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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, 2001
| | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (No Fee Required)
For the transition period from _______________ to ________________
Commission file number 0-21230
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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 Identification No.)
incorporation or organization)
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
------------------- -----------------------------------------
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 (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. | |
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 15, 2002 was $-0-.
The number of shares outstanding of the issuer's classes of common stock, as of
March 15, 2002:
Class B Common Stock, $1,000 par value - 1 share
Class C Common Stock, no par value - 9,298 shares
DOCUMENTS INCORPORATED BY REFERENCE
None.
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. 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. On
July 1, 1993, the Iowa physician-owned malpractice insurer, Iowa Physicians
Mutual Insurance Trust, was merged with and into Midwest Medical. On 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 pursued include practice enhancement, strategic consulting,
and technology services and support.
In January 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).
MedPower was subsequently sold effective July 31, 2001. MedPower processed and
electronically submitted medical claims for over 100 healthcare providers in the
Upper Midwest.
2
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 and Solutions 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.
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 clinics 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.
3
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
4
ITEM 1. BUSINESS (CONTINUED)
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.
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 during 2001 provided a primary
layer of coverage of $1,000,000 in excess of $1,000,000 of retention per
insured. The premium ceded for this coverage was 8.75% of net written premium
with a profit sharing provision that is determined after 3 years. 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.
- Hannover Reinsurance Company, (35%), A+
- Transatlantic Reinsurance Company, (35%), A+
- CNA Re, UK, (15.0%), A-
- Gerling Global Reinsurance Corporation (15%), A
5
ITEM 1. BUSINESS (CONTINUED)
Midwest Medical renewed its reinsurance agreement effective January 1, 2002. The
premium ceded on the renewed reinsurance agreement increased to 9.75% of net
written premium. The reinsurers on the 2002 agreement, their participation
percentages and their A.M. Best rating are listed below:
- Hannover Reinsurance Company, (40%), A+
- Transatlantic Reinsurance Company, (30%), A+
- Gerling Global Reinsurance Corporation of America, (20%), A
- Lloyds syndicates, (10%), A-
From 1992 through 2000, Midwest Medical utilized "swing-rated" treaty
reinsurance contracts. Premium ceded is based upon the losses paid under the
contract limited to a minimum and a maximum percentage of the underlying Midwest
Medical subject premium. These treaties do not include a commutation clause, but
rather develop over time as claims are settled. The paid losses on the 1998-2000
reinsurance contract have already triggered the maximum premium ceded limit and
the 1992-1994 and 1995-1997 reinsurance contracts together have fewer than forty
outstanding claims. Consequently, management believes that the potential for
further significant premium ceded on these contract years is small. All
reinsurance contracts have been commuted and no claims are outstanding for years
prior to 1992.
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 57%
of total invested assets at December 31, 2001 compared to 56% at December 31,
2000. Midwest Medical's investment policy also permits the inclusion of equity
securities. Equity securities comprised approximately 26% of total invested
assets at December 31, 2001 compared to 33% at December 31, 2000. The
6
ITEM 1. BUSINESS (CONTINUED)
decrease in the proportion of equity securities was due to a decrease in equity
market values and sales of equity securities to add to the existing real estate
investment trust holding and to provide capital for other corporate purposes.
The remainder of Midwest Medical's investment portfolio, 17% and 11% at December
31, 2001 and 2000, 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, 2000 Edition, has assigned Midwest Medical an "A", or
excellent, rating in 2001. This is the highest rating currently assigned to any
company that specializes in medical malpractice insurance. Best's ratings are
based on an analysis of the financial condition and operation of an insurance
company as compared with the industry in general. 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, The St. Paul Companies, recently announced
that they are exiting the medical malpractice line of business. Another major
competitor, PHICO, was placed in rehabilitation by the Pennsylvania Department
of Insurance in early 2002. The only national company that remains active in
Midwest Medical's market area is Medical Protective Insurance
7
ITEM 1. BUSINESS (CONTINUED)
Company. In addition, PIC-Wisconsin, another physician-owned specialty carrier,
has entered the market but has yet to be a significant factor in Midwest
Medical's core states of Minnesota, Iowa, North Dakota, South Dakota and
Nebraska. 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.
EMPLOYEES
As of December 31, 2001, Midwest Holding employed 101 persons, of whom ten were
executives, 70 were supervisory employees or specialists and 21 were clerical
employees. As of December 31, 2001, Services employed 13 persons, of whom one
was an executive, nine were supervisory employees or specialists and three 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,
2001
--------------
Office furniture and equipment $ 484,000
Leasehold improvements at leased premises 207,000
Computer hardware 493,000
Computer system software 362,000
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Total $1,546,000
==========
Midwest Holding and its subsidiaries own no real estate. Midwest Holding leases
office space in Edina, Minnesota with total square feet of 26,069 and a lease
term of six years and two months that expires on November 30, 2005. Midwest
Holding also leases 5,018 square feet of office space in West Des Moines, Iowa
under a three-year lease that expires on August 31, 2003. Midwest Holding leases
an additional 4,610 square feet of office space in Omaha, Nebraska under a
five-year lease that expires January 31, 2007. Solutions entered a new five-year
lease commencing December 2001 for 8,031 square feet of office space in
Plymouth, Minnesota. This lease expires December 31, 2006. Services leases a
separate 5,437 square foot facility located in Shoreview, Minnesota. This lease
expires March 31, 2006. Annual rent expense was approximately $1,020,000 in 2001
and $895,000 in 2000.
8
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any pending or threatened legal proceedings which
could have a material adverse effect on its operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
(a) There is no market for Midwest Holding's Class B or Class C Common Stock.
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 anyone other
than Midwest Holding and are subject to mandatory redemption for no
consideration at the time that the physician terminates their insurance
coverage with Midwest Medical for any reason.
(b) As of March 15, 2002, the Minnesota Medical Association held the 1 share
of Class B Common Stock and 9,298 physicians held one share each of Class
C Common Stock.
(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, 2001. 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 2001(1) 2000(1) 1999(1) 1998(2) 1997(2)
- ------------------------------------------------------------------------------------------------------------------------
(Amounts in thousands, except percentage data)
Net premiums earned $ 50,097 $41,344 $46,583 $35,014 $32,916
Net investment and other income 21,549 26,765 20,583 21,015 19,276
-------------------------------------------------------------------------
Total revenue 71,646 68,109 67,166 56,029 52,192
Loss and loss adjustment expenses 58,299 39,587 41,468 37,494 31,834
Policyholder dividends 4,050 8,108 10,175 -- --
Underwriting and other operating expenses 15,745 14,392 11,604 8,861 6,595
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78,094 62,087 63,247 46,355 38,429
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(Loss) income from continuing operations
before tax (6,448) 6,022 3,919 9,674 13,763
Income tax (benefit) expense (2,222) 437 1,281 3,052 4,463
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(Loss) income from continuing operations
after tax $ (4,226) $ 5,585 $ 2,638 $ 6,622 $ 9,300
=========================================================================
10
ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)
YEAR ENDED DECEMBER 31
2001(1) 2000(1) 1999(1) 1998(2) 1997(2)
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(Amounts in thousands, except percentage data)
(Loss) income from continuing operations
after tax/total revenue (5.9)% 8.2% 3.9% 11.8% 17.8%
Return on average equity (3.4)% 3.7% 1.2% 4.4% 7.8%
DECEMBER 31
FINANCIAL CONDITION 2001(1) 2000(1) 1999(2) 1998(2) 1997(2)
- ------------------------------------------------------------------------------------------------------------------------
(Amounts in thousands)
ASSETS
Fixed maturities at fair value $140,436 $146,516 $153,950 $164,652 $171,975
Equity securities at fair value 63,700 86,418 104,898 86,553 49,759
Short-term investments 21,541 19,587 9,128 3,556 13,909
Other 21,616 10,915 10,000 10,000 10,000
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Total investments 247,293 263,436 277,976 264,761 245,643
Reinsurance recoverable on paid and unpaid
losses 14,528 18,833 19,285 16,499 19,117
Other assets 25,584 19,472 22,915 14,223 10,755
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Total assets $287,405 $301,741 $320,176 $295,483 $275,515
=========================================================================
LIABILITIES
Unpaid losses and loss adjustment expenses $118,574 $118,478 $119,141 $110,964 $107,806
Other liabilities 41,944 42,665 53,234 42,072 41,418
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160,518 161,143 172,375 153,036 149,224
SHAREHOLDERS' EQUITY 126,887 140,598 147,801 142,447 126,291
-------------------------------------------------------------------------
Total liabilities and shareholders' equity $287,405 $301,741 $320,176 $295,483 $275,515
=========================================================================
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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.
11
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 2001 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 $247,293,000 and $263,436,000 at December 31, 2001 and 2000,
respectively, which represented 86.0% and 87.3% of total assets. The Investment
Committee of the Board of Directors establishes the Company's investment policy.
The main objectives of the current investment policy 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.
In January 2001, the Company purchased an additional $10,000,000 of the real
estate investment trusts (REIT) bringing its ownership interest to approximately
7% of the total REIT shares outstanding. The purchase used proceeds from sales
of equity securities and was made to capture the current attractive yield on the
REIT, approximately 8.5%, and to reduce the Company's portfolio allocation to
equities to a level more consistent with the rest of the medical malpractice
insurance industry. The Company believes that this will also help to reduce the
volatility in the market value of the total investment portfolio.
The Company's cash flow from operations was $(8,829,000) in 2001 versus
$1,544,000 in 2000 and $2,187,000 in 1999. The 2001 cash flow from operations
was unfavorably impacted by an increase in claim payments, policyholder dividend
payments and premium adjustments paid to reinsurers on reinsurance contracts for
prior years. These negative cash flows were partially offset by an increase in
premium volume. 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 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.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Increases in new business and premium rates drove greater cash receipts from
policyholder premiums in 2001. The increase in new business opportunities is
primarily the result of the easing of competitive pressures in Midwest Medical's
markets. Two main competitors, The St. Paul Companies and PHICO, have recently
exited from the medical malpractice insurance marketplace and other competitors
are generally raising rates aggressively or exiting certain segments of the
medical malpractice market. Increasing reinsurance costs and claims severity has
caused and will likely continue to cause Midwest Medical to raise premium rates
in the near term. Midwest Medical, however, has generally not had to raise rates
to the same degree as other insurers in many parts of the United States medical
malpractice insurance market.
Over $65,000,000 of premium has been returned to policyholders since 1993
through policyholder dividends or retrospective premium credits. The
policyholder dividend program replaced the retrospective premium credit program
beginning in 1999. Policyholder dividends are generally 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, the
renewal of Midwest Medical's reinsurance agreement resulted in a rate change
effective January 1, 2002. The flat, ceded premium rate increased to 9.75% from
8.75%. Although the terrorist attacks of September 11 did not impact the Company
directly, the losses suffered by Midwest Medical's reinsurance partners were a
factor in the reinsurance rate increase. The rate change coupled with
anticipated new business will result in greater reinsurance costs for Midwest
Medical in 2002.
In the past, loss and operating expense payments have generally been met from
policyholder premium receipts with any excess cash invested. In 2001, operating
cash needs primarily from claim payments exceeded premium receipts requiring
approximately $8,800,000 of cash from the investment portfolio. Premium receipts
are expected to once again cover loss and operating expenses in 2002 due to the
recent increase in premium volume and rates. 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. Consequently, borrowing funds
from external sources is not anticipated. The Company does, however, 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, 2001.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
During 2000, Midwest Holding completed a stock restructure that exchanged and
redeemed all outstanding Class A Common Shares. Under the terms of the stock
restructure, Class A shareholders received $66 for each Class A share owned,
plus one Class C share. The stock restructure paid approximately $9,541,000 to
Class A shareholders for the redemption of their Class A shares. 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 was a non-interest bearing note and was retired in
May 2001 by Midwest Holding through a dividend received from Midwest Medical.
More details about the stock restructure, Class A and Class C Common Stock are
found in Note 3 to the audited consolidated financial statements.
Periodically, the Board of Directors of Midwest Medical declares dividends
payable to Midwest Holding to provide capital for holding company and
non-insurance business operations including new business ventures. In 2001, a
dividend from Midwest Medical was also used by Midwest Holding to retire an
$8,500,000 loan used to fund stock restructure payments in 2000. Midwest Medical
declared and paid dividends to Midwest Holding of $11,400,000, $3,000,000 and
$2,050,000 in 2001, 2000 and 1999, respectively.
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.
RESULTS OF OPERATIONS
Net premiums earned increased $8,753,000 in 2001 from 2000. The increase was the
result of the following significant factors:
1. New 2001 business increased earned premium by approximately
$7,785,000.
2. Rate increases and granting fewer premium discounts increased earned
premium by approximately $3,400,000 in 2001.
3. Premiums from reporting endorsements that provide policyholder tail
coverage increased earned premium by approximately $1,686,000 in
2001.
4. The estimated reinsurance premium applicable to the treaty years
1992-1994 and 1995-1997, which is based in part on reinsured claims
experience, increased $3,125,000 in 2001. This compares to an
increase for those treaty years of $634,000 in 2000 resulting in a
net decrease in premium between years of $2,491,000.
5. Due primarily to the increase in premiums written, current year
reinsurance costs were $1,685,000 greater in 2001 compared to 2000.
This decreased 2001 net premiums earned.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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.
Net investment income increased $101,000 in 2001 from 2000 and increased
$1,290,000 in 2000 from 1999. The pick-up in yield from the additional purchase
of the REIT and lower investment expenses due to the drop in market values of
equity securities caused the increase in net investment income in 2001. This was
partially offset by lower yields on bonds and short-term investments due to the
drop in interest rates during 2001. 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.
Realized capital gains decreased $3,931,000 to $6,571,000 in 2001 and increased
$3,282,000 to $10,502,000 in 2000. During 2001, sales of equity securities
realized $6,752,000 of net capital gains while sales of bonds realized
$(181,000) of net capital losses. Approximately $3,000,000 of the net realized
capital gains on equity securities resulted from the sale of common stocks in
the first quarter to fund the additional REIT purchase of $10,000,000. All other
2001 realized capital gains and losses resulted from the management of the
portfolio on a pre-tax total return basis. 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. Another $3,000,000 of net realized capital gains resulted from
sales of equity securities in the latter part of 2000 to fund stock restructure
redemption payments to Class A shareholders. All other 2000 realized capital
gains and losses resulted from the management of the portfolio on a pre-tax
total return basis.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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. 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 decreased $1,386,000 from $4,023,000 in 2000 to $2,637,000 in
2001. Most of this decrease is due to the $1,716,000 recorded by Midwest Medical
in 2000 for interest on federal tax refunds. Also contributing to the decrease
is the elimination of finance charges on 2001 premium billings to Midwest
Medical policyholders. Finance charges of $556,000 were included in other
revenues for 2000. Offsetting these decreases were a $691,000 increase in
Solutions' revenues primarily from technology consulting and a $479,000 increase
in Services' revenues primarily from commission income earned on new accounts
Other revenues increased $1,610,000 from $2,413,000 in 1999 to $4,023,000 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. A
decrease in income from Midwest Holding's officer life insurance policies
partially offset the above increases.
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 $58,299,000 in 2001 compared to $39,587,000 in
2000 and $41,468,000 in 1999. This resulted in an increase of 47.3% in 2001
versus a decrease of 4.5% in 2000. As shown in Note 6 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 $10,664,000 in 2001
compared to $1,521,000 in 2000. The significant increase in 2001 was primarily
driven by additional policyholder exposure from the increase in premium volume
and the increase in Midwest Medical's retention from $750,000 to $1,000,000 per
insured for the primary layer of coverage. Also, a conservative loss position
was taken since a significant portion of the increase in premium volume came
from newer business lines, such as large, healthcare systems and hospitals.
Losses and loss adjustment expenses also include adjustments of prior years'
estimates. These adjustments to the liability for loss and loss adjustment
expense are evaluated by management and supported by an outside actuarial review
performed at the conclusion of the year. As shown in Note 6 of the audited
consolidated financial statements, these evaluations resulted in a small
increase of $172,000 in 2001 in the estimated liabilities applicable to prior
years versus a reduction of $7,876,000 in 2000. The less favorable development
on prior years resulted primarily from an increase in claims severity.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The following schedule summarizes the development of the liability for loss and
loss adjustment expense from 1991 through 2001. 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 1990's has generally resulted in redundancies in the
liability for losses and loss adjustment expenses. The table indicates that the
redundancy in loss liabilities, which develop as actual results become known,
has significantly decreased since 1991. Downward competitive pressure on premium
rates during the latter portion of the 1990's coupled with increasing claims
severity have been major contributors to the decrease in redundancies. Loss and
loss adjustment expense liabilities have not been discounted in the Company's
financial statements.
17
Development of Liability for Loss and Loss Adjustment Expense
(Thousands of Dollars)
1991 1992 1993 1994 1995 1996
-----------------------------------------------------------------------------
Liability for unpaid loss and
loss adjustment expense $100,167 $98,617 $105,589 $88,227 $96,424 $90,342
Cumulative amount of liability paid through:
1 year later 19,112 21,422 25,251 26,879 33,454 30,097
2 years later 32,798 37,498 42,685 46,925 53,132 44,562
3 years later 39,906 45,227 51,087 55,534 59,568 54,411
4 years later 42,752 46,226 53,594 57,129 63,915 60,708
5 years later 43,994 46,823 53,288 58,856 67,291 63,990
6 years later 44,370 46,810 54,709 60,701 68,032
7 years later 44,420 47,218 55,281 61,293
8 years later 44,634 47,249 55,568
9 years later 44,646 47,262
10 years later 44,659
Liability re-estimated as of:
1 year later 83,991 94,633 80,960 85,595 87,580 81,990
2 years later 74,883 69,490 75,364 76,365 79,665 76,542
3 years later 53,538 65,568 64,586 67,891 77,294 70,228
4 years later 52,833 56,426 57,851 65,794 73,979 65,691
5 years later 45,892 52,388 56,785 63,958 70,601 67,566
6 years later 44,370 53,014 55,358 63,037 70,916
7 years later 44,420 52,469 55,790 62,377
8 years later 44,634 52,342 55,568
9 years later 44,646 52,355
10 years later 44,659
Redundancy (deficiency) 55,508 46,262 50,021 25,850 25,508 22,776
1997 1998 1999 2000 2001
----------------------------------------------------------------
Liability for unpaid loss and
loss adjustment expense $89,394 $94,467 $99,894 $ 100,264 $104,870
Cumulative amount of liability paid through:
1 year later 28,755 33,787 35,891 50,829
2 years later 48,437 54,319 69,753
3 years later 60,582 71,162
4 years later 68,726
5 years later
6 years later
7 years later
8 years later
9 years later
10 years later
Liability re-estimated as of:
1 year later 84,961 89,992 92,022 100,436
2 years later 78,679 85,205 96,752
3 years later 74,909 85,512
4 years later 75,096
5 years later
6 years later
7 years later
8 years later
9 years later
10 years later
Redundancy (deficiency) 14,298 8,955 3,142 (172)
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Policyholder dividends of $4,050,000 were declared by the Board of Directors of
Midwest Medical in 2001 and will be paid to physician and clinic policyholders
in 2002. Policyholder dividends of $8,108,000 and $10,175,000 were declared in
2000 and 1999, respectively, and were paid to physician, clinic and hospital
policyholders the following year. The $4,050,000 policyholder dividend declared
in 2001 will be awarded proportionately based on annual premiums for physician
and clinic policyholders that were insured by Midwest Medical in 1997 and remain
insured throughout 2002. The dividend will be paid in four equal installments in
February, May, August and November of 2002. The decrease in policyholder
dividends is primarily due to less favorable loss experience on the 1997
coverage year on which the 2001 policyholder dividend was based. Policyholder
dividends represent a return of prior years' profits that were greater than
anticipated due to favorable claims and investment experience.
Underwriting, acquisition and insurance expenses increased $1,274,000 from
$7,570,000 in 2000 to $8,844,000 in 2001. Greater premium volume drove a
$1,179,000 increase in commission payments and a $399,000 increase in premium
taxes. These increases were partially offset by greater ceding commissions
earned by Midwest Medical of approximately $243,000 resulting from the increase
in premiums ceded to the treaty reinsurance contract for the current year.
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.
Other operating expenses increased $79,000 from $6,822,000 in 2000 to $6,901,000
in 2001. Additional staff for Solutions' technology consulting and practice
management software initiatives and greater commissions paid to Services'
producers from new business primarily drove the increase. This was partially
offset by the decrease in stock restructure expenses, which were all incurred in
2000 by Midwest Holding.
Other operating expenses increased $2,415,000 from $4,407,000 in 1999 to
$6,822,000 in 2000. The stock restructure of Midwest Holding caused an
additional $1,057,000 of compensation expense to be 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
was largely from greater salary and benefit expenses incurred by Midwest
Holding, Services and Solutions primarily to service additional business volume.
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Loss from continuing operations before income taxes was $(6,448,000) in 2001
compared to income of $6,022,000 in 2000. The decrease resulted primarily from
greater loss liabilities estimated for the current year, less favorable
development on prior years' loss liabilities and lower realized capital gains.
This was partially offset by an increase in net premiums earned and lower
policyholder dividends. Income in 2000 also benefited from some non-recurring
items such as the realized capital gains recorded on sales of domestic equity
securities to fund the stock restructure as well as interest on federal tax
refunds.
Income from continuing operations before income taxes increased to $6,022,000 in
2000 compared to $3,919,000 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. This was
partially offset by lower net premiums earned and an increase in other operating
expenses.
Income taxes decreased $2,659,000 resulting in an income tax benefit of
$(2,222,000) for 2001 compared to an income tax expense of $437,000 for 2000.
The effective tax rates for 2001 and 2000 were 34.5% and 7.3%, respectively. The
principal factor in the increase in the effective tax rate was a recovery of
prior year taxes recorded in 2000. The 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 $844,000 to $437,000 for 2000 compared to $1,281,000 for
1999. The effective tax rates for 2000 and 1999 were 7.3% and 32.7%,
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.
Discontinued operations represent the impact of the sale of MedPower effective
July 31, 2001. The Company decided to sell MedPower as continued strong
competition in the electronic medical claims processing marketplace diminished
the prospect of generating sufficient revenues for MedPower to earn a profit.
The Company incurred a loss net of tax of $(135,000) on the 2001 operation of
MedPower through July 31 and recorded a loss net of tax of $(240,000) on the
sale. Further information regarding MedPower and its sale is found in Notes 1
and 2 to the audited consolidated financial statements.
Net (loss) income recorded by the Company decreased $(9,887,000) to a net loss
of $(4,601,000) in 2001 and increased $3,550,000 to net income of $5,286,000 in
2000 due to the factors discussed above.
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements other than historical information contained in this Form 10-K are
considered to be "forward-looking statements" within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities Act
of 1934, as amended.
All forward-looking statements address matters that involve risks and
uncertainties. Accordingly, in addition to the factors discussed in this Form
10-K, there are or will be other significant 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 above factors should be considered in connection with any forward-looking
statement contained in this Form 10-K. The significant 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 above list of significant
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 previously.
21
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.
Professional outside investment firms manage the Company's investment portfolios
according to the objectives and 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 2001 or 2000.
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 $5,800,000 at December 31, 2001 compared to $6,500,000 at
December 31, 2000.
Based primarily on past annual performance relative to the Standard & Poor's 500
Market Index (S&P 500), an abrupt ten percent decrease in the S&P 500 would
adversely affect the fair value of equity securities by approximately $7,800,000
at December 31, 2001 compared to $10,400,000 at December 31, 2000.
A hypothetical ten percent weakening of all foreign currencies relative to the
U.S. dollar would adversely affect the fair value of the Company's investment in
international equity securities by approximately $1,800,000 at December 31, 2001
compared to $2,000,000 at December 31, 2000.
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
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
53 of this Annual Report on Form 10-K.
23
Midwest Medical Insurance Holding Company and Subsidiaries
Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
CONTENTS
Report of Independent Auditors............................................ 24
Consolidated Financial Statements
Consolidated Balance Sheets............................................... 25
Consolidated Statements of Income......................................... 26
Consolidated Statements of Changes in Shareholders' Equity................ 27
Consolidated Statements of Cash Flows..................................... 28
Notes to Consolidated Financial Statements................................ 29
24
Report of Independent Auditors
The 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 (the Company) as of December 31, 2001
and 2000 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, 2001. Our audits also included the financial statements and
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, 2001 and 2000 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001, 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
February 1, 2002
25
Midwest Medical Insurance Holding Company and Subsidiaries
Consolidated Balance Sheets
(In Thousands, Except for Share Amounts)
DECEMBER 31
2001 2000
----------------------
ASSETS
Investments:
Fixed maturities at fair value (cost: 2001 - $137,844;
2000 - $148,832) $140,436 $146,516
Equity securities at fair value (cost: 2001 - $46,432;
2000 - $49,739) 63,700 86,418
Short-term 21,541 19,587
Other 21,616 10,915
----------------------
247,293 263,436
Cash 1,018 976
Accrued investment income 2,219 2,286
Premiums receivable 9,844 6,214
Reinsurance recoverable on paid and unpaid losses 14,528 18,833
Amounts due from reinsurers 1,657 1,390
Other assets 10,846 8,606
----------------------
Total assets $287,405 $301,741
======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Unpaid losses and loss adjustment expenses $118,574 $118,478
Unearned premiums 15,489 12,050
Policyholder dividends 4,050 8,108
Deferred income taxes 1,664 6,635
Amounts due to reinsurers 6,775 5,248
Other liabilities 13,966 10,624
----------------------
Total liabilities 160,518 161,143
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, 9,298 shares in 2001 and 7,961 shares in 2000;
no par value -- --
Paid-in capital 12,789 12,789
Retained earnings 99,923 104,524
Net unrealized appreciation of investments 14,174 23,284
----------------------
126,887 140,598
----------------------
Total liabilities and shareholders' equity $287,405 $301,741
======================
See accompanying notes.
26
Midwest Medical Insurance Holding Company and Subsidiaries
Consolidated Statements of Income
(In Thousands)
YEAR ENDED DECEMBER 31
2001 2000 1999
--------------------------------------
Revenues:
Net premiums earned $ 50,097 $ 41,344 $ 46,583
Net investment income 12,341 12,240 10,950
Realized capital gains 6,571 10,502 7,220
Other 2,637 4,023 2,413
--------------------------------------
71,646 68,109 67,166
Losses and expenses:
Losses and loss adjustment expenses 58,299 39,587 41,468
Policyholder dividends 4,050 8,108 10,175
Underwriting, acquisition and insurance expenses 8,844 7,570 7,197
Other operating expenses 6,901 6,822 4,407
--------------------------------------
78,094 62,087 63,247
--------------------------------------
(Loss) income from continuing operations before tax (6,448) 6,022 3,919
Income tax (benefit) expense (2,222) 437 1,281
--------------------------------------
(Loss) income from continuing operations after tax (4,226) 5,585 2,638
Discontinued operations:
Loss from discontinued operations, net of tax (135) (299) (902)
Loss on disposal, net of tax (240) -- --
--------------------------------------
Net (loss) income $ (4,601) $ 5,286 $ 1,736
======================================
See accompanying notes.
27
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, 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 (loss):
Net income 5,286 -- -- 5,286 --
Other comprehensive income (loss):
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 (loss) (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
Comprehensive income (loss):
Net loss (4,601) -- -- (4,601) --
Other comprehensive income (loss):
Unrealized losses on securities, net of
$2,459 in tax benefits (4,773) -- -- -- (4,773)
Reclassification adjustment for gains included
in net income, net of $2,234 in taxes (4,337) -- -- -- (4,337)
---------
Total comprehensive income (loss) (13,711)
-----------------------------------------------------------------------
Balance at December 31, 2001 $ 126,887 $ 1 $ 12,789 $ 99,923 $ 14,174
=======================================================================
See accompanying notes.
28
Midwest Medical Insurance Holding Company and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
YEAR ENDED DECEMBER 31
2001 2000 1999
-----------------------------------------
OPERATING ACTIVITIES
Net (loss) income $ (4,601) $ 5,286 $ 1,736
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Decrease (increase) in accrued investment income 67 31 (578)
(Increase) decrease in premiums receivable (3,630) 929 (5,120)
Decrease (increase) in reinsurance recoverable 4,305 452 (2,786)
(Increase) decrease in amounts due from reinsurers (267) 2,443 (642)
Increase in other assets (2,240) (805) (1,178)
Deferred tax provision (278) 516 (90)
Increase (decrease) in unpaid losses and loss adjustment
expenses 96 (663) 8,177
Increase (decrease) in unearned premiums 3,439 (747) 4,624
(Decrease) increase in policyholder dividends (4,058) (2,067) 10,175
Decrease in retrospective premiums -- -- (8,543)
Increase in amounts due to reinsurers 1,527 5,248 --
Increase in other liabilities 3,342 365 4,015
Premium amortization, net of accretion of bond discount 40 (253) (636)
Realized capital gains (6,571) (10,502) (7,220)
Compensation expense for vested Class A Common Shares -- 1,311 253
-----------------------------------------
(8,829) 1,544 2,187
INVESTING ACTIVITIES
Purchases of fixed maturity investments and equity securities (118,633) (106,361) (171,139)
Purchase of other investments (10,000) -- --
Sales of fixed maturity investments and equity securities 136,098 120,049 174,651
Calls and maturities of fixed maturity investments 3,360 4,180 2,000
Net purchases of short-term investments (1,954) (10,459) (5,572)
-----------------------------------------
8,871 7,409 (60)
FINANCING ACTIVITIES
Redemption of Class A Common Shares -- (9,798) (953)
-----------------------------------------
Increase (decrease) in cash 42 (845) 1,174
Cash at beginning of year 976 1,821 647
-----------------------------------------
Cash at end of year $ 1,018 $ 976 $ 1,821
=========================================
See accompanying notes.
29
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2001
1. ACCOUNTING POLICIES
ORGANIZATION AND OPERATIONS
The Company's consolidated financial statements include the accounts of Midwest
Medical Insurance Holding Company (Midwest Holding) and its wholly owned
subsidiaries, Midwest Medical Insurance Company (Midwest Medical), MMIHC
Insurance Services, Inc. (Services) and Midwest Medical Solutions, Inc.
(Solutions). 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 for
periods prior to 2001.
Hereafter, Midwest Holding, Midwest Medical, Services and Solutions shall be
collectively referred to as the Company unless the reference pertains to a
specific entity.
The Company, through its subsidiary Midwest Medical and its predecessors, has
been providing professional liability insurance to physicians in the Midwest
since October 1980. The current structure of the Company is the result of a
reorganization in 1988 followed by two business combinations with other
insurers. In 1993, the Company merged with Iowa Physicians Mutual Insurance
Trust. In 1996, the Company merged with Medical Liability Mutual Insurance
Company of Nebraska. Each combination was accounted for as a
pooling-of-interests.
During 1997, the Company formed Solutions as a business development company to
strengthen and promote the independence and interdependencies of physicians,
clinics and hospitals that the Company serves. Business development
opportunities being pursued include practice enhancement, strategic consulting
and technology services and support.
In January 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 was
subsequently sold effective July 31, 2001. MedPower processed and electronically
submitted medical claims for a network of over 100 provider entities (See Note
2).
30
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (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 clients with group
insurance products such as health, dental, life, disability and workers'
compensation.
Midwest Holding provides management and administrative services to Midwest
Medical and Solutions 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, North
Dakota, South Dakota, Wisconsin and Illinois. 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.
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 Minnesota Department of Commerce (see Note 11).
31
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
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.
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 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.
32
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
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 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.
PREMIUMS
Premiums received are recorded as earned ratably over the lives of the policies
to which they apply. A portion of premiums received is deferred to recognize
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.
POLICYHOLDER DIVIDENDS
Midwest Medical implemented a policyholder dividend program in 1999.
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.
33
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
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.
OTHER REVENUES
Other revenues consist primarily of Services' commission income from insurance
carriers and Solutions' technology consulting and software sales and support to
healthcare providers. Generally, such revenues are earned as the related
services and products 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. DISCONTINUED OPERATIONS
As mentioned in Note 1, the Company sold all of the capital stock of MedPower to
ClaimLynx, Inc. effective July 31, 2001. Proceeds from the sale were $150,000.
The Company recorded a $240,000 loss on the sale, net of an income tax benefit
of $124,000. No significant assets or liabilities of MedPower remain as of
December 31, 2001. The Company's consolidated statements of income separately
disclose, as discontinued operations, the operating results and sale of
MedPower, net of tax. Prior periods have been restated accordingly.
34
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. CAPITAL STRUCTURE
Effective November 30, 1988, Midwest Medical policyholders earned Class A Common
Shares for each month of service pursuant to a stock allocation formula based on
underwriting risk classification. Shares earned by new policyholders were not
issued until the end of five years of continuous coverage under a Midwest
Medical policy (the vesting date). At the vesting date, the issued shares were
recorded at the then current redemption value.
Midwest Holding accounted for these shares by increasing common stock by the par
value ($.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 from May 2000
until closing effective July 31, 2000. Remaining shares outstanding after
closing of the tender offer were subsequently acquired pursuant to
35
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. CAPITAL STRUCTURE (CONTINUED)
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.
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 are
not 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 retained 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.
36
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. CAPITAL STRUCTURE (CONTINUED)
Following is the detail of changes in redeemable stock for each of the two years
in the period ended December 31, 2000:
MIDWEST MIDWEST ACCUMULATED
CLASS A COMMON STOCK HOLDING HOLDING OTHER
-------------------- PAID-IN RETAINED COMPREHENSIVE
TOTAL SHARES AMOUNT CAPITAL EARNINGS INCOME
------------------------------------------------------------------------
(In Thousands, Except for Share and Per Share Amounts)
Balance at January 1, 1999 $ 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
37
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. CAPITAL STRUCTURE (CONTINUED)
MIDWEST MIDWEST ACCUMULATED
CLASS A COMMON STOCK HOLDING HOLDING OTHER
-------------------- PAID-IN RETAINED COMPREHENSIVE
TOTAL SHARES AMOUNT CAPITAL EARNINGS INCOME
------------------------------------------------------------------------
(In Thousands, Except for Share and Per Share Amounts)
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 $ -- -- $-- $ -- $ -- $ --
========================================================================
38
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. INVESTMENTS
Components of net investment income are summarized as follows:
2001 2000 1999
--------------------------------------
(In Thousands)
Fixed maturities $ 10,001 $ 10,722 $ 9,836
Equity securities 996 878 870
Short-term investments 925 1,002 505
Other investments 1,482 857 854
--------------------------------------
13,404 13,459 12,065
Investment expenses (1,063) (1,219) (1,115)
--------------------------------------
$ 12,341 $ 12,240 $ 10,950
======================================
The cost (amortized cost for fixed maturities) and fair value of available for
sale investments are as follows:
DECEMBER 31, 2001
-------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-------------------------------------------------
(In Thousands)
Fixed maturities:
United States Government $ 44,859 $ 583 $ (29) $ 45,413
Public utilities 1,451 -- (157) 1,294
Industrial and other 91,534 2,915 (720) 93,729
-------------------------------------------------
Total $137,844 $ 3,498 $ (906) $140,436
=================================================
Equity securities:
Common stock:
Banks, trusts and insurance companies $ 3,792 $ 3,910 $ (77) $ 7,625
Industrial, miscellaneous and other 42,640 17,117 (3,682) 56,075
-------------------------------------------------
Total $ 46,432 $21,027 $(3,759) $ 63,700
=================================================
Other long-term investments:
Real estate investment trusts $ 20,000 $ 1,616 $ -- $ 21,616
=================================================
39
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. INVESTMENTS (CONTINUED)
DECEMBER 31, 2000
-------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-------------------------------------------------
(In Thousands)
Fixed maturities:
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:
Common stock:
Banks, trusts and insurance companies $ 4,383 $ 4,556 $ -- $ 8,939
Industrial, miscellaneous and other 45,356 37,155 (5,032) 77,479
-------------------------------------------------
Total $ 49,739 $41,711 $(5,032) $ 86,418
=================================================
Other long-term investments:
Real estate investment trusts $ 10,000 $ 915 $ -- $ 10,915
=================================================
The components of the unrealized appreciation on available for sale securities
as of December 31 are as follows:
2001 2000
-----------------------
(In Thousands)
Fixed maturities:
Gross unrealized gains $ 3,498 $ 1,774
Gross unrealized losses (906) (4,090)
Equity securities:
Gross unrealized gains 21,027 41,711
Gross unrealized losses (3,759) (5,032)
Other long-term investments:
Gross unrealized gains 1,616 915
-----------------------
21,476 35,278
Deferred income taxes (7,302) (11,994)
-----------------------
$ 14,174 $ 23,284
=======================
40
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. INVESTMENTS (CONTINUED)
The amortized cost and market value of fixed maturities at December 31, 2001, by
contractual maturity, are shown below. 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
----------------------
(In Thousands)
Due in one year or less $ 1,696 $ 1,701
Due after one year through five years 14,334 15,135
Due after five years through ten years 51,120 52,134
Due after ten years 70,694 71,466
----------------------
$137,844 $140,436
======================
Proceeds from sales of available for sale investments and the related gross
realized gains and losses are as follows:
PROCEEDS FROM GROSS REALIZED GROSS REALIZED
SALES GAINS LOSSES
-----------------------------------------------------
(In Thousands)
Year ended December 31, 2001:
Fixed maturities $ 98,700 $ 1,244 $(1,428)
Equity securities 37,398 12,477 (5,722)
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)
41
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. INVESTMENTS (CONTINUED)
Net unrealized appreciation of fixed maturities increased (decreased) by
$4,908,000, $3,198,000 and $(8,736,000) and net unrealized appreciation of
equity securities (decreased) increased by $(19,411,000), $(22,003,000) and
$14,036,000 for the years ended December 31, 2001, 2000 and 1999, respectively.
Net unrealized appreciation of other long-term investments increased by $701,000
and $915,000 for the years ended December 31, 2001 and 2000, respectively, as a
result of independent appraisals of the non-traded real estate investment
trusts.
5. 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 approximately 96% of total premiums in force
and premium income at December 31, 2001 and December 31, 2000. Dividends
declared for the years ended December 31 are as follows:
2001 2000 1999
-------------------------------
(In Thousands)
Physicians and clinics $4,050 $8,000 $10,100
Hospitals -- 108 75
-------------------------------
Total $4,050 $8,108 $10,175
===============================
Dividends are generated from unanticipated profits on prior coverage years.
Declared dividends are allocated to policyholders proportionately based on
current year written premium. To receive a dividend, a policyholder is required
to have been insured in the applicable coverage year and remain insured
throughout the year the dividend is paid. Declared dividends are generally paid
in quarterly installments in the year following declaration.
42
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. POLICYHOLDER DIVIDENDS AND RETROSPECTIVE PREMIUMS (CONTINUED)
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. Payments under the program were generally made in the year
following approval by the Board of Directors. Retrospective premium payments of
$5,802,000 were made to Minnesota and North Dakota policyholders in 1999.
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.
A provision of the agreement and plan of merger between Medical Liability Mutual
and Midwest Medical required 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
stipulated that any amounts due under this provision must be settled no later
than June 5, 2001. No payments were made related to this provision.
43
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
The reconciliation of the liability for unpaid losses and loss adjustment
expenses is as follows:
2001 2000
----------------------
(In Thousands)
Balance as of January 1, net of reinsurance recoverables $100,264 $ 99,894
Incurred related to:
Current year 58,127 47,463
Prior years 172 (7,876)
----------------------
Total incurred 58,299 39,587
Paid related to:
Current year 2,849 3,331
Prior years 50,844 35,886
----------------------
Total paid 53,693 39,217
----------------------
Balance as of December 31, net of reinsurance recoverables 104,870 100,264
Reinsurance recoverables at December 31 13,704 18,214
----------------------
Balance as of December 31, gross $118,574 $118,478
======================
Midwest Medical continually evaluates emerging trends in the development of loss
liabilities. Based on this analysis, management periodically adjusts their
estimates of ultimate losses.
7. SEGMENT INFORMATION
The Company is organized into four legal entity business segments consisting of
Midwest Holding, Midwest Medical, Services and Solutions. 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 four business segments for the years ended 2001, 2000 and 1999.
44
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. SEGMENT INFORMATION (CONTINUED)
2001
---------------------------------------------------------------------------------------------
MIDWEST MIDWEST
HOLDING MEDICAL SERVICES SOLUTIONS ELIMINATIONS (1) CONSOLIDATED
---------------------------------------------------------------------------------------------
(In Thousands)
Revenues:
External customers $ -- $ 50,097 $ 2,196 $ 836 $ -- $ 53,129
Intersegment 15,206 -- -- 135 (15,341) --
Net investment income (401) 12,289 8 19 426 12,341
Other (2) 75 6,527 -- -- (426) 6,176
---------------------------------------------------------------------------------------------
14,880 68,913 2,204 990 (15,341) 71,646
Total expenses 16,416 71,193 2,531 3,295 (15,341) 78,094
---------------------------------------------------------------------------------------------
(Loss) from continuing operations
before tax (1,536) (2,280) (327) (2,305) -- (6,448)
Income tax benefit (475) (857) (106) (784) -- (2,222)
---------------------------------------------------------------------------------------------
Loss from continuing operations
after tax $ (1,061) $ (1,423) $ (221) $ (1,521) $ -- $ (4,226)
=============================================================================================
Total assets $ 132,163 $ 286,878 $ 3,083 $ 1,663 $(136,382) $ 287,405
=============================================================================================
(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 for management fees and
reclassifications between assets and liabilities primarily for taxes.
(2) Other revenues consist primarily of net realized capital gains.
45
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. SEGMENT INFORMATION (CONTINUED)
2000
---------------------------------------------------------------------------------------------
MIDWEST MIDWEST
HOLDING MEDICAL SERVICES SOLUTIONS ELIMINATIONS (1) CONSOLIDATED
---------------------------------------------------------------------------------------------
(In Thousands)
Revenues:
External customers $ -- $ 41,900 $ 1,717 $ 266 $ -- $ 43,883
Intersegment 15,372 -- -- 14 (15,386) --
Net investment income (1,138) 12,166 9 15 1,188 12,240
Other (2) 214 12,006 -- -- (234) 11,986
---------------------------------------------------------------------------------------------
14,448 66,072 1,726 295 (14,432) 68,109
Total expenses 17,306 55,264 1,836 2,113 (14,432) 62,087
---------------------------------------------------------------------------------------------
(Loss) income from continuing
operations before tax (2,858) 10,808 (110) (1,818) -- 6,022
Income tax (benefit) expense (939) 2,026 (32) (618) -- 437
---------------------------------------------------------------------------------------------
(Loss) income from continuing
operations after tax $ (1,919) $ 8,782 $ (78) $ (1,200) $ -- $ 5,585
=============================================================================================
Total assets $ 154,133 $304,932 $ 2,192 $ 2,116 $(161,632) $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.
46
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. SEGMENT INFORMATION (CONTINUED)
1999
---------------------------------------------------------------------------------------------
MIDWEST MIDWEST
HOLDING MEDICAL SERVICES SOLUTIONS ELIMINATIONS (1) CONSOLIDATED
---------------------------------------------------------------------------------------------
(In Thousands)
Revenues:
External customers $ -- $ 47,181 $1,661 $ -- $ -- $ 48,842
Intersegment 16,273 -- -- -- (16,273) --
Net investment income (696) 10,780 21 17 828 10,950
Other (2) 185 7,041 -- -- 148 7,374
---------------------------------------------------------------------------------------------
15,762 65,002 1,682 17 (15,297) 67,166
Total expenses 15,584 59,904 1,648 1,408 (15,297) 63,247
---------------------------------------------------------------------------------------------
Income (loss) from continuing
operations before tax 178 5,098 34 (1,391) -- 3,919
Income tax expense (benefit) 91 1,648 15 (473) -- 1,281
---------------------------------------------------------------------------------------------
Income (loss) from continuing
operations after tax $ 87 $ 3,450 $ 19 $ (918) $ -- $ 2,638
=============================================================================================
Total assets $ 160,848 $311,367 $1,634 $ 1,539 $(155,212) $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.
47
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES
Components of income taxes are as follows:
2001 2000 1999
------------------------------------------------------
(In Thousands)
Current provision $(1,944) $ (79) $1,371
Deferred tax provision (278) 516 (90)
------------------------------------------------------
$(2,222) $ 437 $1,281
======================================================
The Company's income taxes differ from the federal statutory rate applied to
income before tax as follows:
2001 2000 1999
------------------------------------------------------
(In Thousands)
Income before tax at the federal statutory rate
of 34% $(2,192) $ 2,048 $1,333
Dividends received deductions (net of proration
adjustment) (66) (77) (81)
State income taxes, net of federal tax benefit 11 155 86
Benefit for prior year income taxes - (1,697) (59)
Other 25 8 2
------------------------------------------------------
$(2,222) $ 437 $1,281
======================================================
The deferred income tax provision includes the following differences between
financial and income tax reporting:
2001 2000 1999
------------------------------------------------------
(In Thousands)
Discounting of post-1986 unpaid losses and loss
adjustment expenses $ 204 $ 290 $ 167
Liabilities not currently deductible (250) 12 (121)
Unearned and advanced premiums (422) 87 (256)
Investment income not currently taxable 183 34 156
Other 7 93 (36)
------------------------------------------------------
$ (278) $ 516 $ (90)
======================================================
48
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
The Company made income tax payments of $655,000, $2,298,000 and $1,751,000 in
2001, 2000 and 1999, respectively.
The components of the net deferred income tax (liability) asset as of December
31 are as follows:
2001 2000
------------------------------------
(In Thousands)
Deferred tax assets:
Unpaid losses and loss adjustment expenses $ 3,496 $ 3,700
Liabilities not currently deductible 1,438 1,188
Unearned and advanced premiums 1,219 797
Other 623 587
------------------------------------
6,776 6,272
Deferred tax liabilities:
Unrealized gains (7,302) (11,994)
Other (1,138) (913)
------------------------------------
(8,440) (12,907)
------------------------------------
$(1,664) $ (6,635)
====================================
9. 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 its retention limits 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, 2001.
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 $8,167,000 and $15,117,000 are associated with a single
reinsurer, General Reinsurance Corporation, at December 31, 2001 and 2000,
respectively. Midwest Medical also holds collateral under related reinsurance
agreements in the form of letters of credit totaling $4,399,000 that can be
drawn upon in the event the applicable reinsuring company is unable to pay its
obligation to Midwest Medical.
49
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. REINSURANCE (CONTINUED)
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 $1,000,000 of each claim and reinsures the remainder
through a treaty under which premiums are based on a flat rate and could be
subject to adjustment through a profit-sharing provision. For the years 1995
through 2000, Midwest Medical generally retained the first $750,000 of each
claim and reinsured 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 2001, 2000 and 1999
is as follows:
2001 2000 1999
---------------------------- ---------------------------- ------------------------------
WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED
---------------------------- ---------------------------- ------------------------------
(In Thousands) (In Thousands) (In Thousands)
Current Year:
Direct $65,556 $62,160 $48,554 $49,302 $51,672 $47,048
Assumed 116 71 76 76 48 48
Ceded (9,353) (9,085) (7,217) (7,400) (7,817) (6,433)
---------------------------- ---------------------------- ------------------------------
56,319 53,146 41,413 41,978 43,903 40,663
Prior Years:
Ceded (3,049) (3,049) (634) (634) 5,920 5,920
---------------------------- ---------------------------- ------------------------------
Net $53,270 $50,097 $40,779 $41,344 $49,823 $46,583
============================ ============================ ==============================
Loss and loss adjustment expenses incurred are net of applicable reinsurance of
$5,452,000, $5,315,000 and $5,204,000 for the years ended December 31, 2001,
2000 and 1999, respectively.
10. 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, 2001, 2000 and 1999 were $717,000,
$583,000 and $581,000, respectively.
50
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. BENEFIT PLANS (CONTINUED)
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
$636,000, $574,000 and $441,000 for the years ended December 31, 2001, 2000 and
1999, respectively. The liability recognized in the consolidated balance sheets
at December 31, 2001 and 2000 related to this plan was $3,561,000 and
$3,101,000, respectively.
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, 2001,
2000 and 1999 was $38,000, $36,000 and $23,000, respectively. As of December 31,
2000 and 1999, the net post-retirement benefit plan liability was $86,000 and
$51,000, respectively.
11. RECONCILIATION WITH STATUTORY ACCOUNTING PRINCIPLES
The National Association of Insurance Commissioners (NAIC) revised the
Accounting Practices and Procedures Manual in a process referred to as
Codification. The revised manual became effective January 1, 2001. Midwest
Medical's domiciliary state of Minnesota adopted the provisions of the revised
manual. The revised manual has changed, to some extent, prescribed statutory
accounting practices and resulted in changes to the accounting practices that
Midwest Medical used to prepare its statutory-basis financial statements.
Although the implementation of Codification had a negative impact on Midwest
Medical's statutory-basis capital and surplus primarily from the recording of a
net deferred tax liability, management believes Midwest Medical remains in
compliance with all regulatory and contractual obligations.
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).
51
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. RECONCILIATION WITH STATUTORY ACCOUNTING PRINCIPLES (CONTINUED)
The following is a reconciliation of net (loss) income and shareholders' equity
under US GAAP with that reported for Midwest Medical on a statutory basis:
NET (LOSS) INCOME
YEAR ENDED DECEMBER 31
-------------------------------------------------
2001 2000 1999
-------------------------------------------------
(In Thousands)
On the basis of US GAAP, Midwest Medical only $(1,423) $8,782 $3,450
Additions:
Deferred income taxes 92 836 37
-------------------------------------------------
On the basis of statutory accounting principles $(1,331) $9,618 $3,487
=================================================
SHAREHOLDERS' EQUITY
DECEMBER 31
-------------------------------------------------
2001 2000 1999
-------------------------------------------------
(In Thousands)
On the basis of US GAAP, Midwest Medical only $120,018 $141,935 $147,800
Additions (deductions):
Deferred income taxes 881 7,714 12,878
Unrealized (gain) loss on fixed maturities (2,592) 2,316 5,514
Non-admitted assets (275) (11,564) (1,000)
Prescribed market value differences 95 (16) (253)
Other -- 1 (179)
-------------------------------------------------
On the basis of statutory accounting principles $118,127 $140,386 $164,760
=================================================
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 $1,000,000 on any single
risk, the minimum statutory surplus level was $10,000,000 for 2001.
52
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. RECONCILIATION WITH STATUTORY ACCOUNTING PRINCIPLES (CONTINUED)
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 Minnesota Department of Commerce. At December 31, 2001, the
maximum dividend that may be paid by Midwest Medical in 2002 without regulatory
approval is approximately $11,813,000. Cash dividends paid to Midwest Holding by
Midwest Medical in 2001, 2000 and 1999 were $11,400,000, $3,000,000 and
$2,050,000, respectively.
53
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
54
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, 2001 are as follows:
CLASS C
COMMON
DIRECTOR PRINCIPAL SHARES
NAME AGE SINCE OCCUPATION OWNED
- --------------------------------------------------------------------------------------------------------------------
Michael D. Abrams 40 1996 Exec V.P. Iowa Medical Society --
John R. Balfanz, M.D. 56 1995 Physician 1
Mark A. Barnhill, D.O. 55 2001 Physician 1
Gail P. Bender, M.D. 54 1996 Physician 1
James R. Bishop, M.D. 60 1994 Physician 1
David P. Bounk 55 1995 President/CEO - Midwest Holding --
Terence P. Cahill, M.D. 45 2000 Physician 1
Peter J. Daly, M.D. 42 2001 Physician 1
G. Richard Geier, Jr., M.D.
Vice Chairman 61 1995 Physician 1
Anthony C. Jaspers, M.D. 54 1996 Physician 1
Jack L. Kleven 55 1999 President/CEO - Midwest Medical --
Russel J. Kuzel, M.D. 49 1997 Physician 1
Wayne F. Leebaw, M.D.
Secretary 58 1994 Physician 1
Mark O. Liaboe, M.D. 48 1999 Physician 1
Patricia J. Lindholm, M.D. 45 2000 Physician 1
Steven A. McCue, M.D. 60 1995 Physician 1
Roger H. Meyer, M.D. 63 2000 Physician 1
Harold W. Miller, M.D. 54 1996 Physician 1
Mark D. Odlund, M.D. 49 1996 Physician 1
Paul S. Sanders, M.D. 57 1984 CEO-MN Medical Assoc. --
Andrew J. K. Smith, M.D.
Chairman of Board 59 1990 Neurological Surgeon --
Thomas M. Tedford, M.D. 45 2001 Physician 1
Tom D. Throckmorton, M.D. 56 1997 Physician 1
R. Bruce Trimble, M.D. 61 1993 Physician 1
55
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 and the President of Midwest Medical as ex-officio directors;
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.
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, 2001, 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 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.
56
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)
The Chairman of the Board of Directors (currently Dr. Smith) is paid an annual
fee of $56,805. 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 55 President and Chief Executive 1990 to date President and Chief Executive
Officer - Midwest Holding Officer - Midwest Holding
Niles A. Cole 40 Vice President - Finance, 1998 to date Vice President - Finance,
Treasurer and Chief Financial Treasurer and Chief Financial
Officer Officer
Jack L. Kleven 55 President - Midwest Medical 1986 to date President - Midwest Medical
and Chief Operating Officer and Chief Operating Officer
Thomas H. Lee 58 Vice President - Information 1999 to date Vice President - Information
Systems Systems
Elizabeth S. Lincoln 48 Vice President - Law and 1990 to date Vice President - Law and
Health Policy Health Policy
Debra L. McBride 47 Vice President - Risk 2000 to date Vice President - Risk
Management Management
Gerald M. O'Connell 47 Vice President - Sales and 1998 to date Vice President - Sales and
Marketing Marketing
Jerry A. Zeitlin 51 Vice President - Claims 1999 to date Vice President - Claims
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.
57
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)
Mr. Bounk has an employment agreement which renews annually for successive
calendar-year terms unless it is terminated by either party at least 60 days
prior to any renewal date. The agreement provides that Mr. Bounk's base salary
will be adjusted annually by the Executive Committee. If the agreement is
terminated by 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 18 years' experience in the insurance industry, including six
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 27 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 27 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 18 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.
Ms. McBride has over 14 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.
58
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)
Mr. O'Connell has over 25 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. Zeitlin has over 28 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 2001, 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.
59
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 2001 $254,023 $102,356 $33,944
Executive Officer - 2000 239,406 96,560 34,826
Midwest Holding 1999 213,981 85,830 34,348
Jack L. Kleven President - Midwest 2001 210,869 72,830 35,354
Medical and Chief 2000 198,702 68,694 33,886
Operating Officer 1999 177,624 61,636 32,066
Gerald M. O'Connell Vice President - Sales and 2001 135,897 39,266 33,990
Marketing 2000 130,570 37,575 30,156
1999 117,196 34,749 29,864
Thomas H. Lee Vice President - 2001 127,042 36,687 31,709
Information Services 2000 122,042 27,147 28,347
1999 106,594 15,000 18,275
Elizabeth S. Lincoln Vice President - Law and 2001 124,353 35,949 32,946
Health Policy 2000 118,976 34,237 28,061
1999 113,332 33,080 26,826
(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 ten years of service of 70% (55% for new officers after 1997) of the
officer's final average salary. Benefits are reduced for 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
60
ITEM 11. EXECUTIVE COMPENSATION (CONTINUED)
retirement at normal retirement age for the executive officers in the Summary
Compensation Table are as follows: Mr. Bounk-$252,279; Mr. Kleven-$157,426; Mr.
O'Connell-$100,534; Mr. Lee-$75,955 and Ms. Lincoln-$93,907. 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.
61
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, 2001 are
included in this annual report (Form 10-K) in Item 8:
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 2001 and 2000
Consolidated Statements of Income for the years ended December
31, 2001, 2000 and 1999
Consolidated Statements of Changes in Shareholders' Equity for
the years ended December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999
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 2001.
62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Midwest Medical Insurance Holding Company
-----------------------------------------------------------
(Registrant)
By: /s/ David P. Bounk March 15, 2002
-------------------------------------- ----------------
David P. Bounk Date
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ David P. Bounk Principal Executive Officer March 15, 2002
- -------------------------------
David P. Bounk
/s/ Niles Cole Principal Financial Officer and March 15, 2002
- ------------------------------- Principal Accounting Officer
Niles Cole
* Director, Chairman of the Board March 15, 2002
- -------------------------------
Andrew J. K. Smith, M.D.
* Director March 15, 2002
- -------------------------------
Michael D. Abrams
* Director March 15, 2002
- -------------------------------
John R. Balfanz, M.D.
* Director March 15, 2002
- -------------------------------
Mark A. Barnhill, D.O.
63
* Director March 15, 2002
- -------------------------------
Gail P. Bender, M.D.
* Director March 15, 2002
- -------------------------------
James R. Bishop, M.D.
* Director March 15, 2002
- -------------------------------
Terence P. Cahill, M.D.
* Director March 15, 2002
- -------------------------------
Peter J. Daly, M.D.
* Director, Vice Chairman March 15, 2002
- -------------------------------
G. Richard Geier, Jr., M.D.
* Director March 15, 2002
- -------------------------------
Anthony C. Jaspers, M.D.
* Director March 15, 2002
- -------------------------------
Jack L. Kleven
* Director March 15, 2002
- -------------------------------
Russel J. Kuzel, M.D.
* Director, Secretary March 15, 2002
- -------------------------------
Wayne F. Leebaw, M.D.
* Director March 15, 2002
- -------------------------------
Mark O. Liaboe, M.D.
* Director March 15, 2002
- -------------------------------
Patricia J. Lindholm, M.D.
* Director March 15, 2002
- -------------------------------
Steven A. McCue, M.D.
64
* Director March 15, 2002
- -------------------------------
Roger H. Meyer, M.D.
* Director March 15, 2002
- -------------------------------
Harold W. Miller, M.D.
* Director March 15, 2002
- -------------------------------
Mark D. Odland, M.D.
* Director March 15, 2002
- -------------------------------
Paul S. Sanders, M.D.
* Director March 15, 2002
- -------------------------------
Thomas M. Tedford, M.D.
* Director March 15, 2002
- -------------------------------
Tom D. Throckmorton, M.D.
* Director March 15, 2002
- -------------------------------
R. Bruce Trimble, M.D.
* By: /s/ David P Bounk March 15, 2002
-----------------------------------
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.
65
Midwest Medical Insurance Holding Company and Subsidiaries
(Parent Company)
Schedule II - Condensed Financial Information of Registrant
Balance Sheets
DECEMBER 31
2001 2000
------------------------------------
(In Thousands)
ASSETS
Short-term investments $ 443 $ 171
Cash (18) 8
Investment in subsidiaries 124,158 145,793
Other 7,580 8,161
------------------------------------
Total assets $ 132,163 $ 154,133
====================================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accrued expenses and other liabilities $ 5,276 $ 5,035
Note payable to Midwest Medical -- 8,500
------------------------------------
5,276 13,535
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 99,923 104,524
Unrealized appreciation on investments, net of income
taxes 14,174 23,284
------------------------------------
126,887 140,598
------------------------------------
Total liabilities and shareholders' equity $ 132,163 $ 154,133
====================================
See accompanying note.
66
Midwest Medical Insurance Holding Company and Subsidiaries
(Parent Company)
Schedule II - Condensed Financial Information of Registrant (continued)
Statements of Income
YEAR ENDED DECEMBER 31
2001 2000 1999
-------------------------------------------------
(In Thousands)
REVENUES
Management fee from subsidiaries $15,206 $ 15,372 $16,273
Net investment income (401) (1,138) (696)
Realized capital gains 28 213 179
Other income 47 1 6
-------------------------------------------------
14,880 14,448 15,762
EXPENSES
Compensation expense for vested Class A Common Shares -- 1,311 253
Other operating and administrative 16,416 15,995 15,331
-------------------------------------------------
16,416 17,306 15,584
-------------------------------------------------
(Loss) income from continuing operations before tax and
other items (1,536) (2,858) 178
Income tax (benefit) expense (475) (939) 91
-------------------------------------------------
(Loss) income from continuing operations before equity
in undistributed (loss) income of subsidiaries (1,061) (1,919) 87
Equity in undistributed (loss) income of subsidiaries (3,165) 7,504 2,551
-------------------------------------------------
(Loss) income from continuing operations after tax
and other items (4,226) 5,585 2,638
Discontinued operations:
Loss from discontinued operations, net of tax (135) (299) (902)
Loss on disposal, net of tax (240) -- --
-------------------------------------------------
Net (loss) income $(4,601) $ 5,286 $ 1,736
=================================================
See accompanying note.
67
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
2001 2000 1999
-------------------------------------------------
(In Thousands)
Net cash (used in) provided by operating activities $ (254) $ (136) $ 856
INVESTING ACTIVITIES
Net (purchases) sales of short-term investments (272) 936 203
Capitalization of Services (900) (700) (1,500)
Capitalization of Solutions (1,500) (1,800) (650)
FINANCING ACTIVITIES
Redemption of Class A Common Shares -- (9,798) (953)
Note payable to Midwest Medical (8,500) 8,500 --
Dividends from Midwest Medical 11,400 3,000 2,050
-------------------------------------------------
(Decrease) increase in cash (26) 2 6
Cash at beginning of year 8 6 --
-------------------------------------------------
Cash at end of year $ (18) $ 8 $ 6
=================================================
See accompanying note.
68
Midwest Medical Insurance Holding Company and Subsidiaries
(Parent Company)
Schedule II - Condensed Financial Information of Registrant (continued)
Note to Condensed Financial Statements
December 31, 2001
The accompanying condensed financial information of registrant should be read in
conjunction with the audited consolidated financial statements and notes thereto
of Midwest Medical Insurance Holding Company and Subsidiaries.
See Note 3 to the audited consolidated financial statements of Midwest Medical
Insurance Holding Company and Subsidiaries for a description of the stock
restructure completed in 2000.
Midwest Holding received $8,500,000 in 2000 from Midwest Medical through a
non-interest-bearing note. The proceeds from the note were used to redeem Class
A shares under the stock restructure completed during 2000. The note was retired
in 2001.
Certain amounts in the prior year's condensed financial information of
registrant have been reclassified or restated to conform to the current year
presentation.
69
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, 2001:
Insurance premiums:
Property/casualty insurance $62,160 $12,134 $71 $50,097 0.1%
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%
NOTE TO SCHEDULE IV:
Ceded premiums for the years ended December 31, 2001, 2000 and 1999 are net of
(additions) reductions in ceded premiums related to swing-rated reinsurance
treaties of $(3,049,000), $(1,300,000) and $5,205,000, 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.
70
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
2001 N/A $118,574 N/A $15,489
2000 N/A 118,478 N/A 12,050
1999 N/A 119,141 N/A 12,797
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
- -------------------- ----------------------- ---------------------------------------------------------------------
Consolidated property/
casualty entities
2001 $50,097 $12,289 $58,127 $ 172 N/A $53,693 $65,556
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
71
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 Association, holder of the registrant's
Class B Common Share, dated November 30, 1988. 10A.(1)
Lease for office space between registrant and Centennial
Lakes IV, L.L.C., dated July 30, 1999. 10B.(3)
Amended and Restated Management Agreement between the
registrant and Midwest Medical Insurance Company, dated
January 1, 2000. 10C.(4)
Healthcare Liability Excess of Loss Reinsurance Contract
issued to Midwest Medical Insurance Company, effective
January 1, 2001 10D.(6)
Letter of Employment Agreement between the registrant and
David P. Bounk, President and Chief Executive Officer of
the registrant and Midwest Medical Insurance Company, dated
January 1, 1993. 10E.(2)
72
Index to Exhibits (continued)
REGULATION
S-K
EXHIBIT TABLE SEQUENTIAL
ITEM REFERENCE PAGE NO.
- -----------------------------------------------------------------------------------------------------------
1999 Officers Short-term Incentive Plan of the registrant. 10F.(3)
Supplemental Executive Retirement Plan of the registrant. 10G.(1)
Amended and Restated Endorsement Agreement between Midwest
Medical Insurance Company and Iowa Medical Society, dated
January 1, 1999. 10H.(3)
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 1999 Annual Report on Form 10-K and
incorporated herein by reference.
(4) Filed with 2000 Annual Report on Form 10-K and
incorporated herein by reference.
(5) Filed with Schedule TO SEC File No. 005-58917 on
April 26, 2000, as amended, and incorporated herein by
reference.
(6) Filed with this Annual Report on Form 10-K.
73