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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Period Ended June 30, 1998.
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From to
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Commission file number 0-21230
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Midwest Medical Insurance Holding Company
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(Exact name of registrant as specified in its charter)
Minnesota 41-1625287
- ------------------------------ -------------------
(State or other jurisdiction (I.R.S. Employer of
incorporation or organization) Identification No.)
6600 France Ave., So., Suite 245
Minneapolis, Minnesota 55435-1891
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
612-922-5445
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(Registrant's telephone number, including area code)
Not applicable
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(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
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The number of shares outstanding of the issuer's classes of common stock, as
of June 30, 1998:
Class A Common Stock $.01 Par Value 123,270 shares
Class B Common Stock $1,000 Par Value-1 share
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INDEX
Midwest Medical Insurance Holding Company
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets - June 30, 1998 and December 31,
1997
Condensed consolidated statements of income - Six months ended
June 30, 1998 and 1997; Three months ended June 30, 1998 and 1997
Condensed consolidated statements of cash flows - Six months ended
June 30, 1998 and 1997
Notes to condensed consolidated financial statements - June 30, 1998
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Signatures
2
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Part I. Financial Information
Item 1. - Financial Statements
MIDWEST MEDICAL INSURANCE HOLDING COMPANY and SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30 December 31
1998 1997
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ASSETS (Unaudited) (Note)
<S> <C> <C>
Fixed maturity investments at fair value
(Amortized cost: 1998 $159,323;
1997 $170,590) $161,081 $171,975
Equity securities at fair value (cost:
1998 $38,323; 1997 $20,595) 76,400 49,759
Short-term investments 6,924 13,909
Other investments 10,000 10,000
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254,405 245,643
Cash (148) 2,378
Uncollected premiums - Note C 13,823 534
Ceded unearned premium 2,701 0
Accrued investment income 1,988 2,341
Reinsurance recoverable 17,403 19,117
Other assets 7,855 5,502
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$298,027 $275,515
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LIABILITIES, REDEEMABLE STOCK AND OTHER
SHAREHOLDERS' EQUITY
LIABILITIES
Unpaid losses and loss adjust. expenses $107,921 $107,806
Unearned premiums - Note C 27,080 6,072
Amounts due reinsurers 3,805 2,984
Retrospective premiums 1,832 9,905
Deferred income taxes 7,407 3,592
Other liabilities 6,101 11,389
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154,146 141,748
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REDEEMABLE STOCK
Class A Common Stock 6,742 7,476
Class B Common Stock 1 1
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6,743 7,477
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OTHER SHAREHOLDERS' EQUITY 137,138 126,290
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$298,027 $275,515
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</TABLE>
Note: The balance sheet at December 31, 1997 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See notes to condensed consolidated financial statements.
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MIDWEST MEDICAL INSURANCE HOLDING COMPANY and SUBSIDIARIES
Condensed Consolidated Statements of Income
(Dollars in thousands, except per share dollars)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30 June 30
------------------ -------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Net premiums earned $ 18,429 $ 17,789 $ 7,860 $ 9,425
Net investment income 5,874 6,031 2,706 3,039
Realized capital gains(loss) 4,197 (24) 1,133 172
Other 223 0 110 0
-------- -------- -------- --------
28,723 23,796 11,809 12,636
Losses and expenses:
Losses and loss adj. exp. 17,106 17,173 7,724 8,780
Other underwriting expenses 5,083 2,943 2,016 1,367
-------- -------- -------- --------
22,189 20,116 9,740 10,147
-------- -------- -------- --------
Income before income taxes 6,534 3,680 2,069 2,489
Income taxes - Note B 2,286 1,337 723 885
-------- -------- -------- --------
Net income $ 4,248 $ 2,343 $ 1,346 $ 1,604
-------- -------- -------- --------
-------- -------- -------- --------
Income per common share $ 34.87 $ 19.68 $ 10.96 $ 13.40
-------- -------- -------- --------
-------- -------- -------- --------
Income per common share -
assuming dilution $ 31.42 $ 17.77 $ 9.86 $ 12.08
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
See notes to condensed consolidated financial statements.
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MIDWEST MEDICAL INSURANCE HOLDING COMPANY and SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30
----------------------
1998 1997
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<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ (8,374) $ (2,286)
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INVESTING ACTIVITIES
Purchases of fixed maturity investments and equity
securities (271,829) (43,082)
Sales of fixed maturity investments and equity
securities 270,993 42,917
Maturities of fixed maturity investments 0 2,220
Sales (purchases) of short-term investments, net 6,985 (5,234)
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6,149 (3,199)
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FINANCING ACTIVITIES
Redemption of Class A Common Stock (301) (251)
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INCREASE (DECREASE) IN CASH (2,526) (1,164)
Cash at beginning of year 2,378 (895)
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CASH AT JUNE 30 $ (148) $ (2,059)
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</TABLE>
See notes to condensed consolidated financial statements.
5
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MIDWEST MEDICAL INSURANCE HOLDING COMPANY and SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(Unaudited)
June 30, 1998
NOTE A--BASIS OF PRESENTATION
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 six month period ended June 30, 1998 are not necessarily indicative of
the results that may be expected for the year ended December 31, 1998. 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, 1997.
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 annual effective tax rate for the six months
ended June 30, 1998 and 1997 is approximately 35% and 36% respectively, and
are due primarily to the effects of 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 June 30, 1998 represents six months of unearned premium for every active
policy renewed or newly written with an effective date of January 1, 1998.
Since most active policies expired on December 31, 1997, there was no
unearned premium at that date for those expired policies.
Of the total unearned premium balance $6,072,000 at December 31, 1997, the
majority $5,909,000, 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 June 30, 1998.
The increase in uncollected premium from December 31, 1997 to June 30, 1998,
$13,823,000, 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 year's
premium is collected during the year with a small, uncollected balance
remaining at year end.
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Item 2. -
Management's Discussion and Analysis of Financial Condition and
Results of Operations
CAPITAL RESOURCES AND LIQUIDITY
The majority of the Company's assets, 85%, continue to be invested in bonds,
equities 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. Other investments are
equity interests in non-traded real estate investment trusts and are recorded
at cost which approximates fair value.
The investment portfolio was re-allocated in early January 1998 with
$15,000,000 of long-term bonds transferred into international equities. This
is in conjunction with investment guideline goals to maximize total return.
No additional changes to the portfolio are anticipated during 1998.
The retrospective premium liabilities of $1,832,000 at June 30, 1998
represent amounts due to Iowa policyholders under terms of the 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 coverage with MMIC. The
$9,905,000 retrospective premium liability at December 31, 1997 included
$4,905,000 for those former IPMIT policyholders and $5,000,000 liability to
Minnesota policyholders under a retrospective premium rating plan. In March
of 1998, the $5,000,000 Minnesota retrospective premium liability and
$3,100,000 of the Iowa merger agreement liability were paid to policyholders.
Other liabilities at December 31, 1997 include $5,723,000 of premiums
received by the Company in advance of the January 1, 1998 policy effective
date. These premiums were then subsequently recognized as written in 1998 and
are earned ratably over the policy year. The Company had no advance premium
liability at June 30, 1998.
Cash flow from operations was negative during the first six months of both
1998 and 1997, $8,374,000 and $2,286,000 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 MMIC/IPMIT merger agreement.
These payments totaled $8,100,000 in 1998 and $7,103,000 in 1997. The
negative cash flow is greater for the first six months of 1998 than 1997 due
primarily to payments made to reinsurers totaling $2,479,000 to settle or
adjust prior years' reinsurance agreements and additional expenses of
approximately $962,000 associated with the formation of a non-insurance
subsidiary at the beginning of 1998. Expenses for the non-insurance
subsidiary grew in the second quarter of 1998 to bring it into operation;
expenses for the remainder of 1998 are expected to moderate.
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Net income for the first six months of 1998 and 1997 was $4,248,000 and
$2,343,000 respectively. These amounts were added to the Company's retained
earnings.
Total equity consisting of redeemable stock and other shareholder's equity,
increased by $10,114,000 during the first six months of 1998. Increases for
net income of $4,248,000 and for appreciation in the fair value of
investments, net of deferred taxes, of $6,036,000, were offset by Class A
stock redemptions in excess of Class A stock issuances of $170,000.
RESULTS OF OPERATIONS
Net earned premiums increased $640,000 over the same period of 1997 primarily
as a result of new business generated from sales of large account
self-insured retention (SIR) policies totaling $1,163,000. Base rate levels,
with the exception of a 10% increase in Iowa, remained flat. As a result of a
soft reinsurance market and excellent historical loss experience, a new
reinsurance contract was negotiated effective January 1, 1998 which reduced
reinsurance ceded from $1,800,000 to $1,350,000 for each respective quarter.
These savings will continue to be recognized throughout the term of the
contract, which expires December 31, 2000. Offsetting the above increases in
net earned premiums were payments made in the second quarter of 1998 to
reinsurers totaling $2,479,000 to settle or adjust prior years' reinsurance
agreements. A portion of these payments could ultimately be returned to the
Company depending on the actual claims experience on the underlying agreement.
Capital gains of $4,197,000 were realized during the first six months of
1998. The portfolio is managed on a total return basis by professional
investment managers under guidelines set by the Company's investment
committee. These gains were realized in the normal course of managing the
portfolio and are the major component of the increase in net income over
1997. Management has no estimate for future levels of capital gains realized.
Losses and loss adjusting expenses were flat for the first six months of 1998
versus 1997 and were down $1,056,000 for the second quarter of 1998 compared
to 1997. The decrease in the second quarter was the result of favorable paid
claims experience relative to prior claim reserve levels. Until an actuarial
analysis is completed at year-end 1998, management does not attempt to
analyze the effects of calendar year frequency and severity statistics. In
lieu of the actuarial analysis, an estimate for losses is based on a ratio of
net earned premiums that was developed in the rate making process. No
discernable loss trends were observed on a case by case basis.
Other underwriting expenses increased $2,140,000 for the first six months of
1998 compared to 1997. The majority of the increase is due to the formation
of a non-insurance subsidiary, additional staff, and the implementation of a
new insurance company operating system. Expenses are expected to flatten
during the second half of the year.
8
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Part II. Other Information
Item 6. Exhibits
None
Reports on Form 8-K
No reports on Form 8-K have been filed.
9
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Midwest Medical Insurance Holding Company
-----------------------------------------
(Registrant)
Date August 12, 1998 /s/ David P. Bounk
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David P. Bounk
President and Chief Executive Officer
Date August 12, 1998 /s/ Niles A. Cole
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Niles A. Cole
Vice President and
Principal Financial Officer and
Principal Accounting Officer
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 161,081
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 76,400
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 247,481
<CASH> 6,776
<RECOVER-REINSURE> 17,403
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 298,027
<POLICY-LOSSES> 107,921
<UNEARNED-PREMIUMS> 27,080
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 6,743
<OTHER-SE> 137,138
<TOTAL-LIABILITY-AND-EQUITY> 298,027
18,429
<INVESTMENT-INCOME> 5,874
<INVESTMENT-GAINS> 4,197
<OTHER-INCOME> 223
<BENEFITS> 17,106
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 5,083
<INCOME-PRETAX> 6,534
<INCOME-TAX> 2,286
<INCOME-CONTINUING> 4,248
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,248
<EPS-PRIMARY> 34.87
<EPS-DILUTED> 31.42
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
