<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 12, 1997
REGISTRATION NO. *
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
MIDWEST MEDICAL INSURANCE HOLDING COMPANY
(Exact name of registrant as specified in its Charter)
<TABLE>
<S> <C> <C>
MINNESOTA 6749 41-1625287
(State or other jurisdiction (Primary Standard Industrial (IRS Employer
of Classification Code Number) Identification
incorporation or organization) Number)
</TABLE>
6600 FRANCE AVENUE SOUTH, SUITE 245 MINNEAPOLIS, MN 55435
(612) 922-5445
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
DAVID P. BOUNK, PRESIDENT
MIDWEST MEDICAL INSURANCE HOLDING COMPANY
6600 FRANCE AVENUE SOUTH, SUITE 245
MINNEAPOLIS, MN 55435, (612) 922-5445
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
COPIES TO:
CHARLES A. GEER, ESQ. ROSS C. FORMELL, ESQ.
General Counsel for Registrant Best & Flanagan P.L.L.P.
4400 IDS Center 4000 First Bank Place
Minneapolis, MN 55402 601 Second Avenue South
Minneapolis, MN 55402
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: MAY 12, 1997. AS SOON AS POSSIBLE AFTER THE EFFECTIVE DATE OF THIS
REGISTRATION STATEMENT. IF THE SECURITIES BEING REGISTERED ON THIS FORM ARE TO
BE OFFERED ON A DELAYED OR CONTINUOUS BASIS PURSUANT TO RULE 415 UNDER THE
SECURITIES ACT OF 1933, CHECK THE FOLLOWING BOX. /X/
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT OFFERING PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
Class A.............................. 15,000 shares $1006(1)(2) $15,090,000 $4,572.72(1)(2)
Common Stock.........................
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Estimated based upon book value of securities of the registrant to be issued
as of December 31, 1996.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
* THIS FILING ALSO CONSTITUTES POST EFFECTIVE AMENDMENT NUMBER 2 TO THE
REGISTRANT'S FORM S-1 FILING, REGISTRATION NUMBER 33-91308, PURSUANT TO RULE 429
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET
Pursuant to Rule 501(b) of Regulation S-K
Form S-1 Item Number and Caption Location in the Prospectus
- --------------------------------- -------------------------
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus Inside Front Cover Page;
Outside Back Cover Page
3. Summary Information, Risk Factors, and
Ratio of Earnings to Fixed Charges PROSPECTUS SUMMARY
4. Use of Proceeds Not Applicable
5. Determination of Offering Price THE OFFERING
6. Dilution Not Applicable
7. Selling Security Holders Not Applicable
8. Plan of Distribution THE OFFERING
9. Description of Securities to be Registered DESCRIPTION OF CAPITAL
STOCK
10. Interests of Named Experts and Counsel Not Applicable
11. Information with Respect to the Registrant SELECTED FINANCIAL
INFORMATION; MANAGEMENT'S
DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF
OPERATIONS; BUSINESS;
MANAGEMENT; DESCRIPTION
OF CAPITAL STOCK;
FINANCIAL STATEMENTS
12. Disclosure of Commission Position on
Indemnification for Securities
Act Liabilities Not Applicable
<PAGE>
PROSPECTUS
MIDWEST MEDICAL INSURANCE HOLDING COMPANY
Shares of Class A Common Stock
Shares of Class A Common Stock, $.01 par value (the "Shares"), are being
offered by Midwest Medical Insurance Holding Company ("MMIHC") only to insureds
of MMIHC's wholly-owned subsidiary, Midwest Medical Insurance Company ("MMIC").
The Shares are offered only as part of the insuring transaction and insureds are
not required to pay any consideration for the Shares separate from or in
addition to their insurance premiums. MMIC is a physician-controlled medical
malpractice insurance company which provides professional liability insurance to
physicians in Minnesota, Iowa, Nebraska, Wisconsin, Illinois, North Dakota and
South Dakota. Shares accrue daily and are allocated to insureds pursuant to a
formula which considers the insured's underwriting risk classification and
period of coverage with MMIC. Issuance of Shares to new insureds is subject to
a five-year vesting requirement and all rights will be forfeited if insurance
coverage is not continuous for five years. See "THE OFFERING."
The Shares are uncertificated and each shareholder is entitled to only one
vote, regardless of the number of Shares he or she owns. While MMIHC's Class B
Common Share remains outstanding, its holder, the Minnesota Medical Association,
has the exclusive right to elect directors from persons nominated by MMIHC's
Board of Directors, although the holders of the Class A Common Shares can cause
MMIHC to redeem the Class B Common Share at any time for $1,000, and thereby
terminate this right.
The Shares are not transferable or assignable and must be redeemed by
MMIHC at net book value, exclusive of any value attributable to MMIC (MMIHC's
principal asset), upon a shareholder's discontinuance of coverage with MMIC for
any reason. See "DESCRIPTION OF CAPITAL STOCK."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is June 12, 1997.
<PAGE>
No persons have been authorized to give any information or to make any
representation other than those contained in this Prospectus in connection with
this offering and, if given or made, such information or representation must not
be relied upon as having been authorized by MMIHC. This Prospectus does not
constitute an offer to sell, or a solicitation of an offer to buy, any
securities in any jurisdiction to or from any person to whom it is unlawful to
make any such offer or solicitation in such jurisdiction. Neither the delivery
of this Prospectus nor any distribution of securities made hereunder shall,
under any circumstances, create an implication that there has been no change in
the affairs of MMIHC since the date hereof or that the information herein is
correct as of any time subsequent to its date. This Prospectus does not
constitute an offer to sell, or a solicitation of an offer to buy, any
securities other than the registered securities to which it relates.
AVAILABLE INFORMATION
MMIHC is subject to the informational requirements of the Securities
Exchange Act of 1934 and, in accordance therewith, files reports and other
information with the Securities and Exchange Commission. Reports and other
information filed by MMIHC can be inspected and copied at the public reference
facilities maintained by the Commission in Washington, D. C. and at the
following Regional Offices: 26 Federal Plaza, New York, New York 10278; and 219
South Dearborn Street, Chicago, Illinois 60604. Copies of such material also
can be obtained from the Public Reference Section of the Commission in
Washington, D.C. 20549 at prescribed rates, or on the Internet at www.sec.gov.
MMIHC provides its shareholders with an annual report containing
consolidated MMIHC and MMIC year-end financial statements presented in
accordance with generally accepted accounting principles ("GAAP"). MMIC's
separate net income and shareholders' equity are presented on both a GAAP and
statutory accounting basis in the Notes to the Consolidated Financial
Statements. MMIC is subject to the insurance company filing requirements of the
Minnesota Department of Commerce and files the NAIC Annual Statement each year
with the Department of Commerce which includes financial statements presented in
accordance with statutory requirements, together with an independent auditor's
report on those financial statements. MMIHC is subject to insurance holding
company regulations and files Form B with the Minnesota Department of Commerce
annually. Form B contains current information about management, the Board of
Directors, and significant operating agreements, as well as a financial report.
Copies of any of these reports, or any of the documents referred to herein, can
be obtained by requesting them from David P. Bounk, President and Chief
Executive Officer, Midwest Medical Insurance Holding Company, 6600 France Avenue
South, Suite 245, Minneapolis, Minnesota 55435; (612) 922-5445.
-ii-
<PAGE>
TABLE OF CONTENTS
Page
----
Available Information. . . . . . . . . . . . . . . . . . . . . . . . . . . ii
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Selected Financial Information . . . . . . . . . . . . . . . . . . . . . . . 5
Management's Discussion and Analysis of Financial Condition and Results
of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Description of Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . 29
Legal Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Index to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . 32
APPENDIX - Allocation Formula. . . . . . . . . . . . . . . . . . . . . . . . A-1
-iii-
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Prospectus.
THE COMPANIES
MMIC originally was organized in 1980 under the auspices of the Minnesota
Medical Association (the "MMA"), to provide professional liability (malpractice)
insurance to Minnesota physicians who are members of the MMA. At that time,
claims and awards in medical malpractice cases had been increasing dramatically,
and physicians were faced with substantial premium increases and a declining
number of insurers offering medical malpractice coverage. The business was
reorganized on November 30, 1988 into a stock insurance company (MMIC), wholly
owned by a holding company (MMIHC), which could pursue other business
opportunities. The reorganization also was effected to give physicians a
limited equity interest in their malpractice insurer while preserving MMIC's
capital and surplus. As of July 1, 1993, the Iowa physician-owned malpractice
insurer, Iowa Physicians Mutual Insurance Trust ("IPMIT"), was merged with and
into MMIC, and as of June 5, 1996, the Nebraska physician-owned malpractice
insurer, Medical Liability Mutual Insurance Company of Nebraska ("MLM"), was
merged with and into MMIC. MMIC now provides malpractice insurance to
physicians and physician groups in Minnesota, Iowa, Nebraska, Wisconsin,
Illinois, North Dakota and South Dakota on a claims-made basis. Professional
liability, general liability, and umbrella excess liability insurance is also
available to hospitals, nursing homes and extended care facilities through MMIC.
MMIC has had the sponsorship of the MMA since inception, and also has the
sponsorship of the Iowa and North Dakota medical associations. See "BUSINESS."
The address and telephone number of the principal executive offices of MMIHC and
MMIC are as follows: 6600 France Avenue South, Suite 245, Minneapolis,
Minnesota 55435; (612) 922-5445.
THE OFFERING
Class A Common Shares (the "Shares") are being offered only to insureds of
MMIC as part of the insuring transaction, and insureds are not required to pay
any consideration for the Shares separate from, or in addition to, their
insurance premiums. Shares accrue daily and are allocated pursuant to a formula
which considers the insured's underwriting risk classification and period of
coverage with MMIC (the "Allocation Formula", which is set forth in the
Appendix). The number of shares allocated to Nebraska insureds is reduced by a
factor designed to take account of the fact that policy limits, and therefore
premiums, are lower in Nebraska. Shares allocated to new insureds are not
issued until the end of five years of continuous coverage. Cessation of
coverage before the completion of five years of coverage will result in a
forfeiture of accrued but unissued shares. Persons who were insureds at the
time of the 1988 reorganization and persons who were IPMIT or MLM insureds at
the time of the mergers between MMIC, IPMIT and MLM are not subject to the
five-year vesting requirement. See "THE OFFERING."
<PAGE>
THE SHARES
The Shares are uncertificated shares which may be owned by individual
physicians or by individual physicians jointly with the legal entities in which
they practice. In the latter case, the shares can be voted only by the
physicians. See "DESCRIPTION OF CAPITAL STOCK."
Each holder of the Shares is entitled to only one vote, regardless of the
number of Shares held. The Minnesota Medical Association (the "MMA"), so long
as it holds the single Class B Common Share of MMIHC presently outstanding, has
the exclusive right to vote for the election of directors, but only with respect
to persons nominated for election by a committee of the Board of Directors. The
holders of the Class A Common Shares, at any time, may cause MMIHC to redeem the
Class B Common Share at par value ($1,000), and thereby gain the right to elect
directors. Such an action requires the vote of a majority of the Class A
shareholders and two-thirds of the Class A shareholders who vote on the
question.
The Shares are not transferable or assignable, and must be redeemed by
MMIHC at net book value, exclusive of any value attributable to MMIC (MMIHC's
primary asset), upon a shareholder's discontinuance of coverage with MMIC for
any reason. By excluding the value attributable to MMIC from the calculation of
the redemption amount, MMIC's capital and surplus will be preserved and not
reduced by the redemption. The redemption amount thus reflects primarily
MMIHC's net income from operations, which consists principally of management
fees paid by MMIC, plus earnings on investments, plus any dividends paid by MMIC
to MMIHC. In the event of any merger, liquidation, sale of all or substantially
all of the assets, or other extraordinary event, any consideration payable to
holders of the Shares will reflect their full value, and will not be limited to
the redemption amount. See "DESCRIPTION OF CAPITAL STOCK." As of December 31,
1996 the net book value of MMIHC (redemption value) was $64.33 per share.
-2-
<PAGE>
THE OFFERING
Class A Common Shares (the "Shares") are being offered only to insureds of
MMIC who will accrue Shares for each day of insurance coverage they purchase
from MMIC. Insureds are not required to pay any consideration for the Shares
separate from or in addition to their insurance premiums. The Shares will be
allocated semi-annually, pursuant to a formula which considers the insured's
underwriting risk classification and period of coverage with MMIC (the
"Allocation Formula", which is set forth in the Appendix). Shares allocated to
new insureds are not issued until the end of five years of continuous coverage.
Cessation of coverage before the completion of five years of coverage will
result in a forfeiture of accrued but unissued shares. Persons who were
insureds at the time of the 1988 reorganization and persons who were IPMIT or
MLM insureds at the time of the merger between MMIC, IPMIT and MLM were not
subject to the five-year vesting requirement. Those persons were issued Shares
upon completion of those transactions and Shares they accrue currently are
deemed issued when they are allocated.
The Allocation Formula is set forth in the Appendix to the Prospectus. It
consists of a table which indicates the number of Shares to be accrued by and
allocated to each physician for each year of insurance coverage based upon his
or her insurance risk class. The insurance risk class each physician is
assigned is based on his or her medical specialty and is the same risk class to
which the physician has been assigned by MMIC for purposes of writing the
professional liability insurance for the physician. Annual insurance premiums
are based on these risk classes, which are derived from actuarial relativity
statistics. The number of shares shown in the table therefore reflect, in part,
the relative premiums paid to MMIC by each policyholder. These relativities
have changed very little since MMIC began its business. MMIHC reserves the
right to change the Allocation Formula in the future.
The shares allocable to Nebraska physicians are reduced by a factor to take
account of the fact that policy limits, and therefore premiums, are lower in
Nebraska. This factor is the inverse of the Increased Limits Factor determined
by MMIC's regular external actuaries to be applicable in order to adjust for the
difference between the policy limit of policies issued in Nebraska as compared
to the base policy limit issued by MMIC in all other states in which it does
business. MMIC's actuaries have determined that the designated Increased Limits
Factor is currently 1.72. Therefore, a Nebraska policyholder of MMIC would be
allocated the right to receive 58.1% of the shares of MMIHC Class A Common Stock
otherwise indicated by application of the Allocation Formula. This is based
upon current information and policy limits, and the actual factor used may be
recalculated from time-to-time.
The Shares are uncertificated. Although the Shares have been registered
under the Securities Act of 1933 and state securities laws, they are
nontransferable, and there is no market in which they may be sold. Upon
discontinuation of a physician's insurance policy with MMIC for any reason, the
Shares must be redeemed by MMIHC. See "DESCRIPTION OF CAPITAL STOCK."
-3-
<PAGE>
No independent brokers, dealers, or underwriters have been engaged to
represent MMIHC in connection with this offering and no commissions will be paid
to any person in connection with offers or sales of the Shares. The Shares will
be offered and sold solely by officers of MMIHC.
-4-
<PAGE>
SELECTED FINANCIAL INFORMATION
The following selected financial data of MMIHC for the five years ended
December 31, 1996 are derived from the audited financial statements of
MMIHC. The financial data for the three-month periods ended March 31, 1997
and 1996 are derived from unaudited statements. The unaudited statements
include all adjustments, consisting of normal recurring accruals, which
MMIHC considers necessary for a fair presentation of the financial position
and the results of operations for these periods. This data should be read
in conjunction with the consolidated financial statements and notes thereto
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31 ENDED MARCH 31
OPERATIONS DATA 1992(3) 1993(2) 1994(1) 1995(1) 1996(1) 1996 1997
- ----------------------------------------------------------------------------------------------------------- -------------------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Net premiums earned $ 36,317 $ 40,183 $ 26,246 $ 29,798 $ 32,046 $ 8,789 $ 8,364
Net investment and other income 14,859 14,773 11,509 14,191 14,840 4,131 2,796
-----------------------------------------------------------------------------------------
Total revenue 51,176 54,956 37,755 43,989 46,886 12,920 11,160
Loss and loss adjustment expense 19,707 30,693 11,334 37,560 32,257 8,168 8,393
Other underwriting expenses 6,480 5,807 5,509 6,415 5,690 1,805 1,576
-----------------------------------------------------------------------------------------
26,187 36,500 16,843 43,975 37,947 9,973 9,969
-----------------------------------------------------------------------------------------
Income before income taxes 24,989 18,456 20,912 14 8,939 2,947 1,191
Income taxes (benefit) 8,528 6,156 6,417 (1,711) 1,458 1,077 452
-----------------------------------------------------------------------------------------
Net income $ 16,461 $ 12,300 $ 14,495 $ 1,725 $ 7,481 $ 1,870 $ 739
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
Net income per common
share and common share
equivalent $142.20 $ 99.53 $114.84 $13.74 $ 58.33 $ 14.69 $ 5.64
Number of shares used in per
share calculation 115,758(4) 4) 123,575(4) 126,222(4) 125,536(4) 128,259 127,265 130,965
Net income/total revenue 32.2% 22.4% 38.4% 3.9% 16.0% 14.5% 6.6%
Return on average equity 12.9% 9.0% 15.8% 1.7% 6.5% 6.8% 2.5%
</TABLE>
-5-
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31 MARCH 31
FINANCIAL CONDITION 1992 (3) 1993 (2) 1994 (2) 1995 (1) 1996 (1) 1997
- ----------------------------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Fixed maturities at fair value $ - $ - $ 174,203 $ 182,817 $ 183,561 $ 181,291
Fixed maturities at amortized cost 164,878 181,526 - - - --
Equity securities at fair value 17,782 19,580 19,782 28,311 38,001 38,394
Short-term investments 5,674 7,429 9,755 15,015 7,898 5,622
---------------------------------------------------------------------------------------
Total investments 188,334 208,535 203,740 226,143 229,460 $ 225,307
Reinsurance recoverable 19,839 18,310 23,637 25,112 22,174 20,105
Other assets 15,954 16,335 19,100 13,329 10,359 38,028
---------------------------------------------------------------------------------------
Total assets $ 224,127 $ 243,180 $ 246,477 $ 264,584 $ 261,993 $ 283,441
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
LIABILITIES
Unpaid losses and loss adjustment expenses $ 118,171 $ 123,420 $ 110,967 $ 120,264 $ 110,037 $ 110,635
Other liabilities 32,006 33,904 38,358 34,053 33,074 54,708
--------------------------------------------------------------------------------------
150,177 157,324 149,325 154,317 143,111 165,343
REDEEMABLE STOCK
Class A and Class B Common Stock at 7,230 7,605 7,712 6,975 7,604 7,523
redemption value 66,720 78,251 89,440 103,292 111,278 110,575
--------------------------------------------------------------------------------------
OTHER SHAREHOLDERS EQUITY
Total liabilities, redeemable
stock and shareholders' equity $ 224,127 $ 243,180 $ 246,477 $ 264,584 $ 261,993 $ 283,441
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
</TABLE>
-6-
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31 MARCH 31
1992 (2) 1993 (2) 1994 (2) 1995 (1) 1996 (1) 1997
---------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Midwest Medical Insurance
Holding Company:
Class A Common Shares
issued and outstanding 110,333 115,230 116,251 116,855 118,209 119,438
Redemption value per share $65.53 $66.00 $60.00 $66.00 $64.33 $64.33
Class A Common Shares
redeemed 2,953 6,426 12,424 12,640 10,272 2,563
Amount paid to terminating
policyholders upon
redemption $ 233 $ 415 $ 829 $ 840 $ 608 $ 165
</TABLE>
- ---------------------------------------------
(1) Amounts derived from audited consolidated financial statements of MMIHC
included elsewhere in this Prospectus.
(2) Amounts derived from audited consolidated financial statements of MMIHC.
(3) Amounts derived from post-pooling financial statements of MMIHC which have
been audited as to combination only.
(4) Includes pro forma shares computed to give retroactive effect to the merger
of MMIHC/MMIC with MLM. See Note 2 to the consolidated financial statements
included elsewhere in this Prospectus.
-7-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
MANNER OF PRESENTATION. The financial statements of MMIHC and MMIC are
presented on a consolidated basis. In future references in this analysis, which
should be read together with the 1996 Consolidated Financial Statements and
Notes thereto appearing elsewhere in this Prospectus, MMIHC and MMIC are
referred to collectively as the "Midwest Companies."
CAPITAL RESOURCES AND LIQUIDITY
The majority of the Midwest Company's assets are invested in bonds, stocks and
short-term instruments. These investments totaled $229,460,000 and $226,143,000
at December 31, 1996 and 1995, respectively, which represented 87.5% and 85.7%
of total assets. The primary objective of the Company's investment policy is
preservation of assets while securing the highest after-tax return consistent
with asset conservation. The investment in U.S. Government bonds assists in
assuring adequate liquidity for payment of losses. Stocks are carried at fair
value on the balance sheet. The Company adopted SFAS No._115 effective January
1, 1994. Fixed maturity investments are classified as available for sale by
management and therefore, in accordance with SFAS No. 115, are also carried at
fair value effective January 1, 1994. Prior to January 1, 1994, bonds were
carried at the lower of aggregate amortized cost or market. Equity securities
are also classified as available for sale. This caused no change in the
accounting for these investments. See Note 1 of the notes to the consolidated
financial statements for additional detail concerning the impact of adopting
SFAS No.115. Partially taxable state and other political subdivision bonds are
utilized in the portfolio to reduce federal income taxes and to secure a higher
after-tax return than fully taxable investments.
The Company's cash flow from operations has been essentially breakeven for the
years 1996, 1995 and 1994. Premium rates have remained level for several years
causing cash receipts from operations to be relatively level. In addition, in
recent years MMIC has returned substantial amounts of premiums to policyholders
in the form of retrospective premium credits. Loss and operating expense
payments during all three years have generally been met from current year's
premium receipts with any excess cash allocated to the investment portfolio. The
Company regularly analyzes loss liabilities to project cash flow required in
future years. Bond maturities by year approximate this loss payment pattern.
Since the overall portfolio is highly liquid, exact matching is not a goal.
Maturities are selected to maximize total return rather than to achieve exact
matching of liabilities. While operating cash flow was basically breakeven in
1996, 1995 and 1994, given the Company's December 31, 1996 shareholders' equity
of $111,278,000, investments of $229,460,000 and gross loss liabilities of
$110,037,000, the Company anticipates no cash flow problems in the near future.
The Company's bylaws require that MMIHC Class A Common Stock issued to MMIC
policyholders be redeemed when a physician ceases to be insured by MMIC for any
reason. The redemption value per share is calculated by dividing the net book
value of
-8-
<PAGE>
the Company, excluding the net book value of MMIC (other shareholders' equity)
from the calculation, by the number of MMIHC Class A Common Shares outstanding.
More detail about the redeemable stock and the actual redemptions during the
years 1996, 1995 and 1994 are found in Note 3 to the consolidated financial
statements. This limited redemption value preserves the capital of MMIC as
shareholders' equity. The consolidated statements of changes in other
shareholders' equity found in the accompanying financial statements provide the
details of additions to and reductions in other shareholders' equity.
From time to time the Board of Directors of MMIC declares dividends payable to
MMIHC to maintain the redemption value of the Company's Class A Common Stock.
The $1,181,000 dividend declared in November 1994 and the $260,000 dividend in
November 1995 were declared in accordance with that principle and paid in
February of 1994 and 1995, respectively. In July 1996, a dividend of $327,000
was paid to MMIHC as required by a provision of the MMIC/MLM merger agreement.
Per the merger agreement, the amount was sufficient to maintain the per share
redemption value of MMIHC's Class A Common Stock at the same per share value
immediately after the merger as immediately before the merger.
-9-
<PAGE>
LOSS AND LOSS ADJUSTMENT EXPENSE
RECONCILIATION OF LIABILITY FOR LOSS
AND LOSS ADJUSTMENT EXPENSE
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1994 1995 1996
------------------------------------------------
<S> <C> <C> <C>
Liability for loss and loss adjustment
expense at beginning of year $105,589 $ 88,227 $ 96,424
Plus:
Incurred loss and loss adjustment
expense:
Provision for current year 36,275 39,847 41,101
(Decrease) in provision for prior years (24,941) (2,287) (8,844)
------------------------------------------------
Total incurred loss and loss adjustment
expense 11,334 37,560 32,257
Less:
Incurred loss and loss adjustment
expense payments:
Payment attributable to current year 3,445 2,484 4,885
Payment attributable to prior years 25,251 26,879 33,454
------------------------------------------------
Total payments 28,696 29,363 38,339
------------------------------------------------
Liability for loss and loss adjustment
expense at end of year 88,227 96,424 90,342
Reinsurance recoverables on unpaid losses at
end of year 22,740 23,840 19,695
------------------------------------------------
Liability for loss and loss adjustment
expense, gross of reinsurance recoverables
on unpaid losses at end of year $110,967 $120,264 $110,037
------------------------------------------------
------------------------------------------------
</TABLE>
-10-
<PAGE>
The second to the last line on the preceding reconciliation reports the amount
of reinsurance recoverables for unpaid losses which are included in the 1996,
1995 and 1994 balance sheet liability "Unpaid losses and loss adjustment
expenses". Except for adding the reinsurance recoverables, the reconciliation is
presented net of reinsurance which coincides with the manner of presentation of
the income 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, was fairly stable for 1996 and 1995. The 1994 current year provision was
approximately $4,000,000 less than the 1996 and 1995 amounts primarily because
the Company increased its retention from $500,000 per claim to $750,000 per
claim effective January 1, 1995. The loss and loss adjustment expenses reflected
in the consolidated financial statements, and shown in the Reconciliation of
Liability for Loss and Loss Adjustment Expense as total incurred loss and loss
adjustment expense, include adjustments of prior years' estimates.
Incurred loss and loss adjustment expenses for 1996 and 1995 of $32,257,000 and
$37,560,000, respectively, are significantly greater than the $11,334,000 in
1994. During 1994, the liability for loss and loss adjustment expenses was
extensively reevaluated by management which resulted in a significant reduction,
$24,941,000, in these liabilities for years prior to 1994. That reduction was
supported by outside actuarial evaluation. There were smaller reversals of prior
years' liabilities in 1996 and 1995. Following the 1994 extensive review and
liability reduction, management does not expect prior year liability reductions
of similar significance in future years.
The schedule which follows summarizes the development of the liability for loss
and loss adjustment expense from 1986 through 1996. This schedule is also
presented net of reinsurance which the Company believes best explains the
development as it affects operating results. The Company has a conservative loss
reserving policy which, when coupled with a moderation of malpractice insurance
losses which began in approximately 1986 for the Company and across the
industry, has resulted in redundancies in liabilities larger than expected. The
table indicates that the redundancy in loss liabilities, which developed when
more actual results were known, has been significantly reduced from the high at
December 31, 1990. Loss and loss adjustment expense liabilities have not been
discounted in the Company's financial statements.
-11-
<PAGE>
DEVELOPMENT OF LIABILITY FOR LOSS AND LOSS ADJUSTMENT EXPENSE
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Liability for unpaid
loss and loss
adjustment expense $45,105 $60,133 $74,577 $89,630 $97,375 $100,167 $98,617 $105,589 $88,227 $96,424 $90,342
Liability reestimated
as of:
1 year later 41,123 53,358 65,928 73,244 83,359 83,991 94,633 80,960 85,595 87,589
2 years later 36,346 46,297 51,379 62,056 64,876 74,883 69,490 75,364 76,365
3 years later 30,325 35,881 43,516 52,010 56,351 53,538 65,568 64,586
4 years later 24,378 33,448 35,753 44,582 42,075 52,833 56,426
5 years later 24,767 30,345 31,052 37,872 41,771 45,892
6 years later 23,722 26,818 29,052 37,617 39,519
7 years later 22,379 26,613 29,002 35,882
8 years later 22,176 26,620 28,724
9 years later 22,179 26,611
10 years later 22,176
Cumulative redundancy 22,929 33,522 45,853 53,748 57,856 54,275 42,191 41,003 11,862 8,844
Cumulative amount of
liability paid through:
1 year later 7,103 13,421 12,067 10,585 13,973 19,112 21,422 25,251 26,879 33,454
2 years later 16,443 19,787 19,043 21,890 28,643 32,798 37,498 42,685 46,925
3 years later 19,189 23,184 24,143 30,869 35,305 39,906 45,227 51,087
4 years later 20,817 25,238 26,241 35,015 37,624 42,752 46,226
5 years later 21,790 26,240 27,561 35,115 38,298 43,994
6 years later 21,902 26,555 27,660 35,187 39,505
7 years later 22,121 26,610 27,695 35,295
8 years later 22,176 26,610 27,695
9 years later 22,176 26,610
10 years later 22,176
</TABLE>
-12-
<PAGE>
RESULTS OF OPERATIONS
NET PREMIUMS EARNED increased $2,248,000 in 1996 from 1995 while the number of
insured policyholders and rate levels were relatively the same. The primary
reasons for this increase are:
1. In 1996, $2,194,000 was received from the commutation of a reinsurance
treaty covering the years 1989 and 1990. This increases 1996 net
premiums. There was no similar item in 1995.
2. Several other reinsurance treaty adjustments involving prior years
retrospective reinsurance treaties resulted in reducing 1996
reinsurance costs by $1,740,000, thereby increasing net premium
earned. The years involved ranged from 1987-1995. Most of these
treaties originated with IPMIT prior to its merger into MMIC on July
1, 1993.
3. Offsetting these two major reasons for the increase in 1996 net
premiums was one significant item which caused a decrease. The Company
recorded an increase of $2,901,000 in an Iowa development experience
liability account in 1996. A similar increase of $646,000 was recorded
in 1995. The difference between the 1996 and 1995 amounts decreased
net premium $2,255,000. Under terms of the MMIC/IPMIT July 1, 1993
merger agreement, if the financial results for the years prior to 1993
are more favorable than expected at December 31, 1992, that favorable
development must be returned to the prior IPMIT policyholders who
renew coverage with MMIC.
NET PREMIUMS EARNED increased $3,552,000 in 1995 from 1994 even though
policyholder rate levels remained the same and the number of policyholders
insured also remained stable. The primary reasons for this increase are:
1. A $5,200,000 retrospective premium credit was declared in 1995 for
Minnesota policyholders who were insured during 1992, 1993 and 1994
and renew with the Company on January 1, 1996. A similar premium
credit of $6,000,000 was declared in 1994. The 1995 credit was lower
by $800,000 and caused 1995 net premium to be higher by this amount.
These premium credits were paid to policyholders in early March of
1995 and 1996, respectively.
2. The Company recorded an increase of $646,000 in an Iowa development
experience liability account in 1995. Under terms of the MMIC/IPMIT
July 1, 1993 merger agreement, if the financial results for years
prior to 1993 are more favorable than expected at December 31, 1992,
that favorable development must be returned to the prior IPMIT
policyholders who renew coverage with MMIC. The establishment of this
liability reduces earned premiums. A similar increase of $7,227,000
was recorded in 1994. The difference between 1995 and 1994 increased
net premium from 1994 to 1995 by $6,581,000.
-13-
<PAGE>
3. Offsetting the two major reasons for the increase in 1995 net
premiums, which total $7,381,000, is one item which caused a decrease.
In 1994, the Company reduced its estimated unearned premium liability
for free death, disability and retirement reporting endorsements by
$2,903,000 which increases net premium. A further small decrease in
this liability, $310,000, was recorded in 1995. The difference,
$2,593,000, causes 1995 net premium to be lower by that amount.
INVESTMENT INCOME has remained level during the last three years. Invested
assets as shown in the Balance Sheet at fair value increased by $3,317,000 from
December 31, 1995 to December 31, 1996. On a cost basis, the amount of
investments increased by $885,000.
REALIZED CAPITAL GAINS of $1,771,000 in 1996 and $1,646,000 in 1995 were due to
active management of both the bond and equity sections of the portfolio. During
1994, the same investment management philosophy, preservation of assets while
securing the highest total return possible, resulted in a net capital loss of
$455,000. The Company employs two outside professional advisors to manage the
portfolio, one to manage fixed income securities and a separate manager for
equities. The managers operate within the Company's adopted investment policy.
The Investment Committee meets with the outside managers approximately four
times per year.
OTHER UNDERWRITING EXPENSES decreased by $725,000 from 1995 to 1996. This
decrease was primarily due to a reallocation of costs under the Company's
amended management agreement for 1996 filed herein. In 1995 the majority of this
expense was included in other underwriting expense. The increase from 1994 to
1995 was primarily due to a $520,000 reduction in reinsurance ceding commission
received. The reduction occurred in connection with the Company increasing its
retention from $500,000 per claim to $750,000 per claim and changing the method
by which final reinsurance premium is determined for coverage up to $2,000,000
per claim.
INCOME TAXES. In 1996 the Company's book net income before taxes was $8,939,000.
Deductions from book income, primarily tax exempt interest income from municipal
bonds reduces income subject to tax. This current year's tax based on taxable
earnings was increased by a reduction in deferred taxes of $298,000 to arrive at
the income tax charged to operations as shown in the financial statements.
Deferred tax effects are provided whenever expense items are recorded in the
accompanying financial statements in a time period different from those in the
Company's tax returns.
NET INCOME for the Company during the last three years totaled $23,701,000 which
was added to retained earnings. As indicated in the discussion of loss and loss
adjustment expenses, a significant portion of net income for these years
resulted from the reversal of loss liabilities established in prior years.
-14-
<PAGE>
INTERIM PERIODS. The following is management's discussion and analysis of
financial condition and results of operations for the three months ended March
31, 1997 and should be read in conjunction with the selected financial
information.
CAPITAL RESOURCES AND LIQUIDITY
The majority of the Company's assets, 79%, continue to be invested in bonds,
stocks and short-term instruments. The Company has adopted Statement of
Financial Accounting Standards (SFAS) No. 115 "Accounting for Certain
Investments in Debt and Equity Securities." The Company's investments in debt
and equity securities are classified as available for sale and therefore carried
at fair value with unrealized gains and losses, net of applicable taxes,
reflected as a separate component of equity.
Ninety-five percent of the Company's insurance policies renew on January 1 of
each year and expire on December 31. Premiums can be paid in full on January 1
or one-fourth at the beginning of each calendar quarter. At December 31 the
uncollected premiums are relatively low. The uncollected premium of $25,947,000
at March 31, 1997 represents that amount of the calendar year 1997 premium for
each policy renewed for one year on January 1, or newly written during January,
February or March, which is not yet collected. Full 1997 premium for all
policies written as of March 31, 1997 totaled $42,044,000.
The increase in unearned premium of $30,835,000 represents nine months of
premium on all of the January 1 insurance policies written from January 1
through March 31, 1997. Since most policies expire at December 31 each year,
there was no unearned premium at December 31 for most policies written during
1996. An estimated unearned premium reserve for free reporting endorsements
provided to certain insureds at death, disability and retirement amounting to
$6,174,000 is the majority of the unearned premium balance at December 31, 1996.
The same $6,174,000 is included in the March 31, 1997 unearned premium total.
The retrospective premium liabilities of $3,834,000 at March 31, 1997 represents
amounts due to Iowa policyholders under terms of Midwest Medical Insurance
Company/Iowa Physicians Mutual Insurance Trust (MMIC/IPMIT) July 1, 1993 merger
agreement. That agreement provides if financial results for years prior to 1993
are more favorable than expected, the favorable development must be returned to
former IPMIT policyholders who were insured by IPMIT on December 31, 1992 and
who renew their coveraged with MMIC. The $10,838,000 retrospective premium
liability at December 31, 1996 included $6,235,000 for those former IPMIT
policyholders and $4,603,000 liability to Minnesota policyholders under a
retrospective premium rating plan. In March of 1997 both the $4,603,000
Minnesota retrospective premium liability and $2,500,000 of the Iowa merger
agreement liability was paid to policyholders.
Cash flow from operations was negative during the first quarter of both 1997 and
1996, $2,935,000 and $2,238,000 respectively. The primary reason for the
negative cash flows was the payment, in March of both years, of the
retrospective premium credit to Minnesota policyholders and the premium credit
to Iowa policyholders under terms of the
-15-
<PAGE>
MMIC/IPMIT merger agreement. These payments totaled $7,103,000 in 1997 and
$7,500,000 in 1996.
Net income for the first quarter of 1997 and 1996 was $739,000 and $1,870,000
respectively. These amounts were added to the Company's retained earnings.
Total equity consisting of redeemable stock and other shareholders' equity,
decreased by $784,000 during the first quarter of 1997. Net income of $739,000
added to equity was more than offset by a decrease in the fair value of
investments, net of deferred taxes, totalling $1,435,000, and Class A stock
redemptions of $165,000.
RESULTS OF OPERATIONS
Net premiums earned were $425,000 lower during the first three months of 1997
than for the same period in 1996. Base premium rates remained the same in all
states except North Dakota where 425 policyholders received an average increase
of 10%. The decrease in net premium in the first quarter was primarily due to
an aberration in the recording of reinsurance costs and it is expected that net
premium will be approximately the same for the year 1997 as 1996. Total
policyholders at March 31, 1997 was 5,854.
Losses and loss adjustment expense were $225,000 higher during the first quarter
of 1997 than for the same period in 1996. There were no specific identifiable
occurrences which would cause a difference. This amount of variance between
quarters is not unusual.
Net income for the first quarter of 1997 was $1,131,000 less than the same
period of 1996. The smaller net income is due primarily to a realized capital
loss of $196,000 in 1997 versus realized capital gains of $1,000,000 during the
first quarter of 1996. Two outside investment managers are employed by the
Company with the goal of maximizing total return. There were more opportunities
for gains from sales in 1996.
BUSINESS
BACKGROUND. MMIC originally was organized in 1980 under the auspices of
the MMA to provide professional liability insurance to Minnesota physicians who
are members of the MMA. At that time, claims and awards in medical malpractice
cases had been increasing dramatically, and physicians were faced with
substantial premium increases and a declining number of insurers offering
medical malpractice coverage. The business was reorganized in 1988 into a stock
insurance company (MMIC), wholly owned by a holding company (MMIHC) which could
pursue other business opportunities. The reorganization also was effected to
give physicians a limited equity interest in their malpractice insurer, which
would give them input into the operations of the insurer and an opportunity to
share in any profits, while preserving the capital and surplus of MMIC. As of
July 1, 1993, the Iowa physician-owned malpractice insurer, IPMIT, was merged
with and into MMIC, and as of June 5, 1996, the Nebraska physician-owned
malpractice insurer, MLM, was merged with and into MMIC.
-16-
<PAGE>
MMIC now provides professional liability insurance to physicians in
Minnesota, Iowa, Nebraska, Wisconsin, Illinois, North Dakota and South Dakota.
Professional liability, general liability and umbrella excess liability
insurance is also available to hospitals, nursing homes and extended care
facilities through MMIC. MMIC has had the sponsorship of the MMA since
inception and also has the sponsorship of the Iowa and North Dakota medical
associations.
MANAGEMENT AGREEMENT. Pursuant to a written agreement renewable annually,
MMIC pays MMIHC for comprehensive management, administration, and underwriting
services, and for use of MMIHC's facilities, equipment and personnel. MMIHC
receives a management fee generally equal to the allocated cost of providing
such services, plus 10 percent. As a result of this agreement, MMIHC employs
all of the employees, and owns all of the non-financial assets, used in the
operation of the businesses of the Midwest Companies. The agreement is subject
to annual review and approval by the Minnesota Department of Insurance. See
Note 1 to MMIHC's Consolidated Financial Statements.
INSURANCE POLICIES. MMIC primarily writes policies of medical professional
liability insurance to: (1) individual physicians, and (2) partnerships or
professional corporations comprised of physicians ("clinics"). In addition,
MMIC writes business liability insurance providing coverage for claims against a
medical business entity resulting from acts by its employees, and office
premises liability insurance providing coverage for claims arising out of the
ownership, maintenance or use of office premises of the insured.
In addition to meeting MMIC's underwriting standards, insureds must be
licensed to practice in Minnesota, Iowa, Nebraska, Wisconsin, Illinois, North
Dakota or South Dakota, and conduct a majority of their practice in such states.
All insured clinics must have their principal place of business in one of MMIC's
states and all full-time physicians practicing with insured clinics must be
insured by MMIC.
MMIC offers a "claims-made" medical malpractice liability insurance policy.
Under a claims-made policy, coverage is provided for claims asserted and
reported to MMIC while the policy is in effect relating to occurrences which
took place during the period in which the insured had coverage with MMIC. The
policy also covers prior acts (i.e., claims first made during the policy period
with respect to occurrences which took place prior to the date the insured
initially secured coverage from MMIC) for physicians previously insured under a
claims-made policy with another professional liability insurer. Prior acts
coverage is not available from MMIC for physicians who have not been
continuously insured prior to obtaining coverage from MMIC.
MMIC also offers reporting endorsements ("tails") which provide coverage of
subsequent claims (i.e., claims first made subsequent to the date the insured
terminates basic insurance coverage with MMIC, but with respect to occurrences
which took place while the insurance coverage was in effect prior to such
termination date) made against its former insureds who have voluntarily
terminated insurance coverage with MMIC. In the event of death, permanent
disability, or retirement at age 55 or older after five years of coverage with
MMIC, the reporting endorsement is provided at no additional premium.
-17-
<PAGE>
MMIC offers basic limits of coverage from $100,000 for each claim, subject
to $300,000 annual aggregate, up to $5,000,000 for each claim, subject to
$5,000,000 annual aggregate. Excess coverage above the basic limits is
available from MMIC's reinsurers on a facultative basis.
REINSURANCE. MMIC purchases reinsurance in order to reduce its liability
on individual risks and to protect against catastrophic losses. A reinsurance
transaction takes place when an insurance company transfers, or "cedes", to
another insurer a portion of its exposure on insurance it writes. The reinsurer
assumes the exposure in return for a portion of the premium. The reinsurer's
liability is limited to losses it assumes that are in excess of the portion
retained by MMIC. However, in the event the reinsurer is unable or otherwise
fails to pay, MMIC remains primarily liable for the loss.
Historically, entering into reinsurance agreements permitted MMIC to issue
policies having greater liability limits than otherwise would have been allowed
under Minnesota insurance law, which prohibits an insurer from retaining a risk
on any one claim that is greater than 10 percent of its surplus. As MMIC's
surplus has grown, MMIC now utilizes reinsurance primarily to limit its risk on
any single claim. Such limits of risk assumed by MMIC for physician coverage
have increased from $150,000 in the first year of operations to $750,000
currently. The single claim limit of risk assumed is $500,000 for hospital
coverage. The reinsurer will pay losses in excess of the amount of risk
retained by MMIC, not to exceed the limits of liability of the policies issued
by MMIC.
MMIC currently operates under an excess-of-loss reinsurance treaty with
General Reinsurance Corporation of Stanford, Connecticut and Hanover Reinsurance
Company, Hanover, Germany. General Reinsurance Corporation assumes 85% of the
reinsurance risk under this treaty, and Hanover Reinsurance Company assumes the
remaining 15%. General Reinsurance Corporation is the largest reinsurer of
medical professional liability in the United States and one of the largest in
the world and has received the highest rating of A++ by A. M. Best & Company,
Inc. Hanover is one of the largest reinsurers in the world and has been a
leader in medical malpractice insurance. Its A.M. Best & Company, Inc. rating
is A+. (See "Rating" for a further description of A. M. Best.) Coverage under
the treaty was initially issued on October 1, 1986, and is continuous until
cancelled by either party. Previous reinsurance treaties, which remain in
effect for pre-1986 incidents, were with various domestic and foreign
reinsurers, all of whom have maintained their obligations to MMIC and appear to
be financially sound. MMIC currently cedes about $7,200,000 of premium per year
under the reinsurance treaty with General Reinsurance Corporation and Hanover
Reinsurance Company.
MARKETING AND DISTRIBUTION. Marketing of MMIC policies in Minnesota,
South Dakota, Nebraska, Illinois and Wisconsin primarily is handled directly by
MMIC through salaried marketing representatives. MMIC has also made marketing
arrangements with a select group of large national brokers to assist MMIC in the
production of large accounts and in the production of new coverages as they are
developed. MMIC has appointed independent agents in Iowa and North Dakota in
order to enhance marketing efforts there. IMS Services Company, a wholly-owned
subsidiary of the Iowa Medical Society, is the exclusive agent for marketing
MMIC policies in Iowa. MMIC does not believe that the loss of any exclusive
agent would have a material adverse effect on its business because other agents
are available and MMIC has the in-house capacity to market directly in any of
these
-18-
<PAGE>
areas. MMIC hospital insurance policies are marketed directly by MMIC and
through independent agents and brokers. MMIC approves all policies (and their
terms) sold by agents prior to their becoming effective, and no commissions are
earned by agents until such approval has been granted.
INVESTMENTS. MMIC's investment portfolio is under the direction of the
Board of Directors acting through the Investment Committee. The Investment
Committee establishes MMIC's investment policy which, in summary, is to assist
in maintaining MMIC's financial stability through the preservation of assets and
the maximizing of after-tax investment income. Adequate liquidity is maintained
to ensure that MMIC has the ability to meet its insurance operational
requirements, in particular the payment of claims. MMIC employs outside
investment managers who manage the portfolio on a discretionary basis consistent
with the policies set by MMIC. In addition, the Investment Committee utilizes
the services of a separate outside consultant who calculates performance
measures and provides an independent opinion on the overall results being
obtained by the investment managers.
MMIC's investment portfolio consists primarily of fixed income instruments,
including United States government and governmental agency bonds and other
public and municipal bonds. MMIC's investment policy permits the inclusion of
equity securities of up to fifteen percent of the portfolio. In accordance with
this policy, equity securities, based upon then current market values, comprised
approximately 12.3 percent of the portfolio on December 31, 1995. Due to the
increase in market values in 1996, with no new funds committed to equities,
equities comprised 16.6% of the portfolio on December 31, 1996. Since the
excess is due entirely to increase in value of the equity portfolio, the
Investment Committee has temporarily waived compliance with this provision of
the investment policy.
The following table sets forth the composition of the combined investment
portfolio of MMIHC and MMIC at the dates indicated:
BOOK VALUE AT DECEMBER 31,
-------------------------------------
1994 1995 1996
- -------------------------------------------------------------------------------
(IN THOUSANDS)
Investments
Fixed maturities at fair value
(cost: 1996 - $179,979,
1995 - $174,544, 1994 - $178,007) $174,203 $182,817 $183,561
Equity securities at fair value
(cost: 1996 - $20,237,
1995 - 17,670, 1994 - $15,205) 19,782 28,311 38,001
Short-term 9,755 15,015 7,898
-------------------------------------
Total Investments $203,740 $226,143 $229,460
-------------------------------------
-------------------------------------
-19-
<PAGE>
The following schedule compares the average yield on investments during the
last three years.
YEAR ENDING DECEMBER 31,
---------------------------------
1994 1995 1996
---------------------------------
Average yield 5.9% 5.9% 5.4%
The fair value of fixed maturities at December 31, 1996, by contractual
maturity, is shown below as a percentage of the total fixed maturities
portfolio:
PERCENTAGE OF FIXED
MATURITY MATURITY PORTFOLIO AT FAIR VALUE
-------- ------------------------------------
0 - 1 year 4%
1 - 5 years 45
5 - 10 years 36
Over 10 years 15
----
100%
----
----
Rating. A. M. Best & Company, Inc. ("Best's"), publisher of BEST'S
INSURANCE REPORTS, PROPERTY-CASUALTY, has assigned MMIC an A, or excellent,
rating in 1996. Best's ratings range from A++ to F, and are based on an
analysis of the financial condition and operation of an insurance company as
compared with the industry in general. MMIHC believes that a favorable rating
has a positive effect since customers and their advisors often review Best's
ratings when selecting an insurer and are more apt to purchase insurance from a
company with a positive rating because of the greater security and stability
associated with a positive rating. A positive rating relates to the ability of
an insurer to meet its insurance obligations and does not directly relate to the
value of the insurer's securities. A.M. Best calculates several ratios and
publishes them each year as part of its annual report.
GOVERNMENT REGULATION. MMIC is subject to governmental regulation in the
states in which it conducts its business - Minnesota, Iowa, Nebraska, Illinois,
Wisconsin, North Dakota and South Dakota. Such regulation is conducted by state
agencies having broad administrative power dealing with all aspects of MMIC's
business, including policy terms, rates, dividends and retroactive premium
adjustments to insureds, and dividends to the parent corporation, MMIHC.
Without prior approval from the Minnesota Commissioner of Commerce, annual
dividends to MMIHC cannot exceed 10 percent of unassigned surplus of MMIC or the
prior year's net income from operations of MMIC, whichever is greater. MMIC is
also subject to statutes that require it to file periodic information with state
regulatory authorities, and is subject to a financial and business conduct
examination every three years. MMIHC is also subject to statutes governing
insurance holding company systems in Minnesota, which relate primarily to the
acquisition of control of insurance companies directly or through a holding
company.
COMPETITION. MMIC's major competitor is the St. Paul Companies. The
St. Paul Companies is a major national property-casualty insurance company, is
the largest writer of medical professional liability insurance in the United
States, and is many times larger than
-20-
<PAGE>
MMIC. In addition to the St. Paul Companies, several other national companies
have become active in the last several years, including Medical Protective
Insurance Company, CNA Insurance Company, Zurich Insurance Company and Fireman's
Fund Insurance Company. At this time these additional competitors have achieved
limited market penetration, but represent an increasing competitive pressure for
the future. In addition, several other physician-owned specialty carriers have
entered the market, but have yet to be a significant factor in MMIC's area.
Finally, over the past few years several large self-insured hospitals in
Minneapolis and Des Moines have purchased MMIC insured clinics, and other
physician practices have been purchased by large, self-insured clinics such as
the Mayo Clinic, although this trend seemed to slow significantly in 1996.
These trends are causing a contraction in the market for MMIC's primary
malpractice insurance. So far this has resulted in a minimal loss of insureds.
MMIC is the only carrier in Minnesota, Iowa and North Dakota markets endorsed by
local medical societies and owned by its physician-insureds, which management
believes gives MMIC a competitive advantage in marketing to physicians.
The market for medical professional liability insurance is changing,
especially with the dramatic changes proposed and occurring in the broader
health care industry. Various changes in the market for medical professional
liability insurance are possible as a result of developments such as practice
consolidation and integration, physician-hospital organizations, various forms
of managed health care, various forms of alliances between providers, proposals
for enterprise liability, and many others. Management of MMIC has begun the
process of developing new programs and products, such as stop-loss insurance
programs for self-insured entities, which it believes will allow it to remain
competitive as such change occurs, although no assurance can be given to that
effect.
EMPLOYEES. As of December 31, 1996, MMIHC employed 64 persons, of whom
five were executives, 44 were supervisory employees or specialists, and 15 were
clerical employees. None of the employees is covered by a collective bargaining
agreement and management believes that relations with employees are good.
PROPERTIES. MMIHC owns the following fixed assets, all of which are used
in the conduct of its business:
NET BOOK VALUE
DECEMBER 31, 1996
-------------------
Office furniture and equipment $308,758
Leasehold improvements at leased premises,
6600 France Ave. S., Minneapolis, MN 35,127
Computer hardware 166,348
Computer system software 61,476
----------
Total $571,709
----------
----------
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<PAGE>
MMIHC and MMIC own no real estate. MMIHC leases approximately 15,765
square feet of office space in Edina, Minnesota under a 10-year lease that
expires in 2001, subject to the option of MMIHC to renew the lease for an
additional five years after the original term. An additional 4,060 square feet
of office space is leased in West Des Moines, Iowa under a 10-year lease that
expires in 2000, with an option for MMIHC to extend the term for an additional
five years after the original term. Finally, 2,398 square feet of office space
is leased in Omaha, Nebraska under a three year lease that expires November 30,
1997. Aggregate annual rent expense was $392,282 for 1996 and $379,699 for
1995. Management believes such space will be sufficient for the conduct of its
business for the foreseeable future.
LITIGATION. MMIC believes that its loss and loss adjustment expense
reserves are adequate to cover possible liability from claims and lawsuits
against its insureds which arise in the normal course of its insurance business.
Apart from such matters, MMIC is not a party to any pending or threatened legal
proceeding which could have a material adverse effect on its operations.
MANAGEMENT
DIRECTORS
The names and ages of the directors of MMIHC and MMIC, the year each first
became a director, and the number of Class A Common Shares owned by each as of
December 31, 1996, are as follows:
<TABLE>
<CAPTION>
DIRECTOR
CLASS A COMMON
NAME AGE SINCE SHARES OWNED
- ---- --- ----- --------------
<S> <C> <C> <C>
Michael Abrams 35 1996 0
John R. Balfanz, M.D. 51 1995 12
Gail P. Bender, M.D. 49 1996 20
James R. Bishop, M.D. 54 1994 0
David P. Bounk 50 1995 0
E. Duane Engstrom, M.D. 65 1986 33
Secretary
William Eversman, M.D. 58 1993 51
Roger L. Frerichs, M.D. 57 1988 80
Richard Geier Jr., M.D. 56 1995 0
Anthony C. Jaspers, M.D. 49 1996 47
Wayne F. Leebaw, M.D. 53 1994 22
Steven A. McCue, M.D. 55 1995 113
Harold W. Miller, M.D. 49 1996 25
Anton S. Nesse, M.D. 58 1989 51
-22-
<PAGE>
Mark D. Odlund, M.D. 44 1996 75
G. William Orr 61 1996 43
Norman Rinderknecht, M.D. 62 1993 87
Paul S. Sanders, M.D. 52 1984 0
Richard D. Schmidt, M.D. 53 1990 139
Mark B. Siegel, M.D. 49 1989 64
Andrew J. K. Smith, M.D. 54 1990 181
Chairman
G. David Spoelhof, M.D. 43 1989 43
Bruce R. Trimble, M.D. 56 1993 20
Vice Chairman
</TABLE>
As of December 31, 1996 the directors of MMIHC, as a group, owned 1,106
Class A Common Shares, or one percent of the total Class A Common Shares
outstanding as of such date. No executive officer owned any Class A Common
Shares as of such date.
All of the directors have been principally engaged in the practice of
medicine for more than five years, except for Dr. Sanders who has been the
Executive Vice President of the MMA since 1990, Michael Abrams who has been the
Executive Director of the Iowa Medical Society (the "IMS") since 1996 and David
P. Bounk who has been President and CEO of MMIHC since 1991. Prior to 1996, Mr.
Abrams was Director, Governmental Relations of the Indiana Medical Association
for nine years.
The Bylaws of MMIHC provide that MMIHC's Board of Directors shall include
the following: (1) up to 20 physicians divided into three classes and elected
for staggered three-year terms; (2) for as long as the Class B Common Share is
outstanding, the Chief Executive Officer of the MMA and the Executive Vice
President of the IMS, both of whom shall be ex-officio directors; (3) the
President of MMIHC as an ex-officio director; and (4) such additional ex-officio
and advisory members as the Board of Directors may determine. At least
two-thirds of the voting members of the Board of Directors must be members of a
state medical association and insured by MMIC. The MMA, which has the exclusive
right to elect directors, has agreed to elect the directors nominated by a
committee of the Board of Directors. Directors serve until their successors are
elected and qualified or until their prior resignation, removal, death or
disqualification.
The Bylaws of MMIHC provide for the election of directors who are members
of the IMS in a number, when compared to the total number of directors, which is
proportionate to the number of Iowa insureds compared to the total number of
MMIC insureds, subject to a minimum of two Iowa directors, one of whom shall be
the Executive Vice President of the IMS, for as long as the Class B Common Share
is outstanding. The MMA has placed the Class B Voting Share in a voting trust
which
-23-
<PAGE>
requires the trustee to vote the share for the election of the Iowa directors
nominated by the IMS.
The Board of Directors of MMIHC has the following standing committees: (1)
Executive; (2) Audit and Budget; (3) Nomination; and (4) Compensation. The
activities and current membership of each of these committees are described
below:
The Executive Committee, pursuant to Minnesota law and the Bylaws of MMIHC,
has the full power and authority to act for the Board between its meetings. The
members of the Executive Committee include the Chairman, Vice Chairman and
Secretary of the Board of MMIHC, the President, and such other individuals as
appointed by the Board of Directors. The persons currently on the Executive
Committee are as follows: Andrew J.K. Smith, Chairman, David P. Bounk, E. Duane
Engstrom, M.D., Roger L. Frerichs, M.D., Richard Geier, M.D., Paul S. Sanders,
M.D., Richard D. Schmidt, M.D., Bruce Trimble, M.D. and Michael Abrams.
The Audit and Budget Committee reviews and approves the annual audit of the
books and records and annual budget of MMIHC. The members of the Audit and
Budget Committee are R. Bruce Trimble., Andrew J.K. Smith, M.D., Richard Geier,
M.D., John Balfanz, M.D. and Norman Rinderknecht, M.D.
The Nominating Committee submits to the Board of Directors the names of all
nominees for election to the Board. The Chairman of the Board is a member of
the Nominating Committee together with the Vice-Chairman of the Board, the
Chairman of the Board of the MMA or his or her designate, the Chief Executive
Officer of the MMA, and such two members as appointed by the Board. The members
of the Nominating Committee are Andrew J.K. Smith, M.D., Paul S. Sanders, M.D.,
Michael Abrams, R. Bruce Trimble, M.D., Anthony Jaspers, M.D., and Tim Crimmins,
M.D.
The Compensation Committee reviews and establishes the compensation and
benefits of all executives of MMIHC. The Committee consists of the Chairman of
the Board, the Vice Chairman of the Board, and two additional members appointed
by the Board. The current members of the Compensation Committee are Andrew J.K.
Smith, M.D., R. Bruce Trimble, M.D., Mark Siegel, M.D. and James Bishop, M.D.
and Charles A. Geer.
The Bylaws of MMIC provide that the directors of MMIHC shall also serve as
the directors of MMIC, with the exception of any outside directors of MMIHC.
Outside directors are persons who are not policyholders of MMIC or members of
the MMA. There are currently no outside directors of MMIHC so the Boards of
MMIHC and MMIC are identical at this time.
The Board of Directors of MMIC has the following standing committees: (1)
Claims (Minnesota and Iowa); (2) Investment; and (3) Underwriting/Risk
Management. The activities and current membership of each of these committees
are described below.
-24-
<PAGE>
The Minnesota and Iowa Claims Committees review trial alerts and individual
claims when the settlement authority request is in excess of $350,000. The
Claims Committees also review periodically all claims and lawsuits that have
been closed and monitors overall claim statistics. The members of the Minnesota
Claims Committee are Anton S. Nesse, M.D., Theodore S. Olson, M.D., William
Eversmann, Jr., M.D., Mark D. Odland, M.D., Gail Bender, M.D., James R. Bishop,
M.D., William L. Youmans, M.D., Susan J. Cushman, M.D. The members of the Iowa
Claims Committee are James F. Black, M.D., Norman L. Bone, M.D., Clarence H.
Denser, Jr., M.D., William W. Eversmann, Jr., M.D., Joe F. Fellow, M.D., Kevin
R. Kopesky, M.D., Lance E. Longnecker, M.D., James R. Skinner, M.D.
The Investment Committee establishes investment policy which is approved by
the Board and implemented by professional investment managers, who are employed
by MMIC for that purpose. The Investment Committee meets frequently with MMIC's
investment manager and reviews the past performance, the current portfolio and
the future direction of MMIC's investments. See "Business-Investments." The
members of the Investment Committee are Richard Geier, Jr., M.D., Chairman,
Charles A. Geer, M.D., Michael Abrams, M.D., Andrew Smith, M.D., Paul Sanders,
M.D., Gail Bender, M.D., Harold Miller, M.D., William Orr, M.D., and Norman
Rinderknecht, M.D.
The Underwriting/Risk Management Committee establishes criteria for
acceptability of new applicants for insurance. The committee reviews closed
claims to determine renewal acceptability for current policyholders and
recommend changes in underwriting policy to the Board of Directors. The members
of the Committee are Richard Schmidt, M.D., Chairman, Charles F. Eisenbeis,
M.D., Stephen A. McCue, M.D., George J. Nemanich, M.D., Mark B. Siegel, M.D.,
Thomas F. Varecka, M.D., Norman Rinderknecht, M.D., Wayne F. Leebaw, M.D., John
R. Balfanz, M.D., E. Duane Engstrom, M.D., Anthony C. Jaspers, M.D., and Paul
Sanders, M.D.
The Chairman of the MMIHC Board of Directors (currently Dr. Smith) is paid
an annual fee of $31,500. All members of the Board of Directors currently are
paid $750 for each meeting of the Board of Directors they attend. In addition,
members of the Executive Committee currently are paid $750 for each meeting of
the Executive Committee they attend, and committee chairmen are paid $600 for
each meeting of the standing committee they chair. Other members of standing
committees currently are paid between $300 and $500, depending upon distance
traveled, for each committee meeting they attend.
-25-
<PAGE>
EXECUTIVE OFFICERS
The names, ages and positions of the executive officers of MMIHC and MMIC
are as follows:
NAME AGE POSITION
- ---- --- --------
David P. Bounk 50 President and Chief Executive Officer
Merlin R. Bretzman 62 Vice President-Finance and Treasurer
Jack L. Kleven 50 Vice President-Claims
Elizabeth S. Lincoln 43 Vice President-Risk Management
Michael Rutz 43 Vice President - Underwriting
Mr. Bounk has over 28 years experience in the insurance industry and joined
MMIHC and MMIC as President and Chief Executive Officer in August, 1990. From
July, 1982 through July, 1990, he was Executive Vice President and Chief
Operating Officer of Missouri Medical Insurance Company, a corporation providing
malpractice insurance to physicians in Missouri. Mr. Bounk has an MBA degree in
finance.
Mr. Bounk has an annual employment agreement which renews for successive
calendar-year terms unless it is terminated by either party at least 60 days
prior to any renewal date. The agreement provides that Mr. Bounk's base salary
will be adjusted annually by the Executive Committee. If the agreement is
terminated by MMIHC for cause or by Mr. Bounk voluntarily, he is entitled to
receive his base salary for 30 days thereafter. If the agreement is terminated
by MMIHC without cause, Mr. Bounk is entitled to receive his base salary for six
months thereafter, plus one additional month for each year of service, subject
to a maximum of 12 additional months, and then only until he commences new
employment or self-employment. The agreement also prohibits Mr. Bounk from
competing with MMIHC for one year following his termination of employment.
Mr. Bretzman has over 39 years experience in the insurance industry,
including 23 years with Blue Cross/Blue Shield of Minnesota prior to joining
MMIHC's predecessor in 1983. He has been in his current position since March,
1986. He has a BA degree in accounting.
Mr. Kleven has over 24 years experience in medical malpractice claims
adjusting and management. He joined MMIHC's predecessor in 1983, and has held
his current position since March, 1986. Prior to joining MMIHC's predecessor,
he was a liability manager at The St. Paul Companies for six years. He has a BS
degree in business.
-26-
<PAGE>
Ms. Lincoln has over 14 years experience in medical professional liability
risk management. She joined MMIHC's predecessor in 1982, and has held her
current position since January, 1990. She has a law degree.
Mr. Rutz has over 18 years experience in the insurance industry, including
10 years in medical malpractice. From June, 1986 through April, 1994, he was
Senior Regional Underwriting Manager with St. Paul Fire and Marine Insurance
Company. From May, 1994 through April, 1995, he was Vice President with
Alexander and Alexander, insurance brokers. He joined the company in May 1995
as Vice President - Underwriting. He has a BS degree in resource management.
Effective January 1, 1997, MMIHC 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, ranging from
three months to 18 months depending upon length of employment and position.
Officers serve until their successors are appointed by the Board of
Directors, or until their prior resignation, removal or death.
SUMMARY COMPENSATION TABLE
The following table summarizes the compensation paid by MMIHC to its Chief
Executive Officer and each of its four other most highly-compensated executive
officers during the last three fiscal years:
ANNUAL COMPENSATION
-------------------
PRINCIPAL ALL OTHER
NAME POSITION YEAR SALARY BONUS COMPENSATION(1)
- --------------------------------------------------------------------------------
David P. President 1996 $170,080 $51,024 $17,687
Bounk & Chief 1995 162,760 47,200 22,620
Executive 1994 153,540 53,062 22,012
Officer
Merlin R. Vice President- 1996 $133,240 $39,972 $18,478
Bretzman Finance and 1995 127,500 36,975 19,899
Treasurer 1994 122,160 40,148 19,351
-27-
<PAGE>
ANNUAL COMPENSATION
-------------------
PRINCIPAL ALL OTHER
NAME POSITION YEAR SALARY BONUS COMPENSATION(1)
- --------------------------------------------------------------------------------
Jack L. Vice President- 1996 $132,420 $39,796 $17,384
Kleven Claims 1995 126,720 36,749 18,512
1994 121,716 40,015 18,112
Elizabeth S. Vice President- 1996 $97,020 $29,106 $14,319
Lincoln Risk Management 1995 88,690 5,720 13,677
1994 78,240 26,972 12,159
Michael G. Vice President 1996 $108,680 $32,604 $14,980
Rutz Underwriting 1995 65,000 7,250 8,658
(1) Includes employer contributions to qualified retirement plans and the term
and cash surrender value of supplemental life insurance premiums.
The compensation of the President is determined by the Executive Committee.
Pursuant to the Bylaws, the President is a member of the Executive Committee,
but he does not participate in actions on his compensation. The President
determines the compensation of the other executive officers.
MMIHC also maintains a Supplemental Executive Retirement Plan ("SERP")
which provides an annual retirement benefit for an executive officer who retires
at age 65 with 20 years of service of 65 percent (70 percent for the Chief
Executive Officer) of the officer's final average salary. Benefits are reduced
for years of service less than 20 and retirement prior to age 65. The annual
benefit payable under the SERP is reduced by 50 percent of the officer's primary
Social Security benefit and by the annual benefit (expressed in the form of an
annuity) of the officer's accrued benefits under MMIHC's current money purchase
pension plan and a predecessor plan. The estimated annual benefits payable upon
retirement at normal retirement age for the executive officers in the Summary
Compensation table are as follows: Mr. Bounk - $133,300; Mr. Bretzman -
$69,500; Mr. Kleven - $66,200; Ms. Lincoln - $51,800 and Mr. Rutz - $71,600.
The estimated annual retirement benefits were calculated assuming salary
increases of six percent per year, discounted four percent per year for future
inflation to express the estimated benefits in today's dollars.
-28-
<PAGE>
DESCRIPTION OF CAPITAL STOCK
DESCRIPTION OF CLASS A COMMON SHARES. Class A Common Shares, $.01 par
value, are uncertificated shares which may be owned by individual physicians or
by individual physicians jointly with the legal entities in which they practice.
In the latter case the Shares can be voted only by the physicians, subject to
their right to grant proxies. Each individual holder of Class A Common Shares
has only one vote, regardless of the number of shares that he or she owns.
Holders of Class A Common Shares have the right to vote on all corporate matters
except for the election of members of the Board of Directors of MMIHC. Such
right has been granted to the MMA, the holder of the sole Class B Voting Share
which is authorized and outstanding. However, the MMA has agreed to elect the
directors nominated by a committee of the Board of Directors. See "Description
of Class B Voting Share."
As long as the Class B Voting Share remains outstanding, the holders of
Class A Common Shares may, at any time, cause MMIHC to redeem the Class B Common
Share at par value ($1,000), and thereby gain the right to elect directors.
Such an action requires the vote of a majority of the Class A shareholders and
two-thirds of the Class A shareholders who vote on the question.
The Class A Common Shares are restricted shares that cannot be sold to any
person other than MMIHC and are subject to mandatory redemption at the time that
the physician-insured terminates his or her insurance coverage for any reason.
The redemption price will be based on the net book value of MMIHC, excluding the
net book value attributable to MMIC (MMIHC's primary asset). By excluding the
value attributable to MMIC from the calculation of the redemption price, MMIC's
capital and surplus will be preserved and not reduced by the redemption. Other
terms and conditions of the redemption will be established by the Board of
Directors of MMIHC. The redemption amount thus reflects primarily MMIHC's net
income from operations, which consists principally of management fees paid by
MMIC, plus earnings on investments, plus any dividends paid by MMIC to MMIHC.
Holders of Class A Common Shares will share in any remaining assets upon
liquidation of MMIHC, proportionately on the basis of the number of shares held
by each shareholder. In the event of any liquidation, all of the assets of
MMIHC will be included, including MMIC if MMIC remains a subsidiary of MMIHC at
the time of liquidation. In the event of any merger, sale of all or
substantially all of the assets, or other extraordinary event, any consideration
payable to holders of Class A Common Shares will reflect the full value of the
Shares and will not be limited to the redemption amount.
The Class A Common Shares do not entitle their holders to preemptive rights
or cumulative voting, and no assignment or other transfer of the Class A Common
Shares is permitted. Holders of Class A Common Shares are permitted to enter
into voting agreements and appoint proxies to vote such shares, and are
permitted to assign their rights, if any, to the proceeds from any redemption of
Class A Common Shares.
-29-
<PAGE>
There is no market for the Class A Common Shares, nor is it anticipated
that there ever will be a public or private market in which the Class A Common
Shares are traded. Accordingly, all holders of Class A Common Shares must
expect to retain their shares until they cease to be policyholders of MMIC.
MMIHC has never paid a dividend nor does it intend to within the foreseeable
future, although the Class A Common Shares will have the right to receive
dividends when, as, and if the Board of Directors of MMIHC authorizes the
payment of a dividend.
All physicians who were MMIC insureds at the time of the reorganization in
1988, IPMIT insureds at the time of its merger with MMIC in 1993, or MLM
insureds at the time of its merger with MMIC in 1996, received shares of MMIHC
upon completion of those transactions in accordance with the Allocation Formula
set forth in the Appendix, based upon their periods of coverage by MMIC and its
predecessors and their underwriting classifications. These insureds also accrue
and are issued additional Shares pursuant to the Allocation Formula (reduced by
the inverse of the Increased Limits Factor for Nebraska insureds, see "The
Offering") for each day they remain insured with MMIC after the completion of
those transactions. Issuance of shares to new insureds of MMIC is subject to a
five-year vesting requirement and all rights will be forfeited if insurance
coverage is not continuous for five years. The Allocation Formula has been
modified since 1988 and MMIHC reserves the right to modify it in the future.
As of December 31, 1996, there were 118,209 Class A Common Shares
outstanding held by 3,445 physicians; 2,116 additional physicians have accrued
the right to receive 12,772 additional Class A Common Shares subject to
completion of the five-year vesting period.
DESCRIPTION OF CLASS B VOTING SHARE. The holder of the one Class B Voting
Share authorized by MMIHC's Articles of Incorporation is the MMA. The Class B
Voting Share has no rights or preferences other than the right to elect the
members of the Board of Directors of MMIHC. This right gives the MMA the
effective right to elect the Board of Directors of MMIC, since the Bylaws of
both corporations provide that each member of the Board of Directors of MMIC
will be a member of the Board of Directors of MMIHC, and the MMA and MMIHC have
entered into an agreement to exercise their respective voting rights to elect
the same persons to the Board of Directors of MMIHC and MMIC. A nominating
committee of MMIHC nominates persons to be elected as members of the Board of
Directors, and the MMA has agreed to elect these persons to the Board of
Directors.
The Class B Voting Share is currently held in a voting trust which
requires the trustee to vote the share for the election of at least two Iowa
directors nominated by the IMS. See, "MANAGEMENT - Directors."
As long as the Class B Voting Share remains outstanding, the holders of
Class A Common Shares may, at any time, cause MMIHC to redeem the Class B Common
Share at par value ($1,000) by the vote of a majority of the outstanding Class A
shareholders and two-thirds of the Class A shareholders who vote on the
question.
-30-
<PAGE>
LEGAL MATTERS
The validity of the shares of MMIHC Class A Common Stock to be issued in
connection with this offering is being passed upon for MMIHC by its general
counsel, Charles A. Geer, Esq., Minneapolis, Minnesota. Best & Flanagan PLLP,
Minneapolis, Minnesota, has acted as special securities law counsel to MMIHC.
EXPERTS
The consolidated financial statements and schedules of Midwest Medical
Insurance Holding Company at December 31, 1996 and 1995, and for each of the
three years in the period ended December 31, 1996, appearing in this Prospectus
and Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein and in
the Registration Statement, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
-31-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page No.
FINANCIAL STATEMENTS
Condensed Consolidated Financial Statements (Unaudited)
Balance Sheet - March 31, 1997 . . . . . . . . . . . . . . . . . . . .F1
Statements of Income - Three Months Ended March 31, 1997 and 1996 . . .F2
Statements of Cash Flows - Three Months Ended March 31, 1997
and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .F3
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . .F4
Consolidated Financial Statements
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . .F6
Consolidated Balance Sheets - December 31, 1996 and 1995 . . . . . . . F7
Consolidated Statements of Income - For the Years Ended
December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . F8
Consolidated Statements of Changes in Other Shareholders'
Equity - For the Years Ended December 31, 1996, 1995 and 1994. . . . F9
Consolidated Statements of Cash Flows - For the Years Ended
December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . F11
Notes to Consolidated Financial Statements . . . . . . . . . . . . F12
FINANCIAL STATEMENT SCHEDULES
Schedule II - Condensed Financial Information of Registrant
(Parent Company) . . . . . . . . . . . . . . . . . . . . . . . . . . F33
Balance Sheets - December 31, 1996 and 1995. . . . . . . . . . . . F33
Statements of Income - For the Years Ended December 31, 1996, 1995
and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . F34
Statements of Cash Flows - For the Years Ended December 31, 1996,
1995 and 1994. . . . . . . . . . . . . . . . . . . . . . . . . . F35
Note to Condensed Financial Statements . . . . . . . . . . . . . . F36
Schedule IV - Reinsurance - For the Years Ended December 31, 1996,
1995 and 1994. . . . . . . . . . . . . . . . . . . . . . . . . . F37
Schedule VI - Supplemental Information Concerning Property/Casualty
Insurance Operations - December 31, 1996 and 1995 and for Each
of the Three Years in the Period Ended December 31, 1995 . . . . F38
-32-
<PAGE>
MIDWEST MEDICAL INSURANCE HOLDING COMPANY AND SUBSIDIARY
Condensed Consolidated Balance Sheet
(Dollars in thousands)
March 31, 1997
--------------
ASSETS (Unaudited)
Fixed maturity investments at fair value $181,291
(Amortized cost: $180,495)
Equity securities at fair value (cost: 38,394
$20,056) 5,622
Short-term investments (1,814)
Cash 25,947
Uncollected premiums - Note C 3,970
Ceded unearned premium 2,596
Accrued investment income 20,105
Reinsurance recoverable 1,903
Deferred income tax 5,427
--------
Other assets $283,441
--------
--------
LIABILITIES, REDEEMABLE STOCK AND OTHER
SHAREHOLDERS' EQUITY
LIABILITIES
Unpaid losses and loss adjustment
expenses $110,635
Unearned premiums - Note C 37,695
Amounts due reinsurers 10,083
Retrospective premiums 3,834
Other liabilities 3,096
--------
$165,343
--------
REDEEMABLE STOCK
Class A Common Stock 7,522
Class B Common Stock 1
--------
7,523
--------
Other Shareholders' Equity 110,575
--------
$283,441
--------
--------
F1
<PAGE>
MIDWEST MEDICAL INSURANCE HOLDING COMPANY AND SUBSIDIARY
Condensed Consolidated Statements of Income
(Dollars in thousands, except per share dollars)
(Unaudited)
Three Months Ended
March 31
-----------------------
Revenues: 1997 1996
---- ----
Net premiums earned $ 8,364 $ 8,789
Net investment income 2,992 3,131
Realized capital gains (losses) (196) 1,000
------- --------
$11,160 $ 12,920
Losses and expenses:
Losses and loss adjustment expense $ 8,393 $ 8,168
Other underwriting expenses 1,576 1,805
------- --------
$ 9,969 $ 9,973
------- --------
Income before income taxes $ 1,191 $ 2,947
Income taxes - Note B $ 452 $ 1,077
------- --------
Net income $ 739 $ 1,870
------- --------
------- --------
Income per common share and common
share equivalent $ 5.64 $ 14.69
------- --------
------- --------
Number of shares used in per share
calculation 130,965 127,265
------- --------
------- --------
See notes to condensed consolidated financial statements
F2
<PAGE>
MIDWEST MEDICAL INSURANCE HOLDING COMPANY AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Three Months Ended
March 31
-----------------------
1997 1996
NET CASH USED IN OPERATING ACTIVITIES
$(2,935) $(2,238)
-------- --------
INVESTING ACTIVITIES
Purchases of fixed maturity investments and
equity securities
Sales of fixed maturity investments (28,053) (30,015)
and equity securities
Maturities of fixed maturity investments 27,510 15,696
Purchases of short-term investments, net 300 9,950
2,276 6,217
-------- --------
2,033 1,848
-------- --------
FINANCING ACTIVITIES
Redemption of Class A Common Stock
INCREASE (DECREASE) IN CASH (17) (129)
-------- --------
(919) (519)
Cash at beginning of year
CASH AT MARCH 31 (895) (710)
-------- --------
$(1,814) $(1,229)
-------- --------
-------- --------
See notes to condensed consolidated financial statements.
F3
<PAGE>
MIDWEST MEDICAL INSURANCE HOLDING COMPANY AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 1997
NOTE A - BASIS OF PRESENTATION
On June 5, 1996 the Company completed a merger with Medical Liability Mutual
Insurance Company of Nebraska (MLM). MLM was merged with and into Midwest
Medical Insurance Company (MMIC) which is owned 100% by the Company. The merger
was accounted for on a pooling of interests basis. All prior period financial
statements have been restated to reflect the pooling. MLM represented less than
five percent of the assets, revenue and equity of the Company.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended March 31,
1997 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1997. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Registrant Company and Subsidiaries' annual report on Form 10-K for the year
ended December 31, 1996.
NOTE B - INCOME TAXES
The Company calculates its income tax provision for interim periods by
estimating its annual effective tax rate and applying this rate to the income of
the interim period. The effective tax rate for the three months ended March 31,
1997 and 1996 is approximately 38% and 37% respectively, and are due primarily
to the effects of the tax-exempt income and state income taxes, net of federal
tax benefit.
NOTE C - UNEARNED PREMIUM AND UNCOLLECTED PREMIUM
The majority of the Company's insurance policies expire at December 31 and renew
on January 1 of each year. The majority of the unearned premium amount at March
31,
F4
<PAGE>
1997 represents nine months of unearned premium for every active policy renewed
or newly written from January 1, 1997 through March 31, 1997. Since most active
policies expired on December 31, 1996, there was no unearned premium at that
date for those expired policies.
Of the total unearned premium balance of $6,860,000 at December 31, 1996, the
majority $6,174,000, is a reserve for the issuance of free reporting
endorsements for policyholders at death, disability or retirement. That same
amount is also included in the unearned premium balance at March 31, 1997.
The increase in uncollected premium from December 31, 1996 to March 31, 1997,
$25,363,000, is due to the renewal of most active policies on January 1. The
full year's premium is recorded as written and collectible at January 1.
Premiums may be paid annually or quarterly. The majority of each years' premium
is collected during the year with very little uncollected at each December 31.
F5
<PAGE>
Report of Independent Auditors
Board of Directors
Midwest Medical Insurance Holding Company
and Subsidiaries
We have audited the accompanying consolidated balance sheets of Midwest Medical
Insurance Holding Company and Subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of income, changes in other shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1996. Our audits also included the financial statement schedules listed in
the index at Item 16(b). 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 generally accepted auditing
standards. 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, 1996 and 1995, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles. 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.
In 1994, as discussed in Note 1 to the financial statements, the Company changed
its method of accounting for certain investments in debt and equity securities.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
January 31, 1997
F6
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Consolidated Balance Sheets
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
-------------------------
<S> <C> <C>
ASSETS
Investments (NOTE 4):
Fixed maturities at fair value (cost: 1996--$179,979;
1995--$174,544) $183,561 $182,817
Equity securities at fair value (cost: 1996--$20,237;
1995--$17,670) 38,001 28,311
Short-term 7,898 15,015
-------------------------
229,460 226,143
Cash - 704
Accrued investment income 2,778 2,875
Reinsurance recoverable (NOTE 8) 22,174 25,112
Other assets 6,451 7,446
Deferred income taxes (NOTE 7) 1,130 2,304
-------------------------
Total assets $261,993 $264,584
-------------------------
-------------------------
LIABILITIES, REDEEMABLE STOCK AND OTHER
SHAREHOLDERS' EQUITY
Liabilities:
Unpaid losses and loss adjustment expenses $110,037 $120,264
Unearned premiums 6,860 7,033
Retrospective premiums (NOTE 5) 10,838 10,864
Amounts due reinsurers 7,274 7,818
Other liabilities 8,102 8,338
-------------------------
Total liabilities 143,111 154,317
Redeemable stock (NOTES 3 AND 12):
Class A Common Stock--authorized 300,000 shares,
issued and outstanding 118,209 shares in 1996 and 116,251
shares in 1995 7,603 6,974
Class B Common Stock--authorized, issued and outstanding 1 share 1 1
-------------------------
7,604 6,975
Other shareholders' equity (NOTES 3 AND 11) 111,278 103,292
-------------------------
Total liabilities, redeemable stock and other
shareholders' equity $261,993 $264,584
-------------------------
-------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F7
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Consolidated Statements of Income
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31
1996 1995 1994
--------------------------------------
Revenues:
Net premiums earned (NOTE 8) $ 32,046 $29,798 $26,246
Net investment income (NOTE 4) 12,212 12,211 11,995
Realized capital gains (losses) 1,771 1,646 (455)
Other 857 334 (31)
--------------------------------------
46,886 43,989 37,755
Losses and expenses:
Losses and loss adjustment expenses
(NOTES 6 AND 8) 32,257 37,560 11,334
Other underwriting expenses 5,690 6,415 5,509
--------------------------------------
37,947 43,975 16,843
--------------------------------------
Income before income taxes 8,939 14 20,912
Income taxes (benefit) (NOTE 7) 1,458 (1,711) 6,417
--------------------------------------
Net income $ 7,481 $ 1,725 $14,495
--------------------------------------
--------------------------------------
Income per common share and common
share equivalent $58.33 $13.74 $114.84
--------------------------------------
--------------------------------------
Number of shares used in per share
calculation 128,259 125,536 126,222
--------------------------------------
--------------------------------------
SEE ACCOMPANYING NOTES.
F8
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Consolidated Statements of Changes in Other Shareholders' Equity
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION
PAID-IN RETAINED ON INVESTMENTS,
CAPITAL EARNINGS NET OF TOTAL
INCOME TAXES
----------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993, as originally reported $12,770 $58,523 $ 2,690 $73,983
Adjustments for pooling of interests:
Equity of Medical Liability Mutual Insurance Company 346 4,054 283 4,683
Pro forma distribution to holding company from
subsidiary for assumed issuance of Class A
Common Stock (415) - - (415)
----------------------------------------------------
Balance at December 31, 1993, restated 12,701 62,577 2,973 78,251
Increase in unrealized appreciation, net of income
tax, resulting from initial adoption of
SFAS No. 115 (NOTE 1) - - 7,762 7,762
Net income - 14,495 - 14,495
Net loss of Midwest Medical Insurance Holding
Company includable in Class A Common Stock
redemption value - 487 - 487
Dividend declared by subsidiary payable to Midwest
Medical Insurance Holding Company - (1,181) - (1,181)
Decrease in unrealized appreciation, net of
income tax - - (10,379) (10,379)
Adjustment to pro forma distribution to holding
company from subsidiary to reflect change in
number of Class A common shares issued and
net redemption value per share 33 - - 33
----------------------------------------------------
Balance at December 31, 1994 (carried forward) 12,734 76,378 356 89,468
</TABLE>
F9
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Consolidated Statements of Changes in Other Shareholders' Equity (continued)
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION
PAID-IN RETAINED ON INVESTMENTS,
CAPITAL EARNINGS NET OF TOTAL
INCOME TAXES
----------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 (brought forward) $12,734 $76,378 $ 356 $ 89,468
Net income - 1,725 - 1,725
Net loss of Midwest Medical Insurance Holding
Company includable in Class A Common Stock
redemption value - 387 - 387
Dividend declared by subsidiary payable to Midwest
Medical Insurance Holding Company - (260) - (260)
Increase in unrealized appreciation, net of
income tax - - 11,936 11,936
Adjustment to pro forma combination of Midwest
Medical Insurance Holding Company and Medical
Liability Mutual Insurance Company - (26) 7 (19)
Adjustment to pro forma distribution to holding
company from subsidiary to reflect change in
number of Class A common shares issued and net
redemption value per share 55 - - 55
----------------------------------------------------
Balance at December 31, 1995 12,789 78,204 12,299 103,292
Net income - 7,481 - 7,481
Net income of Midwest Medical Insurance Holding
Company includable in Class A Common Stock
redemption value - (1,070) - (1,070)
Increase in unrealized appreciation, net of
income tax - - 1,575 1,575
----------------------------------------------------
Balance at December 31, 1996 $12,789 $84,615 $13,874 $111,278
----------------------------------------------------
----------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F10
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Consolidated Statements of Cash Flows
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
--------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 7,481 $ 1,725 $14,495
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Decrease (increase) in accrued investment income 97 (50) (76)
Decrease (increase) in reinsurance recoverable 2,938 (1,475) (5,324)
Decrease (increase) in other assets 1,015 (1,898) (1,690)
Deferred tax provision 298 482 426
(Decrease) increase in unpaid losses and loss
adjustment expenses (10,227) 9,297 (12,454)
Decrease in unearned premiums (173) (281) (3,917)
(Decrease) increase in retrospective premiums (26) (3,171) 11,255
Decrease in amounts due reinsurers (544) (1,287) (1,316)
(Decrease) increase in other liabilities (236) 469 (1,359)
Accretion of bond discount, net of premium amortization (1,080) (1,087) (1,160)
Realized capital (gains) losses (1,771) (1,646) 455
Compensation expense for vested Class A common shares 156 193 310
--------------------------------------
(2,072) 1,271 (355)
INVESTING ACTIVITIES
Purchases of fixed maturity investments and equity
securities (75,684) (56,345) (51,445)
Sales of fixed maturity investments and equity
securities 54,293 52,545 44,616
Calls and maturities of fixed maturity investments 16,250 7,535 10,859
Net sales (purchases) of short-term investments 7,117 (5,261) (2,326)
--------------------------------------
1,976 (1,526) 1,704
FINANCING ACTIVITIES
Redemption of Class A Common Stock (608) (829) (840)
--------------------------------------
(Decrease) increase in cash (704) (1,084) 509
Cash at beginning of year 704 1,788 1,279
--------------------------------------
Cash at end of year $ - $ 704 $ 1,788
--------------------------------------
--------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F11
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1996
1. Accounting Policies
ORGANIZATION AND OPERATIONS
The Minnesota Medical Insurance Exchange (Exchange) began operations in October
1980 as a reciprocal or inter-insurance exchange organized under Chapter 71A of
the Minnesota Statutes. Minnesota Medical Management, Inc. (MMMI) was the
Exchange's attorney-in-fact and was responsible for management of the Exchange.
On November 30, 1988, the Exchange was reorganized into a stock insurance
company, Midwest Medical Insurance Company (MMIC), under the statutes of the
State of Minnesota. Concurrently, MMMI merged with the Midwest Medical Insurance
Holding Company (MMIHC) which then acquired all outstanding shares of the
reorganized stock company.
Effective July 1, 1993, MMIC merged with Iowa Physicians Mutual Insurance Trust
(IPMIT), a physician-owned professional liability insurance company providing
insurance coverage to Iowa physicians. As provided for in the agreement and plan
of merger, IPMIT was merged into MMIC. The merger was accounted for as a
pooling-of-interests and, accordingly, the consolidated financial statements
include the combined financial position and results of operations of MMIHC and
IPMIT for all periods presented.
During 1995, MMIHC formed MMIHC Services, Inc. to provide agency services for
the distribution of complementary insurance products and services to physicians,
clinics and hospitals.
Effective June 5, 1996, MMIC merged with Medical Liability Mutual Insurance
Company of Nebraska (MLM), a physician-owned professional liability insurance
company providing insurance coverage to Nebraska physicians. As provided for in
the agreement and plan of merger, MLM was merged into MMIC. The merger was
accounted for as a pooling-of-interests and, accordingly, the consolidated
financial statements include the combined financial position and results of
operations of MMIHC and MLM for all periods presented (see Note 2).
F12
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
The holding company provides management and administrative services to the
insurance company for a fee generally equal to the cost of services provided
plus ten percent. The insurance company provides professional liability
insurance to physicians in Minnesota, Iowa, Nebraska, North Dakota and South
Dakota.
Insurance policies issued by MMIC are on a "claims made" basis and provide
coverage for the policyholder for claims first made against the policyholder and
reported to MMIC during the policy period for claims which occurred on or after
the retroactive date stated in the policy.
MMIC provides, upon payment of an additional premium, a reporting endorsement
which extends the period in which claims otherwise covered by the "claims made"
policy may be reported to MMIC. In the event of death or permanent disability of
a policyholder, the reporting endorsement is issued without additional premium.
Upon retirement, as defined in the policy, a policyholder with at least five
years of consecutive coverage with MMIC is eligible for a credit toward the
additional premium for the reporting endorsement.
Prior acts coverage may be purchased by policyholders who were previously
insured under a "claims made" policy with another professional liability insurer
for an additional premium at the option of the insured in lieu of purchasing
reporting endorsement coverage from the previous insurer.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of MMIHC and its
wholly-owned subsidiaries, MMIC and MMIHC Services, Inc. All transactions
between MMIHC and its subsidiaries have been eliminated in consolidation with
the exception of the distribution of capital to MMIHC by MMIC in the form of
dividends. From time to time the Board of Directors of MMIC may declare
dividends payable to MMIHC in lieu of adjusting the management fee rate.
Hereafter, MMIHC, MMIC and MMIHC Services, Inc. shall be collectively referred
to as the Company unless the reference pertains to a specific entity.
F13
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
BASIS OF PRESENTATION
The consolidated financial statements have been presented in conformity with
generally accepted accounting principles, which differ in certain respects from
statutory accounting practices followed by MMIC in reporting to the Department
of Commerce of the State of Minnesota (see Note 11).
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles 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.
On January 1, 1994, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". Consistent with management's classification of its investments 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 separate
component of equity, net of applicable deferred taxes. As a result of the
initial adoption of SFAS No. 115, the balance of redeemable stock and other
shareholders' equity increased by $8,000 and $7,762,000, respectively, on
January 1, 1994.
F14
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
Prior to January 1, 1994, fixed maturity investments were carried at the lower
of aggregate amortized cost or market. Unrealized losses on the fixed maturity
portfolio are recorded as a component of equity, net of applicable deferred
taxes. Equity securities are recorded at market. Unrealized gains and losses are
reported as a component of equity, net of applicable deferred taxes.
Fair values are based on quoted market prices, where available. For fixed
maturity investments not actively traded, fair values are estimated using values
obtained from independent pricing services. Short-term investments are
principally money market funds backed by U.S. government securities and are
recorded at cost which approximates fair value.
Realized gains and losses on sales of investments are reported on a pre-tax
basis as a component of income and are determined on the specific identification
basis.
LOSSES AND LOSS ADJUSTMENT EXPENSES
The liability for losses and loss adjustment expenses represents an estimate of
the ultimate cost of all such amounts which are unpaid at the balance sheet
dates. The liability is based on both case-by-case estimates and statistical
analysis and projections using the historical loss experience of MMIC, and gives
effect to estimates of trends in claim severity and frequency. These estimates
are continually reviewed and, as adjustments become necessary, such adjustments
are included in current operations. MMIC believes that the estimate of the
liability for losses and loss adjustment expenses is reasonable.
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 the
Company'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.
F15
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
The Company has a retro premium program whereby physicians may receive credits
against future premiums based upon loss experience of the Company. Amounts to be
returned under the program are accrued when approved by the Board of Directors
and reflected as a reduction in net premium earned.
REINSURANCE
The Company cedes reinsurance in order to reduce its liability on individual
risks and to enable it to write business at limits it otherwise would be unable
to accept. All reinsurance contracts are excess-of-loss contracts which
indemnify the Company for losses in excess of a stated retention limit up to the
policy limits.
Reinsurance receivables and recoverables and prepaid reinsurance premiums are
reported as assets and reserve liabilities are reported gross of reinsurance
credits.
UNDERWRITING EXPENSES
Underwriting costs are expensed when incurred. Due to the nature of its
operations, MMIC does not pay significant amounts in commissions.
INCOME TAXES
The Company uses the asset and liability method of accounting for income taxes.
Deferred income tax assets or liabilities are recognized for the temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and amounts used for income tax purposes.
EARNINGS PER SHARE
Earnings per share is computed using weighted average issued and outstanding
Class A common shares as well as Class A common share equivalents. All earned
but unissued shares of Class A Common Stock (see Note 3) are considered common
share equivalents for purposes of the earnings per share computation.
F16
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain amounts in the prior years' financial statements have been reclassified
to conform with the 1996 presentation.
2. BUSINESS COMBINATION
Effective June 5, 1996, MLM policyholders received, in exchange for their
ownership interests, 5,447 shares of MMIHC Class A Common Shares which was
computed by dividing the December 31, 1995 GAAP basis capital and surplus of MLM
by the net book value per share of MMIHC. These shares were distributed to the
MLM policyholders ratably in proportion to their ownership of shares of MLM
Common Stock. To maintain the net redemption value of the Class A Common Shares
(see Note 3), a dividend in the amount of $327,000 was paid by MMIC to MMIHC at
the time of the merger. Net premiums earned, losses and loss adjustment expenses
and net income for the individual entities for the period ended December 31,
1995 were as follows (in thousands):
MMIHC MLM ADJUSTMENTS COMBINED
-------------------------------------
Net premium earned $27,981 $1,817 $ - $29,798
Losses and loss adjustment expenses 35,472 2,088 - 37,560
Net income 1,425 (172) 472 1,725
In order to restate the components of shareholders' equity and determine the
restated income per common share and common share equivalent, management
computed the number of shares that would have been issued to MLM policyholders
as of December 31, 1995, 1994 and 1993 as if the effective date of the merger
had been as of those dates, respectively. Following is that computation (dollars
in thousands, except for share and per share amounts).
F17
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. BUSINESS COMBINATION (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31
DECEMBER 31 1994 1993
-------------------------
<S> <C> <C> <C>
Redeemable stock and other shareholders' equity of
MMIHC and subsidiaries $ 104,667 $ 92,365 $ 81,173
Divided by MMIHC Class A Common Shares outstanding 110,804 111,067 108,945
---------------------------------------
Net book value per share $ 944.61 $ 831.62 $ 745.08
---------------------------------------
---------------------------------------
Capital and surplus of MLM $ 5,145 $ 4,814 $ 4,683
Divided by MMIHC net book value per share $ 944.61 $ 831.62 $ 745.08
---------------------------------------
Shares to be issued to MLM policyholders 5,447 5,788 6,285
Multiplied by net redemption value of MMIHC
Class A Shares $ 60.00 $ 66.00 $ 66.00
---------------------------------------
Dividend from MMIC to MMIHC to maintain pre-merger
net redemption value $ 327 $ 382 $ 415
---------------------------------------
---------------------------------------
</TABLE>
A provision of the agreement and plan of merger requires that any favorable
development of certain pre-merger liabilities of MLM be paid to the former MLM
policyholders who remain active MMIC insureds as of the date of payment through
a retrospective premium credit. The agreement further stipulates that any
amounts due under this provision must be settled no later than June 5, 2001. As
of December 31, 1996, there has been no favorable development and therefore
there is no accrual related to this provision.
3. REDEEMABLE STOCK
Effective November 30, 1988, MMIC policyholders earn Class A Common Shares for
each month of service pursuant to a stock allocation formula based on
underwriting risk classification. Shares earned by new policyholders are not
issued until the end of five years of continuous coverage under an MMIC policy
(the vesting date). The Company does not record any amounts related to unissued
Class A Common Shares. At the vesting date, the issued shares are recorded at
the then current redemption value (see Note 12).
F18
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. REDEEMABLE STOCK (CONTINUED)
The Company accounts for these shares by increasing Common Stock by the par
value ($.01 per share) of the newly issued shares, increasing paid-in capital by
the excess of the redemption value over par and charging stock compensation
expense for the full redemption value. Once vested, policyholders will continue
to earn shares for each month they remain insured with MMIC according to the
stock allocation formula. The Company accounts for additional shares issued to
vested policyholders by increasing Common Stock for the par value of the shares
and decreasing retained earnings by the same amount.
MMIC policyholders whose initial effective date was on or before the November
30, 1988 reorganization, IPMIT policyholders whose initial effective date was on
or before December 31, 1992 and MLM policyholders whose initial effective date
was on or before December 31, 1995 became fully vested upon initial receipt of
their shares without regard to their length of coverage. These policyholders
will continue to earn and receive additional Class A shares for each month they
remain insured with MMIC. The Company accounts for these shares similar to
additional shares issued to other fully vested shareholders.
In accordance with the Articles of Incorporation and By-laws of MMIHC, only
active policyholders of MMIC may own shares of Class A Common Stock of MMIHC. At
each meeting of the shareholders, every Class A shareholder having the right to
vote shall be entitled to one vote, either in person or by proxy, regardless of
the number of Class A shares held by the individual.
Class A shareholders are required to redeem their shares with MMIHC upon
termination as policyholders of MMIC. The net redemption value (NRV) of the
shares is equal to the net book value of MMIHC, excluding the amount of net book
value that is attributable to MMIC, divided by the number of outstanding Class
A Common Shares of MMIHC at the semi-annual valuation dates of June 30 and
December 31 of each year. The amount paid upon redemption is the redemption
value determined at the most recent semi-annual valuation.
F19
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. REDEEMABLE STOCK (CONTINUED)
MMIHC has issued one share of Class B voting stock which carries with it the
right to elect the Board of Directors of MMIHC. The voting rights are currently
exercised by the Minnesota Medical Association and the Iowa Medical Society. A
majority of the Class A shareholders may at any time, by a two-thirds vote,
elect to redeem the Class B share at cost.
The schedule which follows has been restated for the merger of MMIC with MLM.
The schedule was further restated in that redemption of shares due to
policyholder termination has been changed for all periods to reclassify a pro
rata portion of each redemption to paid-in capital with the remainder to
retained earnings. As originally presented in prior years, each redemption was
charged entirely to retained earnings.
F20
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. REDEEMABLE STOCK (CONTINUED)
Following is the detail of changes in redeemable stock for the three years ended
December 31, 1996 (in thousands, except for share and per share amounts):
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION
(DEPRECIATION)
CLASS A COMMON STOCK CLASS B MMIHC MMIHC ON INVESTMENTS,
-------------------- COMMON PAID-IN RETAINED NET OF INCOME
SHARES AMOUNT STOCK CAPITAL EARNINGS TAXES TOTAL
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994, as originally reported with
redemptions reclassified 108,945 $1 $1 $3,380 $3,808 $ - $7,190
Pro forma issuance of shares to MLM policyholders as if
the merger with MMIC became effective on January 1,
1994 (NOTE 2) 6,285 415 415
------------------------------------------------------------------------
Balance at January 1, 1994, restated 115,230 1 1 3,795 3,808 - 7,605
Unrealized appreciation, net of income tax, resulting
from initial adoption of SFAS No. 115 (NOTE 1) 8 8
Redemption of shares due to policyholder terminations
by effective date:
January 1, 1994 to June 30, 1994; NRV of $66.00 (7,974) (247) (279) (526)
July 1, 1994 to December 31, 1994; NRV of $67.04 (4,666) (1) (148) (165) (314)
Issuance of shares to vested policyholders 10,140 1 (1) -
Initial issuance of shares to policyholders upon vesting 4,622 310 310
Dividend receivable from Midwest Medical Insurance
Company 1,181 1,181
Net loss of Midwest Medical Insurance Holding
Company includable in Class A Common Stock
redemption value (487) (487)
Change in unrealized appreciation, net of income tax (32) (32)
Adjustment to pro forma issuance of shares to MLM
policyholders to adjust effective date to December 31,
1994 (497) (33) (33)
------------------------------------------------------------------------
Balance at December 31, 1994 (carried forward) 116,855 1 1 4,858 2,876 (24) 7,712
</TABLE>
F21
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. REDEEMABLE STOCK (CONTINUED)
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION
(DEPRECIATION)
CLASS A COMMON STOCK CLASS B MMIHC MMIHC ON INVESTMENTS,
-------------------- COMMON PAID-IN RETAINED NET OF INCOME
SHARES AMOUNT STOCK CAPITAL EARNINGS TAXES TOTAL
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 (brought forward) 116,855 $1 $1 $4,858 $2,876 $(24) $7,712
Redemption of shares due to policyholder terminations
by effective date:
January 1, 1995 to June 30, 1995; NRV of $66.00 (8,017) (323) (207) (530)
July 1, 1995 to December 31, 1995; NRV of $67.65 (4,407) (1) (181) (117) (299)
Issuance of shares to vested policyholders 9,271 1 (1) -
Initial issuance of shares to policyholders upon vesting 2,890 193 193
Dividend receivable from Midwest Medical Insurance
Company 260 260
Net loss of Midwest Medical Insurance Holding
Company includable in Class A Common Stock
redemption value (387) (387)
Change in unrealized appreciation, net of income tax 81 81
Adjustment to pro forma issuance of shares to MLM
policyholders to adjust effective date to December 31,
1995 (341) (55) (55)
------------------------------------------------------------------------
Balance at December 31, 1995 116,251 1 1 4,752 2,164 57 6,975
Redemption of shares due to policyholder terminations
by effective date:
January 1, 1996 to June 30, 1996; NRV of $60.00 (6,277) (1) (259) (117) (377)
July 1, 1996 to December 31, 1996; NRV of $57.84 (3,995) (159) (72) (231)
Issuance of shares to vested policyholders 9,540 1 (1) -
Initial issuance of shares to policyholders upon vesting 2,690 156 156
Net income of Midwest Medical Insurance Holding
Company includable in Class A Common Stock
redemption value 1,070 1,070
Change in unrealized appreciation, net of income tax 11 11
------------------------------------------------------------------------
Balance at December 31, 1996 118,209 $1 $1 $4,490 $3,044 $ 68 $7,604
------------------------------------------------------------------------
------------------------------------------------------------------------
</TABLE>
F22
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. INVESTMENTS
Components of net investment income are summarized as follows (in thousands):
1996 1995 1994
------------------------------------
Fixed maturities $11,561 $11,716 $11,953
Equity securities 380 338 288
Short-term investments 904 923 487
------------------------------------
12,845 12,977 12,728
Investment expenses (633) (766) (733)
-------------------------------------
$12,212 $12,211 $11,995
------------------------------------
------------------------------------
The cost (amortized cost for fixed maturities) and fair value of available for
sale investments are as follows (in thousands):
DECEMBER 31, 1996
-------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-------------------------------------------------
Fixed maturities:
MMIHC:
Industrial and other $ 1,031 $ 4 $ (2) $ 1,033
MMIC:
United States Government 92,365 2,075 (797) 93,643
State and other political
subdivisions 57,968 1,885 (45) 59,808
Industrial and other 28,615 648 (186) 29,077
-------------------------------------------------
Total $ 179,979 $ 4,612 $ (1,030) $ 183,561
-------------------------------------------------
-------------------------------------------------
Equity securities $ 20,237 $18,183 $ (419) $ 38,001
-------------------------------------------------
-------------------------------------------------
F23
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. INVESTMENTS (CONTINUED)
DECEMBER 31, 1995
-------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-------------------------------------------------
Fixed maturities:
MMIHC:
Industrial and other $ 847 $ 4 $ - $ 851
MMIC:
United States Government 96,826 4,933 (179) 101,580
State and other political
subdivisions 64,894 2,795 (41) 67,648
Industrial and other 11,977 761 - 12,738
-------------------------------------------------
Total $ 174,544 $ 8,493 $ (220) $ 182,817
-------------------------------------------------
-------------------------------------------------
Equity securities $ 17,670 $10,825 $ (184) $ 28,311
-------------------------------------------------
-------------------------------------------------
The components of the unrealized appreciation on available for sale securities
as of December 31 are as follows (in thousands):
1996 1995
------------------------ -----------------------
MMIHC MMIC MMIHC MMIC
------------------------ -----------------------
Fixed maturities:
Gross unrealized gains $4 $ 4,608 $4 $ 8,489
Gross unrealized losses (2) (1,028) - (220)
Equity securities:
Gross unrealized gains - 18,183 - 10,825
Gross unrealized losses - (419) - (184)
------------------------ -----------------------
2 21,344 4 18,910
Deferred income taxes - (7,470) - (6,611)
------------------------ -----------------------
$2 $ 13,874 $4 $ 12,299
------------------------ -----------------------
------------------------ -----------------------
F24
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. INVESTMENTS (CONTINUED)
In addition to the unrealized gains and losses per the above schedule, MMIHC has
unrealized gains on certain investments in mutual funds. The mutual fund assets
are classified as other assets in the consolidated balance sheet and are held to
coordinate with the Supplemental Executive Retirement Plan obligation (Note 10).
At December 31, 1996 and 1995, respectively, gross unrealized gains related to
these assets were $103,000 and $84,000. Deferred taxes related to these
unrealized gains were $37,000 and $31,000, respectively.
The amortized cost and market value of fixed maturities at December 31, 1996, by
contractual maturity, are shown below (in thousands). Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
AMORTIZED MARKET
COST VALUE
---------------------------------
Due in one year or less $ 7,477 $ 7,514
Due after one year through five years 79,456 81,736
Due after five years through ten years 65,380 66,576
Due after ten years 27,666 27,735
---------------------------------
$ 179,979 $ 183,561
---------------------------------
---------------------------------
F25
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. INVESTMENTS (CONTINUED)
Proceeds from sales of available for sale investments and the related gross
realized gains and losses are as follows (in thousands):
GROSS GROSS
PROCEEDS REALIZED REALIZED
FROM SALES GAINS LOSSES
--------------------------------
Year ended December 31, 1996:
Fixed maturities $46,735 $ 803 $(214)
Equity securities 7,558 1,347 (165)
Year ended December 31, 1995:
Fixed maturities 43,387 1,012 (254)
Equity securities 9,158 1,356 (468)
Year ended December 31, 1994:
Fixed maturities 37,647 509 (652)
Equity securities 6,969 472 (784)
Net unrealized appreciation of fixed maturities (decreased) increased by
$(4,691,000), $11,630 and $(15,610,000) and net unrealized appreciation of
equity securities increased by $7,123,000, $6,078,000 and $232,000 for the years
ended December 31, 1996, 1995 and 1994, respectively.
5. RETROSPECTIVE PREMIUMS
The components of retrospective premiums at December 31 are as follows (in
thousands):
1996 1995
--------------------------
Retrospective premium credits declared:
Minnesota policyholders $ 4,603 $ 5,200
Iowa policyholders active at date of merger
and renewing in 1995 2,500 2,300
Favorable development on pre-merger IPMIT
liabilities not yet approved for credit 3,735 3,364
--------------------------
$10,838 $10,864
--------------------------
--------------------------
F26
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
A provision of the agreement and plan of merger between IPMIT and the Company
requires that any favorable development of certain pre-merger liabilities of
IPMIT be paid to the former IPMIT policyholders who remain active MMIC insureds
as of the date of payment through a retrospective premium credit. The agreement
further stipulates that any amounts due under this provision must be settled no
later than December 31, 1998. Actual payments of $2,330,000 and $3,017,000 were
made to former IPMIT policyholders in 1996 and 1995, respectively. Actual
retrospective premium credits applied to Minnesota policyholder accounts in 1996
and 1995 were $5,198,000 and $6,076,000, respectively.
6. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
The reconciliation of the liability for unpaid losses and loss adjustment
expenses is as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
--------------------------------
<S> <C> <C> <C>
Balance as of January 1, net of reinsurance
recoverables $ 96,424 $ 88,227 $105,589
Incurred related to:
Current year 41,101 39,847 36,275
Prior years (8,844) (2,287) (24,941)
--------------------------------
Total incurred 32,257 37,560 11,334
Paid related to:
Current year 4,885 2,484 3,445
Prior years 33,454 26,879 25,251
--------------------------------
Total paid 38,339 29,363 28,696
--------------------------------
Balance as of December 31, net of reinsurance
recoverables 90,342 96,424 88,227
Reinsurance recoverables at December 31 19,695 23,840 22,740
--------------------------------
Balance as of December 31, gross $110,037 $120,264 $110,967
--------------------------------
--------------------------------
</TABLE>
F27
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The Company continually evaluates emerging trends in the development of loss
liabilities including the trends related to the pre-merger IPMIT business. Based
on this analysis, management periodically adjusts their estimates of ultimate
losses. See Note 5 regarding retrospective premium credits paid and accrued.
7. INCOME TAXES
Components of income taxes are as follows (in thousands):
1996 1995 1994
-------------------------------
Current provision (benefit) $1,160 $(2,193) $5,991
Deferred tax provision 298 482 426
-------------------------------
$1,458 $(1,711) $6,417
-------------------------------
-------------------------------
The Company's income taxes differ from the federal statutory rate applied to
income before tax as follows (in thousands):
1996 1995 1994
-------------------------------
Income before tax at the federal statutory rate
of 35% $3,129 $ 5 $7,319
Tax-exempt income (net of proration adjustment) (1,452) (1,090) (1,104)
State income taxes, net of federal tax benefit 50 (42) 603
Proceeds on life insurance (368) - -
Benefit for prior year income taxes - (660) (316)
Other 99 76 (85)
-------------------------------
$1,458 $(1,711) $6,417
-------------------------------
-------------------------------
F28
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. INCOME TAXES (CONTINUED)
The deferred income tax (benefit) provision includes the following differences
between financial and income tax reporting (in thousands):
1996 1995 1994
------------------------
Discounting of post-1986 unpaid losses and loss
adjustment expenses $1,190 $232 $1,540
Liabilities not currently deductible (274) 481 (1,571)
Unearned premiums 6 22 277
Alternative minimum tax carryforwards (496) - -
Other (128) (253) 180
------------------------
$ 298 $482 $ 426
------------------------
------------------------
The Company made income tax payments of $3,260,000, $832,000 and $8,065,000, in
1996, 1995 and 1994, respectively.
The components of the net deferred income tax asset as of December 31 are as
follows (in thousands):
1996 1995
-------------------
Deferred tax assets:
Unpaid losses and loss adjustment expenses $5,319 $6,509
Liabilities not currently deductible 2,311 2,037
Unearned premiums 534 540
Alternative minimum tax credit 496 -
Other 510 442
-------------------
9,170 9,528
Deferred tax liabilities:
Unrealized gains (7,507) (6,642)
Other (533) (582)
-------------------
(8,040) (7,224)
-------------------
$1,130 $2,304
-------------------
-------------------
F29
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. REINSURANCE
Management has determined that no valuation allowances were necessary for
unrealizable portions of deferred tax assets. This was supported primarily
through the presence of taxable income in carryback years and reversals of
existing temporary differences which provide taxable income in future years. A
portion of the deferred tax assets was supported through reliance on available
tax planning strategies which could be implemented at no cost.
To reduce overall risk, including exposure to large losses, the Company
participates in various reinsurance programs. MMIC would only become liable for
losses in excess of stipulated amounts in the event that any reinsuring company
were unable to meet its obligations under the existing agreement. Management is
not aware of any such default at December 31, 1996. Reinsurance recoverables on
paid and unpaid losses of $17,485,000 and $18,967,000 are associated with a
single reinsurer at December 31, 1996 and 1995, respectively.
MMIC is authorized to issue policies with limits not to exceed $5,000,000 for
each claim and $5,000,000 in the aggregate under each policy in any one policy
year. Limits in excess of $5,000,000 for each claim and $5,000,000 annual
aggregate are available to physicians and clinics through reinsurance handled by
MMIC. The Company generally retains the first $750,000 of each claim and
reinsures the remainder. In years prior to 1995, retention levels for a portion
of MMIC's business varied from $200,000 to $500,000.
Total ceded reinsurance premiums, before the effects of treaty commutations, for
the years ended December 31, 1996, 1995 and 1994 were $6,416,000, $7,544,000 and
$8,704,000, respectively. Loss and loss adjustment expenses incurred are net of
applicable reinsurance of $2,459,000, $7,873,000 and $8,025,000 for the years
ended December 31, 1996, 1995 and 1994, respectively.
In 1996, the Company commuted reinsurance treaties covering the period January
1, 1989 through December 31, 1990. Net premiums recovered as a result of these
commutations of $2,194,000 have been included in net premiums earned in 1996.
F30
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. OTHER COMMITMENTS
In the normal course of claim settlement, MMIC negotiates structured settlements
including the purchase of annuities from life insurance companies with an A+
rating from A.M. Best (an industry rating organization) at the date of issue and
a minimum of $100_million in surplus. These annuities guarantee a stream of
payments to the claimant holding the annuity. The majority of these settlements
have been assigned to the life insurance company which releases MMIC from any
future contractual liability to the claimant. MMIC and its reinsurers could only
become liable for ultimate settlement of those claims which have not been
assigned. At December 31, 1996 and 1995, respectively, non-assigned structured
settlements guaranteed $5,926,000 and $4,087,000 of payments under annuity
contracts for which MMIC and its reinsurers paid $3,208,000 and $1,833,000. In
the event that the insurance company issuing the annuity was unable to meet its
obligation under the terms provided, MMIC would be liable for the ultimate
settlement.
10. BENEFIT PLANS
The Company has a non-contributory defined contribution pension plan covering
substantially all employees. Contributions to the plan are based upon each
covered employee's salary. The Company also sponsors a 401(k) plan covering
substantially all employees and provides a fifty percent match on employee
contributions subject to certain limitations. Total contributions charged to
expense for the years ended December 31, 1996, 1995 and 1994 were $371,000,
$294,000 and $283,000, respectively.
The Company provides an unfunded Supplemental Executive Retirement Plan (SERP)
which is a non-qualified, defined benefit retirement plan covering certain
Company officers. Benefits are based upon years of service and compensation.
Although the plan is technically unfunded, the Company has purchased life
insurance contracts for each officer, the cash value of which is designed to
coordinate with the projected benefit payments under the SERP. The cash value of
these contracts is included in other assets. The net periodic pension cost for
this plan was $323,000, $292,000 and $266,000 for the years ended December 31,
1996, 1995 and 1994, respectively. The liability recognized in the consolidated
balance sheets at December 31, 1996 and 1995 related to this plan was $1,909,000
and $1,643,000, respectively.
F31
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. BENEFIT PLANS (CONTINUED)
The Company 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, 1996, 1995 and
1994 was $30,000, $25,000 and $38,000, respectively. As of December 31, 1996 and
1995, the net post-retirement benefit plan asset recognized in the consolidated
balance sheets was $12,000 and $116,000, respectively. The plan is funded
through contributions to mutual funds.
11. RECONCILIATION WITH STATUTORY ACCOUNTING PRINCIPLES
The following is a reconciliation of net income and shareholders' equity under
generally accepted accounting principles with that reported for MMIC on a
statutory basis (in thousands):
Net Income
YEAR ENDED DECEMBER 31
1996 1995 1994
-------------------------------
As reported under generally accepted
accounting principles $7,481 $1,725 $14,495
MMIHC (income) loss (1,070) 387 487
-------------------------------
On the basis of generally accepted
accounting principles, MMIC only 6,411 2,112 14,982
Additions (deductions):
Deferred income taxes 445 442 524
Other 123 (215) -
-------------------------------
On the basis of statutory accounting
principles $6,979 $2,339 $15,506
-------------------------------
-------------------------------
F32
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. RECONCILIATION WITH STATUTORY ACCOUNTING PRINCIPLES (CONTINUED)
Shareholders' Equity
DECEMBER 31
1996 1995 1994
-----------------------------------
As reported under generally accepted
accounting principles $111,278 $103,292 $89,468
Additions (deductions):
Deferred income taxes (590) (2,015) (8,875)
Unrealized (gain) loss on fixed maturities
(3,580) (8,269) 3,771
Pro forma equity distributed to MMIHC
in connection with pooling - 327 382
Other (41) (14) 157
-----------------------------------
On the basis of statutory accounting
principles $107,067 $ 93,321 $84,903
-----------------------------------
-----------------------------------
The equity of MMIHC, exclusive of the carrying value of its investment in MMIC,
is subject to redemption and therefore reported outside of shareholders' equity
under the caption redeemable stock. As a result, consolidated other
shareholders' equity as reported on the balance sheets represents equity of MMIC
only under generally accepted accounting principles.
Under Minnesota insurance statutes, MMIC is required to maintain statutory
surplus in excess of ten times its per occurrence reinsurance retention limit.
The minimum level is $7,500,000 for 1996 and 1995.
F33
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. NET REDEMPTION VALUE
The net redemption value per share of the Class A common shares was as follows:
CLASS A NET REDEMPTION
MMIHC COMMON SHARES VALUE PER
NET EQUITY OUTSTANDING SHARE
----------------------------------------
(000'S)
December 31, 1992 $7,230 110,333* $65.53
------------ ---------
------------ ---------
December 31, 1993 $7,605 115,230* $66.00
------------ ---------
------------ ---------
December 31, 1994 $7,712 116,855* $66.00
------------ ---------
------------ ---------
December 31, 1995 $6,975 116,251* $60.00
------------ ---------
------------ ---------
December 31, 1996 $7,604 118,209 $64.33
------------ ---------
------------ ---------
* Includes pro forma shares related to merger.
F34
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
(Parent Company)
Schedule II--Condensed Financial Information of Registrant
Balance Sheets
DECEMBER 31
1996 1995
---------------------
---------------------
(IN THOUSANDS)
ASSETS
Fixed maturities $ 1,032 $ 851
Short-term investments 4,183 5,521
Investment in subsidiary 111,278 103,292
Accrued investment income 45 57
Dividend receivable - 587
Other 5,399 3,787
---------------------
Total assets $121,937 $114,095
---------------------
---------------------
LIABILITIES, REDEEMABLE STOCK AND
OTHER SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable $ 22 $ 986
Accrued expenses and other liabilities 3,033 2,842
---------------------
3,055 3,828
REDEEMABLE STOCK
Class A Common Stock 7,603 6,674
Class B Common Stock 1 1
---------------------
7,604 6,975
OTHER SHAREHOLDERS' EQUITY
Additional paid-in capital 12,789 12,789
Retained earnings, comprised of undistributed earnings of
subsidiary 84,615 78,204
Unrealized appreciation on investments, net of income
taxes 13,874 12,299
---------------------
111,278 103,292
---------------------
$121,937 $114,095
---------------------
---------------------
SEE ACCOMPANYING NOTE.
F35
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
(Parent Company)
Schedule II--Condensed Financial Information of Registrant (continued)
Statements of Income
YEAR ENDED DECEMBER 31
1996 1995 1994
-----------------------------------
-----------------------------------
(IN THOUSANDS)
REVENUES
Management fee from subsidiary $8,706 $5,405 $ 4,931
Investment income 726 704 238
Other income (loss) 4 17 (49)
-----------------------------------
9,436 6,126 5,120
EXPENSES
Operating and administrative 8,357 6,783 5,968
-----------------------------------
Income (loss) before income taxes and
other items 1,079 (657) (848)
Income tax expense (benefit) 9 (270) (361)
-----------------------------------
Income (loss) before equity in undis-
tributed income of subsidiary 1,070 (387) (487)
Equity in undistributed income of
subsidiary 6,411 2,112 14,982
-----------------------------------
Net income $7,481 $1,725 $14,495
-----------------------------------
-----------------------------------
SEE ACCOMPANYING NOTE.
F36
<PAGE>
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
1996 1995 1994
---------------------------
---------------------------
(IN THOUSANDS)
Net cash (used in) provided by operating activities $ (877) $ 1,184 $ (155)
INVESTING ACTIVITIES
Purchase of fixed maturities (20,469) (670) (2,200)
Sales of fixed maturities 20,289 1,833 3,642
Calls and maturities of fixed maturities - 240 -
Sales purchases of short-term investments, net 1,338 (1,758) (447)
FINANCING ACTIVITIES
Redemption of Class A Common Stock (608) (829) (840)
Dividend from MMIC in connection with merger 327 - -
---------------------------
Change in cash - - -
Cash at beginning of year - - -
---------------------------
Cash at end of year $ - $ - $ -
---------------------------
---------------------------
SEE ACCOMPANYING NOTE.
F37
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
(Parent Company)
Schedule II--Condensed Financial Information of Registrant (continued)
Note to Condensed Financial Statements
December 31, 1996
The accompanying condensed financial statements should be read in conjunction
with the consolidated financial statements and notes thereto of Midwest Medical
Insurance Holding Company and Subsidiaries.
See Note 3 to the consolidated financial statements of Midwest Medical Insurance
Holding Company and Subsidiaries for a description of the redeemable stock.
F38
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Schedule IV--Reinsurance
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E COL. F
- ---------------------------------------------------------------------------------------------------
PERCENTAGE OF
CEDED TO ASSUMED AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
- ---------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Insurance premiums:
Property/casualty insurance $34,875 $2,829 $ - $32,046 N/A
Year ended December 31, 1995:
Insurance premiums:
Property/casualty insurance 37,342 7,544 - 29,798 N/A
Year ended December 31, 1994:
Insurance premiums:
Property/casualty insurance 34,950 8,704 - 26,246 N/A
</TABLE>
NOTE TO SCHEDULE IV:
Ceded premiums for the years ended December 31, 1996, 1995 and 1994 are net of
reductions (additions) in ceded premiums related to swing rated reinsurance
treaties of $748,000, $(260,000), and $(346,000), respectively. Ceded premiums
in 1996 are also net of proceeds from commutations of reinsurance covering the
period January 1, 1987 through December 31, 1990 of $2,194,000.
F39
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Schedule VI--Supplemental Information Concerning Property/Casualty
Insurance Operations
<TABLE>
<CAPTION>
DECEMBER 31 YEAR ENDED DECEMBER 31
----------------------------------------------------- -------------------------------------------------
COL. A COL. B COL. C COL. D COL. E COL. F COL. G COL. H
- ------------------------------------------------------------------ -------------------------------------------------
LOSSES AND LOSS
ADJUSTMENT EXPENSES
RESERVES FOR INCURRED RELATED TO
DEFERRED UNPAID LOSSES DISCOUNT, -----------------------
AFFILIATION POLICY AND LOSS IF ANY, NET (1) (2)
WITH ACQUISITION ADJUSTMENT DEDUCTED IN UNEARNED EARNED INVESTMENT CURRENT PRIOR
REGISTRANT COSTS EXPENSES COLUMN C PREMIUMS PREMIUMS INCOME YEAR YEAR
- ---------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated
property/
casualty
entities
1996 N/A $110,037 N/A $6,860 $32,046 $12,212 $41,101 $(8,844)
1995 N/A 120,264 N/A 7,033 29,798 12,211 39,847 (2,287)
1994 26,246 11,995 36,275 (24,941)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
- ---------------------------------------------------------------
COL. A COL. I COL. J COL. K
- ---------------------------------------------------------------
AMORTIZATION PAID
OF DEFERRED LOSSES
AFFILIATION POLICY AND LOSS
WITH ACQUISITION ADJUSTMENT PREMIUMS
REGISTRANT COSTS EXPENSES WRITTEN
- ---------------------------------------------------------------
<S> <C> <C> <C>
Consolidated
property/ casualty
entities
1996 N/A $38,339 $32,036
1995 N/A 29,363 35,519
1994 N/A 28,696 28,462
</TABLE>
F40
<PAGE>
APPENDIX
MIDWEST MEDICAL INSURANCE COMPANY
Allocation Formula for Class A Common Shares
Number of Shares Per Full Year Insured*
(Calculations Are Based On Number of Days Insured)
<TABLE>
<CAPTION>
1985
CLASS THRU 1992 TO
CLASS DESCRIPTION 1990 1991 PRESENT
- ----- ----------- ---- ---- -------
<S> <C> <C> <C> <C>
1A Psychiatry - No ECT .720 .780 .840
Pathology
Occupational Medicine
Physical Medicine and Rehab.
1 Family Practice - no surg 1.200 1.200 1.200
Surgical Specialists - office
practice only - no surg.
Administrative Medicine
Radiology - no invasive procedures
Dermatology - no surg.
Pediatrics - no surg.
1C Internal Medicine - all (Class 1 prior to 1-1-89) 1.584 1.440 1.440
subspecialities - no surg.
no invasive procedures
Neurology - no surg. (Class 1 prior to 1-1-89)
no invasive procedures
2 Ophthalmology - inc. surg. (Class 3 prior to 1-1-89) 2.160 1.920 1.800
Family Practice - minor surg.
No OB
Internal Medicine - all
subspecialities minor surg.
Neurology - minor surg.
Dermatology - minor surg.
Pathology - minor surg.
Pediatrics - minor surg.
3 Family Practice - inc. OB 3.672 3.00 2.520
no C-Sections
Emergency Medicine
Internal Medicine - all
subspecialities - major risk
</TABLE>
* SUBJECT TO REDUCTION FOR PHYSICIANS PRACTICING IN NEBRASKA. SEE "THE
OFFERING".
A1
<PAGE>
NUMBER OF SHARES PER FULL YEAR INSURED*
(CALCULATIONS ARE BASED ON NUMBER OF DAYS INSURED)
<TABLE>
<CAPTION>
1985
CLASS THRU 1992 TO
CLASS DESCRIPTION 1990 1991 PRESENT
- ----- ----------- ---- ---- -------
<S> <C> <C> <C> <C>
procedures
Neurology - major risk
procedures
Colon & Rectal Surgery
Radiology - inc. radiation
therapy
Dermatolory - inc. radiation
therapy
Psychiatry - inc. ECT
Urological Surgery (Class 4 prior to 1-1-89)
Neonatology
Pediatrics - major risk
procedures
4 Family Practice -
inc. OB & C Sections 4.897 3.900 3.120
General Surgery (Class 5 prior to 1-1-89)
Anesthesiology (Class 5 prior to 1-1-89)
Otorhinolaryngological
Surgery
5 Plastic Surgery (Class 6 prior to 1-1-89) 6.121 5.400 4.800
Gynecological Surgery
Foot & Ankle Surgery (New Class since 1-1-91)
Oral Maxillofacial Surgery
6 Cardiac Surgery 7.321 6.900 6.600
Thoracic Surgery (Class 7 prior to 1-1-89)
Vascular Surgery (Class 7 prior to 1-1-89)
Cardiovascular Surgery
OB & GYN - inc. surgery
Hand Surgery
Head & Neck Surgery
7 Orthopedic Surgery 9.000 9.000 7.800
Trauma Surgery
8 Neurological Surgery 12.000 12.600 10.800
</TABLE>
A2
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following are the estimated expenses to be paid by the Company in connection
with the distribution of the securities being registered. All such expenses are
estimated, except for the SEC registration fee:
SEC registration fee . . . . . . . . . . . . . . . . . . . . . . . $4,572.72
Accounting fees and expenses . . . . . . . . . . . . . . . . . . . 10,000.00
Legal fees and expenses. . . . . . . . . . . . . . . . . . . . . . .10,000.00
Printing and engraving expenses. . . . . . . . . . . . . . . . . . .10,000.00
Blue Sky fees and expenses . . . . . . . . . . . . . . . . . . . . . 5,000.00
Miscellaneous expenses . . . . . . . . . . . . . . . . . . . . . . . 1,427.28
----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $41,000.00
----------
----------
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article X of the Bylaws of the registrant provides that each director, officer,
and employee shall be indemnified for expenses and liabilities in the manner,
under the circumstances, and to the extent permitted by Minnesota Statutes,
Section 302A.521, as amended from time to time.
Minnesota Statutes, Section 302A.521, generally requires a corporation to
indemnity its directors, officers, and employees against judgments, penalties,
fines, and expenses, including attorney's fees, incurred in connection with
their official capacities, provided that such person (i) has not been
indemnified by another with respect to the same matter, (ii) acted in good
faith, (iii) received no improper personal benefit, (iv) had no reasonable cause
to believe that his conduct was unlawful, and (v) reasonably believed that his
conduct was in the best interests of the corporation.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The registrant has made no sales of unregistered securities in the last three
years.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
(1) 2A. Plan and Agreement of Merger between the Company and IPMIT,
without exhibits (Form S-4, Exhibit 3C).
(3) 2B. Plan and Agreement of Merger between the Company and Medical
Liability Mutual Insurance Company, dated August 15, 1996,
without exhibits.
(1) 3A. Restated Articles of Incorporation of the registrant (Form S-4,
Exhibit 3C).
II-1
<PAGE>
(1) 3B. Bylaws of the registrant, as amended (Form S-4, Exhibit 3D).
* 5. Opinion and Consent of Charles A. Geer, Esq.
(1) 9. Voting Trust Agreement between the Minnesota Medical
Association and the Iowa Medical Society.
(1) 10A. Governance Agreement between the registrant and the Minnesota
Medical Association, holder of the registrant's Class B Common
Share, dated November 30, 1988.
(1) 10B. Lease for office space between the registrant and Lexington
Property Fund, L.P. Limited Partnership, dated March 26, 1991.
10C. Amended and Restated Management Agreement between the
registrant and Midwest Medical Insurance Company dated
January 1, 1996. (Incorporated herein by reference to the
Annual Report on Form 10-K, SEC file number 0-21230, filed
by registrant for the year ended December 31, 1996.)
(1) 10D. Agency Agreement with Vaaler Insurance, Inc. pursuant to which
Vaaler acts as agent of MMIC in North Dakota, dated April 21,
1989.
(1) 10E. Agreement of Reinsurance between Midwest Medical Insurance
Company and General Reinsurance Corporation, dated March 3,
1992.
(2) 10F. Letter 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.
(1) 10G. Executive Bonus Plan of the registrant.
(1) 10H. Supplemental Executive Retirement Plan of the registrant.
10I. Agency Agreement with IMS Services, Inc. pursuant to which
IMS acts as agent of MMIC in Iowa, dated July 1, 1993.
(Incorporated herein by reference to the Report on Form 10-K
filed by the registrant for the fiscal year ended December
31, 1993, file number 0-21230.)
*10J. Form of Termination Agreement with Executive Officers.
(1) 21. Subsidiaries of the registrant.
* 23A. Consent of Ernst & Young LLP
* 24. Powers of Attorney.
(1) Incorporated herein by reference to the registration statement on
Form S-4, file number 33-55062, filed by registrant on November
25, 1993, as amended.
II-2
<PAGE>
(2) Incorporated herein by reference to the registration statement on
Form S-1, SEC file number 33-70182, filed by registrant on
October 12, 1993, as amended.
(3) Incorporated herein by reference to the registration statement on
Form S-4, SEC file number 333-00134, filed by registrant on
January 10, 1996, as amended.
(*) Filed herewith.
(b) Financial Statement Schedules.
The following financial statement schedules of Midwest Medical
Insurance Holding Company and subsidiary required by Regulation S-X and
Form S-1 are filed as part of this Registration Statement:
II. Condensed Financial Information of Registrant (Parent
Company)--Balance Sheets--December 31, 1996 and 1995, Statements of
Income--For the Years Ended December 31, 1996 and 1995 and 1994; and,
Statements of Cash Flows--For the Years Ended December 31, 1996, 1995 and
1994. Included in "FINANCIAL STATEMENTS" Section of Prospectus filed
herewith.
IV. Reinsurance Summary for the Years Ended December 31, 1996, 1995 and
1994. Included in "FINANCIAL STATEMENTS" section of Prospectus filed
herewith.
VI. Supplemental Information Concerning Property/Casualty Insurance
Operations--December 31, 1996 and 1995, and for Each of the Three Years in
the Period Ended December 31, 1998. Included in "FINANCIAL STATEMENTS"
section of Prospectus filed herewith.
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate,
represent a fundamental change in the information set
forth in the registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement.
II-3
<PAGE>
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold
at the termination of the offering.
(4) If the registrant is a foreign private issuer, to file a
post-effective amendment to the registrant statement to include any
financial statements required by 3-19 of Regulation S-X at the start
of any delayed offering or throughout a continuous offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Minneapolis, State of
Minnesota, on June 12, 1997.
MIDWEST MEDICAL INSURANCE HOLDING COMPANY
By: /s/ David P. Bounk
-------------------
David P. Bounk, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on June 12, 1997.
SIGNATURE CAPACITY
- --------- --------
/s/ David P. Bounk Principal Executive Officer and Director
- -------------------------
David P. Bounk
/s/ Merlin R. Bretzman Principal Financial Officer and
- ------------------------- Principal Accounting Officer
Merlin R. Bretzman
* Director, Chairman of the Board
- -------------------------
Andrew J.K. Smith, M.D.
* Director
- -------------------------
Michael Abrams
* Director
- -------------------------
John R. Balfanz, M.D.
* Director
- -------------------------
Gail P. Bender, M.D.
* Director
- -------------------------
James R. Bishop, M.D.
* Director
- -------------------------
E. Duane Engstrom, M.D.
* Director
- -------------------------
William Eversman, M.D.
* Director
- -------------------------
Roger L. Frerichs, M.D.
* Director
- -------------------------
G. Richard Geier, M.D.
* Director
- -------------------------
Anthony C. Jaspers, M.D.
* Director
- -------------------------
Wayne F. Leebaw, M.D.
* Director
- -------------------------
Stephen A. McCue, M.D.
II-5
<PAGE>
* Director
- -------------------------
Harold W. Miller, M.D.
* Director
- -------------------------
Anton S. Nesse, M.D.
* Director
- -------------------------
Mark D. Odlund, M.D.
* Director
- -------------------------
G. William Orr, M.D.
* Director
- -------------------------
Norman Rinderknecht, M.D.
* Director
- -------------------------
Paul S. Sanders, M.D.
* Director
- -------------------------
Richard D. Schmidt, M.D.
* Director
- -------------------------
Mark B. Siegel, M.D
* Director
- -------------------------
G. David Spoelhof, M.D.
* Director
- -------------------------
Bruce R. Trimble, M.D.
*By: /s/ David P. Bounk
----------------------
David P. Bounk pursuant to
power of attorney
The above persons signing as directors constitute all of the directors of the
registrant.
II-6
<PAGE>
EXHIBIT INDEX
Exhibit Page
- ------- ----
5. Opinion of Charles A. Geer, Esq.
10J. Form of Termination Agreement with Executive Officers
23. Consent of Ernst & Young LLP
24. Powers of Attorney.
<PAGE>
Exhibit 5
LETTERHEAD OF CHARLES A. GEER
June 11, 1997
Midwest Medical Insurance Holding Company
6600 France Avenue South, Suite 245
Minneapolis, Minnesota 55435-1891
Ladies and Gentlemen:
You have requested my opinion with regard to the legality of the proposed
offering by Midwest Medical Insurance Holding Company (the "Company") of up to
15,000 shares of the Company's Class A common stock to be issued in the two
years following May 1, 1997 to insureds of its wholly owned subsidiary, Midwest
Medical Insurance Company, pursuant to a registration statement on Form S-1
filed under Securities and Exchange Commission Rule 415.
I have examined the Restated Articles of Incorporation of the Company, the
Amended Bylaws of the Company, the minutes of all meetings of the directors of
the Company in which any action was taken pertaining to the issuance of the
shares to be registered, the Registration Statement on Form S-1, all amendments
to the Registration Statement, and other matters deemed relevant by me.
Based upon examination of the foregoing documents and questions of law as I have
deemed applicable, I am of the following opinion:
1. That the Company is a corporation duly organized and existing under
the laws of the State of Minnesota.
<PAGE>
2. That the shares to be offered by the Company in connection with the
proposed offering, when issued upon the terms and in the manner set forth in the
Registration Statement and related prospectus, will by duly authorized, legally
issued, fully paid and non assessable share of the Company's Class A common
stock.
I hereby consent to the inclusion of this letter as part of the Registration
Statement referred to above, and any amendments thereto, and the use of my name
under the caption "Legal Matters" in the Prospectus forming a part of the
Registration Statement.
Very truly yours,
/s/ Charles A. Geer
Charles A. Geer
<PAGE>
Exhibit 10J
TERMINATION AGREEMENT
This Agreement is made as of the 31st day of December, 1996, between
Midwest Medical Insurance Holding Company, a Minnesota corporation, with its
principal offices at 6600 France Avenue South (the "Company") and
_______________________ ("Employee").
W I T N E S S E T H T H A T:
WHEREAS, this Agreement is intended to specify the financial arrangements
that the Company will provide to the Employee upon Employee's separation from
employment with the Company under any of the circumstances described herein; and
WHEREAS, this Agreement is entered into by the Company on authority of its
Board of Directors, in the belief that it is in the best interests of the
Company and its shareholders to provide stable conditions of employment for
Employee in all circumstances including a change in control of the Company, and
other circumstances, thereby enhancing the Company's ability to attract and
retain highly qualified people.
NOW, THEREFORE, to assure the Company that it will have the continued
dedication of Employee and to induce Employee to remain the employ of the
Company, and for other good and valuable consideration, the Company and Employee
agree as follows:
1. TERM OF AGREEMENT. The term of this Agreement shall commence on the
later of the date hereof as written above and the first anniversary of
Employee's employment by the Company and shall continue through December 31,
1997; PROVIDED THAT commencing on January 1, 1998 and each January 1 thereafter,
the term of this Agreement shall automatically be extended for one additional
year unless not later than September 30 of the preceding year; the Company shall
have given notice that it does not wish to extend this Agreement; and PROVIDED,
FURTHER, THAT notwithstanding any such notice by the Company not to extend, this
Agreement shall continue in effect for a period of 17 months beyond the date of
a Change of Control (as defined in Section 3(i) hereof) if such a change occurs
during the term of this Agreement.
2. TERMINATION OF EMPLOYMENT
(i) PRIOR TO A CHANGE IN CONTROL. Prior to a Change in Control (as
defined in Section 3(i) hereof), and subject to the terms of any employment
agreement which may exist between Employee and the Company, which has been duly
executed by the Chief Executive and/or Chairman of the Company on its behalf
("Employment Agreement"), the Company
<PAGE>
may terminate Employee from employment with the Company at will, with or without
Cause (as defined in Section 3(iii) hereof), at any time, subject only to
payments as provided in Section 4(ii).
(ii) AFTER A CHANGE IN CONTROL.
(a) From and after the date of a Change in Control during the
term of this Agreement (as defined in Section 3(i) hereof), and subject
to the terms of any employment agreement which may exist between Employee
and the Company, which has been duly executed by the Chief Executive
and/or Chairman of the Company on its behalf ("Employment Agreement"),
the Company shall not terminate Employee from employment with the Company
except as provided in this Section 2(ii) or as a result of Employee's
Disability (as defined in Section 3(iv).
(b) From and after the date of a Change in Control during the
term of this Agreement, the Company shall have the right to terminate
Employee from employment with the Company at any time for Cause, by
written notice to the Employee, specifying the particulars of the conduct
of Employee forming the basis for such termination.
(c) From and after the date of a Change in Control during the
term of this Agreement:
(aa) the Company shall have the right to terminate Employee's
employment without Cause, at any time, and Employee, upon the
occurrence of such a termination by the Company without Cause, shall
be entitled to receive the benefits provided in Section 4(iii) hereof;
(bb) the Employee shall also be entitled to receive the
benefits provided in Section 4(iii) hereof upon the voluntary
termination for Good Reason (as defined in Section 3(ii) hereof) of
Employee's employment by Employee, subject to Section 13, and
PROVIDED THAT at the time of such termination such Employee has
continued in the employ of Company four, but not more than five,
months following the date of such Change of Control;
(cc) the Employee shall also be entitled to receive the
benefits provided in Section 4(iii) hereof upon the voluntary
termination without Good Reason of Employee's employment by
Employee, subject to Section 13, and PROVIDED THAT (i) Good Reason
(as defined in Section 3(ii) hereof) existed at the time of a Change
in Control and Employee did not elect to terminate, and (ii) at the
time of such termination such Employee has continued in the employ
of Company 16, but not more than 17, months following the date of
such Change of Control.
Employee shall evidence a voluntary termination by written notice setting forth
in reasonable detail the proposed termination date and the facts and
circumstances claimed by the Employee to constitute Good Reason, if the Employee
claims the termination is for Good Reason, given to the Company at least 20 days
before the effectiveness of such a termination.
<PAGE>
3. DEFINITIONS.
(i) A "Change in Control" shall mean:
(a) The sale of all or substantially all of the assets of the
Company; or the liquidation or dissolution of the Company;
(b) Any person, or persons, who do not own Class A Common Shares of
Company at the date of this Agreement become the "beneficial owner" (as
defined in Rule 13d-3 promulgated under the Securities Exchange Act of
1934, as amended), directly or indirectly, of securities of the Company
representing 35% or more of the combined voting power of the Company's then
outstanding securities, other than by issuance of shares by the Company in
the ordinary course of its business;
(c) The Continuing Directors (as defined in Section 3(v) hereof)
cease to constitute a majority of the Company's Board of Directors; or
(d) The majority of the Continuing Directors (as defined in Section
3(v)hereof) determine in their sole and absolute discretion that there has
been a change in control of the Company.
(ii) "Good Reason" shall mean the occurrence of any of the following
events, except for the occurrence of such an event in connection with the
termination or reassignment of Employee's employment by the Company for Cause
(as defined in Section 3(iii) hereof), for Disability (as defined in Section
3(iv) hereof) or for death:
(a) the assignment to Employee of employment responsibilities
which are not of comparable responsibility and status as the employment
responsibilities held by Employee immediately prior to a Change in
Control;
(b) a reduction by the Company in Employee's base salary as in
effect immediately prior to a Change in Control;
(c) the Company's requiring Employee to be based anywhere other
than within 100 miles of Employee's office location immediately prior to
a Change in Control, except for requirements of temporary travel on the
Company's business to an extent substantially consistent with Employee's
business travel obligations immediately prior to a Change in Control;
(d) the amendment, modification or elimination of the Company's
benefit (as defined in Section 3(vi)) in any way which would materially and
substantially reduce Employee's entitlements thereunder and which is
discriminatory vis a vis Employee when compared with other employees of
like circumstances or which is not part of a Company-wide change in
Benefits applicable to all employees; or
(e) the failure by the Company to obtain, as specified in Section
5(i) hereof, an assumption of the obligations of the Company to perform
this Agreement by any successor to the Company.
(iii) "Cause" shall mean termination by the Company of Employee's
employment based upon (a) willful and continued failure by Employee
substantially to perform his duties and
<PAGE>
obligations (other than any such failure resulting from his incapacity due to
physical or mental illness or any such actual or anticipated failure resulting
from Employee's termination for Good Reason) or (b) the willful engaging by
Employee in misconduct which is materially injurious to the Company, monetarily
or otherwise. For purposes of this Section 3(iii), no action or failure to act
on Employee's part shall be considered "willful" unless done, or omitted to be
done, by Employee in bad faith and without reasonable belief that his action or
omission was in the best interests of the Company.
(iv) "Disability" shall mean any physical or mental condition which would
qualify Employee for a disability benefit under the Company's long-term
disability plan.
(v) "Continuing Director" shall mean any person who is a member of the
Board of Directors of the Company immediately prior to a Change of Control.
(vi) "Benefits" shall mean the Company's bonus, incentive compensation,
qualified pension or retirement plans, health, accident, disability and life
insurance plans.
4. PAYMENTS UPON TERMINATION OF EMPLOYMENT
(i) PAYMENTS UPON VOLUNTARY TERMINATION. Upon the voluntary termination
of employment, except pursuant to Section 2(ii)(c), or as required by law,
Employee shall not be entitled to any payments, Benefits or payments with
respect to Benefits, except as required by law.
(ii) PAYMENTS PRIOR TO CHANGE OF CONTROL. Upon the involuntary termination
of employment pursuant to Section 2(i) for Cause or by reason of Disability or
death, Employee shall not be entitled to any payments, Benefits or payments with
respect to Benefits, except as required by law.
Upon the involuntary termination of employment pursuant to Section 2(i)
without Cause, Employee shall be entitled to receive, as severance pay, the
payments specified in this Section 4 (ii). Except as otherwise provided, the
amounts due to Employee under subparagraphs (a) - (c) of this Section 4(ii)
shall be paid to Employee not later than one business day after the date that
the termination of Employee's employment becomes effective. All payments to
Employee pursuant to this Section 4(ii) shall be subject to any applicable
payroll or other taxes required by law to be withheld. Required payments
include, payment of which is subject to Section 13:
(a) the full base salary earned by him and unpaid through the date
that the termination of Employee's employment becomes effective, at the
rate in effect at the time written notice of termination was given.
(b) any amount earned by Employee as a bonus with respect to the
fiscal year of the Company preceding the termination of his employment if
such bonus has not theretofore been paid to Employee; PROVIDED, THAT
Employee shall not be entitled to any bonus payment with respect to the
fiscal year including the termination of his employment, whether accrued or
not.
(c) an amount representing credit for any vacation earned or accrued
by him but not taken.
<PAGE>
(d) on a monthly basis, an amount equal to Employee's monthly base
salary (as in effect in the month preceding the month in which the
termination becomes effective) during the month in which the termination
becomes effective and during each month thereafter for an aggregate of
three and three-quarters (3.75) months plus the number of months equal to
one-twelfth of the number of total months of Employee's employment by
Employer, up to a maximum of 11.25 months total, and subject to Section
4(iv) and (v).
(e) No Benefits, or payments with respect to Benefits, shall be
provided beyond the month of termination, except as required by law.
(iii) PAYMENTS AFTER CHANGE OF CONTROL. Upon the termination
(voluntary or involuntary) of the employment of Employee pursuant to Section
2(ii)(c) hereof, other than a technical termination which is followed by
re-employment by any successor to the business or assets of Company, Employee
shall be entitled to receive, as severance payments, the payments specified in
this Section 4(iii). The amounts due to Employee under subparagraph (a) - (e)
of this Section 4(iii) shall be paid to Employee not later than one business day
after the date that the termination of Employee's employment becomes effective.
All payments to Employee pursuant to this Section 4(iii) shall be subject to any
applicable payroll or other taxes required by law to be withheld. Required
payments include, payment of which is subject to Section 13:
(a) The full base salary earned by him and unpaid through the date
that the termination of Employee's employment becomes effective, at the
rate in effect at the time written notice of termination (voluntary or
involuntary) was given.
(b) Any amount earned by Employee as a bonus with respect to the
fiscal year of the Company preceding the termination of his employment if
such bonus has not theretofore been paid to Employee.
(c) Any amount accrued by Employee as a pro-rata bonus with respect
to the fiscal year of the Company including the termination of his
employment, which amount shall be determined by Company after the end of
such year and paid within ten business days after the date of
determination, but not later than March 31 of the ensuing fiscal year.
(d) An amount representing credit for any vacation earned or accrued
by him but not taken.
(e) The Company shall provide Employee with a fully paid up,
individual term life insurance policy in an initial face amount of three
times the Employee's base compensation at the date of termination, which
face amount shall reduce to 50% of the initial amount at age 65; provided,
however, that such policy must be available to the Company at a cost
reasonably comparable to the cost to purchase paid up term insurance under
the split-dollar policy now maintained on the life of Employee as a part of
his SERP account.
(f) On a monthly basis, an amount equal to Employee's monthly
base salary (as in effect in the month preceding the month in which the
termination becomes effective) during the month in which the termination
becomes effective and during each month thereafter, as follows:
(aa) If pursuant to Section 2(ii)(c)(aa) hereof, nine (9)
months plus the
<PAGE>
number of months equal to one-twelfth of the number of total months of
Employee's employment by Employer, up to a maximum of 24 months total, and
subject to Section 4(iv), (v) and (vi);
(bb) If pursuant to Section 2(ii)(c)(bb) hereof, six (6) months
plus the number of months equal to one-twelfth of the number of total
months of Employee's employment by Employer, up to a maximum of 18 months
total, and subject to Section 4(iv), (v) and (vi); provided, that, in the
event the Good Reason stated by Employee is a failure to relocate after
Employer has made a good faith offer to Employee which otherwise does not
provide Employee Good Cause except with respect to the relocation
requirement, three (3) months plus the number of months equal to
one-twelfth of the number of total months of Employee's employment by
Employer, up to a maximum of nine (9) months total;
(cc) If pursuant to Section 2(ii)(c)(cc) hereof, six (6) months
plus the number of months equal to one-twelfth of the number of total
months of Employee's employment by Employer, up to a maximum of 18 months
total, subject to Section 4(iv), (v) and (vi).
(g) So long as monthly payments are made under Section 4 (iii)(f),
Company shall provide and pay the cost of Benefits but shall have no obligation
to make payments past the date of termination of employment with respect to
supplemental benefit plans (including SERP and split dollar life insurance),
discriminatory plans or any qualified pension or retirement plans (including 401
K plans).
(iv) DUTY TO MITIGATE. In all situations of employment under this
Agreement, employee shall use his best, reasonable efforts to seek and obtain
employment reasonably comparable to his present employment and, upon
commencement of a new employment relationship, all payments, Benefits, and
payments with respect to Benefits hereunder, except as required by law, shall
terminate at the later of the month of commencement of such new
employment or the month representing the 50% of the maximum number of months of
payments under Section 4.
(v) ELIGIBILITY FOR RETIREMENT BENEFITS. All payments, Benefits, and
payments with respect to Benefits hereunder, to the extent enforceable and
except as required by law, shall terminate the earlier of the month Employee
becomes eligible for full retirement benefits under the Benefit and supplemental
benefit plans of the Company or the month Employee first accepts partial
benefits under such plans by reason of his retirement.
(vi) NON-COMPETITION; CONFIDENTIALITY; COMPETITIVE EMPLOYMENT. Upon
termination of employment under this Agreement, Employee shall be under no
restriction or limitation as to engaging in the insurance business in
competition with the Company or otherwise; provided, however, (i) that Employee
agrees not to use Company property, confidential or proprietary information
(i.e., customer lists, rates, forms, software, manuals or other written or
tangible materials) for his own account, and (ii) agrees that payments,
Benefits, or payments with respect to Benefits, except as required by law shall
terminate (xx) immediately upon commencement of a new employment relationship
with a company engaged in the medical malpractice business in one or more of the
states in which the Company actively conducted its business at the date of
termination of employment, and (yy) in the event Employee, during the 24 month
period following termination of employment solicits medical malpractice business
or otherwise competes with the Company, directly or indirectly, in the medical
malpractice business in the states in which the Company actively conducts its
business at the date of termination of employment.
<PAGE>
(vii) IRS SECTION 2M. In the event that any payment or benefit received
or to be received by Employee in connection with a Change in Control of the
Company or termination of Employee's employment (whether payable pursuant to the
terms of this Agreement or any other plan, contract, agreement or arrangement
with the Company, with any person whose actions result in a Change in Control of
the Company or with any person constituting a member of an "affiliated group" as
defined in Section 28OG(d)(5) of the Internal Revenue Code of 1986, as amended
(the "Code"), with the Company or with any person whose actions result in a
Change in Control of the Company (collectively, the "Total Payments")) would not
be deductible (in whole or in part) by the Company or such other person making
such payment or providing such benefit solely as a result of Section 28OG of the
Code, the amount payable to Employee pursuant to Section 4(i)(b) hereof shall be
reduced until no portion of the Total Payments is not deductible solely as a
result of Section 28OG of the Code or such amount payable to Employee pursuant
to Section 4(i)(b) is reduced to zero. For purposes of this limitation, (a) no
portion of the Total Payments the receipt or enjoyment of which Employee shall
have effectively waived in writing prior to the date of payment of the amount
pursuant to Section 4(i)(b) shall be taken into account; (b) no portion of the
Total Payments shall be taken into account which in the opinion of tax counsel
selected by the Company and acceptable to Employee does not constitute a
"parachute payment" within the meaning of Section 28OG(b)(2) of the Code; (c,)
the payment pursuant to Section 4(i)(b) shall be reduced only to the extent
necessary so that the Total Payment (other than those referred to in the
immediately preceding clause (b)) in their entirety constitute reasonable
compensation within the meaning of Section 28OC(b)(4)(B) of the Code, in the
opinion of the tax counsel referred to in the immediately preceding clause (b);
((i) the value of any benefit provided by Section 4(i)(d) of this Agreement
shall not be taken into account in computing Total Payments; and (e) the value
of any other noncash benefit or of any deferred cash payment included in the
Total Payments shall be determined by the Company's independent auditors in
accordance with the principles of Section 28OG(d)(3) and (4) of the Code. In
case of uncertainty as to whether all or some portion of a payment is or is not
payable to Employee under this Agreement the Company shall initially make the
payment to the Employee, and Employee agrees to refund to the Company any
amounts ultimately determined not to have been payable under the terms hereof
5. SUCCESSORS AND BINDING AGREEMENT
(i) The Company will require any successor (whether direct or
indirect, bypurchase, merger, consolidation or otherwise to all or substantially
all of the business and/or assets of the Company), by agreement in form and
substance satisfactory to Employee, to expressly assume and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place. Failure of the
Company to obtain such agreement prior to the effectiveness of any such
succession shall be a breach of this Agreement and shall entitle Employee to
compensation from the Company in the same amount and on the same terms as
Employee would be entitled hereunder if employee terminated his employment after
a Change in Control for Good Reason, except that for purposes of implementing
die foregoing, the date on which any succession becomes effective shall be
deemed the date that the termination of Employee's employment becomes effective.
As used in this Agreement, "Company" shall mean the Company and any successor to
its business and/or assets which executes and delivers the agreement provided
for in this Section 5(i) or which otherwise becomes bound by all terms and
provisions of this Agreement by operation of law.
(ii) This Agreement is personal to Employee, and Employee may not
assign or transfer any part of his rights or duties hereunder, or any
compensation due to him hereunder, to
<PAGE>
any other person. Notwithstanding the foregoing, this Agreement shall inure to
the benefit of and be enforceable by Employee's personal or legal
representatives, executors, administrators, heirs, distributes, devisees and
legatees.
6. ARBITRATION. Any dispute or controversy arising wider or in
connection with this Agreement shall be settled exclusively by arbitration in
the Minneapolis-St. Paul metropolitan area, in accordance with the applicable
rules of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court having jurisdiction.
7. MODIFICATION: WAIVER. No provisions of this Agreement may be
modified, waived or discharged unless such waiver, modification or discharge
is agreed to in a writing signed by Employee and such officer as may be
specifically designated by the Board of Directors of the Company. No waiver
by either party hereto at any time of any breach by the other party hereto
of, or compliance with, any condition or provision of this Agreement to be
performed by such other party shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or subsequent
time.
8. NOTICE. All notices, requests, demands and all other
communications required or permitted by either party to the other party by
this Agreement (including, without limitation, any notice of termination of
employment and any notice of an intention to arbitrate) shall be in writing
and shall be deemed to have been duly given when delivered personally or
received by certified or registered mail, return receipt requested, postage
prepaid, at the address of the other party, as first written above (directed
to the attention of the Board of Directors and Corporate Secretary in the
case of the Company). Either party hereto may change its address for
purposes of this Section 8 by giving 15 days' prior notice to the either
party hereto.
9. SEVERABILITY. If any term or provision of this Agreement or the
application hereof to any person or circumstances shall to any extent be
invalid or unenforceable, the remainder of this Agreement or the application
of such term or provision to persons or circumstances other than those as to
which it is held invalid or unenforceable shall not be affected thereby, and
each term and provision of this Agreement shall be valid and enforceable to
the fullest extent permitted by law.
10. COUNTERPARTS. This Agreement may be executed in several counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
11. GOVERNING LAW This Agreement has been executed and delivered in the
State of Minnesota and shall in all respects be governed by, and construed and
enforced in accordance with, the laws of the State of Minnesota, including all
matters of construction, validity and performance.
12. EFFECT OF AGREEMENT. The Company and the Employee understand and
agree that this Agreement is intended to reflect their agreement only with
respect to payments and benefits upon termination in certain cases and is not
intended to create any obligation on the part of either party to continue
employment. This Agreement supersedes any and all other oral or written
agreements or policies made relating to the subject matter hereof and
constitutes the entire agreement of the parties relating to the subject matter
hereof, PROVIDED, THAT this Agreement shall not supersede or limit in any way
Employee's rights under any written employment agreement or Company Benefits in
accordance with their terms.
<PAGE>
13. RELEASE. As an express condition to the right to receive payments
under this Agreement after termination of employment, Employee shall provide
Company with a release of any and all claims he may have against the Company
with respect to the circumstances surrounding his termination, or otherwise,
whether provided by law, contract, or otherwise; PROVIDED, THAT such release
shall not supersede or limit Employee's rights under any written Employment
Agreement or Benefits in accordance with their terms.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed, all as of the date first written above.
MIDWEST MEDICAL INSURANCE HOLDING COMPANY
By ______________________________
Andrew J.K. Smith, M.D.
By _______________________________
David P. Bounk
Its Chief Executive officer
Employee
______________________________________
77876.doc
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated January 31, 1997, in the Registration Statement (Form S-
1) and related Prospectus of Midwest Medical Insurance Holding Company and
Subsidiary dated June 11, 1997.
Ernst & Young LLP
Minneapolis, Minnesota
June 11, 1997
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
I, Andrew J.K. Smith, M.D., do hereby constitute and appoint David P. Bounk and
Merlin R. Bretzman, or either of them, my attorneys in fact for the purposes of
signing in my name and on my behalf as director of Midwest Medical Insurance
Holding Company, a registration statement on Form S-1 for the registration under
the Securities Act of 1933, as amended, of Class A common stock of the Company,
par value of $.01 per share, and any and all amendments to said registration
statement, and to deliver on my behalf said registration statement and any and
all amendments thereto, as each thereof is so signed, for filing with the
Securities and Exchange Commission.
Dated: April 1, 1997 /s/ Andrew J.K. Smith, M.D.
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<PAGE>
POWER OF ATTORNEY
I, Michael Abrams, M.D., do hereby constitute and appoint David P. Bounk and
Merlin R. Bretzman, or either of them, my attorneys in fact for the purposes of
signing in my name and on my behalf as director of Midwest Medical Insurance
Holding Company, a registration statement on Form S-1 for the registration under
the Securities Act of 1933, as amended, of Class A common stock of the Company,
par value of $.01 per share, and any and all amendments to said registration
statement, and to deliver on my behalf said registration statement and any and
all amendments thereto, as each thereof is so signed, for filing with the
Securities and Exchange Commission.
Dated: April 1, 1997 /s/ Michael Abrams, M.D.
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<PAGE>
POWER OF ATTORNEY
I, John R. Balfanz, M.D., do hereby constitute and appoint David P. Bounk and
Merlin R. Bretzman, or either of them, my attorneys in fact for the purposes of
signing in my name and on my behalf as director of Midwest Medical Insurance
Holding Company, a registration statement on Form S-1 for the registration under
the Securities Act of 1933, as amended, of Class A common stock of the Company,
par value of $.01 per share, and any and all amendments to said registration
statement, and to deliver on my behalf said registration statement and any and
all amendments thereto, as each thereof is so signed, for filing with the
Securities and Exchange Commission.
Dated: April 1, 1997 /s/ John R. Balfanz, M.D.
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<PAGE>
POWER OF ATTORNEY
I, Gail P. Bender, M.D., do hereby constitute and appoint David P. Bounk and
Merlin R. Bretzman, or either of them, my attorneys in fact for the purposes of
signing in my name and on my behalf as director of Midwest Medical Insurance
Holding Company, a registration statement on Form S-1 for the registration under
the Securities Act of 1933, as amended, of Class A common stock of the Company,
par value of $.01 per share, and any and all amendments to said registration
statement, and to deliver on my behalf said registration statement and any and
all amendments thereto, as each thereof is so signed, for filing with the
Securities and Exchange Commission.
Dated: April 1, 1997 /s/ Gail P. Bender, M.D.
------------------------------------------
<PAGE>
POWER OF ATTORNEY
I, James P. Bishop, M.D., do hereby constitute and appoint David P. Bounk and
Merlin R. Bretzman, or either of them, my attorneys in fact for the purposes of
signing in my name and on my behalf as director of Midwest Medical Insurance
Holding Company, a registration statement on Form S-1 for the registration under
the Securities Act of 1933, as amended, of Class A common stock of the Company,
par value of $.01 per share, and any and all amendments to said registration
statement, and to deliver on my behalf said registration statement and any and
all amendments thereto, as each thereof is so signed, for filing with the
Securities and Exchange Commission.
Dated: April 1, 1997 /s/ James P. Bishop, M.D.
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<PAGE>
POWER OF ATTORNEY
I, E. Duane Engstrom, M.D., do hereby constitute and appoint David P. Bounk and
Merlin R. Bretzman, or either of them, my attorneys in fact for the purposes of
signing in my name and on my behalf as director of Midwest Medical Insurance
Holding Company, a registration statement on Form S-1 for the registration under
the Securities Act of 1933, as amended, of Class A common stock of the Company,
par value of $.01 per share, and any and all amendments to said registration
statement, and to deliver on my behalf said registration statement and any and
all amendments thereto, as each thereof is so signed, for filing with the
Securities and Exchange Commission.
Dated: April 1, 1997 /s/ E. Duane Engstrom, M.D.
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<PAGE>
POWER OF ATTORNEY
I, William Eversman, M.D., do hereby constitute and appoint David P. Bounk and
Merlin R. Bretzman, or either of them, my attorneys in fact for the purposes of
signing in my name and on my behalf as director of Midwest Medical Insurance
Holding Company, a registration statement on Form S-1 for the registration under
the Securities Act of 1933, as amended, of Class A common stock of the Company,
par value of $.01 per share, and any and all amendments to said registration
statement, and to deliver on my behalf said registration statement and any and
all amendments thereto, as each thereof is so signed, for filing with the
Securities and Exchange Commission.
Dated: April 1, 1997 /s/ William Eversman, M.D.
------------------------------------------
<PAGE>
POWER OF ATTORNEY
I, Roger L. Frerichs, M.D., do hereby constitute and appoint David P. Bounk and
Merlin R. Bretzman, or either of them, my attorneys in fact for the purposes of
signing in my name and on my behalf as director of Midwest Medical Insurance
Holding Company, a registration statement on Form S-1 for the registration under
the Securities Act of 1933, as amended, of Class A common stock of the Company,
par value of $.01 per share, and any and all amendments to said registration
statement, and to deliver on my behalf said registration statement and any and
all amendments thereto, as each thereof is so signed, for filing with the
Securities and Exchange Commission.
Dated: April 1, 1997 /s/ Roger L. Frerichs, M.D.
------------------------------------------
<PAGE>
POWER OF ATTORNEY
I, G. Richard Geier, M.D., do hereby constitute and appoint David P. Bounk and
Merlin R. Bretzman, or either of them, my attorneys in fact for the purposes of
signing in my name and on my behalf as director of Midwest Medical Insurance
Holding Company, a registration statement on Form S-1 for the registration under
the Securities Act of 1933, as amended, of Class A common stock of the Company,
par value of $.01 per share, and any and all amendments to said registration
statement, and to deliver on my behalf said registration statement and any and
all amendments thereto, as each thereof is so signed, for filing with the
Securities and Exchange Commission.
Dated: April 1, 1997 /s/ G. Richard Geier, M.D.
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<PAGE>
POWER OF ATTORNEY
I, Anthony C. Jaspers, M.D., do hereby constitute and appoint David P. Bounk and
Merlin R. Bretzman, or either of them, my attorneys in fact for the purposes of
signing in my name and on my behalf as director of Midwest Medical Insurance
Holding Company, a registration statement on Form S-1 for the registration under
the Securities Act of 1933, as amended, of Class A common stock of the Company,
par value of $.01 per share, and any and all amendments to said registration
statement, and to deliver on my behalf said registration statement and any and
all amendments thereto, as each thereof is so signed, for filing with the
Securities and Exchange Commission.
Dated: April 1, 1997 /s/ Anthony C. Jaspers, M.D.
------------------------------------------
<PAGE>
POWER OF ATTORNEY
I, Wayne F. Leebaw, M.D., do hereby constitute and appoint David P. Bounk and
Merlin R. Bretzman, or either of them, my attorneys in fact for the purposes of
signing in my name and on my behalf as director of Midwest Medical Insurance
Holding Company, a registration statement on Form S-1 for the registration under
the Securities Act of 1933, as amended, of Class A common stock of the Company,
par value of $.01 per share, and any and all amendments to said registration
statement, and to deliver on my behalf said registration statement and any and
all amendments thereto, as each thereof is so signed, for filing with the
Securities and Exchange Commission.
Dated: April 1, 1997 /s/ Wayne F. Leebaw, M.D.
------------------------------------------
<PAGE>
POWER OF ATTORNEY
I, Stephen A. McCue, M.D., do hereby constitute and appoint David P. Bounk and
Merlin R. Bretzman, or either of them, my attorneys in fact for the purposes of
signing in my name and on my behalf as director of Midwest Medical Insurance
Holding Company, a registration statement on Form S-1 for the registration under
the Securities Act of 1933, as amended, of Class A common stock of the Company,
par value of $.01 per share, and any and all amendments to said registration
statement, and to deliver on my behalf said registration statement and any and
all amendments thereto, as each thereof is so signed, for filing with the
Securities and Exchange Commission.
Dated: April 1, 1997 /s/ Stephen A. McCue, M.D.
------------------------------------------
<PAGE>
POWER OF ATTORNEY
I, Harold W. Miller, M.D., do hereby constitute and appoint David P. Bounk and
Merlin R. Bretzman, or either of them, my attorneys in fact for the purposes of
signing in my name and on my behalf as director of Midwest Medical Insurance
Holding Company, a registration statement on Form S-1 for the registration under
the Securities Act of 1933, as amended, of Class A common stock of the Company,
par value of $.01 per share, and any and all amendments to said registration
statement, and to deliver on my behalf said registration statement and any and
all amendments thereto, as each thereof is so signed, for filing with the
Securities and Exchange Commission.
Dated: April 1, 1997 /s/ Harold W. Miller, M.D.
------------------------------------------
<PAGE>
POWER OF ATTORNEY
I, Anton S. Nesse, M.D., do hereby constitute and appoint David P. Bounk and
Merlin R. Bretzman, or either of them, my attorneys in fact for the purposes of
signing in my name and on my behalf as director of Midwest Medical Insurance
Holding Company, a registration statement on Form S-1 for the registration under
the Securities Act of 1933, as amended, of Class A common stock of the Company,
par value of $.01 per share, and any and all amendments to said registration
statement, and to deliver on my behalf said registration statement and any and
all amendments thereto, as each thereof is so signed, for filing with the
Securities and Exchange Commission.
Dated: April 1, 1997 /s/ Anton S. Nesse, M.D.
------------------------------------------
<PAGE>
POWER OF ATTORNEY
I, Mark D. Odlund, M.D., do hereby constitute and appoint David P. Bounk and
Merlin R. Bretzman, or either of them, my attorneys in fact for the purposes of
signing in my name and on my behalf as director of Midwest Medical Insurance
Holding Company, a registration statement on Form S-1 for the registration under
the Securities Act of 1933, as amended, of Class A common stock of the Company,
par value of $.01 per share, and any and all amendments to said registration
statement, and to deliver on my behalf said registration statement and any and
all amendments thereto, as each thereof is so signed, for filing with the
Securities and Exchange Commission.
Dated: April 1, 1997 /s/ Mark D. Odlund, M.D.
------------------------------------------
<PAGE>
POWER OF ATTORNEY
I, G. William Orr, M.D., do hereby constitute and appoint David P. Bounk and
Merlin R. Bretzman, or either of them, my attorneys in fact for the purposes of
signing in my name and on my behalf as director of Midwest Medical Insurance
Holding Company, a registration statement on Form S-1 for the registration under
the Securities Act of 1933, as amended, of Class A common stock of the Company,
par value of $.01 per share, and any and all amendments to said registration
statement, and to deliver on my behalf said registration statement and any and
all amendments thereto, as each thereof is so signed, for filing with the
Securities and Exchange Commission.
Dated: April 1, 1997 /s/ G. William Orr, M.D.
------------------------------------------
<PAGE>
POWER OF ATTORNEY
I, Norman Rinderknecht, M.D., do hereby constitute and appoint David P. Bounk
and Merlin R. Bretzman, or either of them, my attorneys in fact for the purposes
of signing in my name and on my behalf as director of Midwest Medical Insurance
Holding Company, a registration statement on Form S-1 for the registration under
the Securities Act of 1933, as amended, of Class A common stock of the Company,
par value of $.01 per share, and any and all amendments to said registration
statement, and to deliver on my behalf said registration statement and any and
all amendments thereto, as each thereof is so signed, for filing with the
Securities and Exchange Commission.
Dated: April 1, 1997 Norman Rinderknecht, M.D.
------------------------------------------
<PAGE>
POWER OF ATTORNEY
I, Paul S. Sanders, M.D., do hereby constitute and appoint David P. Bounk and
Merlin R. Bretzman, or either of them, my attorneys in fact for the purposes of
signing in my name and on my behalf as director of Midwest Medical Insurance
Holding Company, a registration statement on Form S-1 for the registration under
the Securities Act of 1933, as amended, of Class A common stock of the Company,
par value of $.01 per share, and any and all amendments to said registration
statement, and to deliver on my behalf said registration statement and any and
all amendments thereto, as each thereof is so signed, for filing with the
Securities and Exchange Commission.
Dated: April 1, 1997 /s/ Paul S. Sanders, M.D.
------------------------------------------
<PAGE>
POWER OF ATTORNEY
I, Richard D. Schmidt, M.D., do hereby constitute and appoint David P. Bounk and
Merlin R. Bretzman, or either of them, my attorneys in fact for the purposes of
signing in my name and on my behalf as director of Midwest Medical Insurance
Holding Company, a registration statement on Form S-1 for the registration under
the Securities Act of 1933, as amended, of Class A common stock of the Company,
par value of $.01 per share, and any and all amendments to said registration
statement, and to deliver on my behalf said registration statement and any and
all amendments thereto, as each thereof is so signed, for filing with the
Securities and Exchange Commission.
Dated: April 1, 1997 Richard D. Schmidt, M.D.
------------------------------------------
<PAGE>
POWER OF ATTORNEY
I, Mark B. Siegel, M.D., do hereby constitute and appoint David P. Bounk and
Merlin R. Bretzman, or either of them, my attorneys in fact for the purposes of
signing in my name and on my behalf as director of Midwest Medical Insurance
Holding Company, a registration statement on Form S-1 for the registration under
the Securities Act of 1933, as amended, of Class A common stock of the Company,
par value of $.01 per share, and any and all amendments to said registration
statement, and to deliver on my behalf said registration statement and any and
all amendments thereto, as each thereof is so signed, for filing with the
Securities and Exchange Commission.
Dated: April 1, 1997 /s/ Mark B. Siegel, M.D.
------------------------------------------
<PAGE>
POWER OF ATTORNEY
I, G. David Spoelhof, M.D., do hereby constitute and appoint David P. Bounk and
Merlin R. Bretzman, or either of them, my attorneys in fact for the purposes of
signing in my name and on my behalf as director of Midwest Medical Insurance
Holding Company, a registration statement on Form S-1 for the registration under
the Securities Act of 1933, as amended, of Class A common stock of the Company,
par value of $.01 per share, and any and all amendments to said registration
statement, and to deliver on my behalf said registration statement and any and
all amendments thereto, as each thereof is so signed, for filing with the
Securities and Exchange Commission.
Dated: April 1, 1997 /s/ G. David Spoelhof, M.D.
------------------------------------------
<PAGE>
POWER OF ATTORNEY
I, Bruce R. Trimble, M.D., do hereby constitute and appoint David P. Bounk and
Merlin R. Bretzman, or either of them, my attorneys in fact for the purposes of
signing in my name and on my behalf as director of Midwest Medical Insurance
Holding Company, a registration statement on Form S-1 for the registration under
the Securities Act of 1933, as amended, of Class A common stock of the Company,
par value of $.01 per share, and any and all amendments to said registration
statement, and to deliver on my behalf said registration statement and any and
all amendments thereto, as each thereof is so signed, for filing with the
Securities and Exchange Commission.
Dated: April 1, 1997 /s/ Bruce R. Trimble, M.D.
------------------------------------------
