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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 September 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
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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 (I.R.S. Employer
incorporation or organization) Identification No.)
7650 Edinborough Way, Suite 400
Minneapolis, Minnesota 55435-5978
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(Address of principal executive offices) (Zip Code)
952-838-6700
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(Registrant's telephone number, including area code)
Not applicable
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(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
September 30, 2002:
Class B Common Stock, $1,000 par value - 1 share
Class C Common Stock, no par value - 10,633 shares
1
INDEX
Midwest Medical Insurance Holding Company
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets - September 30, 2002 and
December 31, 2001
Condensed consolidated statements of income - three months
ended September 30, 2002 and 2001; nine months ended September
30, 2002 and 2001
Condensed consolidated statements of cash flows - nine months
ended September 30, 2002 and 2001
Notes to condensed consolidated financial statements -
September 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
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
CERTIFICATIONS
2
Part I. Financial Information
Item 1. - Financial Statements
MIDWEST MEDICAL INSURANCE HOLDING COMPANY and SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in thousands)
September 30 December 31
2002 2001
----------------- ---------------
(Unaudited) (Note A)
ASSETS
Fixed maturities at fair value (cost:
2002 $139,229; 2001 $137,844) $141,207 $140,436
Equity securities at fair value (cost:
2002 $26,891; 2001 $46,432) 30,386 63,700
Short-term investments 39,699 21,541
Other investments at fair value (cost:
2002 $40,192; 2001 $20,000) 37,137 21,616
-------- --------
248,429 247,293
Cash 2,824 1,018
Accrued investment income 1,583 2,219
Premiums receivable - Note C 19,655 9,844
Reinsurance recoverable on paid and unpaid losses 15,686 14,528
Amounts due from reinsurers 7,568 1,657
Deferred income taxes 4,849 -
Other assets 10,139 10,846
-------- --------
Total assets $310,733 $287,405
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Unpaid losses and loss adjustment expenses $142,410 $118,574
Unearned premiums - Note C 39,392 15,489
Policyholder dividends - Note D 1,011 4,050
Deferred income taxes - 1,664
Amounts due to reinsurers 8,137 6,775
Other liabilities - Note C 7,143 13,966
-------- --------
198,093 160,518
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 10,633 shares in 2002
and 9,298 shares in 2001; no par value - -
Paid-in capital 12,789 12,789
Retained earnings 98,254 99,923
Accumulated other comprehensive income:
Net unrealized appreciation of investments 1,596 14,174
-------- --------
112,640 126,887
-------- --------
Total liabilities and shareholders' equity $310,733 $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 Nine months ended
September 30 September 30
------------------------- -------------------------
2002 2001 2002 2001
-------- -------- -------- --------
Revenues:
Net premiums earned $ 18,944 $ 13,688 $ 51,464 $ 34,422
Net investment income 3,200 3,188 9,194 9,437
Net realized capital (losses) gains (223) 119 559 6,244
Other 967 635 3,309 2,172
-------- -------- -------- --------
22,888 17,630 64,526 52,275
Losses and expenses:
Losses and loss adjustment expenses 17,967 16,587 53,975 39,877
Policyholder dividends - Note D - 4,050 - 4,050
Underwriting, acquisition and
insurance expenses 2,619 2,032 7,699 6,435
Other operating expenses 1,899 1,629 6,067 4,973
-------- -------- -------- --------
22,485 24,298 67,741 55,335
-------- -------- -------- --------
Income (loss) from continuing operations
before income taxes 403 (6,668) (3,215) (3,060)
Income tax benefit - Note B (306) (2,310) (1,546) (998)
-------- -------- -------- --------
Income (loss) from continuing operations after
income taxes 709 (4,358) (1,669) (2,062)
Discontinued operations - Note E:
Loss from discontinued operations,
net of income tax benefit - (16) - (135)
Loss on disposal, net of income tax benefit - (246) - (246)
-------- -------- -------- --------
- (262) - (381)
-------- -------- -------- --------
Net income (loss) $ 709 $ (4,620) $ (1,669) $ (2,443)
======== ======== ======== ========
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)
Nine months ended
September 30
----------------------------
2002 2001
--------- ---------
OPERATING ACTIVITIES
Net income $ (1,669) $ (2,443)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Increase in premiums receivable (9,811) (10,868)
Increase in amounts due from reinsurers (5,911) (2,368)
Increase (decrease) in unpaid losses and loss
adjustment expenses 23,836 (2,847)
Increase in unearned premiums 23,903 16,949
Decrease in policyholder dividends (3,039) (2,024)
Increase in amounts due to reinsurers 1,362 1,729
Decrease in other liabilities (6,823) (1,951)
Net realized capital gains (559) (6,244)
Other changes, net 133 1,208
--------- ---------
21,422 (8,859)
INVESTING ACTIVITIES
Purchases of fixed maturity investments and
equity securities (154,375) (104,225)
Sales of fixed maturity investments and equity
securities 151,217 113,438
Maturities and calls of fixed maturity investments 1,700 3,360
Net purchase of short-term investments (18,158) (4,690)
--------- ---------
(19,616) 7,883
--------- ---------
Increase (decrease) in cash 1,806 (976)
Cash at beginning of year 1,018 976
--------- ---------
CASH AT SEPTEMBER 30 $ 2,824 $ -
========= =========
See notes to condensed consolidated financial statements.
5
MIDWEST MEDICAL INSURANCE HOLDING COMPANY and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 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)
The investments in debt and equity securities are classified by management as
available for sale, consequently these 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, judged to be 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 that 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 nine-month periods ended September 30, 2002 and 2001 was
34%. An estimate for state income taxes is also made for each entity.
7
NOTE B - INCOME TAXES (continued)
In the third quarter, Midwest Medical received a $443,000 tax refund from
amending the 1997 tax return to address issues carried over from the 1992-1996
Internal Revenue Service examination. Interest of $115,000 was also received.
The tax refund was recorded as an income tax benefit and the interest was
recorded as other income.
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 September 30, 2002 represents three 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.
The total unearned premium balance of $15,489,000 at December 31, 2001 includes
$5,800,000 that 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
September 30, 2002 includes a $6,550,000 estimate for this obligation.
The increase of $9,811,000 in premiums receivable from December 31, 2001 to
September 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.
The total other liabilities balance of $13,966,000 at December 31, 2001 includes
$6,878,000 for premium payments received from policyholders in advance of their
January 1, 2002 policy renewal. No advance premium payments were recorded at
September 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 94% and 96% of total premiums
in force and premium income at September 30, 2002 and December 31, 2001,
respectively.
The first three 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, May and August, respectively. The remaining quarterly
installment will be paid to physician and clinic policyholders in 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.
8
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.
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 $(5,146,000) and $(14,247,000) for the three and nine-months ended
September 30, 2002 and $(9,752,000) and $(15,716,000) for the three and
nine-months ended September 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
nine-month periods ended September 30, 2002 and 2001 (in thousands).
9
NOTE G - SEGMENT INFORMATION (continued)
Three months ended September 30, 2002
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Midwest Midwest Medical Office
Holding Medical Benefits Solutions Solutions Eliminations(1) Consolidated
---------------------------------------------------------------------------------------------------
Revenues:
External customers $ - $ 18,944 $ 549 $ 290 $ 14 $ - $ 19,797
Intersegment 4,077 - - 52 - (4,129) -
Net investment income 1 3,197 1 1 - - 3,200
Other(2) 1 (110) - - - - (109)
---------------------------------------------------------------------------------------------------
4,079 22,031 550 343 14 (4,129) 22,888
Total expenses 4,367 20,586 651 929 81 (4,129) 22,485
---------------------------------------------------------------------------------------------------
(Loss) income from continuing
operations before tax (288) 1,445 (101) (586) (67) - 403
Income tax (benefit) expense (98) 49 (35) (199) (23) - (306)
---------------------------------------------------------------------------------------------------
(Loss) income from continuing
operations after tax $ (190) $ 1,396 $ (66) $ (387) $ (44) $ - $ 709
===================================================================================================
Total assets $ 118,172 $ 300,309 $ 2,943 $ 2,360 $ 174 $(113,225) $ 310,733
===================================================================================================
(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 losses on
investment sales.
10
NOTE G - SEGMENT INFORMATION (continued)
Three months ended September 30, 2001
---------------------------------------------------------------------------------------------------
Midwest Midwest Medical Office
Holding Medical Benefits Solutions Solutions Eliminations(1) Consolidated
---------------------------------------------------------------------------------------------------
Revenues:
External customers $ - $ 13,695 $ 476 $ 115 $ - $ - $ 14,286
Intersegment 3,727 - - 43 - (3,770) -
Net investment income 6 3,175 2 5 - - 3,188
Other(2) 46 110 - - - - 156
---------------------------------------------------------------------------------------------------
3,779 16,980 478 163 - (3,770) 17,630
Total expenses 4,016 22,669 615 768 - (3,770) 24,298
---------------------------------------------------------------------------------------------------
Loss from continuing operations
before tax (237) (5,689) (137) (605) - - (6,668)
Income tax benefit (80) (1,978) (47) (205) - - (2,310)
---------------------------------------------------------------------------------------------------
Loss from continuing operations
after tax $ (157) $ (3,711) $ (90) $ (400) $ - $ - $ (4,358)
===================================================================================================
Total assets $ 129,688 $ 283,724 $ 3,094 $ 1,797 $ - $(127,057) $ 291,246
===================================================================================================
(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 on
investment sales.
11
NOTE G - SEGMENT INFORMATION (continued)
Nine months ended September 30, 2002
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Midwest Midwest Medical Office
Holding Medical Benefits Solutions Solutions Eliminations(1) Consolidated
---------------------------------------------------------------------------------------------------
Revenues:
External customers $ - $ 51,464 $ 1,771 $ 1,406 $ 19 $ - $ 54,660
Intersegment 12,041 - - 183 - (12,224) -
Net investment income 6 9,183 2 2 1 - 9,194
Other(2) 26 646 - - - - 672
---------------------------------------------------------------------------------------------------
12,073 61,293 1,773 1,591 20 (12,224) 64,526
Total expenses 12,925 61,673 1,987 3,166 214 (12,224) 67,741
---------------------------------------------------------------------------------------------------
Loss from continuing operations
before tax (852) (380) (214) (1,575) (194) - (3,215)
Income tax benefit (308) (564) (72) (536) (66) - (1,546)
---------------------------------------------------------------------------------------------------
(Loss) income from continuing
operations after tax
$ (544) $ 184 $ (142) $ (1,039) $ (128) $ - $ (1,669)
===================================================================================================
Total assets $ 118,172 $ 300,309 $ 2,943 $ 2,360 $ 174 $(113,225) $ 310,733
===================================================================================================
(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 on
investment sales.
12
NOTE G - SEGMENT INFORMATION (continued)
Nine months ended September 30, 2001
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Midwest Midwest Medical Office
Holding Medical Benefits Solutions Solutions Eliminations(1) Consolidated
---------------------------------------------------------------------------------------------------
Revenues:
External customers $ - $ 34,422 $ 1,625 $ 509 $ - $ - $ 36,556
Intersegment 11,396 - - 84 - (11,480) -
Net investment income 23 9,391 6 17 - - 9,437
Other(2) 74 6,208 - - - - 6,282
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11,493 50,021 1,631 610 - (11,480) 52,275
Total expenses 12,282 50,362 1,817 2,354 - (11,480) 55,335
---------------------------------------------------------------------------------------------------
Loss from continuing operations
before tax (789) (341) (186) (1,744) - - (3,060)
Income tax benefit (247) (97) (62) (592) - - (998)
---------------------------------------------------------------------------------------------------
Loss from continuing operations
after tax $ (542) $ (244) $ (124) $ (1,152) $ - $ - $ (2,062)
===================================================================================================
Total assets $ 129,688 $ 283,724 $ 3,094 $ 1,797 $ - $(127,057) $ 291,246
===================================================================================================
(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 on
investment sales.
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 September 30, 2002 and 86% at
December 31, 2001, are invested in 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. 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 $21,422,000 of positive cash flow during the first nine
months of 2002 compared to $(8,859,000) of negative cash flow for the same
period of 2001. Growth in new business volume of approximately $17,857,000 and
premium rate increases of approximately 18% on average per renewed account
caused greater cash receipts in the first nine 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. Claim, reinsurance, policyholder
dividend, and federal tax payments drove the negative operating cash flow in the
first nine 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 nine months of 2002.
Shareholders' equity decreased $(14,247,000) during the first nine months of
2002. The decrease consisted of a net loss from operations of $(1,669,000) and
net unrealized losses in the fair value of investments, net of deferred taxes,
of $(12,578,000). $(9,076,000) of net unrealized losses resulted from the common
stock portfolio and an additional $(2,675,000) of net unrealized loss resulted
from the international equity limited partnership.
14
Results of Operations
Net premiums earned increased $17,042,000 for the first nine months of 2002
compared to the same period of 2001. New business generated approximately
$9,807,000 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 nine 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 $6,611,000 in 2001 to $11,244,000 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 nine months ended September 30, 2002 and 2001:
Nine months ended September 30
----------------------------------------------------------------------------
2002 2001
------------------------------------ ------------------------------------
Written Earned Written Earned
------------------------------------ ------------------------------------
(In Thousands) (In Thousands)
Current Year:
Direct $ 86,589 $ 62,884 $ 60,363 $ 43,498
Assumed 338 141 115 31
Ceded (17,155) (11,244) (8,979) (6,611)
------------------------------------ ------------------------------------
69,772 51,781 51,499 36,918
Prior Years:
Ceded (317) (317) (2,496) (2,496)
------------------------------------ ------------------------------------
Net $ 69,455 $ 51,464 $ 49,003 $ 34,422
==================================== ====================================
Net capital gains of $559,000 were realized during the first nine months of
2002, a decrease of $(5,685,000) over the same period in 2001. Capital gains of
approximately $1,733,000 were realized on sales of bonds in the first nine
months of 2002. This was partially offset by capital losses realized on sales of
common stock. These sales were primarily initiated by the investment managers
who manage the portfolios to maximize pre-tax total return while adhering to the
guidelines provided by the Company's investment policy. In the first nine 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 $3,309,000 for the first nine months of 2002, an increase of
$1,137,000 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 $879,000 in new revenues from the sale, installation and
support of NextGen systems in the first nine months of 2002.
Losses and loss adjustment expenses increased $14,098,000 for the first nine
months of 2002 versus 2001. Since the effects of interim claim frequency and
severity statistics are not actuarially analyzed,
15
Results of Operations (continued)
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 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.
No policyholder dividends have been declared by the Board of Directors of
Midwest Medical in 2002. The decision was based on the 1998 report year, which
did not develop unanticipated profits that could be returned to policyholders in
2003.
Underwriting, acquisition and insurance expenses increased $1,264,000 for the
first nine 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 $1,094,000 for the first nine 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 nine months of 2002 incurred an income tax benefit of $1,546,000
compared to an income tax benefit of $998,000 for the same period in 2001. The
increase in the income tax benefit is primarily due to Midwest Medical receiving
a $443,000 tax refund in the third quarter of 2002. This refund resulted from
amending the 1997 tax return to address issues carried over from the 1992-1996
Internal Revenue Service examination.
As a result of the factors discussed above, the Company recorded a net loss of
$1,669,000 for the nine months ended September 30, 2002 compared to a net loss
of $2,443,000 for the same period of 2001.
16
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.
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 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 $4,800,000 at September 30, 2002 compared to $5,800,000 at
December 31, 2001.
17
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 $5,900,000 at September 30, 2002
compared to $7,800,000 at December 31, 2001.
No material change occurred in 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.
Item 4. - Controls and Procedures
(a) Under the supervision and with the participation of Company management,
including the Chief Executive Officer and Chief Financial Officer, the
Company conducted an evaluation of its disclosure controls and
procedures, as such term is defined under Rule 13a-14(c) under the
Securities Exchange Act of 1934, as amended, within 90 days of the
filing date of this report. Based on that evaluation, Company
management, including the Chief Executive Officer and Chief Financial
Officer, concluded that the disclosure controls and procedures are
adequate and effective to ensure that material information related to
the Company, including its consolidated subsidiaries, required to be
included in the periodic reports to be filed with the SEC is made known
to them in a timely manner.
(b) There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect these
controls subsequent to the date that the evaluation referenced in
paragraph (a) above was carried out.
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
18
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 November 12, 2002 /s/ David P. Bounk
- ---------------------- --------------------------------
David P. Bounk
President and Chief Executive Officer
Date November 12, 2002 /s/ Niles Cole
- ---------------------- ---------------------------------
Niles Cole
Vice President and
Principal Financial Officer and
Principal Accounting Officer
CERTIFICATIONS
I, David P. Bounk, certify that:
(1) I have reviewed this quarterly report on Form 10-Q;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
19
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether material or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
(6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date November 12, 2002 /s/ David P. Bounk
- ---------------------- -------------------------------------
David P. Bounk
President and Chief Executive Officer
20
CERTIFICATIONS
I, Niles Cole, certify that:
(1) I have reviewed this quarterly report on Form 10-Q;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether material or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
(6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date November 12, 2002 /s/ Niles Cole
- ---------------------- -------------------------------------
Niles Cole
Vice President and
Principal Financial Officer and
Principal Accounting Officer
21