 1994, she served as a trial attorney specializing in
insurance defense. She has a B.A. degree in nursing and a law degree.
Mr. O'Connell has over 24 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 Midwest Holding in October 1996. He has a B.S. in
agriculture business management with an emphasis in insurance.
Mr. Rutz has over 22 years' experience in the insurance industry, including 12
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 Midwest Holding in May 1995 as Vice
President - Underwriting. He has a B.S. degree in resource management.
Mr. Zeitlin has over 27 years of claims experience in the property-casualty
insurance industry. Prior to joining Midwest Holding in 1993, he was Liability
Supervisor for The St. Paul Companies from 1979 to 1993. He has a B.S. 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 2000, 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.
64
65
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table summarizes compensation paid by Midwest Holding to its five
most highly compensated executive officers for services rendered in all
capacities during the last three years.
CASH COMPENSATION
NAME OF INDIVIDUAL CAPACITIES IN ----------------- ALL OTHER
OR NUMBER IN GROUP WHICH SERVED SALARY BONUS COMPENSATION(A)
- -------------------------------------------------------------- ------------------------------------------------
David P. Bounk President and Chief 2000 $239,406 $96,560 $34,826
Executive Officer - 1999 213,981 85,830 34,348
Midwest Holding 1998 200,187 56,126 32,272
Jack L. Kleven President - Midwest 2000 198,702 68,694 33,886
Medical and Chief 1999 177,624 61,636 32,066
Operating Officer 1998 167,716 43,752 30,847
Michael G. Rutz Vice President- 2000 129,701 37,435 32,814
Underwriting 1999 125,000 36,694 31,377
1998 119,816 34,233 31,406
Gerald M. O'Connell Vice President - Sales and 2000 130,570 37,575 30,156
Marketing 1999 117,196 34,749 29,864
1998 109,000 11,530 21,739
Niles A. Cole Vice President - Finance, 2000 119,095 34,274 29,223
Treasurer and Chief 1999 112,898 32,585 27,382
Financial Officer 1998 103,769 7,308 23,035
(a) Includes employer contributions to qualified retirement plans and car
allowances
Midwest Holding also maintains a Supplemental Executive Retirement Plan 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
plan 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 Midwest Holding'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
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ITEM 11. EXECUTIVE COMPENSATION (CONTINUED)
Summary Compensation Table are as follows: Mr. Bounk--$239,839; Mr.
Kleven--$146,811; Mr. Rutz--$138,981; Mr. O'Connell--$101,990 and Mr.
Cole--$90,040. The estimated annual retirement benefits were calculated assuming
salary increases of 5% per year, discounted 4% per year for future inflation to
express the estimated benefits in today's dollars.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The response to this item is contained in Item 10.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
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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, 2000 are
included in this annual report (Form 10-K) in Item 8:
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 2000 and 1999
Consolidated Statements of Income for the years ended December 31,
2000, 1999 and 1998
Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended December
31, 2000, 1999 and 1998
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 2000.
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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 16, 2001
--------------------------------------- --------------
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 16, 2001
- -------------------------------------------
David P. Bounk
/s/ Niles Cole Principal Financial Officer and March 16, 2001
- -------------------------------------------
Niles Cole Principal Accounting Officer
* Director, Chairman of the Board March 16, 2001
- -------------------------------------------
Andrew J. K. Smith, M.D.
* Director March 16, 2001
- -------------------------------------------
Michael D. Abrams
* Director March 16, 2001
- -------------------------------------------
John R. Balfanz, M.D.
* Director March 16, 2001
- -------------------------------------------
Gail P. Bender, M.D.
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* Director March 16, 2001
- -------------------------------------------
James R. Bishop, M.D.
* Director March 16, 2001
- -------------------------------------------
Terence P. Cahill, M.D.
* Director March 16, 2001
- -------------------------------------------
Thomas C. Evans, M.D.
* Director March 16, 2001
- -------------------------------------------
G. Richard Geier, Jr., M.D.
* Director March 16, 2001
- -------------------------------------------
Anthony C. Jaspers, M.D.
* Director March 16, 2001
- -------------------------------------------
Russel J. Kuzel, M.D.
* Director March 16, 2001
- -------------------------------------------
Wayne F. Leebaw, M.D.
* Director March 16, 2001
- -------------------------------------------
Mark O. Liaboe, M.D.
* Director March 16, 2001
- -------------------------------------------
Patricia J. Lindholm, M.D.
* Director March 16, 2001
- -------------------------------------------
Steven A. McCue, M.D.
* Director March 16, 2001
- -------------------------------------------
Roger H. Meyer, M.D.
* Director March 16, 2001
- -------------------------------------------
Harold W. Miller, M.D.
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* Director March 16, 2001
- -------------------------------------------
Anton S. Nesse, M.D.
* Director March 16, 2001
- -------------------------------------------
Mark D. Odland, M.D.
* Director March 16, 2001
- -------------------------------------------
Paul S. Sanders, M.D.
* Director, Secretary March 16, 2001
- -------------------------------------------
Richard D. Schmidt, M.D.
* Director March 16, 2001
- -------------------------------------------
Tom D. Throckmorton, M.D.
* Director, Vice Chairman March 16, 2001
- -------------------------------------------
R. Bruce Trimble, M.D.
* By: /s/ David P Bounk March 16, 2001
-----------------------------------
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
2000 1999
------------------------------------
(In Thousands)
ASSETS
Short-term investments $ 171 $ 1,107
Cash 8 6
Investment in subsidiaries 145,793 150,734
Other 8,161 9,001
------------------------------------
Total assets $ 154,133 $ 160,848
====================================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accrued expenses and other liabilities $ 5,035 $ 5,245
Note payable to Midwest Medical 8,500 -
Class A Redeemable Common Stock - 7,802
------------------------------------
13,535 13,047
SHAREHOLDERS' EQUITY
Class B Common Stock 1 1
Class C Common Stock - -
Additional paid-in capital 12,789 12,789
Retained earnings, comprised of undistributed earnings of subsidiaries
104,524 100,095
Unrealized appreciation on investments, net of income
taxes 23,284 34,916
------------------------------------
140,598 147,801
------------------------------------
Total liabilities and shareholders' equity $ 154,133 $ 160,848
====================================
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
2000 1999 1998
-------------------------------------------------
(In Thousands)
REVENUES
Management fee from subsidiaries $15,372 $16,273 $14,038
Net investment income (1,138) (696) (429)
Realized capital gains 213 179 137
Other income 1 6 2
-------------------------------------------------
14,448 15,762 13,748
EXPENSES
Compensation expense for vested Class A Common Shares 1,311 253 224
Other operating and administrative 15,995 15,331 13,257
-------------------------------------------------
17,306 15,584 13,481
-------------------------------------------------
(Loss) income before income taxes and other items (2,858) 178 267
Income tax (benefit) expense (939) 91 104
-------------------------------------------------
(Loss) income before equity in undistributed income of
subsidiaries (1,919) 87 163
Equity in undistributed income of subsidiaries 7,205 1,649 5,785
-------------------------------------------------
Net income $ 5,286 $ 1,736 $ 5,948
=================================================
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
2000 1999 1998
-------------------------------------------------
(In Thousands)
Net cash (used in) provided by operating
activities $ (136) $ 856 $ (366)
INVESTING ACTIVITIES
Purchase of fixed maturities - - (21,758)
Sales of fixed maturities - - 22,826
Calls and maturities of fixed maturities - - 250
Sales of short-term investments, net 936 203 1,420
Capitalization of Services (700) (1,500) -
Capitalization of Solutions (1,800) (650) (3,850)
FINANCING ACTIVITIES
Redemption of Class A Common Shares (9,798) (953) (522)
Note payable to Midwest Medical 8,500 - -
Dividends from Midwest Medical 3,000 2,050 2,000
-------------------------------------------------
Increase in cash 2 6 -
Cash at beginning of year 6 - -
-------------------------------------------------
Cash at end of year $ 8 $ 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, 2000
The accompanying condensed financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto of Midwest
Medical Insurance Holding Company and Subsidiaries.
See Note 2 to the audited consolidated financial statements of Midwest Medical
Insurance Holding Company and Subsidiaries for a description of the stock
restructure completed in 2000.
The $8,500,000 received from Midwest Medical through a non-interest-bearing note
was used to redeem Class A shares under the stock restructure during 2000. The
note will be retired in 2001.
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, 2000:
Insurance premiums:
Property/casualty insurance $49,302 $8,034 $76 $41,344 0.2%
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%
NOTE TO SCHEDULE IV:
Ceded premiums for the years ended December 31, 2000, 1999 and 1998 are net of
(additions) reductions in ceded premiums related to swing-rated reinsurance
treaties of $(1,300,000), $5,205,000 and $2,550,000, respectively. Ceded
premiums in 2000 and 1999 are also net of proceeds from contingent commission on
reinsurance covering the period January 1, 1992 through December 31, 1994 of
$666,000 and $715,000, respectively. 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
2000 N/A $118,478 N/A $12,050
1999 N/A 119,141 N/A 12,797
1998 N/A 110,964 N/A 8,173
YEAR ENDED DECEMBER 31
------------------------------------------------------------------------------------------
COL. A 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
AFFILIATION NET (1) (2) POLICY AND LOSS
WITH EARNED INVESTMENT CURRENT PRIOR ACQUISITION ADJUSTMENT PREMIUMS
REGISTRANT PREMIUMS INCOME YEAR YEAR COSTS EXPENSES WRITTEN
- ----------------------------------------------------------------------------------------------------------------
(In Thousands)
Consolidated
property/ casualty
entities
2000 $41,344 $12,166 $47,463 $(7,876) N/A $39,217 $48,554
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
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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, as amended. 3A.(1)(5)
Bylaws of the registrant. 3B.(1)
Certificate of Designation for Class C Common Stock. 4.(5)
Voting Trust Agreement. 9.(1)
Governance Agreement between the registrant and the Minnesota Medical 10A.(1)
Association, holder of the registrant's Class B Common Share,
dated November 30, 1988.
Lease for office space between registrant and Centennial Lakes IV, 10B.(4)
L.L.C., dated July 30, 1999.
Amended and Restated Management Agreement between the registrant and 10C.(6)
Midwest Medical Insurance Company, dated January 1, 2000.
Agreement of Reinsurance between Midwest Medical Insurance Company and 10D.(3)
General Reinsurance Corporation, effective January 1, 1998.
Letter of Employment Agreement between the registrant and David P. 10E.(2)
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.(6)
Power of attorney. 24.(6)
- ---------------------------------
(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 and incorporated herein by
reference.
(4) Filed with 1999 Annual Report on Form 10-K and incorporated herein by
reference.
(5) Filed with Schedule TO SEC File No. 005-58917 filed on April 26, 2000, as
amended, and incorporated herein by reference.
(6) Filed with this Annual Report on Form 10-K.
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