<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Period Ended September 30, 1998.
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From to
---------------- ----------------
Commission file number 0-21230
-------
Midwest Medical Insurance Holding Company
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Minnesota 41-1625287
- ------------------------------ ------------------------------
(State or other jurisdiction (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
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of the issuer's classes of common stock, as
of September 30, 1998:
Class A Common Stock $.01 Par Value 124,179 shares
Class B Common Stock $1,000 Par Value-1 share
1
<PAGE>
INDEX
Midwest Medical Insurance Holding Company
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets-September 30, 1998 and
December 31, 1997
Condensed consolidated statements of income - Three months ended
September 30, 1998 and 1997; Nine months ended September 30, 1998
and 1997
Condensed consolidated statements of cash flows-Nine months ended
September 30, 1998 and 1997
Notes to condensed consolidated financial statements - September 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
<PAGE>
Part I. Financial Information
Item 1. - Financial Statements
MIDWEST MEDICAL INSURANCE HOLDING COMPANY and SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30 December 31
1998 1997
------------ -----------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Fixed maturity investments at fair value
(amortized cost: 1998 $155,120;
1997 $170,590) $ 160,869 $ 171,975
Equity securities at fair value (cost:
1998 $41,021; 1997 $20,595) 68,784 49,759
Short-term investments 14,031 13,909
Other investments 10,000 10,000
---------- ----------
253,684 245,643
Cash (956) 2,378
Uncollected premiums - Note C 7,524 534
Ceded unearned premium 1,424 0
Accrued investment income 1,898 2,341
Reinsurance recoverable 18,490 19,117
Other assets 8,153 5,502
---------- ----------
$ 290,217 $ 275,515
---------- ----------
---------- ----------
LIABILITIES, REDEEMABLE STOCK AND OTHER
SHAREHOLDERS' EQUITY
LIABILITIES
Unpaid losses and loss adjust. expenses $ 111,368 $ 107,806
Unearned premiums - Note C 18,071 6,072
Amounts due reinsurers 2,113 2,984
Retrospective premiums 8,543 9,905
Deferred income taxes 5,194 3,592
Other liabilities 5,248 11,389
---------- ----------
150,537 141,748
REDEEMABLE STOCK
Class A Common Stock; authorized 300,000 shares,
shares issued and outstanding 124,179 and
121,322 in 1998 and 1997, respectively 6,224 7,476
Class B Common Stock; authorized, issued and
outstanding 1 share 1 1
---------- ----------
6,225 7,477
OTHER SHAREHOLDERS' EQUITY
Paid-in capital 12,789 12,789
Retained earnings 98,884 93,643
Accumulated other comprehensive income:
Net unrealized appreciation of investments 21,782 19,858
---------- ----------
133,455 126,290
---------- ----------
$ 290,217 $ 275,515
---------- ----------
---------- ----------
</TABLE>
Note: The balance sheet at December 31, 1997 has been derived from the
audited financial statements at that date and 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.
3
<PAGE>
MIDWEST MEDICAL INSURANCE HOLDING COMPANY and SUBSIDIARIES
Condensed Consolidated Statements of Income
(Dollars in thousands, except per share dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
----------------------- ------------------------
1998 1997 1998 1997
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Net premiums earned $ 3,741 $ 3,029 $ 22,170 $ 20,818
Net investment income 3,157 2,899 8,610 8,923
Realized capital gains 3,279 2,148 7,476 2,124
Other 72 1 295 2
-------- --------- --------- ---------
10,249 8,077 38,551 31,867
Losses and expenses:
Losses and loss adj. exp. 9,602 8,962 26,708 25,684
Other underwriting expenses 2,360 1,429 7,022 4,817
-------- --------- --------- ---------
11,962 10,391 33,730 30,501
-------- --------- --------- ---------
Income before income taxes (1,713) (2,314) 4,821 1,366
Incomes taxes - Note B (1,701) (819) 585 518
-------- --------- --------- ---------
Net income $ (12) $ (1,495) $ 4,236 $ 848
-------- --------- --------- ---------
-------- --------- --------- ---------
Income per common share $ (0.10) $ (12.51) $ 34.58 $ 7.11
-------- --------- --------- ---------
-------- --------- --------- ---------
Income per common share -
assuming dilution $ (0.09) $ (11.30) $ 31.22 $ 6.43
-------- --------- --------- ---------
-------- --------- --------- ---------
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
MIDWEST MEDICAL INSURANCE HOLDING COMPANY and SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ (6,856) $ (7,495)
---------- ----------
INVESTING ACTIVITIES
Purchases of fixed maturity investments and equity
securities (322,614) (132,019)
Sales of fixed maturity investments and equity
securities 326,387 179,638
Maturities of fixed maturity investments 250 4,200
Sales (purchases) of short-term investments, net (122) (44,228)
---------- ----------
3,901 7,591
---------- ----------
FINANCING ACTIVITIES
Redemption of Class A Common Stock (379) (324)
---------- ----------
INCREASE (DECREASE) IN CASH (3,334) (228)
Cash at beginning of year 2,378 (895)
---------- ----------
CASH AT SEPTEMBER 30 $ (956) $ (1,123)
---------- ----------
---------- ----------
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
MIDWEST MEDICAL INSURANCE HOLDING COMPANY and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 1998
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial
statements of Midwest Medical Insurance Holding Company (the "Company") 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 notes 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 any interim
period are not necessarily indicative of the results that may be expected for
the full year. These interim financial statements should be read in
conjunction with the 1997 consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K as filed with the
Securities and Exchange Commission.
Certain amounts applicable to prior periods have been reclassified to conform
to the classifications followed in the current year. All intercompany amounts
have been eliminated.
In 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income". SFAS No. 130 defines the financial statement
presentation for all changes in a company's equity during a period except
those resulting from investments by owners and distribution to owners. The
adoption of this statement by the Company resulted in merely changing the
presentation of other shareholders' equity on the balance sheet. SFAS No. 130
had no impact on the amount of net income, earnings per share or the total
other shareholders' equity reported.
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 estimated annual effective tax rates used for the
nine months ended September 30, 1998 and 1997 were approximately 35% and 38%,
respectively. The effective tax rate for 1998 was offset by 1997 federal and
state income tax benefits of approximately $1,136,000 recorded in the third
quarter. These benefits resulted primarily from the election of using the
Company's loss payment pattern rather than the industry's in discounting loss
reserves for tax purposes.
6
<PAGE>
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. As a result, the majority of the unearned
premium amount at September 30, 1998 represents three months of unearned
premium for every active policy renewed or newly written with an expiration
date of December 31, 1998. At December 31, 1997, most active 1997 policies
expired and therefore had no unearned premium at that date.
Of the total unearned premium balance of $6,072,000 at December 31, 1997,
$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 September 30, 1998.
The increase of $6,990,000 in uncollected premium from December 31, 1997 to
September 30, 1998 is primarily due to the renewal of most active policies on
January 1. The full year's premium is recorded as written and collectible at
January 1. Premiums may be paid annually or quarterly. The majority of each
year's premium is collected during the year with a small, uncollected balance
remaining at year-end.
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, 87%, continue to be invested in
investment-grade bonds, equities and short-term instruments. The Company has
adopted 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 $8,543,000 at September 30, 1998 and
$9,905,000 at December 31, 1997 consist of two items. One represents amounts
due to policyholders under a retrospective premium rating plan. This
liability consisted of $5,480,000 due to Minnesota and North Dakota
policyholders at September 30, 1998 and $5,000,000 due to Minnesota
policyholders at December 31, 1997. The second represents 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.
The merger 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.
7
<PAGE>
CAPITAL RESOURCES AND LIQUIDITY CONTINUED
This second liability totaled $3,063,000 at September 30, 1998 and $4,905,000
at December 31, 1997. Retrospective and merger premium refunds are generally
paid in the first quarter of the following year. In March of 1998, $5,000,000
of the Minnesota retrospective premium liability and $3,100,000 of the Iowa
merger agreement liability were paid to policyholders.
Cash flow from operations was negative during the first nine months of both
1998 and 1997, $6,856,000 and $7,495,000 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.
Total equity consisting of redeemable stock and other shareholders' equity,
increased by $5,913,000 during the first nine months of 1998. Equity
increases were from net income of $4,236,000, unrealized appreciation in the
fair value of investments, net of deferred taxes, of $1,924,000, and Class A
stock issuances of $207,000. These increases were offset by Class A stock
redemptions of $454,000.
RESULTS OF OPERATIONS
Net premiums earned increased $1,352,000 over the same period of 1997
primarily as a result of writing $2,638,000 of new business that was
generated primarily from sales of policies to large, healthcare systems. 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 premiums earned 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 future claims experience
on the underlying agreements.
Capital gains of $7,476,000 were realized during the first nine 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 source of the increase in net income over 1997.
Management has no estimate for future levels of realized capital gains or
losses.
Losses and loss adjusting expenses increased $1,024,000 for the first nine
months of 1998 versus 1997. The increase in 1998 was primarily driven by the
increase in premium volume as interim period losses are estimated based on a
ratio of net premiums earned until the year-end actuarial analysis is
completed. The estimated loss ratio was developed while determining 1998
premium rates. Although the Company's management does not attempt to analyze
the effects of interim frequency and severity statistics, no discernable loss
trends were observed on a case by case basis.
8
<PAGE>
RESULTS OF OPERATIONS CONTINUED
Other underwriting expenses increased $2,205,000 for the first nine months of
1998 compared to 1997. The majority of the increase is due to staff
additions, the implementation of a new insurance company operating system,
and operating two, minor non-insurance subsidiaries newly formed at the
beginning of 1998.
As a result of the factors discussed above, the Company realized net income
of $4,236,000 for the nine months ended September 30, 1998 compared to net
income of $848,000 for the same period of 1997. This caused diluted earnings
per share to increase to $31.22 for the nine months ended September 30, 1998
from the $6.43 per share reported a year ago.
Part II. Other Information
Item 6. Exhibits
None
Reports on Form 8-K
No reports on Form 8-K have been filed.
9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Midwest Medical Insurance Holding Company
-----------------------------------------
(Registrant)
Date November 11, 1998 /s/ David P. Bounk
----------------- ------------------------------------------
David P. Bounk
President and Chief Executive Officer
Date November 11, 1998 /s/ Niles A. Cole
----------------- ------------------------------------------
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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 160,869
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 68,784
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 239,653
<CASH> 13,075
<RECOVER-REINSURE> 18,490
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 290,217
<POLICY-LOSSES> 111,368
<UNEARNED-PREMIUMS> 18,071
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 6,225
<OTHER-SE> 133,455
<TOTAL-LIABILITY-AND-EQUITY> 290,217
22,170
<INVESTMENT-INCOME> 8,610
<INVESTMENT-GAINS> 7,476
<OTHER-INCOME> 295
<BENEFITS> 26,708
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 7,022
<INCOME-PRETAX> 4,821
<INCOME-TAX> 585
<INCOME-CONTINUING> 4,236
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,236
<EPS-PRIMARY> 34.58
<EPS-DILUTED> 31.22
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
