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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Period Ended September 30, 1999.
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
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(Exact name of registrant as specified in its charter)
Minnesota 41-1625287
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(State or other jurisdiction (I.R.S. Employer of
incorporation or organization) Identification No.)
7650 Edinborough Way, Suite 400
Minneapolis, Minnesota 55435-5978
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(Address of principal executive offices) (Zip Code)
612-838-6700
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(Registrant's telephone number, including area code)
6600 France Avenue South, Suite 245
Minneapolis, MN 55435-1891
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(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of the issuer's classes of common stock, as of
September 30, 1999:
Class A Common Stock $.01 par value - 122,052 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 - September 30, 1999 and
December 31, 1998
Condensed consolidated statements of income - Three months
ended September 30, 1999 and 1998; Nine months ended September
30, 1999 and 1998
Condensed consolidated statements of cash flows - Nine months
ended September 30, 1999 and 1998
Notes to condensed consolidated financial statements - September 30,
1999
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
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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>
September 30 December 31
1999 1998
------------- ------------
(Unaudited) (Note A)
<S> <C> <C>
ASSETS
Fixed maturity investments at fair value
(amortized cost: 1999 $157,402;
1998 $161,430) $ 152,915 $ 164,652
Equity securities at fair value (cost:
1999 $45,806; 1998 $41,907) 87,412 86,553
Short-term investments 9,045 3,556
Other investments 10,000 10,000
--------- ---------
259,372 264,761
Cash 757 647
Accrued investment income 2,383 1,739
Reinsurance recoverable 16,659 16,499
Uncollected premiums - Note C 13,589 2,023
Amounts due from reinsurers 2,792 3,191
Other assets 7,229 6,623
--------- ---------
$ 302,781 $ 295,483
========= =========
LIABILITIES, REDEEMABLE STOCK AND OTHER
SHAREHOLDERS' EQUITY
LIABILITIES
Unpaid losses and loss adjustment expenses $ 111,981 $ 110,964
Unearned premiums - Note C 22,684 8,173
Dividends payable to policyholders - Note D 10,100 -
Retrospective premiums - 8,543
Deferred income taxes 7,279 10,966
Other liabilities 5,484 6,244
--------- ---------
157,528 144,890
REDEEMABLE STOCK
Class A Common Stock; authorized 300,000 shares,
shares issued and outstanding 122,052 and
125,682 in 1999 and 1998, respectively 6,754 8,146
Class B Common Stock; authorized, issued and
outstanding 1 share 1 1
--------- ---------
6,755 8,147
OTHER SHAREHOLDERS' EQUITY
Paid-in capital 12,789 12,789
Retained earnings 101,767 98,695
Accumulated other comprehensive income:
Net unrealized appreciation of investments 23,942 30,962
--------- ---------
138,498 142,446
--------- ---------
$ 302,781 $ 295,483
========= =========
</TABLE>
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 amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
---------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Net premiums earned $ 14,576 $ 3,394 $ 35,363 $ 21,388
Net investment income 3,047 3,180 8,853 8,671
Net realized capital gains 1,649 3,279 7,716 7,476
Other 495 262 2,227 1,077
-------- ------- -------- --------
19,767 10,115 54,159 38,612
Losses and expenses:
Losses and loss adjustment expenses 9,717 9,486 29,664 26,379
Policyholder dividends - Note D 10,100 - 10,100 -
Underwriting, acquisition and
insurance expenses 1,847 1,315 6,126 4,790
Other operating expenses 1,435 1,027 4,553 2,621
-------- ------- -------- --------
23,099 11,828 50,443 33,790
-------- ------- -------- --------
Income before income taxes (3,332) (1,713) 3,716 4,822
Income taxes - Note B (1,109) (1,701) 1,360 586
-------- ------- -------- --------
Net income $ (2,223) $ (12) $ 2,356 $ 4,236
======== ======= ======== ========
Income per common share $ (18.13) $ (0.10) $ 18.82 $ 34.58
======== ======= ======== ========
Income per common share -
assuming dilution $ (16.36) $ (0.09) $ 16.94 $ 31.22
======== ======= ======== ========
</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>
Nine Months Ended
September 30
-----------------------
1999 1998
--------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 2,356 $ 4,236
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Increase in uncollected premiums (11,566) (6,990)
Increase in unearned premiums 14,511 11,999
Increase in dividends payable to policyholders 10,100 -
Decrease in retrospective premiums (8,543) (1,362)
Decrease in other liabilities (760) (6,141)
Net realized capital gains (7,716) (7,476)
Other changes, net 71 (1,122)
---------- --------
(1,547) (6,856)
INVESTING ACTIVITIES
Purchases of fixed maturity investments and equity
securities (129,200) (322,614)
Sales of fixed maturity investments and equity
securities 135,249 326,387
Maturities of fixed maturity investments 2,000 250
Net (purchases) sales of short-term investments (7,638) (1,972)
Capitalization of MMIHC Insurance Services, Inc. 1,500 -
Capitalization of Midwest Medical Solutions, Inc. 650 1,850
---------- --------
2,561 3,901
FINANCING ACTIVITIES
Redemption of Class A Common Stock (904) (379)
---------- --------
INCREASE (DECREASE) IN CASH 110 (3,334)
Cash at beginning of year 647 2,378
---------- --------
CASH AT SEPTEMBER 30 $ 757 $ (956)
========== ========
</TABLE>
See notes to condensed consolidated financial statements.
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MIDWEST MEDICAL INSURANCE HOLDING COMPANY and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 1999
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial
statements of Midwest Medical Insurance Holding Company and its
subsidiaries (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 1998 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.
The balance sheet at December 31, 1998 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.
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.
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 rate
used for the three and nine-month periods ended September 30, 1999 and
1998 approximated the statutory rate of 35%. During the third quarter
of 1999 and 1998, the Company recorded tax adjustments to reconcile its
books with the actual federal and state tax returns filed for the
previous year. The adjustments recorded in the third quarter of 1999
resulted in additional income tax expense of approximately $43,000 for
the 1998 tax year. The adjustments recorded in the third quarter of
1998 resulted in income tax benefits of approximately $1,136,000 for
the 1997 tax year. These income tax benefits were primarily driven by
the Company's election to use its loss payment pattern rather than the
industry's loss payment pattern in discounting loss reserves for tax
purposes. Excluding these adjustments, the Company's effective tax
rates for the first nine months of 1999 and 1998 were 35.4% and 35.7%,
respectively.
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NOTE C - UNEARNED PREMIUMS and UNCOLLECTED PREMIUMS
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, 1999 represents three months
of unearned premium for every active policy renewed or newly written
with an expiration date of December 31, 1999. At December 31, 1998,
most active 1998 policies expired and therefore had no unearned
premium.
Of the total unearned premium balance of $8,173,000 at December 31,
1998, $6,520,000 is reserved to recognize the Company's obligation to
provide reporting endorsement coverage without additional premium upon
the death, disability or retirement of policyholders. That same amount
is also included in the unearned premium balance at September 30, 1999
and represents the actuarially determined present value of future
benefits to be provided less the present value of future revenues to be
received.
The increase of $11,566,000 in uncollected premiums from December 31,
1998 to September 30, 1999 is primarily due to the renewal of most
active policies on January 1. The full year's premium is recorded as
written and collectible at January 1. Premiums may be paid annually or
quarterly and the majority of each year's premium is collected during
the year. The uncollected balance remaining at the end of the year
primarily relates to the few policies underwritten by the Company that
have other than December 31 expiration dates.
NOTE D - POLICYHOLDER DIVIDENDS
In 1998, the Company decided to replace its policyholder retrospective
premium refund program with a policyholder dividend program beginning
in 1999. A policyholder dividend program afforded the Company more
flexibility in determining amounts to be refunded to policyholders and
more closely resembled programs of peer companies thus making the
financial statement impact similar. In the third quarter of 1999, the
Company's Board of Directors declared a $10,100,000 dividend to be paid
to policyholders in four equal installments in February, May, August,
and November 2000. As a percentage of written premium, approximately
65% of the Company's policies will participate in the policyholder
dividend. The policyholder dividend will be allocated to participating
policies on a proportionate basis for policyholders that were insured
by the Company in 1995 and maintain policies with the Company
throughout 2000.
NOTE E - COMPREHENSIVE INCOME
The components of the Company's comprehensive income are net income and
changes in unrealized appreciation of investments. Total comprehensive
income was $(5,912,000) and $(4,664,000) for the three and nine-months
ended September 30, 1999 and $(4,121,767) and $6,161,000 for the three
and nine-months ended September 30, 1998.
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NOTE F - EARNINGS PER SHARE DATA
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except for share and per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------ ----------------------------
1999 1998 1999 1998
----------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Numerator for basic and dilutive earnings per
share available to common shareholders $ (2,223) $ (12) $ 2,356 $ 4,236
=========== =========== =========== ==========
Denominator:
Denominator for basic earnings
per share--weighted average
shares 122,624 123,805 125,183 122,485
Effect of dilutive securities:
Unvested shares 13,263 12,883 13,886 13,213
----------- ----------- ----------- ----------
Denominator for dilutive
earnings per share--adjusted
weighted average shares and
assumed conversions 135,887 136,688 139,069 135,698
=========== =========== =========== ==========
Basic earnings per share $ (18.13) $ (0.10) $ 18.82 $ 34.58
=========== =========== =========== ==========
Diluted earnings per share $ (16.36) $ (0.09) $ 16.94 $ 31.22
=========== =========== =========== ==========
</TABLE>
Item 2. - Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The following analysis of the financial condition and results of operations of
Midwest Medical Insurance Holding Company (Holding Company) and its wholly-owned
subsidiaries, Midwest Medical Insurance Company (MMIC), Midwest Medical
Solutions, Inc. (Solutions), MedPower Information Resources, Inc. (MedPower),
and MMIHC Insurance Services, Inc. (Services), should be read in conjunction
with the consolidated financial statements and notes thereto included elsewhere
in this report. Midwest Medical Insurance Holding Company and its subsidiaries
are collectively referred to as the Company.
The Holding Company's principal operating subsidiary is MMIC. The primary
business of MMIC is selling and issuing policies of medical professional
liability insurance to: (1) individual physicians, (2) partnerships or
professional corporations comprised of physicians, (3) clinics, (4) hospitals,
and (5) health plans.
Solutions is a business development company formed to strengthen and promote the
independence and interdependencies of physicians, clinics and hospitals that
MMIC serves. Business development opportunities being considered include
practice enhancement, strategic consulting, and electronic processing and
integration services and support. MedPower is a wholly-owned subsidiary of
Solutions formed through a purchase of assets in January 1998. MedPower
processes and electronically submits medical claims for over 100 healthcare
providers in the Upper Midwest. MedPower also provides various information
consulting and network support services.
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General (continued)
Together, Solutions and MedPower had assets of less than
$3,000,000 at September 30, 1999 and at December 31, 1998 and had
revenues of approximately $354,000 and $303,000 for the nine
months ended September 30, 1999 and 1998, respectively.
Services was incorporated in 1995 and began active operations in
January 1999 with the acquisition of a book of business from
Johnson-McCann Benefits, Inc. (Johnson-McCann). The Holding
Company provided $1,500,000 of capital to Services to fund the
first of three installment payments on the Johnson-McCann purchase
as well as to provide additional funds for future agency
acquisitions. The remaining two installment payments will be made
to Johnson-McCann in 2000 and 2001 with the payment amounts tied
to the retention of the purchased book of business. Services is an
insurance agency specializing in providing clients with group
insurance products such as health, dental, life, disability, and
workers compensation. Commission income from insurance carriers is
the principal source of revenue. Services had assets of
approximately $1,577,000 at September 30, 1999 and had revenues of
approximately $1,225,000 for the nine months ended September 30,
1999.
Capital Resources and Liquidity
The majority of the Company's assets, 86%, continue to be invested
in investment-grade bonds, equities and short-term instruments.
Under 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 retrospective premium liability of $8,543,000 at December 31,
1998 consisted of two items. One represented amounts due to
policyholders under a retrospective premium rating plan. This
liability consisted of $5,480,000 due to Minnesota and North
Dakota policyholders. The second component represented 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 provided that 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. This second liability
totaled $3,063,000. Both the retrospective and merger premium
liabilities were paid to policyholders in the first quarter of
1999.
Cash flow from operations was negative during the first nine
months of 1999 and 1998, $(1,547,000) and $(6,856,000)
respectively. The primary reason for the negative cash flows was
the payment, in the first quarter of both years, of the
retrospective premium credit and the premium credit under the
terms of the MMIC/IPMIT merger agreement. These payments totaled
$8,886,000 in 1999 and $8,100,000 in 1998. The merger premium
credit of $3,063,000 paid to Iowa policyholders during the first
quarter of 1999 was the final payment under the terms of the
MMIC/IPMIT merger agreement.
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Capital Resources and Liquidity (continued)
The negative cash flow was lower in the first nine months of 1999
compared to the same period in 1998 primarily due to greater
premium receipts. Fewer policyholders paid premiums in advance of
1/1/99 policy renewals due to later policy billings. Consequently,
more policy premiums were paid after January 1 rather than prior
to that date compared to the same period the previous year.
Total equity, consisting of redeemable stock and other
shareholders' equity, decreased by $5,340,000 during the first
nine months of 1999. Equity increases were from net income of
$2,356,000 and Class A stock issuances of $228,000. These
increases were offset by net unrealized depreciation in the fair
value of investments, net of deferred taxes, of $(7,020,000) and
Class A stock redemptions of $(904,000).
Results of Operations
Net premiums earned increased $13,975,000 over the same period of
1998. Several factors drove the increase. New business generated
primarily from sales of policies to large, healthcare systems
resulted in approximately $3,375,000 of additional 1999 earned
premium. Favorable premium adjustments due to better than expected
loss experience on the 1992-1994 and 1995-1997 reinsurance
contracts drove increases of approximately $1,092,000 and
$3,245,000, respectively. 1998 net premiums earned were reduced by
$6,700,000 for retrospective premium refunds to policyholders. The
retrospective premium refund program was replaced in 1999 by the
policyholder dividend program. Policyholder dividends are recorded
as a separate expense on the income statement and therefore do not
impact premiums. The increase in net premiums earned was offset by
a 5% decrease in 1999 premium rate levels for policyholders in
Minnesota, North Dakota, and South Dakota and by $986,000 of
favorable premium adjustments recorded in 1998 primarily from the
commutation of a 1991 reinsurance contract.
Net capital gains of $7,716,000 were realized during the first
nine months of 1999. Most of these capital gains resulted from the
sale of common stock to fund the payment of retrospective and
MMIC/IPMIT merger premium credits during the first quarter. The
Company's investment portfolio is managed by professional, outside
investment advisors on a total return basis under guidelines set
by the Investment Committee of the Company's Board of Directors.
These investment managers may therefore take advantage of
opportunities to increase total return through sales of selected
securities in response to changing market conditions.
Consequently, future levels of realized capital gains or losses
are difficult to estimate.
Other revenues consist primarily of finance charges on MMIC
premium billings, commission income from Services, and claim
processing fees from MedPower. The increase for the first nine
months of 1999 over the same period of 1998 is primarily due to
Services beginning active operations in January 1999.
Losses and loss adjustment expenses increased $3,285,000 for the
first nine months of 1999 versus 1998. The increase in 1999 was
largely driven by the increase in premium volume as interim period
losses are estimated based on a ratio of net premiums earned. The
estimated loss ratio was developed while determining 1999 premium
rates. At year-end, an outside actuarial analysis of losses is
completed. Although the effects of interim claim frequency and
severity statistics are not actuarially analyzed, management did
not observe any discernable loss trends during the first nine
months of 1999 that would materially alter loss expectations.
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Results of Operations (continued)
As mentioned previously, the company implemented a policyholder
dividend program in 1999 to replace its retrospective premium
refund program. Policyholder dividends are recorded as a separate
expense on the income statement. In the third quarter of 1999, the
Company's Board of Directors declared a $10,100,000 dividend to be
paid to policyholders in four equal installments in February, May,
August, and November 2000. This policyholder dividend represents a
return of prior years' profits that were greater than anticipated
due to favorable claims and investment experience.
Underwriting, acquisition and insurance expenses increased
$1,336,000 for the first nine months of 1999 compared to the same
period in 1998. The majority of the increase is due to staff
additions to spur MMIC business growth and costs associated with
the implementation and enhancement of a new insurance company
operating system. Also contributing to the increase were costs
associated with relocating the Minneapolis main office effective
October 4, 1999.
Other operating expenses increased $1,932,000 for the first nine
months of 1999 compared to the same period in 1998. The increase
can be attributed primarily to Services beginning active
operations in January 1999 and additional salary, benefits, and
outside consulting expenses incurred by Solutions from
intensifying its business development efforts.
Income taxes increased to $1,360,000 for the first nine months of
1999 compared to $586,000 for the same period in 1998. The
principal factors in the increase were additional prior year taxes
of approximately $43,0000 recorded in 1999 and a recovery of prior
year taxes of approximately $1,136,000 recorded in 1998. Excluding
these adjustments, the Company's effective tax rates for the first
nine months of 1999 and 1998 were 35.4% and 35.7%, respectively.
As a result of the factors discussed above, the Company realized
net income of $2,356,000 for the nine months ended September 30,
1999 compared to net income of $4,236,000 for the same period of
1998. Basic net income per share decreased to $18.82 from $34.58
for the nine months ended September 30, 1999 and 1998,
respectively. Diluted net income per share decreased to $16.94 for
the nine months ended September 30, 1999 from the $31.22 per share
reported a year ago.
Year 2000 Update
The Year 2000 issue is the result of computer programs being
written using two digits rather than four to define the applicable
year. Any computer programs that have time sensitive software may
recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculation
causing disruptions of operations, including, among other things,
a temporary inability to process transactions, send billings, or
engage in similar normal business activities.
The Company's Year 2000 Task Force continues to monitor and
evaluate Year 2000 issues. The key areas being assessed by the
Year 2000 Task Force are internal computer hardware and software,
significant business partners and vendors, insurance policy
exposure, and contingency plans.
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Year 2000 Update (continued)
An evaluation of the Year 2000 readiness of all significant
internal computer hardware and software applications and devices
was completed in the latter part of 1998. The evaluation
identified MedPower's operating system as posing a significant
Year 2000 risk to the Company. The Company responded by converting
MedPower's operating system to a new, Year 2000 compliant
platform. The conversion and testing was completed as of the end
of September 1999 with a total conversion cost of approximately
$275,000. As a result of the above, the Company believes that the
Year 2000 issue has been adequately addressed with respect to
internal use hardware and software.
A Year 2000 compliance inquiry was prepared and mailed in October
of 1998 to all of the Company's key business partners and service
vendors. Responses were obtained from each vendor. The Company's
department heads with the assistance of information systems staff
evaluated vendor responses and followed up with vendors as
necessary. As of August 1999, the Company's department heads had
completed their review and were satisfied with the level of Year
2000 compliance of the Company's key vendors. Despite these
efforts, no assurances can be given that the systems of other
companies on which the Company's operations rely will be Year 2000
compliant, or that the failure by a third party to be Year 2000
compliant would not have a material adverse effect on the Company.
A multi-departmental team consisting of claims, risk management
and underwriting management studied and carefully assessed the
exposure that might exist in the policies issued by MMIC. The
majority of the exposure is related to medical equipment that
contains computer chips that could be affected by the Year 2000
bug. This is primarily an exposure for the products liability
carrier which insures the medical equipment manufacturer. All
hospital insureds have been surveyed to monitor their compliance
to MMIC guidelines on medical equipment. All current hospital
insureds are in compliance. No coverage change or exclusion has
been enacted for the medical malpractice professional liability
policy. A Year 2000 exclusion became effective January 1, 1999 on
all premises and general liability policies issued by MMIC. This
exclusion will continue through the 2000 policy year. MMIC has
communicated its Year 2000 exposure preparedness to its reinsurers
and they fully support the Company's plan and actions. While MMIC
feels confident in the completeness of its due diligence on Year
2000 exposure, it is not known whether Year 2000 claims will be
made against these policies, whether such claims will have any
merit, and what potential financial impact these claims may have.
Although the Company believes it has substantially completed and
tested its Year 2000 remediation, the risk of a Year 2000 failure
still exists. A failure in remedying a Year 2000 issue, caused by
internal computer hardware or software errors or failures, or by
key business partners and service vendors who fail to become Year
2000 compliant could, in a worst case, interrupt the Company's
business. Depending upon the extent and duration of the business
interruption resulting from non-compliance issues, such
interruption could have a material adverse effect on the Company's
business, financial condition, and results of operations. Although
the Company believes the likelihood is remote based on the due
diligence it has performed, the potential does exist in a worst
case scenario for claims to be made by MMIC policyholders for Year
2000 failures they experience. Depending on whether such claims
are deemed to have merit and to the extent and amount these claims
are awarded compensation, such claims could have a material
adverse effect on the Company's business, financial condition, and
results of operations.
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Year 2000 Update (continued)
Year 2000 contingency plans have been developed for the Company
and are being tested as deemed necessary by the Year 2000 Task
Force. These plans include manual processing of core functions if
the Company encounters Year 2000 problems with respect to internal
computer hardware and software and using alternative vendors or
internally handling essential services if unanticipated Year 2000
problems occur with key vendors. The Company also intends to shut
down all network and computer systems on December 31, 1999 and
bring them back on-line on January 1, 2000 to avoid any potential
problems that the actual on-line change in year might cause. In
the event Year 2000 claims are made on policies written by MMIC,
the Company believes these claims will be without merit and will
vigorously defend its position. Although the Company believes its
contingency plans will be adequate, no assurances can be given
that such plans will address all risks that may actually arise.
Readers are reminded that forward-looking statements contained in
this description of the Company's treatment of the Year 2000 issue
should be read in conjunction with the disclosures under the
heading "Cautionary Note Regarding Forward-Looking Statements"
below.
Cautionary Note Regarding Forward-Looking Statements
Statements other than historical information contained in this
report are considered to be "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Act of 1934, as
amended.
All forward-looking statements address matters that involve risks
and uncertainties. Accordingly, in addition to the factors
discussed in this report, there are or will be other important
factors that could cause actual results to differ materially from
those indicated in such statements. These factors include but are
not limited to:
i. the impact of changing market conditions on the Company's
business strategy;
ii. the effects of increased competition on pricing,
coverage terms, retention of customers and ability to
attract new customers;
iii. greater severity or frequency of the types of losses that
are insured by the Company;
iv. faster or more adverse loss development experience than what
the Company had based its underwriting, reserving, and
investment practices;
v. developments in global financial markets which could
adversely affect the performance of the Company's investment
portfolio;
vi. litigation, regulatory or tax developments which could
adversely affect the Company's business;
vii. risks associated with the introduction of new products and
services;
viii. dependence on key personnel;
ix. the impact of mergers and acquisitions; and
x. failure of the Company or significant third parties to
achieve Year 2000 compliance.
The facts set forth above should be considered in connection with
any forward-looking statement contained in this report. The
important factors that could affect such forward-looking
statements are subject to change, and the Company does not intend
to update any forward-looking statement or the forgoing list of
important factors. By this cautionary note, the Company intends to
rely upon the safe harbor from liability with respect to
forward-looking statements provided by Section 27A and Section 21E
referred to above.
13
<PAGE> 14
Item 3. - Quantitative and Qualitative Disclosures About Market
Risk
Market risk is the risk of loss that may occur when fluctuations
in interest and foreign currency exchange rates and equity and
commodity prices change the value of a financial instrument. Both
derivative and nonderivative financial instruments have market
risk. The Company is primarily exposed to interest rate risk on
its investment in fixed maturities, equity price risk on its
investment in equity securities, and foreign currency exchange
rate risk on its investment in international equity securities.
As previously disclosed, the Company's fixed maturity and equity
investments are classified as available for sale and are managed
to preserve assets, maximize pre-tax total return, and assure
adequate liquidity to meet the funding needs of the Company. Under
the current investment policy, management does not use derivative
instruments to manage exposure to market risks. Professional
outside investment managers adjust portfolio characteristics, such
as sector, duration and industry exposure, based on their outlook
of market conditions within the parameters set by the Company's
investment policy as approved by the Investment Committee of the
Board of Directors.
Based on the effective duration of the fixed maturity investment
portfolio, an abrupt 100 basis point increase in interest rates
along the entire interest rate yield curve would adversely affect
the fair value of fixed maturity investments by approximately
$8,600,000 at September 30, 1999 and $8,500,000 at December 31,
1998.
Based primarily on past annual performance relative to the
Standard & Poors 500 Market Index (S&P 500), an abrupt ten percent
decrease in the S&P 500 would adversely affect the fair value of
equity securities by approximately $10,100,000 at September 30,
1999 and $10,000,000 at December 31, 1998.
A hypothetical ten percent weakening of all foreign currencies
relative to the U.S. dollar would adversely affect the fair value
of the Company's investment in international equity securities by
approximately $1,700,000 at September 30, 1999 and $1,600,000 at
December 31, 1998.
The Company believes that there would be no material effect on its
net income and cash flows in any of the above scenarios. This
effect on net income and cash flows does not consider the possible
effects a change in economic activity could have in such an
environment. Investors, customers, regulators and legislators
could respond to these fluctuations in ways the Company cannot
foresee. Because the Company cannot be certain what specific
actions would be taken and their effects, the above sensitivity
analyses assume no significant changes in the Company's financial
structure.
14
<PAGE> 15
Part II. Other Information
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits
(27) Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K
None
15
<PAGE> 16
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Midwest Medical Insurance Holding Company
-----------------------------------------
(Registrant)
Date November 12, 1999 /s/ David P. Bounk
------------------ ---------------------------------
David P. Bounk
President and Chief Executive Officer
Date November 12, 1999 /s/ Niles Cole
------------------ ----------------------------------
Niles Cole
Vice President and
Principal Financial Officer and
Principal Accounting Officer
16
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