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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Period Ended June 30, 2002.
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From to
------------ ------------
Commission file number 0-21230
Midwest Medical Insurance Holding Company
- --------------------------------------------------------
(Exact name of registrant as specified in its charter)
Minnesota 41-1625287
- ---------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7650 Edinborough Way, Suite 400
Minneapolis, Minnesota 55435-5978
- ----------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
952-838-6700
- --------------------------------------------
(Registrant's telephone number, including area code)
Not applicable
- --------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
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
--- ---
The number of shares outstanding of the issuer's classes of common stock as of
June 30, 2002:
Class B Common Stock, $1,000 par value - 1 share
Class C Common Stock, no par value -- 10,762 shares
1
INDEX
Midwest Medical Insurance Holding Company
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets -- June 30, 2002 and
December 31, 2001
Condensed consolidated statements of income - Three months
ended June 30, 2002 and 2001; Six months ended June 30, 2002
and 2001
Condensed consolidated statements of cash flows - six months
ended June 30, 2002 and 2001
Notes to condensed consolidated financial statements -- June 30, 2002
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
2
Part I. Financial Information
Item 1. - Financial Statements
MIDWEST MEDICAL INSURANCE HOLDING COMPANY and SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in thousands)
June 30 December 31
2002 2001
---------- -----------
(Unaudited) (Note A)
ASSETS
Fixed maturities at fair value (cost:
2002 $146,959; 2001 $137,844) $148,810 $140,436
Equity securities at fair value (cost:
2002 $29,517; 2001 $46,432) 37,993 63,700
Short-term investments 21,984 21,541
Other investments at fair value (cost:
2002 $39,860; 2001 $20,000) 40,821 21,616
---------- -----------
249,608 247,293
Cash - 1,018
Accrued investment income 2,097 2,219
Premiums receivable -- Note C 24,974 9,844
Reinsurance recoverable on paid and unpaid losses 14,410 14,528
Amounts due from reinsurers 6,779 1,657
Deferred income taxes 1,833 -
Other assets 12,480 10,846
---------- -----------
Total assets $312,181 $287,405
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Unpaid losses and loss adjustment expenses $133,658 $118,574
Unearned premiums -- Note C 43,624 15,489
Policyholder dividends -- Note D 2,024 4,050
Deferred income taxes - 1,664
Amounts due to reinsurers 8,615 6,775
Other liabilities -- Note C 6,475 13,966
---------- -----------
194,396 160,518
SHAREHOLDERS' EQUITY
Class B Common Stock; authorized, issued and
outstanding 1 share; $1,000 par value 1 1
Class C Common Stock; authorized 300,000 shares,
issued and outstanding 10,762 shares in 2002
and 9,298 shares in 2001; no par value - -
Paid-in capital 12,789 12,789
Retained earnings 97,545 99,923
Accumulated other comprehensive income:
Net unrealized appreciation of investments 7,450 14,174
---------- -----------
117,785 126,887
---------- -----------
Total liabilities and shareholders' equity $312,181 $287,405
========== ===========
See notes to condensed consolidated financial statements.
3
MIDWEST MEDICAL INSURANCE HOLDING COMPANY and SUBSIDIARIES
Condensed Consolidated Statements of Income
(Dollars in thousands)
(Unaudited)
Three months ended Six months ended
June 30 June 30
--------------------------- ----------------------------
2002 2001 2002 2001
-------- -------- -------- ---------
Revenues:
Net premiums earned $ 15,774 $ 9,150 $ 32,520 $ 20,734
Net investment income 3,077 3,250 5,995 6,249
Net realized capital gains 238 3,828 782 6,126
Other 1,097 872 2,341 1,536
-------- -------- -------- --------
20,186 17,100 41,638 34,645
Losses and expenses:
Losses and loss adjustment expenses 17,925 11,581 36,008 23,290
Underwriting, acquisition and
insurance expenses 1,947 1,693 5,079 4,402
Other operating expenses 2,053 1,684 4,169 3,345
-------- -------- -------- --------
21,925 14,958 45,256 31,037
-------- -------- -------- --------
(Loss) income from continuing
operations before income taxes (1,739) 2,142 (3,618) 3,608
Income tax (benefit) expense --
Note B (617) 784 (1,240) 1,312
-------- -------- -------- --------
(Loss) income from continuing
operations after income taxes (1,122) 1,358 (2,378) 2,296
Discontinued operations -- Note E:
Loss from discontinued operations,
net of income tax benefit -- (65) -- (119)
-------- -------- -------- --------
Net (loss) income $ (1,122) $ 1,293 $ (2,378) $ 2,177
======== ======== ======== ========
See notes to condensed consolidated financial statements.
4
MIDWEST MEDICAL INSURANCE HOLDING COMPANY and SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Six months ended
June 30
----------------------------
2002 2001
------- -------
OPERATING ACTIVITIES
Net income $(2,378) $ 2,177
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Increase in premiums receivable (15,130) (14,497)
Decrease in reinsurance recoverable on paid and
unpaid losses 118 7,180
Increase in amounts due from reinsurers (5,122) (2,991)
Increase (decrease) in unpaid losses and loss
adjustment expenses 15,084 (8,225)
Increase in unearned premiums 28,135 22,437
Decrease in policyholder dividends (2,026) (4,045)
Decrease in other liabilities (7,491) (5,030)
Net realized capital gains (782) (6,126)
Other changes, net 412 1,151
------- -------
10,820 (7,969)
INVESTING ACTIVITIES
Purchases of fixed maturity investments and
equity securities (119,728) (80,636)
Sales of fixed maturity investments and equity
securities 108,333 84,924
Maturities and calls of fixed maturity investments - 3,360
Net (purchase) sale of short-term investments (443) 560
------- -------
(11,838) 8,208
------- -------
(Decrease) increase in cash (1,018) 239
Cash at beginning of year 1,018 976
------- -------
CASH AT JUNE 30 $ - $ 1,215
======= =======
See notes to condensed consolidated financial statements.
5
MIDWEST MEDICAL INSURANCE HOLDING COMPANY and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
June 30, 2002
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial
statements of Midwest Medical Insurance Holding Company and its
subsidiaries have been prepared in accordance with accounting
principles generally accepted in the United States for interim
financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and notes required by accounting principles generally
accepted in the United States for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included. Operating results for any interim period are not necessarily
indicative of the results that may occur for the full year. These
interim financial statements should be read in conjunction with the
2001 consolidated financial statements and notes thereto included in
Midwest Holding's Annual Report on Form 10-K as filed with the
Securities and Exchange Commission.
The balance sheet at December 31, 2001 has been derived from the
audited financial statements at that date but does not include all of
the information and notes required by accounting principles generally
accepted in the United States for complete financial statements.
Certain amounts applicable to prior periods have been reclassified to
conform to the classifications followed in the current year. All
intercompany amounts have been eliminated.
In management's judgment, the following are the critical accounting
policies of the Company:
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management
to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses, as well as disclosure of
contingent assets and liabilities at the date of the financial
statements. Actual results could differ from those estimates.
Investments
The Company manages its investment portfolio to achieve its long-term
investment objective of providing for the financial stability of the
Company through preservation of assets and maximization of total
portfolio return. Although management believes the Company has the
ability to hold its fixed maturity investment portfolio to maturity,
these investments are classified as "available for sale," as management
may take advantage of opportunities to increase total return through
sales of selected securities in response to changing market conditions.
6
NOTE A - BASIS OF PRESENTATION (continued)
Consistent with management's classification of its investment in debt
and equity securities as available for sale, such investments are
carried at fair value, with unrealized holding gains and losses
reflected as a component of other comprehensive income, net of
applicable deferred taxes.
Fair values are based on quoted market prices, where available. For
fixed maturity investments not actively traded, fair values are
estimated using values obtained from independent pricing services.
Short-term investments are principally money market funds and
commercial paper with maturities of less than one year. Short-term
investments are recorded at cost, which approximates fair value.
Other investments are less than 20% equity interests in a non-traded
real estate investment trust and an international equity limited
partnership. The real estate investment trust is recorded at appraised
value and the international equity limited partnership is recorded at
its net asset 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.
When evidence indicates a decline, which is other than temporary, in
the underlying value or earning power of individual investments, such
investments are written down to fair value by a charge to income.
Losses and Loss Adjustment Expenses
The liability for unpaid losses and loss adjustment expenses represents
management's best 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.
Reinsurance
Midwest Medical purchases 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 costs are recorded as a reduction of premium, which
is known in the insurance industry as ceded premium.
NOTE B - INCOME TAXES
The Company calculates its federal income tax provision for interim
periods by estimating its annual federal effective tax rate and
applying this rate to the income of the interim period. The estimated
annual federal effective tax rate used for the three and six-month
periods ended June 30, 2002 and 2001 was 34%. An estimate for state
income taxes is also made for each entity.
7
NOTE C - UNEARNED PREMIUMS, PREMIUMS RECEIVABLE and OTHER LIABILITIES
The majority of Midwest Medical's insurance policies expire at December
31 and renew on January 1 of each year. As a result, the majority of
the unearned premium amount at June 30, 2002 represents six months of
unearned premium for every active policy renewed or newly written on
January 1, 2002 with an expiration date of December 31, 2002. At
December 31, 2001, most active 2001 policies expired and therefore had
no unearned premium.
Of the total unearned premium balance of $15,489,000 at December 31,
2001, $5,800,000 is reserved to recognize Midwest Medical's obligation
to provide reporting endorsement coverage without additional premium
upon the death, disability or retirement of policyholders. This amount
represents an actuarial estimate of the present value of future
benefits to be provided less the present value of future revenues to be
received. The unearned premium balance at June 30, 2002 includes a
$6,300,000 estimate for this obligation.
The increase of $15,130,000 in premiums receivable from December 31,
2001 to June 30, 2002 is primarily due to the renewal of most active
policies on January 1. The full year's premium is recorded as written
and collectible at January 1. Premiums may be paid annually or
quarterly and each year's premium is nearly all collected during the
year. The receivable balance remaining at the end of the year primarily
relates to the small number of policies underwritten by Midwest Medical
that have other than December 31 expiration dates.
Of the total other liabilities balance of $13,966,000 at December 31,
2001, $6,878,000 is for premium payments received from policyholders in
advance of their January 1, 2002 policy renewal. No advance premium
payments were recorded at June 30, 2002.
NOTE D - POLICYHOLDER DIVIDENDS
Midwest Medical's policyholder dividend program has been in place since
1999 replacing the previous retrospective premium credit program for
physicians. Participating policies represented approximately 96% of
total premiums in force and premium income at June 30, 2002 and
December 31, 2001, respectively.
The first two quarterly installments of the $4,050,000 policyholder
dividend declared in the third quarter of 2001 by Midwest Medical's
Board of Directors were paid in February and May, respectively. The
remaining two quarterly installments will be paid to physician and
clinic policyholders in August and November. The dividend is awarded
proportionately based on annual premiums for physician and clinic
policyholders that were insured by Midwest Medical in 1997 and remain
insured throughout 2002.
NOTE E - DISCONTINUED OPERATIONS
Effective July 31, 2001, the Company sold all of the capital stock of
MedPower Information Resources, Inc. to ClaimLynx, Inc. Proceeds from
the sale were $150,000. The Company recorded a $240,000 loss on the
sale net of an income tax benefit of $124,000. No significant assets or
liabilities remain from MedPower. The Company's condensed consolidated
financial statements and notes report its former electronic medical
claims processor as discontinued operations. Prior periods have been
restated accordingly.
8
NOTE F - COMPREHENSIVE INCOME
The components of Midwest Holding's comprehensive income are net income
and changes in net unrealized appreciation of investments. Total
comprehensive income was $(5,290,000) and $(9,102,000)for the three and
six-months ended June 30, 2002 and $(342,000) and $(5,964,000)for the
three and six-months ended June 30, 2001.
NOTE G - SEGMENT INFORMATION
The Company's continuing operations are organized into five legal
entity business segments. MMIC Business Office Solutions, Inc. (Office
Solutions) began operations in February 2002 to provide physicians with
business office outsourcing services. The main outsourcing service is
the billing and collection of patient accounts. The other four segments
are described under the "Background" section in Item 1 of the 2001
Annual Report on Form 10-K. The legal entity name of MMIHC Insurance
Services, Inc. (Services) was changed to MMIC Benefits, Inc. (Benefits)
in April 2002.
The following financial information summarizes the results of
operations and total assets reported by the Company's five business
segments for the three and six-month periods ended June 30, 2002 and
2001 (in thousands).
9
NOTE G - SEGMENT INFORMATION (continued)
Three months ended June 30, 2002
-------------------------------------------------------------------------------------------------
Midwest Midwest Medical Office
Holding Medical Benefits Solutions Solutions Eliminations(1) Consolidated
-------------------------------------------------------------------------------------------------
Revenues:
External customers $ -- $ 15,775 $ 687 $ 390 $ 5 $ -- $ 16,857
Intersegment 3,976 -- -- 60 -- (4,036) --
Net investment income 3 3,073 -- -- 1 -- 3,077
Other(2) 17 235 -- -- -- -- 252
-------------------------------------------------------------------------------------------------
3,996 19,083 687 450 6 (4,036) 20,186
Total expenses 4,277 19,872 663 1,072 77 (4,036) 21,925
-------------------------------------------------------------------------------------------------
(Loss) income from continuing
operations before tax (281) (789) 24 (622) (71) -- (1,739)
Income tax (benefit)
expense (119) (271) 9 (212) (24) -- (617)
-------------------------------------------------------------------------------------------------
(Loss) income from
continuing operations
after tax $ (162) $ (518) $ 15 $ (410) $ (47) $ -- $ (1,122)
=================================================================================================
Total assets $ 122,886 $ 304,246 $ 3,021 $ 2,098 $ 119 $(120,189) $ 312,181
=================================================================================================
(1) Intersegment eliminations for revenues and expenses are primarily for
management and administrative services provided by Midwest Holding.
Eliminations for assets consist primarily of investments in
wholly-owned subsidiaries, intersegment receivables and payables for
management fees and reclassifications between assets and liabilities
primarily for taxes.
(2) Other revenues consist primarily of net realized capital gains.
10
NOTE G - SEGMENT INFORMATION (continued)
Three months ended June 30, 2001
--------------------------------------------------------------------------------------------
Midwest Midwest Medical Office
Holding Medical Benefits Solutions Solutions Eliminations(1) Consolidated
--------------------------------------------------------------------------------------------
Revenues:
External customers $ -- $ 9,154 $ 644 $ 224 $ -- $ -- $ 10,022
Intersegment 3,877 -- -- 20 -- (3,897) --
Net investment income 2 3,242 1 5 -- -- 3,250
Other(2) -- 3,828 -- -- -- -- 3,828
--------------------------------------------------------------------------------------------
3,879 16,224 645 249 -- (3,897) 17,100
Total expenses 4,175 13,274 576 830 -- (3,897) 14,958
--------------------------------------------------------------------------------------------
(Loss) income from
continuing operations
before tax (296) 2,950 69 (581) -- -- 2,142
Income tax (benefit)
expense (85) 1,042 24 (197) -- -- 784
--------------------------------------------------------------------------------------------
(Loss) income from
continuing operations
after tax $ (211) $ 1,908 $ 45 $ (384) $ -- $ -- $ 1,358
============================================================================================
Total assets $ 139,151 $ 291,740 $ 3,139 $ 2,662 $ -- $(138,154) $ 298,538
============================================================================================
(1) Intersegment eliminations for revenues and expenses are primarily for
management and administrative services provided by Midwest Holding.
Eliminations for assets consist primarily of investments in
wholly-owned subsidiaries, intersegment receivables and payables for
management fees and reclassifications between assets and liabilities
primarily for taxes.
(2) Other revenues consist primarily of net realized capital gains.
11
NOTE G - SEGMENT INFORMATION (continued)
Six months ended June 30, 2002
-------------------------------------------------------------------------------------------------
Midwest Midwest Medical Office
Holding Medical Benefits Solutions Solutions Eliminations(1) Consolidated
-------------------------------------------------------------------------------------------------
Revenues:
External customers $ -- $ 32,520 $ 1,222 $ 1,116 $ 5 $ -- $ 34,863
Intersegment 7,964 -- -- 131 -- (8,095) --
Net investment income 5 5,987 1 1 1 -- 5,995
Other(2) 25 755 -- -- -- -- 780
-------------------------------------------------------------------------------------------------
7,994 39,262 1,223 1,248 6 (8,095) 41,638
Total expenses 8,558 41,087 1,336 2,237 133 (8,095) 45,256
-------------------------------------------------------------------------------------------------
Loss from continuing
operations before tax (564) (1,825) (113) (989) (127) -- (3,618)
Income tax benefit (210) (613) (37) (337) (43) -- (1,240)
-------------------------------------------------------------------------------------------------
Loss from continuing
operations after tax $ (354) $ (1,212) $ (76) $ (652) $ (84) $ -- $ (2,378)
==================================================================================================
Total assets $ 122,886 $ 304,246 $ 3,021 $ 2,098 $ 119 $(120,189) $ 312,181
==================================================================================================
(1) Intersegment eliminations for revenues and expenses are primarily for
management and administrative services provided by Midwest Holding.
Eliminations for assets consist primarily of investments in
wholly-owned subsidiaries, intersegment receivables and payables for
management fees and reclassifications between assets and liabilities
primarily for taxes.
(2) Other revenues consist primarily of net realized capital gains.
12
NOTE G -- SEGMENT INFORMATION (continued)
Six months ended June 30, 2001
----------------------------------------------------------------------------------------------
Midwest Midwest Medical Office
Holding Medical Benefits Solutions Solutions Eliminations(1) Consolidated
----------------------------------------------------------------------------------------------
Revenues:
External customers $ -- $ 20,727 $ 1,149 $ 394 $ -- $ -- $ 22,270
Intersegment 7,669 -- -- 41 -- (7,710) --
Net investment income 17 6,216 4 12 -- -- 6,249
Other(2) 28 6,098 -- -- -- -- 6,126
----------------------------------------------------------------------------------------------
7,714 33,041 1,153 447 -- (7,710) 34,645
Total expenses 8,266 27,693 1,202 1,586 -- (7,710) 31,037
----------------------------------------------------------------------------------------------
(Loss) income from
continuing operations
before tax (552) 5,348 (49) (1,139) -- -- 3,608
Income tax (benefit)
expense (167) 1,881 (15) (387) -- -- 1,312
----------------------------------------------------------------------------------------------
(Loss) income from
continuing operations
after tax $ (385) $ 3,467 $ (34) $ (752) $ -- $ -- $ 2,296
==============================================================================================
Total assets $ 139,151 $ 291,740 $ 3,139 $ 2,662 $ -- $(138,154) $ 298,538
==============================================================================================
(1) Intersegment eliminations for revenues and expenses are primarily for
management and administrative services provided by Midwest Holding.
Eliminations for assets consist primarily of investments in
wholly-owned subsidiaries, intersegment receivables and payables for
management fees and reclassifications between assets and liabilities
primarily for taxes.
(2) Other revenues consist primarily of net realized capital gains.
13
Item 2. - Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
The following analysis of the financial condition and results of
operations of Midwest Holding and its wholly-owned subsidiaries,
Midwest Medical Insurance Company, MMIC Benefits, Inc., Midwest Medical
Solutions, Inc., and MMIC Business Office Solutions, Inc. should be
read in conjunction with the condensed consolidated financial
statements and notes included in this report. Midwest Holding and its
subsidiaries are collectively referred to as the Company unless the
reference pertains to a specific entity.
Capital Resources and Liquidity
The majority of the Company's assets, 80% at June 30, 2002 and 86% at
December 31, 2001, are invested in investment-grade bonds, equities, a
real estate investment trust fund, an international equity limited
partnership, and short-term investments. Other investments consist of
equity interests in a non-traded real estate investment trust (REIT)
and an international equity limited partnership. These investments are
classified as available for sale and are therefore recorded at fair
value. The fair value for the REIT is determined by the most recent
independent appraisal and the fair value for the international equity
limited partnership is determined by the period ending net asset value
as reported by the limited partnership's custodian. In the second
quarter of 2002, the Company completed a like-kind exchange that
transferred its managed international equities account to the
investment manager's international equity limited partnership. The
transfer retains the Company's diversification in international
equities while simplifying the administration and reducing the related
investment expense.
Operations generated $10,820,000 of positive cash flow during the first
six months of 2002 compared to $(7,969,000) of negative cash flow for
the same period of 2001. Growth in new business volume of approximately
$12,600,000 and premium rate increases of approximately 18% on average
per renewed account caused greater cash receipts in the first six
months of 2002. Lower policyholder dividend payments also contributed
to the positive cash flow. Increased reinsurance costs due to volume
growth and reinsurance rate increases partially offset the above
positive cash flows. Reinsurance, policyholder dividend, claim, and
federal tax payments drove the negative operating cash flow in the
first six months of 2001.
The Company believes that its cash, internally generated funds and
investments will be sufficient to meet normal operating requirements.
The principal operating requirement is the payment of insurance claims.
Loss and operating expense payments have been met from policyholder
premium receipts during the first six months of 2002. Policyholder
premium receipts are anticipated to cover loss and operating expense
payments for the remainder of 2002 due to growth in new business volume
and premium rate increases.
Shareholders' equity decreased $(9,102,000) during the first six months
of 2002. The decrease consisted of a net loss from operations of
$(2,378,000) and net unrealized losses in the fair value of
investments, net of deferred taxes, of $(6,724,000).
14
Results of Operations
Net premiums earned increased $11,786,000 for the first six months of
2002 compared to the same period of 2001. New business generated
approximately $5,434,000 of additional earned premium. Base rate
increases and fewer premium discounts resulted in an average written
premium increase of approximately 18% on policies that renewed in the
first six months of 2002. This was partially offset by greater
reinsurance costs. The greater premium volume coupled with an increase
in 2002 reinsurance rates caused current year reinsurance costs to
increase from $4,120,000 in 2001 to $6,629,000 in 2002. Although the
exit of major competitors from the medical malpractice marketplace has
created many opportunities to write new business, Midwest Medical
remains selective in assuming new risks. The following provides further
detail on premiums written and earned for the six months ended June 30,
2002 and 2001:
Six months ended June 30
--------------------------------------------------
2002 2001
---------------------- ----------------------
Written Earned Written Earned
---------------------- ----------------------
(In Thousands) (In Thousands)
Current Year:
Direct $ 67,584 $ 39,405 $ 49,747 $ 27,310
Assumed 15 60 21 21
Ceded (11,751) (6,629) (7,112) (4,120)
---------------------- ----------------------
55,848 32,836 42,656 23,211
Prior Years:
Ceded (316) (316) (2,477) (2,477)
---------------------- ----------------------
Net $ 55,532 $ 32,520 $ 40,179 $ 20,734
====================== ======================
Net capital gains of $782,000 were realized during the first six months
of 2002, a decrease of $(5,344,000) over the same period in 2001. The
realized capital gains in the first six months of 2002 resulted
primarily from bond sales initiated by the investment manager who
manages the portfolio on a pre-tax total return basis. In the first six
months of 2001, equities selected by the outside, domestic equity
manager were sold to fund the additional REIT purchase of $10,000,000
and policyholder dividend payments. Future levels of realized capital
gains or losses are difficult to predict as investment managers
purchase and sell securities in response to changing market conditions
and investment policy guidelines.
Other revenues were $2,341,000 for the first six months of 2002, an
increase of $805,000 from the same period of 2001. Most of this
increase is due to Medical Solutions' revenue growth primarily from the
practice solutions division. Practice solutions is a value added
reseller of the NextGen electronic practice management (EPM) and
electronic medical records (EMR) systems. Practice solutions generated
$783,000 in new revenues from the sale, installation and support of
NextGen systems in the first six months of 2002.
Losses and loss adjustment expenses increased $12,718,000 for the first
six months of 2002 versus 2001. Since the effects of interim claim
frequency and severity statistics are not actuarially analyzed,
incurred losses are estimated during the interim using historical
company data, known trends and management's judgment. The increase in
2002 incurred losses was in line with management's expectations due to
Midwest Medical's growth in business and the corresponding
15
exposure as well as a recent upward trend in claims severity. Nothing
came to management's attention during this period that would materially
alter loss expectations for the remainder of the year.
Underwriting, acquisition and insurance expenses increased $677,000 for
the first six months of 2002 compared to the same period in 2001.
Additional commissions and premium taxes resulting from the greater
premium volume drove the increase.
Other operating expenses increased $824,000 for the first six months of
2002 compared to the same period in 2001. The increase was primarily
due to the practice solutions division of Medical Solutions becoming
fully operational towards the end of 2001 and the launch of Office
Solutions in the first quarter of 2002.
The first six months of 2002 incurred an income tax benefit of
$1,240,000 compared to an income tax expense of $1,312,000 for the same
period in 2001. The effective tax rates were 34% and 36%, respectively.
State income tax estimates caused the difference from the estimated
annual federal effective tax rate of 34% in 2001.
As a result of the factors discussed above, the Company recorded a net
loss of $2,378,000 for the six months ended June 30, 2002 compared to
net income of $2,177,000 for the same period of 2001.
Cautionary Note Regarding Forward-Looking Statements
Statements other than historical information contained in this report
are considered to be "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E
of the Securities Act of 1934, as amended.
All forward-looking statements address matters that involve risks and
uncertainties. Accordingly, in addition to the factors discussed in
this report, there are or will be other significant factors that could
cause actual results to differ materially from those indicated. 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 what the
Company had 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 above factors should be considered when reviewing any
forward-looking statement contained in this report. The significant
factors that could affect forward-looking statements are subject to
change, and the Company does not intend to update any forward-looking
statement or the above list of significant factors.
16
Cautionary Note Regarding Forward-Looking Statements (continued)
By this cautionary note, the Company intends to rely upon the safe
harbor from liability with respect to forward-looking statements
provided by Section 27A and Section 21E referred to previously.
Item 3. - Quantitative and Qualitative 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 investments in equity securities
and the international equity limited partnership, and foreign currency
exchange rate risk on its investment in the international equity
limited partnership.
Based primarily on past annual performance relative to the Standard &
Poors 500 Market Index (S&P 500), an abrupt ten percent decrease in the
S&P 500 would adversely affect the fair value of equity securities and
the international equity limited partnership by approximately
$7,000,000 at June 30, 2002 compared to $7,800,000 at December 31,
2001.
No material change occurred in the interest rate risk or the foreign
currency exchange rate risk since the year ended December 31, 2001.
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.
Part II. Other Information
Item 6. -- Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Chief Executive Officer Certification
pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Chief Financial Officer Certification
pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None
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Signatures
Pursuant to the requirements 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)
Date August 12, 2002 /s/ David P. Bounk
--------------- -------------------------------------
David P. Bounk
President and Chief Executive Officer
Date August 12, 2002 /s/ Niles Cole
--------------- -------------------------------------
Niles Cole
Vice President and
Principal Financial Officer and
Principal Accounting Officer
18