<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (Fee Required)
For the fiscal year ended December 31, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required)
For the transition period from to
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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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6600 France Avenue So., Suite 245
Minneapolis, Minnesota 55435-1891
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 922-5445
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
<TABLE>
<CAPTION>
Title of Each Class Name of Each Exchange on Which Registered
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<S> <C>
Class A Common Stock $.01 par value N/A
</TABLE>
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value (based on December 31, 1998 Net Redemption Value per
share) of the voting stock held by non-affiliates of the registrant as of March
30, 1999 was $8,062,838.
The number of shares outstanding of the issuer's classes of common stock, as of
March 30, 1999:
Class A Common Stock $.01 par Value - 125,682 shares
Class B Common Stock $1,000 par value - 1 share
DOCUMENTS INCORPORATED BY REFERENCE
None.
1
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PART I
ITEM 1. BUSINESS
BACKGROUND
Midwest Medical Insurance Holding Company (MMIHC) is an insurance holding
company organized under the laws of the State of Minnesota. Midwest Medical
Insurance Company (MMIC) is a wholly-owned subsidiary of MMIHC and is MMIHC's
primary operating asset.
MMIC's primary business 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. In addition, MMIC writes business liability insurance
providing coverage for claims against a medical business entity resulting from
acts by the employees who work for the entity, and office premises liability
insurance providing coverage for claims arising out of the ownership,
maintenance or use of office premises of the insured.
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. 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. MMIHC has not engaged in such activities to any material
extent. 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. 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, North Dakota, South Dakota, Nebraska, Illinois and Wisconsin
on a claims-made basis. MMIC has had the sponsorship of the MMA since inception
and also has the sponsorship of the Iowa Medical Society (IMS) and North Dakota
Medical Association. Professional liability, general liability, and umbrella
excess liability insurance is also available to hospitals, nursing homes and
extended care facilities throughout MMIC's territory.
MMIC has no employees. Instead, MMIHC provides all management and administrative
services to MMIC for a fee based upon the cost of providing services. For
insurance operational expenses, a ten percent administrative surcharge is added.
During 1997, MMIHC formed Midwest Medical Solutions, Inc. (Solutions) as a
business development company 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
2
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ITEM 1. BUSINESS (CONTINUED)
integration services and support. Solutions purchased the assets of MedPower
Information Services, Inc. effective January 1, 1998. Solutions then contributed
those assets to its newly formed, wholly-owned subsidiary, MedPower Information
Resources, Inc. (MedPower). 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.
Together, Solutions and MedPower had assets of less than $3,000,000 at
December 31, 1998 and revenues of less than $400,000 for the year ended December
31, 1998.
Hereafter, MMIHC, MMIC, Solutions and MedPower shall be collectively referred to
as the Company unless the reference pertains to a specific entity. Further, due
to the nature of the relationship between MMIHC and MMIC, the insurance
operations of MMIC will be discussed as though they are the operations of the
registrant.
ELIGIBLE PHYSICIANS
An individual physician must meet the following criteria in order to be eligible
to obtain insurance coverage from MMIC:
1. An applicant must be licensed to practice medicine, surgery or
osteopathy in Minnesota, Iowa, Nebraska, North Dakota, South Dakota,
Illinois, or Wisconsin;
2. An applicant must conduct a majority of his or her practice in
Minnesota, Iowa, Nebraska, North Dakota, South Dakota, Illinois or
Wisconsin.
ELIGIBLE GROUPS
MMIC also provides professional liability insurance to entities including
partnerships, professional corporations and other associations through which
qualifying physicians practice medicine, surgery or osteopathy.
A group must meet the following criteria in order to be eligible to be insured
by MMIC:
1. The entity must have its principal place of business in Minnesota,
Iowa, Nebraska, North Dakota, South Dakota, Illinois or Wisconsin;
and
2. The group must demonstrate that a majority of the individual
physicians practicing medicine, surgery or osteopathy on a full-time
basis through such clinic are, or intend to be, insured by MMIC.
3
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ITEM 1. BUSINESS (CONTINUED)
ELIGIBLE HOSPITALS, NURSING HOMES AND OTHER EXTENDED CARE FACILITIES
MMIC also provides professional liability, general liability and umbrella excess
liability to hospitals, nursing homes and other extended care facilities which
provide medical services to patients on more than an outpatient basis.
A business must meet the following criteria in order to be eligible to be
insured by MMIC:
1. The entity must have its principal place of business in Minnesota,
Iowa, Nebraska, North Dakota, South Dakota, Illinois or Wisconsin; and
2. The facility must be a licensed hospital, nursing home, hospice or
other extended care facility.
POLICY FORMS
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 policyholder had coverage with MMIC.
For purposes of policy coverage, a claim includes any lawsuit, allegation of
liability or other notice of patient dissatisfaction with services performed
that is communicated to MMIC as required by the policy. The policy also covers
prior acts (i.e., claims first made during the policy period with respect to
occurrences which took place prior to the date the insured initially secured
coverage from 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 continuous
coverage with MMIC, the reporting endorsement is provided at no additional
premium.
MMIC offers basic limits of coverage from $1,000,000 for each claim, subject to
$3,000,000 annual aggregate, up to $12,000,000 for each claim, subject to
$14,000,000 annual aggregate. Excess coverage above the basic limits is
available from MMIC's reinsurers on a facultative basis.
4
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ITEM 1. BUSINESS (CONTINUED)
The basic office premises liability limits offered are $100,000 for each
occurrence for bodily injury and $100,000 for each occurrence for property
damage. Limits up to $1,000,000 for each occurrence are also available.
The basic liability limits for coverage of employees and assistants cannot
exceed the limits purchased by the insured physician or clinic.
MARKETING AND DISTRIBUTION
Marketing of MMIC policies in Minnesota, North Dakota, South Dakota, Nebraska,
Illinois and Wisconsin is handled principally 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. These brokers will
work in all states. MMIC has appointed an exclusive independent agent in Iowa in
order to enhance marketing efforts there. 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.
Distribution of policies is handled through a processing system which MMIC has
utilized for several years. Since most policies have a common expiration date,
it is essential that MMIC's policy processing operations be highly efficient.
MMIC consistently has been able to provide policy processing on a timely basis.
In 1998 the Company completed an implementation of an entirely new operating
system which has expanded its capacity and efficiency.
REINSURANCE
MMIC purchases reinsurance in order to reduce its liability on individual risks.
A reinsurance transaction takes place when an insurance company transfers or
"cedes" to another insurer a portion of its exposure on insurance it writes. The
reinsurer assumes the exposure in return for a portion of the premium. The
reinsurer's liability is limited to losses it assumes that are in excess of the
portion retained by 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 $750,000 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.
5
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ITEM 1. BUSINESS (CONTINUED)
MMIC currently operates under an excess-of-loss reinsurance treaty with General
Reinsurance Corporation of Stamford, Connecticut (80%), Hanover Reinsurance
Company of Hanover, Germany (7%), Transatlantic Reinsurance Corp. (6.5%), and
CNA Re, UK (6.5%), whereby the reinsurers insure against losses in excess of the
loss limit retained by MMIC. 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 Reinsurance Company is rated A+; Transatlantic Re is rated
A++; and CNA Re, UK is rated A by A.M. Best & Company, Inc. Coverage under the
treaty was initially issued on January 1, 1998, and is continuous until canceled
by either party. MMIC commuted the reinsurance treaties covering the period from
October 1, 1986 through December 31, 1991. As a result, there is no longer any
reinsurance coverage for those report years. As of December 31, 1998, there is
one open case with $10,000 in loss reserves pertaining to those report years.
Previous reinsurance treaties, which remain in effect for incidents prior to
October 1, 1986, 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 $4,700,000 of premium per year under the reinsurance
treaty.
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
pre-tax investment income. In 1997, the Committee changed the investment
guidelines to maximize pre-tax income and to extend the duration of the fixed
income investments. Adequate liquidity is maintained to assure 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 investment grade fixed income
instruments, including United States Government, governmental agency, and
corporate bonds. Fixed income investments comprised approximately 62% of total
invested assets at December 31, 1998 compared to 70% at December 31, 1997.
MMIC's investment policy also permits the inclusion of equity securities. Equity
securities comprised approximately 33% of total invested assets at December 31,
1998 compared to 20% at December 31, 1997. The increase in the proportion of
equity securities was due to an increase in equity market values and a
reallocation of $15,000,000 from fixed income investments to international
equities in January 1998. The objectives of this reallocation were to further
diversify the portfolio and maximize pre-tax total return. The remainder of
MMIC's investment portfolio, 5% and 10% at December 31, 1998 and 1997,
respectively, was invested in a real estate investment trust and short-term
instruments.
6
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ITEM 1. BUSINESS (CONTINUED)
RATING
A.M. Best & Company, Inc. ("Best's"), publisher of BEST'S INSURANCE REPORTS,
PROPERTY-CASUALTY, 1997 Edition, has assigned MMIC an "A", or excellent, rating
in 1998. This is the highest rating given to any company that specializes in
medical malpractice insurance. Best's ratings are based on an analysis of the
financial condition and operation of an insurance company as compared with the
industry in general. 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.
GOVERNMENT REGULATION
MMIC is subject to governmental regulation in the states in which it conducts
its business (Minnesota, Iowa, North Dakota, South Dakota, Nebraska, Illinois,
and Wisconsin). Such regulation is conducted by state agencies having broad
administrative power dealing with all aspects of MMIC's business, including
policy terms, rates, dividends and retrospective premium credits to
policyholders, 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 periodic financial and business conduct
examinations. 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 in all states in which it conducts its business is
The St. Paul Companies. The St. Paul Companies is a major national
property-casualty insurance company, the largest writer of medical professional
liability insurance in the United States, and is many times larger than MMIC. In
addition to The St. Paul Companies, several other national companies have become
active competitors in the last several years, including Medical Protective
Insurance Company, CNA Insurance Company, Zurich Insurance Company, Fireman's
Fund Insurance Company, and American Continental Insurance Company (commonly
referred to as MMI). At this time they 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, in the mid-nineties
several large self-insured hospitals in Minneapolis and Des Moines purchased
7
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ITEM 1. BUSINESS (CONTINUED)
MMIC insured clinics, and other physician practices were purchased by large,
self-insured clinics such as the Mayo Clinic. In response to the consolidation
occurring among healthcare providers, MMIC expanded its underwriting capability
by partnering with its reinsurers to provide the types of coverages needed by
larger healthcare organizations. MMIC is also the only carrier endorsed by local
medical societies in Minnesota, Iowa and North Dakota 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 believes it is
developing new programs and products which will allow it to remain an industry
leader as such change occurs, although no assurance can be given to that effect.
EMPLOYEES
As of December 31, 1998, MMIHC employed 82 persons, of whom 6 were executives,
52 were supervisory employees or specialists, and 24 were clerical employees.
None of the employees of MMIHC is covered by a collective bargaining agreement
and management believes that relations with employees are good.
8
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ITEM 2. PROPERTIES
MMIHC owns the following fixed assets, all of which are used in the conduct of
its business:
<TABLE>
<CAPTION>
NET BOOK VALUE
DECEMBER 31,
1998
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<S> <C>
Office furniture and equipment $ 250,291
Leasehold improvements at leased premises,
6600 France Avenue South, Minneapolis, MN 37,819
Computer hardware 728,593
Computer system software 1,911,712
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Total $2,928,415
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</TABLE>
The Company owns 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 for MMIHC to renew the lease for an additional
five years after the original term. 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. An additional 1,249 square feet of office space is
leased in Omaha, Nebraska under a three year lease that expires November 30,
2000. Solutions and MedPower operate out of a separate 3,149 square foot
facility also located in Edina, Minnesota. This lease is set to expire in
2001. Annual rent expense was $501,032 for 1998 and $427,646 for 1997.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any pending or threatened legal proceedings which
could have a material adverse effect on its operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders.
9
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
(a) There is no market for the Company's Class A or Class B Common Stock. Class
A shares are issued only to insured individual physicians or individual
physicians jointly with the legal entities in which they practice. The
shares are restricted and cannot be sold to any person other than MMIHC and
are subject to mandatory redemption at the time that the physician
terminates his or her insurance coverage for any reason.
(b) As of March 30, 1999, there were 125,682 shares of Class A Common Stock
outstanding held by 3,496 physicians and 1 share of Class B Common Stock
held by the Minnesota Medical Association.
(c) MMIHC has never paid a shareholder dividend nor does it intend to within
the foreseeable future. Without prior approval from the Minnesota
Commissioner of Commerce, annual dividends to MMIHC from MMIC cannot exceed
10% of unassigned surplus of MMIC or the prior year's net income from
operations of MMIC, whichever is greater.
ITEM 6. SELECTED FINANCIAL DATA
Following is the selected financial data of MMIHC for the five years ended
December 31, 1998. This data should be read in conjunction with the consolidated
financial statements and notes thereto appearing under Item 8 of this Form 10-K.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
OPERATIONS DATA 1998(1) 1997(1) 1996(1) 1995(2) 1994(2)
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(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net premiums earned $ 35,014 $ 32,916 $ 31,177 $ 29,798 $ 26,246
Net investment and other income 21,404 19,276 15,558 14,258 11,509
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Total revenue 56,418 52,192 46,735 44,056 37,755
Loss and loss adjustment expenses 37,494 31,834 32,257 37,560 11,334
Underwriting and other operating expenses 10,287 6,595 5,539 6,482 5,509
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47,781 38,429 37,796 44,042 16,843
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Income before income taxes 8,637 13,763 8,939 14 20,912
Income taxes (benefit) 2,689 4,463 1,458 (1,711) 6,417
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Net income $ 5,948 $ 9,300 $ 7,481 $ 1,725 $ 14,495
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</TABLE>
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ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998(1) 1997(1) 1996(1) 1995(2) 1994(2)
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(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net income per common share - assuming dilution $43.65 $70.23 $58.33 $13.74 $114.84
Number of shares used in per share calculation 136,251 132,427 128,259 125,536(3) 126,222(3)
Net income/total revenue 10.5% 17.8% 16.0% 3.9% 38.4%
Return on average equity 4.2% 7.4% 6.5% 1.7% 15.8%
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31
FINANCIAL CONDITION 1998(1) 1997(1) 1996(2) 1995(2) 1994(2)
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(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
ASSETS
Fixed maturities at fair value $164,652 $171,975 $183,561 $182,817 $174,203
Equity securities at fair
value 86,553 49,759 38,001 28,311 19,782
Short-term investments 3,556 13,909 7,898 15,015 9,755
Other 10,000 10,000 -- -- --
----------------------------------------------------
Total investments 264,761 245,643 229,460 226,143 203,740
Reinsurance recoverable 16,499 19,117 22,174 25,112 23,637
Other assets 14,223 10,755 10,359 13,329 19,100
----------------------------------------------------
Total assets $295,483 $275,515 $261,993 $264,584 $246,477
----------------------------------------------------
----------------------------------------------------
LIABILITIES
Unpaid losses and loss
adjustment expenses $110,964 $107,806 $110,037 $120,264 $110,967
Other liabilities 33,926 33,942 33,074 34,053 38,358
----------------------------------------------------
144,890 141,748 143,111 154,317 149,325
REDEEMABLE STOCK
Class A and Class B Common
Stock at redemption value 8,147 7,477 7,604 6,975 7,712
OTHER SHAREHOLDERS' EQUITY 142,446 126,290 111,278 103,292 89,440
----------------------------------------------------
Total liabilities, redeemable
stock and shareholders'
equity $295,483 $275,515 $261,993 $264,584 $246,477
----------------------------------------------------
----------------------------------------------------
</TABLE>
11
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ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31
1998(1) 1997(1) 1996(1) 1995(2) 1994(2)
-------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Midwest Medical Insurance Holding
Company:
Class A Common Shares issued and
outstanding 125,682 121,322 118,209 116,251(3) 116,855(3)
Redemption value per share $64.81 $61.63 $64.33 $60.00 $66.00
Class A Common Shares redeemed
9,005 10,306 10,272 12,424 12,640
Amount paid to terminating
policyholders upon redemption $ 523 $ 648 $ 608 $ 829 $ 840
</TABLE>
_______________________________________
(1) Amounts derived from audited consolidated financial statements of MMIHC
included in Item 8 of this Form 10-K.
(2) Amounts derived from audited consolidated financial statements of MMIHC.
(3) Includes pro forma shares computed to give retroactive effect to the merger
of MMIHC/MMIC with MLM. See Note 1 to the consolidated financial statements
included in Item 8 of this Form 10-K.
12
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MANNER OF PRESENTATION
The financial statements of MMIHC and its subsidiaries are presented on a
consolidated basis. In future references in this analysis, which should be read
together with the 1998 consolidated financial statements and notes thereto
appearing under Item 8 in this Form 10-K, MMIHC and its subsidiaries are
referred to collectively as the "Company."
LIQUIDITY AND CAPITAL RESOURCES
The majority of the Company's assets are invested in investment-grade bonds,
stocks, a real estate investment trust and short-term instruments. These
investments totaled $264,761,000 and $246,746,000 at December 31, 1998 and 1997,
respectively, which represented 89.6% and 89.5% of total assets. The primary
objectives of the Company's investment policy established by the Board's
Investment Committee are the preservation of assets, maximizing pre-tax total
portfolio return, and assuring adequate liquidity to meet operational
requirements primarily the payment of insurance claims. Fixed maturity
investments and equity securities are classified as available for sale and
carried at fair value. The real estate investment trust and short-term
instruments are recorded at cost which approximates fair value.
During 1997, the Company adopted a revised Investment Policy resulting in a
portfolio restructuring designed to increase the pre-tax total return from
investments. The benchmark total return goal set for the fixed portfolio manager
was increased. This resulted in a turnover of most of the fixed income portfolio
which included selling all municipal bonds. To further diversify the portfolio
and maximize total return, the Company invested $10 million in a private
placement real estate investment trust in September of 1997 and invested $15
million in international equities in January of 1998. These changes reflect the
Company's strong financial position relative to the risk inherent in the amount
of premium written.
The Company's cash flow from operations decreased in 1998 versus 1997 and 1996.
The 1998 cash flow from operations of $(9,605,000) was unfavorably impacted by
premium adjustments paid to reinsurers on reinsurance contracts for prior years,
less premium received in advance at the end of the year due to later billing of
policies with January effective dates, and an increase in underwriting and other
operating expenses. 1998 underwriting expenses increased primarily from
additional staff needed to manage Company growth and added costs from the
conversion to a new insurance company operating system. 1998 other operating
expenses increased primarily from launching the operations of Solutions
including the acquisition of MedPower. The positive cash flow from 1997
operations of $4,002,000 was primarily the result of a decrease in claim
payments, whereas the negative cash flow from 1996 operations of $(2,072,000)
was primarily driven by an increase in claim payments.
13
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Premium rates in general have remained stable with slight rate increases in
regions where the Company has experienced unfavorable claim trends.
Consequently, cash receipts from policyholder premiums have been relatively
level. MMIC, however, has returned substantial amounts of premiums to
policyholders in recent years in the form of retrospective premium credits. The
retrospective premium credits have been paid to policyholders in the first
quarter of each year. Loss and operating expense payments have generally been
met from policyholder premium receipts with any excess cash allocated to the
investment portfolio. The Company regularly analyzes loss liabilities to project
the cash flow required in future years. Since the overall portfolio is highly
liquid, exact matching of bond maturities and liabilities is not a goal. Bond
maturities are primarily selected to maximize total return. The Company believes
that its cash and investments combined with its internally generated funds will
be sufficient to meet its present and reasonably foreseeable operating and
capital requirements and will not need to borrow funds from external sources.
The Company had no material capital expenditure commitments as of December 31,
1998.
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 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 details about the redeemable stock and the actual redemptions
during the years 1998, 1997 and 1996 are found in Note 2 to the consolidated
financial statements. This limited redemption value preserves the capital of
MMIC which is separately disclosed as other shareholders' equity in the
consolidated financial statements. The consolidated statements of changes in
other shareholders' equity found in the accompanying consolidated 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 and
to provide capital for new ventures entered into by Solutions. A $2,000,000
dividend was declared in September of 1998 and paid in November of 1998 for
those reasons mentioned above. No dividends were declared or paid by MMIC to
MMIHC in 1997. 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. A $260,000 dividend was declared in
November of 1995 and paid in February of 1996 primarily to maintain the
redemption value of the Company's Class A Common Stock.
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
NET PREMIUMS EARNED increased $2,098,000 in 1998 from 1997. Although
policyholder rates remained relatively level, new business generated
approximately $1,263,000 of additional earned premium. The remaining increase
was the result of the following significant factors:
1. The estimated reinsurance premium applicable to the treaty years
1992-1994 and 1995-1997, which is based in part on reinsured claims
experience, was reduced $2,550,000 on a net basis in 1998. This
compares to a net reduction for those treaty years of $2,950,000 in
1997 resulting in a net DECREASE in premium between years of $400,000.
2. The Company negotiated lower rates on its 1998 reinsurance
contract that reduced ceded premiums by $1,031,000 compared to 1997. This
INCREASED 1998 net premiums earned.
3. In 1998, $789,000 was received from the commutation of a reinsurance
treaty covering the 1991 year. Since no reinsurance commutation
occurred in 1997, premiums INCREASED from 1997 to 1998 by $789,000.
4. Retrospective premium credits of $5,200,000 for Minnesota
policyholders and $280,000 for North Dakota policyholders were
recorded in 1998. The premium credits for 1997 were $5,000,000 for
Minnesota policyholders only. The difference between years resulted in
a $480,000 DECREASE in 1998 net premiums earned.
Net premiums earned increased $1,749,000 in 1997 from 1996. Although
policyholder rates remained relatively level for 1996 and 1997, an increase in
the number of policyholders in 1997 resulted in additional earned premium of
$500,000. The remaining increase was the result of the following significant
factors:
1. The estimated reinsurance premium applicable to the treaty years
1992-1994 and 1995-1997, which is based in part on reinsured claims
experience, was reduced $2,950,000 in 1997 versus an increase of
$925,000 in 1996. This resulted in a net INCREASE in premium between
years of $3,875,000.
2. The Company recorded an increase of $1,171,000 in the Iowa Development
Experience Liability account in 1997. A similar increase of $2,901,000
was recorded in 1996. While these increased liabilities both reduce
premium, the difference in the amounts between years caused an
INCREASE in net premiums earned from 1996 to 1997 of $1,730,000.
3. In 1996, $2,194,000 was received from the commutation of a reinsurance
treaty covering the years 1989 and 1990. This increased 1996 premiums.
Since there was no counterpart in 1997, premiums DECREASED $2,194,000
from 1996 to 1997.
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
4. A number of other prior year reinsurance premium adjustments recorded
in 1996 increased 1996 premiums by $2,143,000. With no counterpart in
1997, the difference between years DECREASED 1997 premiums by
$2,143,000.
NET INVESTMENT INCOME decreased $590,000 from 1997 to 1998 and $552,000 from
1996 to 1997. Although total invested assets has increased over the same time
period, the fixed maturity component of invested assets has decreased due to the
Company's efforts to maximize total return and diversify the portfolio as
referred to earlier under the Liquidity and Capital Resources section. Since it
is the largest contributor to the Company's investment income, the decrease in
fixed maturity investments decreased investment income. Yields on fixed maturity
investments also declined over the same time period further contributing to the
decrease in investment income.
REALIZED CAPITAL GAINS increased $2,465,000 to $8,949,000 in 1998 and increased
$4,713,000 to $6,484,000 in 1997. During 1998, approximately $1,175,000 of net
capital gains were realized through the allocation of $15,000,000 to
international equities in January of 1998. The remaining $7,774,000 of 1998 net
realized capital gains resulted from the management of the portfolio on a
pre-tax total return basis within the parameters set by the Board's Investment
Committee. During 1997, the fixed income portfolio was restructured to pursue
the newly adopted pre-tax total return objective resulting in net realized
capital gains of $4,916,000. An additional $1,568,000 of net capital gains were
realized in 1997 in the normal course of managing the investment portfolio. The
Company employs three outside professional advisors to manage the portfolio: one
to manage investment-grade fixed income securities, one to manage large-cap
domestic equities, and one to manage international equities. The managers
operate within the Company's adopted investment policy as approved by the
Board's Investment Committee. This policy was revised in 1997 as previously
discussed under the Liquidity and Capital Resources section. The Investment
Committee meets with outside investment managers approximately four times per
year.
LOSSES AND LOSS ADJUSTMENT EXPENSES are the costs associated with the settlement
of insurance claims and are the Company's principal expense. Incurred loss and
loss adjustment expenses were $37,494,000 for 1998 compared to $31,834,000 in
1997 and $32,257,000 in 1996. This results in an increase of 17.8 % between 1998
and 1997 versus a slight decrease of 1.3% between 1997 and 1996. As shown in
Note 5 of the consolidated financial statements, the current year's provision
for loss and loss adjustment expense, which is based upon policyholder exposure,
expected frequency of losses, and severity of losses, was fairly stable for the
years 1998, 1997 and 1996. Loss and loss adjustment expenses also include
adjustments of prior years' estimates. These adjustments to the liability for
loss and loss adjustment expense are evaluated by management and supported by an
outside actuarial review performed at the conclusion of the year. As shown in
Note 5 of the consolidated financial statements, these evaluations resulted in a
reduction in estimated liabilities applicable to prior years of $4,433,000,
$8,352,000 and $8,844,000, respectively in 1998, 1997 and 1996. The less
favorable development on prior years is the primary reason for the greater
incurred loss and loss adjustment expenses in 1998.
16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The following schedule summarizes the development of the liability for loss and
loss adjustment expense from 1988 through 1998. This schedule is 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 beginning
approximately in 1986 for the Company and across the industry, has resulted in
redundancies in liabilities greater than expected. The table indicates that the
redundancy in loss liabilities, which develop as actual results become known,
has significantly decreased from the high at December 31, 1990. Loss and loss
adjustment expense liabilities have not been discounted in the Company's
financial statements.
17
<PAGE>
DEVELOPMENT OF LIABILITY FOR LOSS AND LOSS ADJUSTMENT EXPENSE
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Liability for unpaid loss
and loss adjustment
expense $74,577 $89,630 $97,375 $100,167 $98,617 $105,589 $88,227 $96,424 $90,342 $89,394 $94,467
Cumulative amount of
liability paid through:
1 year later 12,067 10,585 13,973 19,112 21,422 25,251 26,879 33,454 30,097 28,755
2 years later 19,043 21,890 28,643 32,798 37,498 42,685 46,925 53,132 44,562
3 years later 24,143 30,869 35,305 39,906 45,227 51,087 55,534 59,568
4 years later 26,241 35,015 37,624 42,752 46,226 53,594 57,129
5 years later 27,561 35,115 38,298 43,994 46,823 53,288
6 years later 27,695 35,187 39,505 44,370 46,810
7 years later 27,695 35,295 39,861 44,420
8 years later 27,695 35,295 39,862
9 years later 27,695 35,295
10 years later 27,695
Liability re-estimated as
of:
1 year later 65,928 73,244 83,359 83,991 94,633 80,960 85,595 87,580 81,990 84,961
2 years later 51,379 62,056 64,876 74,883 69,490 75,364 76,365 79,665 76,542
3 years later 43,516 52,010 56,351 53,538 65,568 64,586 67,891 77,294
4 years later 35,753 44,582 42,075 52,833 56,426 57,851 65,794
5 years later 31,052 37,872 41,771 45,892 52,388 56,785
6 years later 29,052 37,617 39,519 43,760 53,014
7 years later 29,002 35,882 38,929 43,563
8 years later 28,724 35,882 38,929
9 years later 28,724 35,882
10 years later 28,724
Cumulative redundancy 45,853 53,748 58,446 56,604 45,603 48,804 22,433 19,130 13,800 4,433
</TABLE>
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
UNDERWRITING, ACQUISITION AND INSURANCE EXPENSES increased $1,189,000 from
$5,509,000 in 1997 to $6,698,000 in 1998. Approximately $469,000 of the increase
came from increases in variable expenses such as commissions and premium taxes
that resulted from the greater premium volume. The remaining increase was
largely due to additional staff needed to manage Company growth and added costs
from the conversion to a new insurance company operating system.
Underwriting, acquisition and insurance expenses increased $828,000 from 1996 to
1997. Approximately $425,000 of the increase was due to payments to state
medical societies, for the first time in 1997, under license and endorsement
agreements. The remaining increase reflected the increase in overall cost of
operating the Company in 1997 with employee salaries and benefits being the
largest component.
OTHER OPERATING EXPENSES increased $2,503,000 from $1,086,000 in 1997 to
$3,589,000 in 1998. Approximately $2,344,000 of the increase was from operating
two new, non-insurance companies, Solutions and MedPower. Both Solutions and
MedPower began active operations as of the beginning of 1998 as described in
Item 1 of this Form 10-K. The remaining increase resulted primarily from added
costs of operating the holding company.
Other operating expenses increased $228,000 from $858,000 in 1996 to $1,086,000
in 1997. Approximately $131,000 of the increase was from researching and forming
the new business development company that became Solutions. The remaining
increase resulted primarily from additional stock issuance expenses.
INCOME BEFORE INCOME TAXES decreased to $8,637,000 in 1998 compared to
$13,763,000 in 1997. The decrease resulted primarily from less favorable
development on loss liabilities estimated in prior years and added expenses from
operating two non-insurance companies newly formed at the beginning of 1998.
Income before income taxes increased to $13,763,000 in 1997 from $8,939,000 in
1996 primarily from the reversal of loss liabilities established in prior years
and additional net realized capital gains from the repositioning of the
investment portfolio.
INCOME TAXES decreased to $2,689,000 for 1998 compared to $4,463,000 for 1997.
The effective tax rates for 1998 and 1997 were 31.1% and 32.4%, respectively.
The principal factor in the decline in the effective tax rate was a recovery of
prior taxes recorded in 1998.
Income taxes increased to $4,463,000 for 1997 compared to $1,458,000 for 1996.
The effective tax rates for 1997 and 1996 were 32.4% and 16.3%, respectively.
The increase in the effective tax rate for 1997 was primarily due to a reduction
in tax-exempt investment income due to the 1997 repositioning of the investment
portfolio that eliminated tax-exempt municipal bonds. A 1997 payment of prior
year taxes and tax-exempt life insurance proceeds received in 1996 also
contributed to the increase in the effective tax rate in 1997.
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
NET INCOME realized by the Company was $5,948,000 for 1998 compared to
$9,300,000 for 1997 because of the factors discussed above. Basic net income per
share decreased to $48.36 for 1998 from $77.79 per share for 1997. Diluted net
income per share decreased to $43.65 for 1998 from $70.23 per share for 1997.
Also due to the factors discussed above, the Company realized net income of
$9,300,000 for 1997 compared to net income of $7,481,000 for 1996. Basic net
income per share increased to $77.79 for 1997 from $64.45 per share for 1996.
Diluted net income per share increased to $70.23 for 1997 from $58.33 per share
for 1996.
YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
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.
A Year 2000 Task Force was formed in early 1998 consisting of members of senior
and departmental management to evaluate and monitor the Year 2000 issue,
identify the causes and consequences to the Company, and develop courses of
action including contingency plans as deemed necessary. The Year 2000 Task Force
assessment includes the following key areas: internal computer hardware and
software, significant business partners and vendors and insurance policy
exposure.
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 three pieces of network hardware and
one subsidiary operating system that were not Year 2000 compliant. The three
pieces of network hardware did not impact time sensitive operations and
therefore did not pose any significant Year 2000 risk to the Company. The
operating system used by the MedPower subsidiary is in the process of being
converted to a new, Year 2000 compliant platform. The new operating system is
expected to be fully operational by June 1999 with a total conversion cost
estimated at $250,000. The conversion was approximately 60% completed and had
expenditures of approximately $150,000 as of the date of this Form 10-K
filing. As a result of the above evaluation, management believes that the
Year 2000 issue has been adequately addressed with respect to internal use
hardware and software.
20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
A Year 2000 compliance inquiry was prepared and mailed in early October of 1998
to all of the Company's key business partners and service vendors. Responses are
being evaluated and follow-up will be performed during 1999 as appropriate. No
assurances, however, can be given that the systems of other companies on which
the Company's operations rely will become Year 2000 compliant in a timely
manner, or that the failure by a third party to become 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 and may be affected by the Year 2000 bug.
This is primarily an exposure for the products liability carrier. All hospital
insureds have been surveyed to monitor their compliance to MMIC guidelines on
medical equipment. All current hospital insureds are in compliance. At this
point, 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 plan as developed. While MMIC feels confident in the
completeness of its due diligence on Year 2000 exposure, it is not yet possible
to determine whether Year 2000 claims will be made against these policies or if
such claims will be held to have merit and what potential financial impact may
result.
Although the Company expects to complete its Year 2000 remediation in 1999,
there are risks if its efforts are delayed or fail. A delay or 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 performed as described previously, 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.
21
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The Year 2000 Task Force has developed contingency plans for the Company with
the exception of the MedPower subsidiary which is in the process of developing a
separate contingency plan. MedPower's contingency plan is expected to be
completed by June 1999. If the Company encounters Year 2000 problems with
respect to internal computer hardware and software, core functions can be
processed manually until the problems are remedied. If unanticipated Year 2000
problems occur with key service vendors, essential services can be handled
manually or through other vendors until the problems are resolved. The Year 2000
Task Force will be evaluating the need to test backup manual systems and
identify alternative key service vendors. 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.
The anticipated completion dates for Year 2000 compliance and the Company's
contingency plans and the cost estimates for the completion of Year 2000
modifications are based on management's best estimates utilizing current data
regarding available resources, coordination with third parties and other
relevant factors and information about systems conversion. No assurances,
however, can be given that these estimates will be achieved and actual results
may differ from those anticipated.
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 Company's following disclosures under the heading
"Cautionary Note Regarding Forward-Looking Statements."
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements other than historical information contained in this Form 10-K are
considered to be "forward-looking statements" within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities Act
of 1934, as amended.
All forward-looking statements address matters that involve risks and
uncertainties. Accordingly, in addition to the factors discussed in this Form
10-K, there are or will be other 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 the Company
insure;
22
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
iv. faster or more adverse loss development experience than that on which
the Company 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 or material expense incurred in connection with such
compliance.
The facts set forth above should be considered in connection with any
forward-looking statement contained in this Form 10-K. 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 avail
itself of the safe harbor from liability with respect to forward-looking
statements provided by Section 27A and Section 21E referred to above.
ITEM 7a. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT
MARKET RISK
Market risk is the risk of loss that may occur when fluctuations in interest and
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 and equity price risk on its investment in equity
securities.
As disclosed previously, 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 either interest rate risk or equity
price risk. Professional outside investment managers adjust portfolio
characteristics, such as sector and average life, 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.
23
<PAGE>
ITEM 7a. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT
MARKET RISK (CONTINUED)
Based on the effective duration of the fixed maturity investment portfolio as of
December 31, 1998, 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 $8,500,000. 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 $10,000,000 at December 31, 1998.
The Company believes that there would be no material effect on its net income
and cash flows in either scenario. 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of Midwest Medical Insurance Holding
Company and Subsidiaries are presented on the following pages 25 through 53 of
this Annual Report on Form 10-K.
24
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Consolidated Financial Statements
Years ended December 31, 1998, 1997 and 1996
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . 26
Consolidated Financial Statements
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . . 27
Consolidated Statements of Income. . . . . . . . . . . . . . . . . . . . . 28
Consolidated Statements of Changes in Other Shareholders' Equity . . . . . 29
Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . . . 30
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . 31
</TABLE>
25
<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, 1998 and 1997, 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, 1998. Our audits also included the financial statement schedules listed in
the index at Item 14(a). These financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with 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, 1998 and 1997, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, 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 herein.
/s/ ERNST & YOUNG LLP
Minneapolis, Minnesota
February 1, 1999
26
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Consolidated Balance Sheets
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
-----------------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities at fair value (cost: 1998--$161,430;
1997--$170,590) $164,652 $171,975
Equity securities at fair value (cost: 1998--$41,907
1997--$21,576) 86,553 50,862
Short-term 3,556 13,909
Other 10,000 10,000
-----------------------
264,761 246,746
Cash 647 2,378
Accrued investment income 1,739 2,341
Reinsurance recoverable 16,499 19,117
Amounts due from reinsurers 3,191 -
Other assets 8,646 4,933
-----------------------
Total assets $295,483 $275,515
-----------------------
-----------------------
LIABILITIES, REDEEMABLE STOCK AND OTHER
SHAREHOLDERS' EQUITY
Liabilities:
Unpaid losses and loss adjustment expenses $110,964 $107,806
Unearned premiums 8,173 6,072
Retrospective premiums 8,543 9,905
Deferred income taxes 10,966 3,592
Amounts due reinsurers - 2,984
Other liabilities 6,244 11,389
-----------------------
Total liabilities 144,890 141,748
Redeemable stock:
Class A Common Stock--authorized 300,000 shares,
issued and outstanding 125,682 shares in 1998
and 121,322 shares in 1997 8,146 7,476
Class B Common Stock--authorized, issued and outstanding 1 share 1 1
-----------------------
8,147 7,477
Other shareholders' equity 142,446 126,290
-----------------------
Total liabilities, redeemable stock and other
shareholders' equity $295,483 $275,515
-----------------------
-----------------------
</TABLE>
SEE ACCOMPANYING NOTES.
27
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Consolidated Statements of Income
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
-------------------------------------
<S> <C> <C> <C>
Revenues:
Net premiums earned $35,014 $32,916 $31,177
Net investment income 10,919 11,509 12,061
Realized capital gains 8,949 6,484 1,771
Other 1,536 1,283 1,726
-------------------------------------
56,418 52,192 46,735
Losses and expenses:
Losses and loss adjustment expenses 37,494 31,834 32,257
Underwriting, acquisition and insurance expenses 6,698 5,509 4,681
Other operating expenses 3,589 1,086 858
-------------------------------------
47,781 38,429 37,796
-------------------------------------
Income before income taxes 8,637 13,763 8,939
Income taxes 2,689 4,463 1,458
-------------------------------------
Net income $5,948 $9,300 $7,481
-------------------------------------
-------------------------------------
Income per common share $48.36 $77.79 $64.45
-------------------------------------
-------------------------------------
Income per common share--assuming dilution $43.65 $70.23 $58.33
-------------------------------------
-------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
28
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Consolidated Statements of Changes in Other Shareholders' Equity
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
PAID-IN RETAINED COMPREHENSIVE
TOTAL CAPITAL EARNINGS INCOME
-------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 $103,292 $12,789 $78,204 $12,299
Comprehensive income:
Net income 7,481 - 7,481 -
Other comprehensive income:
Unrealized gains on securities net of $1,468 in taxes 2,726 - - 2,726
Reclassification adjustment for gains included in net
income net of $620 in taxes (1,151) - - (1,151)
--------
Total comprehensive income 9,056
Net income of non-insurance entities includable in Class A
Common Stock redemption value (1,070) - (1,070) -
-----------------------------------------------------
Balance at December 31, 1996 111,278 12,789 84,615 13,874
Comprehensive income:
Net income 9,300 - 9,300 -
Other comprehensive income:
Unrealized gains on securities net of $5,491 in taxes 10,199 - - 10,199
Reclassification adjustment for gains included in net
income net of $2,269 in taxes (4,215) - - (4,215)
--------
Total comprehensive income 15,284
Net income of non-insurance entities includable in Class A
Common Stock redemption value (272) - (272) -
-----------------------------------------------------
Balance at December 31, 1997 126,290 12,789 93,643 19,858
Comprehensive income:
Net income 5,948 - 5,948 -
Other comprehensive income:
Unrealized gains on securities net of $9,111 in taxes 16,921 - - 16,921
Reclassification adjustment for gains included in net
income net of $3,132 in taxes (5,817) - - (5,817)
--------
Total comprehensive income 17,052
Dividend paid by Midwest Medical Insurance Company to
Midwest Medical Insurance Holding Company (2,000) - (2,000) -
Net loss of non-insurance entities includable in Class A
Common Stock redemption value 1,104 - 1,104 -
-----------------------------------------------------
Balance at December 31, 1998 $142,446 $12,789 $98,695 $30,962
-----------------------------------------------------
-----------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
29
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Consolidated Statements of Cash Flows
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
---------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 5,948 $ 9,300 $ 7,481
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Decrease in accrued investment income 602 437 97
Decrease in reinsurance recoverable 2,618 3,057 2,938
Increase in amounts due from reinsurers (3,191) - -
(Increase) decrease in other assets (3,713) 1,518 1,015
Deferred tax provision 1,354 1,494 298
Increase (decrease) in unpaid losses and loss
adjustment expenses 3,158 (2,231) (10,227)
Increase (decrease) in unearned premiums 2,101 (788) (173)
Decrease in retrospective premiums (1,362) (933) (26)
Decrease in amounts due reinsurers (2,984) (4,290) (544)
(Decrease) increase in other liabilities (5,145) 3,287 (236)
Accretion of bond discount, net of premium amortization (266) (618) (1,080)
Realized capital gains (8,949) (6,484) (1,771)
Compensation expense for vested Class A common shares 224 253 156
---------------------------------------
(9,605) 4,002 (2,072)
INVESTING ACTIVITIES
Purchases of fixed maturity investments and equity securities (401,922) (311,947) (75,684)
Sales of fixed maturity investments and equity securities 398,717 316,982 54,293
Calls and maturities of fixed maturity investments 1,250 - 16,250
Net sales (purchases) of short-term investments 6,502 (6,011) 7,117
Capitalization of Midwest Medical Solutions, Inc. 3,850 - -
---------------------------------------
8,397 (976) 1,976
FINANCING ACTIVITIES
Redemption of Class A Common Stock (523) (648) (608)
---------------------------------------
(Decrease) increase in cash (1,731) 2,378 (704)
Cash at beginning of year 2,378 - 704
---------------------------------------
Cash at end of year $ 647 $ 2,378 $ -
---------------------------------------
---------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
30
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1998
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.
During 1995, MMIHC formed MMIHC Insurance Services, Inc. (Services) 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.
During 1997, MMIHC formed Midwest Medical Solutions, Inc. (Solutions) as a
business development company to strengthen and promote the independence and
interdependencies of physicians, clinics and hospitals that MMIC serves.
Business development opportunities being pursued include practice enhancement,
strategic consulting, and electronic processing and integration services and
support.
31
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
Effective January 1, 1998, Solutions purchased the assets and operations of
MedPower Information Resources, Inc. (MedPower). MedPower processes and
electronically submits medical claims for a network of over 100 provider
entities. MedPower also provides various information consulting and network
support services.
MMIHC provides management and administrative services to MMIC for a fee
generally equal to the cost of services provided plus ten percent. The insurance
company provides professional liability insurance to physicians, clinics,
hospitals and healthcare systems in Minnesota, Iowa, Nebraska, Wisconsin,
Illinois, 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, Services, and Solutions, which includes
Solution's wholly-owned subsidiary, MedPower. 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.
32
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
Hereafter, MMIHC, MMIC, Services, Solutions and MedPower shall be collectively
referred to as the Company unless the reference pertains to a specific entity.
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 10).
COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement 130, REPORTING
COMPREHENSIVE INCOME. Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net income or shareholders'
equity. Statement 130 requires unrealized gains or losses on the Company's
available-for-sale securities, which prior to adoption were reported separately
in shareholders' equity, to be included in other comprehensive income. Prior
year financial statements have been reclassified to conform to the requirements
of Statement 130.
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.
33
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
INVESTMENTS
The Company manages its investment portfolio to achieve its long-term investment
objective of providing for the financial stability of the Company through
preservation of assets and maximization of total portfolio return. Although
management believes the Company has the ability to hold its fixed maturity
investment portfolio to maturity, these investments are classified as "available
for sale" as management may take advantage of opportunities to increase total
return through sales of selected securities in response to changing market
conditions.
Consistent with management's classification of its investment in debt and equity
securities as available for sale, such investments are carried at fair value
with unrealized holding gains and losses reflected as a component of other
comprehensive income, net of applicable deferred taxes.
Fair values are based on quoted market prices, where available. For fixed
maturity investments not actively traded, fair values are estimated using values
obtained from independent pricing services.
Short-term investments are principally money market funds backed by U.S.
government securities and are recorded at cost which approximates fair value.
Other investments are less than twenty percent equity interests in non-traded
real estate investment trusts and are recorded at cost.
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.
34
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
LOSSES AND LOSS ADJUSTMENT EXPENSES
The liability for unpaid losses and loss adjustment expenses represents an
estimate of the ultimate cost of all such amounts which are unpaid at the
balance sheet dates. The liability is based on both case-by-case estimates and
statistical analysis and projections using the historical loss experience of
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
MMIC'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.
MMIC has a retro premium program whereby physicians may receive credits against
future premiums based upon loss experience of MMIC. Amounts to be returned under
the program are accrued when approved by the Board of Directors and reflected as
a reduction in net premiums earned.
REINSURANCE
MMIC 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 MMIC 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.
35
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
ACQUISITION COSTS
Acquisition costs are expensed when incurred. Due to the nature of its
operations, MMIC does not pay significant amounts in commissions.
INCOME TAXES
The Company files a consolidated tax return with its subsidiaries. Income tax
expense is allocated to the subsidiaries based upon separate company taxable
income under a tax-sharing agreement. The Company uses the asset and liability
method of accounting for income taxes. Deferred income tax assets or liabilities
are recognized for the temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and amounts used for
income tax purposes.
EARNINGS PER SHARE
Basic earnings per share (EPS) is computed by dividing income available to
common shareholders by the weighted-average number of common shares outstanding
for the year. Diluted EPS reflects the potential dilution that could occur if
earned but unissued shares of Class A common stock were issued.
RECLASSIFICATIONS
Certain amounts in the prior years' financial statements have been reclassified
to conform with the current year presentation.
2. 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).
36
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. 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.
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.
37
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. REDEEMABLE STOCK (CONTINUED)
Following is the detail of changes in redeemable stock for each of the three
years in the period ended December 31, 1998 (in thousands, except for share and
per share amounts):
<TABLE>
<CAPTION>
ACCUMULATED
CLASS A COMMON STOCK CLASS B MMIHC MMIHC OTHER
-------------------- COMMON PAID-IN RETAINED COMPREHENSIVE
TOTAL SHARES AMOUNT STOCK CAPITAL EARNINGS INCOME
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $6,975 116,251 $ 1 $1 $4,752 $2,164 $ 57
Comprehensive income:
Net income of non-insurance entities includable
in Class A Common Stock redemption value 1,070 - - - - 1,070 -
Other comprehensive income:
Unrealized gains on securities net of $6 in taxes 11 - - - - - 11
------
Total comprehensive income 1,081
Redemption of shares due to policyholder terminations
by effective date:
January 1, 1996 to June 30, 1996; NRV of $60.00 (377) (6,277) (1) - (259) (117) -
July 1, 1996 to December 31, 1996; NRV of $57.84 (231) (3,995) - - (159) (72) -
Issuance of shares to vested policyholders - 9,540 1 - - (1) -
Initial issuance of shares to policyholders upon vesting 156 2,690 - - 156 - -
----------------------------------------------------------------------
Balance at December 31, 1996 (CARRIED FORWARD) 7,604 118,209 1 1 4,490 3,044 68
</TABLE>
38
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. REDEEMABLE STOCK (CONTINUED)
<TABLE>
<CAPTION>
ACCUMULATED
CLASS A COMMON STOCK CLASS B MMIHC MMIHC OTHER
-------------------- COMMON PAID-IN RETAINED COMPREHENSIVE
TOTAL SHARES AMOUNT STOCK CAPITAL EARNINGS INCOME
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 (BROUGHT FORWARD) $7,604 118,209 $ 1 $1 $4,490 $3,044 $ 68
Comprehensive income:
Net income of non-insurance entities includable
in Class A Common Stock redemption value 272 - - - - 272 -
Other comprehensive income:
Unrealized gains on securities net of $6 in taxes 11 - - - - - 11
------
Total comprehensive income 283
Redemption of shares due to policyholder terminations
by effective date:
January 1, 1997 to June 30, 1997; NRV of $64.33 (278) (4,363) - - (165) (113) -
July 1, 1997 to December 31, 1997; NRV of $62.12 (370) (5,943) (1) - (220) (149) -
Issuance of shares to vested policyholders - 9,406 1 - - (1) -
Initial issuance of shares to policyholders upon vesting 253 4,013 - - 253 - -
Other (15) - - - - (15) -
------------------------------------------------------------------------
Balance at December 31, 1997 (CARRIED FORWARD) 7,477 121,322 1 1 4,358 3,038 79
</TABLE>
39
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. REDEEMABLE STOCK (CONTINUED)
<TABLE>
<CAPTION>
ACCUMULATED
CLASS A COMMON STOCK CLASS B MMIHC MMIHC OTHER
-------------------- COMMON PAID-IN RETAINED COMPREHENSIVE
TOTAL SHARES AMOUNT STOCK CAPITAL EARNINGS INCOME
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 (BROUGHT FORWARD) $ 7,477 121,322 $ 1 $1 $4,358 $ 3,038 $ 79
Comprehensive income:
Net loss of non-insurance entities includable in
Class A Common Stock redemption value (1,104) - - - - (1,104) -
Other comprehensive income:
Unrealized gains on securities net of $39 in taxes 73 - - - - - 73
-------
Total comprehensive income (1,031)
Redemption of shares due to policyholder terminations
by effective date:
January 1, 1998 to June 30, 1998; NRV of $61.63 (251) (4,070) - - (147) (104) -
July 1, 1998 to December 31, 1998; NRV of $54.70 (272) (4,935) (1) - (160) (111) -
Issuance of shares to vested policyholders - 9,437 1 - - (1) -
Initial issuance of shares to policyholders upon vesting 224 3,928 - - 224 - -
Dividend from MMIC 2,000 - - - 2,000 - -
------------------------------------------------------------------------
Balance at December 31, 1998 $ 8,147 125,682 $ 1 $1 $6,275 $ 1,718 $152
------------------------------------------------------------------------
------------------------------------------------------------------------
</TABLE>
40
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS
Components of net investment income are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------------
<S> <C> <C> <C>
Fixed maturities $ 9,340 $10,901 $11,561
Equity securities 820 523 380
Short-term investments 926 939 904
Other investments 855 - -
---------------------------------
11,941 12,363 12,845
Investment expenses (1,022) (854) (784)
---------------------------------
$10,919 $11,509 $12,061
---------------------------------
---------------------------------
</TABLE>
The cost (amortized cost for fixed maturities) and fair value of available
for sale investments are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-----------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturities:
MMIC:
United States Government $110,729 $ 2,729 $ (70) $113,388
Public utilities 1,609 5 - 1,614
Industrial and other 49,092 651 (93) 49,650
-----------------------------------------------
Total $161,430 $ 3,385 $(163) $164,652
-----------------------------------------------
-----------------------------------------------
Equity securities:
MMIHC $ 520 $ 234 $ - $ 754
MMIC 41,387 45,297 (885) 85,799
-----------------------------------------------
Total $ 41,907 $ 45,531 $(885) $ 86,553
-----------------------------------------------
-----------------------------------------------
</TABLE>
41
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-----------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturities:
MMIHC:
United States Government $ 1,255 $ - $ - $ 1,255
Industrial and other 53 - - 53
MMIC:
United States Government 97,234 801 (36) 97,999
State and other political
subdivisions 32,991 383 - 33,374
Industrial and other 39,057 257 (20) 39,294
-----------------------------------------------
Total $170,590 $ 1,441 $(56) $171,975
-----------------------------------------------
-----------------------------------------------
Equity securities:
MMIHC $ 981 $ 122 $ - $ 1,103
MMIC 20,595 29,164 - 49,759
-----------------------------------------------
Total $ 21,576 $ 29,286 $ - $ 50,862
-----------------------------------------------
-----------------------------------------------
</TABLE>
The components of the unrealized appreciation on available for sale
securities as of December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
MMIHC MMIC MMIHC MMIC
----------------- -----------------
<S> <C> <C> <C> <C>
Fixed maturities:
Gross unrealized gains $ - $ 3,385 $ - $ 1,441
Gross unrealized losses - (163) - (56)
Equity securities:
Gross unrealized gains 234 45,297 122 29,164
Gross unrealized losses - (885) - -
----------------- -----------------
234 47,634 122 30,549
Deferred income taxes (82) (16,672) (43) (10,691)
----------------- -----------------
$ 152 $ 30,962 $ 79 $ 19,858
----------------- -----------------
----------------- -----------------
</TABLE>
42
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
The amortized cost and market value of fixed maturities at December 31, 1998, 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.
<TABLE>
<CAPTION>
AMORTIZED MARKET
COST VALUE
------------------------
<S> <C> <C>
Due in one year or less $ 6,192 $ 6,221
Due after one year through five years 40,322 40,982
Due after five years through ten years 27,671 28,309
Due after ten years 87,245 89,140
------------------------
$161,430 $164,652
------------------------
------------------------
</TABLE>
Proceeds from sales of available for sale investments and the related gross
realized gains and losses are as follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
PROCEEDS REALIZED REALIZED
FROM SALES GAINS LOSSES
--------------------------------
<S> <C> <C> <C>
Year ended December 31, 1998:
Fixed maturities $382,048 $3,600 $(769)
Equity securities 16,669 6,404 (286)
Year ended December 31, 1997:
Fixed maturities 310,235 5,806 (884)
Equity securities 6,747 2,109 (547)
Year ended December 31, 1996:
Fixed maturities 46,735 803 (214)
Equity securities 7,558 1,347 (165)
</TABLE>
Net unrealized appreciation of fixed maturities increased (decreased) by
$1,837,000, $(2,197,000) and $(4,691,000) and net unrealized appreciation of
equity securities increased by $15,360,000, $11,417,000 and $7,140,000 for the
years ended December 31, 1998, 1997 and 1996, respectively.
43
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. RETROSPECTIVE PREMIUMS
The components of retrospective premiums at December 31 are as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
-------------------
<S> <C> <C>
Retrospective premium credits declared:
Minnesota policyholders $5,200 $5,000
North Dakota policyholders 280 -
Iowa policyholders active at date of merger
and renewing in 1999 and 1998 3,063 3,100
Favorable development on pre-merger IPMIT
liabilities not yet approved for credit - 1,805
-------------------
$8,543 $9,905
-------------------
-------------------
</TABLE>
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 finalized
using financial information available as of December 31, 1998. Final amounts due
under this provision will be paid to physician insureds in early 1999. Actual
payments of $3,073,000 and $2,501,000 were made to former IPMIT policyholders in
1998 and 1997, respectively. Actual retrospective premium payments made to
Minnesota policyholders' accounts in 1998 and 1997 were $5,008,000 and
$4,803,000, respectively.
A provision of the agreement and plan of merger between MLM and the Company
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, 1998, there has been no favorable
development and therefore there is no accrual related to this provision.
44
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. 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>
1998 1997 1996
--------------------------------------
<S> <C> <C> <C>
Balance as of January 1, net of reinsurance
recoverables $ 89,394 $ 90,342 $ 96,424
Incurred related to:
Current year 41,927 40,186 41,101
Prior years (4,433) (8,352) (8,844)
--------------------------------------
Total incurred 37,494 31,834 32,257
Paid related to:
Current year 3,666 2,685 4,885
Prior years 28,755 30,097 33,454
--------------------------------------
Total paid 32,421 32,782 38,339
--------------------------------------
Balance as of December 31, net of reinsurance
recoverables 94,467 89,394 90,342
Reinsurance recoverables at December 31 16,497 18,412 19,695
--------------------------------------
Balance as of December 31, gross $110,964 $107,806 $110,037
--------------------------------------
--------------------------------------
</TABLE>
The Company continually evaluates emerging trends in the development of loss
liabilities including the trends related to the pre-merger IPMIT and MLM
business. Based on this analysis, management periodically adjusts their
estimates of ultimate losses. See Note 4 regarding retrospective premium credits
paid and accrued.
45
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. INCOME TAXES
Components of income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---------------------
<S> <C> <C> <C>
Current provision $1,335 $2,969 $1,160
Deferred tax provision 1,354 1,494 298
---------------------
$2,689 $4,463 $1,458
---------------------
---------------------
</TABLE>
The Company's income taxes differ from the federal statutory rate applied to
income before tax as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------------------
<S> <C> <C> <C>
Income before tax at the federal statutory rate
of 35% $ 3,023 $ 4,817 $ 3,129
Tax-exempt income (net of proration adjustment) - (775) (1,374)
Dividends received deductions (net of proration
adjustment) (99) (89) (78)
State income taxes, net of federal tax benefit 37 198 50
Payment of prior year taxes - 300 -
Recovery of prior year taxes (267) - -
Proceeds on life insurance - - (368)
Other (5) 12 99
---------------------------------------
$ 2,689 $ 4,463 $ 1,458
---------------------------------------
---------------------------------------
</TABLE>
46
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. INCOME TAXES (CONTINUED)
The deferred income tax provision includes the following differences between
financial and income tax reporting (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------
<S> <C> <C> <C>
Discounting of post-1986 unpaid losses and loss
adjustment expenses $ 842 $ 323 $1,190
Liabilities not currently deductible 596 636 (274)
Unearned premiums (151) 57 6
Utilization of alternative minimum tax carryforwards - 496 -
Alternative minimum tax carryforwards - - (496)
Other 67 (18) (128)
-------------------------------------
$1,354 $1,494 $ 298
-------------------------------------
-------------------------------------
</TABLE>
The Company made income tax payments of $3,041,000, $1,518,000 and $3,260,000 in
1998, 1997 and 1996, respectively.
The components of the net deferred income tax (liability) asset as of December
31 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
------------------------
<S> <C> <C>
Deferred tax assets:
Unpaid losses and loss adjustment expenses $ 4,154 $ 4,996
Liabilities not currently deductible 1,079 1,675
Unearned premiums 628 477
Other 550 552
------------------------
6,411 7,700
Deferred tax liabilities:
Unrealized gains (16,754) (10,734)
Other (623) (558)
------------------------
(17,377) (11,292)
------------------------
$(10,966) $(3,592)
------------------------
------------------------
</TABLE>
47
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. INCOME TAXES (CONTINUED)
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.
7. REINSURANCE
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, 1998. Reinsurance recoverables on
paid and unpaid losses of $16,277,000 and $16,141,000 are associated with a
single reinsurer, General Reinsurance Corporation, at December 31, 1998 and
1997, respectively.
MMIC is authorized to issue policies with limits not to exceed $12,000,000 for
each claim and $14,000,000 in the aggregate under each policy in any one policy
year. Limits in excess of $12,000,000 for each claim and $14,000,000 annual
aggregate are available to physicians and clinics through reinsurance placed on
a facultative basis by MMIC. The Company generally retains the first $750,000 of
each claim and reinsures the remainder through a treaty under which premiums are
subject to adjustment based on experience.
Total ceded reinsurance premiums, before the effects of treaty commutations, for
the years ended December 31, 1998, 1997 and 1996 were $3,104,000, $3,329,000 and
$6,416,000, respectively. Loss and loss adjustment expenses incurred are net of
applicable reinsurance of $2,240,000, $2,455,000 and $2,459,000 for the years
ended December 31, 1998, 1997 and 1996, respectively.
In 1998, the Company commuted reinsurance treaties covering the period January
1, 1991 through December 31, 1991. Net premiums recovered as a result of these
commutations of $789,000 have been included in net premiums earned in 1998.
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.
48
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. 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, 1998 and 1997, respectively, non-assigned structured
settlements guaranteed $5,820,000 and $12,299,000 of payments under annuity
contracts for which MMIC and its reinsurers paid $2,627,000 and $4,726,000. 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.
9. 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, 1998, 1997 and 1996 were $521,000,
$393,000 and $371,000, 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 invests in specified
assets which are designed to coordinate with the projected obligation under the
SERP. The net periodic pension cost for this plan was $404,000, $363,000 and
$323,000 for the years ended December 31, 1998, 1997 and 1996, respectively. The
liability recognized in the consolidated balance sheets at December 31, 1998 and
1997 related to this plan was $2,439,000 and $2,192,000, respectively.
49
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. 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, 1998, 1997 and
1996 was $41,000, $27,000 and $30,000, respectively. As of December 31, 1998 the
plan was fully funded. As of December 31, 1997, the net post-retirement benefit
plan liability was $4,000.
10. 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
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
------------------------------------
<S> <C> <C> <C>
As reported under generally accepted
accounting principles $5,948 $ 9,300 $ 7,481
(Income) loss of non-insurance entities 1,104 (272) (1,070)
------------------------------------
On the basis of generally accepted accounting
principles, MMIC only 7,052 9,028 6,411
Additions (deductions):
Deferred income taxes 1,390 1,525 445
Other - - 123
------------------------------------
On the basis of statutory accounting principles $8,442 $10,553 $6,979
------------------------------------
------------------------------------
</TABLE>
50
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. RECONCILIATION WITH STATUTORY ACCOUNTING PRINCIPLES (CONTINUED)
Shareholders' Equity
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997 1996
---------------------------------
<S> <C> <C> <C>
As reported under generally accepted
accounting principles $142,446 $126,290 $111,278
Additions (deductions):
Deferred income taxes 11,526 4,158 (590)
Unrealized (gain) loss on fixed maturities (3,222) (1,385) (3,580)
Other (34) (3) (41)
---------------------------------
On the basis of statutory accounting
principles $150,716 $129,060 $107,067
---------------------------------
---------------------------------
</TABLE>
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 1998 and 1997.
51
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. EARNINGS PER SHARE
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>
1998 1997 1996
--------------------------------
<S> <C> <C> <C>
Numerator for basic and dilutive
earnings per share available
to common shareholders $5,948 $9,300 $7,481
--------------------------------
--------------------------------
Denominator:
Denominator for basic earnings
per share--weighted average
shares 123,004 119,554 116,071
Effect of dilutive securities:
Unvested shares 13,247 12,873 12,188
--------------------------------
Denominator for dilutive
earnings per share--adjusted
weighted-average shares and
assumed conversions 136,251 132,427 128,259
--------------------------------
--------------------------------
Basic earnings per share $48.36 $77.79 $64.45
--------------------------------
--------------------------------
Diluted earnings per share $43.65 $70.23 $58.33
--------------------------------
--------------------------------
</TABLE>
52
<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:
<TABLE>
<CAPTION>
CLASS A NET REDEMPTION
MMIHC COMMON SHARES VALUE PER
NET EQUITY OUTSTANDING SHARE
-----------------------------------------
(000S)
<S> <C> <C> <C>
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
------ ------
------ ------
December 31, 1997 $7,477 121,322 $61.63
------ ------
------ ------
December 31, 1998 $8,147 125,682 $64.81
------ ------
------ ------
</TABLE>
* Includes pro forma shares related to merger.
53
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
54
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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, 1998, are as follows:
<TABLE>
<CAPTION>
CLASS A
COMMON
DIRECTOR PRINCIPAL SHARES
NAME AGE SINCE OCCUPATION OWNED
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Michael Abrams 37 1996 Exec V.P. Iowa Medical Society -
John R. Balfanz, M.D. 53 1995 Physician 15
Gail P. Bender 51 1996 Physician 23
James R. Bishop, M.D. 57 1994 Physician -
David P. Bounk 52 1995 President and CEO -
Roger L. Frerichs, M.D. 59 1988 Surgeon 88
Richard Geier, Jr., M.D. 58 1995 Physician 24
Anthony C. Jaspers, M.D. 51 1996 Physician 52
Russel J. Kuzel, M.D. 46 1997 Physician 27
Wayne F. Leebaw, M.D. 55 1994 Physician 25
Steven A. McCue, M.D. 57 1995 Physician 126
William J. McMillan, Jr. M.D. 51 1997 Physician 70
Harold W. Miller, M.D. 51 1996 Physician 27
Anton S. Nesse, M.D. 60 1989 Radiologist 54
Mark D. Odlund, M.D. 46 1996 Physician 88
G. William Orr, M.D. 63 1996 Physician 56
Norman Rinderknecht, M.D. 64 1993 Physician 97
Paul S. Sanders, M.D. 54 1984 CEO-MN Medical Assoc. -
Richard D. Schmidt, M.D.
Secretary 55 1990 Physician 152
Judith F. Shank, M.D. 56 1999 Physician 15
Andrew J. K. Smith, M.D.
Chairman of Board 56 1990 Neurological Surgeon 199
G. David Spoelhof, M.D. 45 1989 Physician 48
Tom D. Throckmorton, M.D. 53 1997 Physician 72
R. Bruce Trimble, M.D.
Vice Chair of Board 58 1993 Physician 23
</TABLE>
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
55
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(CONTINUED)
advisory members as the Board of Directors may determine. At least two-thirds of
the voting members of the Board of Directors must be physician directors. All
physician directors must be members of a state medical association and insured
by 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.
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 any state
medical society. There are currently no outside directors of MMIHC so the Boards
of MMIHC and MMIC are identical at this time.
Pursuant to the merger with IPMIT, the Bylaws of MMIHC were amended to 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 requires the trustee to
vote the share for the election of the Iowa directors nominated by the IMS.
Directors serve until their successors are elected and qualified, or until their
prior resignation, removal, death or disqualification.
As of December 31, 1998, the directors of MMIHC, as a group, owned 1,283 Class A
Common Shares or 1.0 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 Vice
President of the Iowa Medical Society beginning in 1996 and David P. Bounk who
has been the President and CEO of MMIHC since 1991. Prior to 1990, Dr. Sanders
was principally engaged in the practice of medicine. Prior to 1996 Michael
Abrams was Director, Government Relations of the Indiana Medical Association for
nine years.
The Chairman of the Board of Directors (currently Dr. Smith) is paid an annual
fee of $38,528. 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.
56
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(CONTINUED)
EXECUTIVE OFFICERS
The names, ages and positions of the executive officers of MMIHC and MMIC are as
follows:
<TABLE>
<CAPTION>
PERIOD OF SERVICE
POSITION AS PRINCIPAL
NAME AGE WITH COMPANY AN OFFICER OCCUPATION
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
David P. Bounk 52 President and Chief 8/1/90 to date President and Chief
Executive Officer Executive Officer
Niles A. Cole 37 Vice President-Finance 1998 to date Vice President-Finance
and Treasurer and Treasurer
Jack L. Kleven 52 Senior Vice President 1986 to date Senior Vice President
and Chief Operating and Chief Operating
Officer Officer
Elizabeth S. Lincoln 45 Vice President-Law and 1990 to date Vice President-Law and
Health Policy Health Policy
Gerald M. O'Connell 44 Vice President - 1998 to date Vice President -
Marketing Marketing
Michael G. Rutz 45 Vice President- 5/15/95 to date Vice President-
Underwriting Underwriting
</TABLE>
Mr. Bounk has over 30 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 employment agreement which renews annually for successive
calendar-year terms unless it is terminated by either party at least 60 days
prior to any renewal date. The agreement provides that Mr. Bounk's base salary
will be adjusted annually by the Executive Committee. If the agreement is
terminated by 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
57
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(CONTINUED)
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.
Effective January 1, 1997, the Company entered into termination agreements with
the executive officers. These agreements provide a severance package to these
executives in the event of termination of employment without cause.
Mr. Cole has over 15 years experience in the insurance industry, including 6
years with Washington State Physician's Insurance Association. He has been in
his current position since March 1998. He has BS degrees in accounting and
finance.
Mr. Kleven has over 25 years experience in medical malpractice claims adjusting
and management. He joined the Exchange in 1983, and was Vice President, Claims
since March 1986. He was promoted to Chief Operating Officer on January 1, 1998.
Prior to joining the Exchange, he was a liability manager at The St. Paul
Companies for six years. He has a BS degree in business.
Ms. Lincoln has over 15 years experience in medical professional liability risk
management. She joined the Exchange in 1982, and was Vice President, Risk
Management since January 1990. She transferred to Vice President, Law and Health
Policy, effective January 1, 1998. She has a law degree.
Mr. Rutz has over 20 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.
Mr. O'Connell has over 22 years in the medical malpractice segment of the
insurance industry. From 1977 to 1995, he was with St. Paul Fire and Marine
Insurance Company holding various marketing and underwriting management
positions. He joined the Company in October 1996. He has a BS in Agriculture
Business Management with an emphasis in Insurance.
Officers serve until their successors are appointed by the Board of Directors,
or until their prior resignation, removal or death.
58
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(CONTINUED)
BENEFICIAL OWNERSHIP REPORTING
Section 16 of the Securities Exchange Act of 1934 requires officers and
directors of reporting companies to file reports disclosing ownership of, and
transactions in, securities of the Company. During 1998, required Forms 3 were
not filed for the new directors and officers. This failure was cured by filings
of Forms 5 made after the end of the year.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table summarizes compensation paid by MMIHC to its five most
highly compensated executive officers for services rendered in all capacities
during the last three years.
<TABLE>
<CAPTION>
CASH COMPENSATION
NAME OF INDIVIDUAL CAPACITIES IN --------------------- ALL OTHER
OR NUMBER IN GROUP WHICH SERVED SALARY BONUS COMPENSATION(a)
- ------------------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C>
David P. Bounk President and Chief 1998 $200,187 $85,830 $32,272
Executive Officer 1997 187,088 56,126 20,963
1996 170,080 51,024 17,687
Jack L. Kleven Senior Vice President and 1998 167,716 61,636 30,847
Chief Operating Officer 1997 145,840 43,752 17,193
1996 132,420 39,796 17,384
Elizabeth S. Lincoln Vice President-Law 1998 108,015 33,080 29,242
and Health Policy 1997 102,871 30,861 13,286
1996 97,020 29,106 14,319
Gerald M. O'Connell Vice President-Marketing 1998 109,000 34,749 21,739
1997 95,077 11,530 17,850
1996 24,900 2,423 4,608
Michael G. Rutz Vice President- 1998 119,816 36,694 31,406
Underwriting 1997 114,110 34,233 14,113
1996 108,680 32,604 14,980
</TABLE>
(a) Includes employer contributions to qualified retirement plans and the term
and cash surrender value of supplemental life insurance premiums.
59
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION (CONTINUED)
MMIHC also maintains a Supplemental Executive Retirement Plan ("SERP") which
provides an annual retirement benefit for an executive officer who retires at
age 62 with 10 years of service of 70% of the officer's final average salary.
Benefits are reduced for years of service less than 10 and retirement prior to
age 62. The annual benefit payable under the SERP is reduced by 50% of the
officer's primary Social Security benefit and by the annual benefit (expressed
in the form of an annuity) of the officer's accrued benefits under 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--$201,500;
Mr. Kleven--$125,900; Ms. Lincoln--$82,000; Mr. Rutz--$147,100 and Mr.
O'Connell--$96,400. The estimated annual retirement benefits were calculated
assuming salary increases of five percent per year, discounted four percent per
year for future inflation to express the estimated benefits in today's dollars.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The response to this item is contained in Item 10.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
60
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(a)(1) The following consolidated financial statements of Midwest Medical
Insurance Holding Company, Inc. for the year ended December 31, 1998 are
included in this annual report (Form 10-K) in Item 8:
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Income for the years ended December 31, 1998,
1997 and 1996
Consolidated Statements of Changes in Other Shareholders' Equity for the
years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996
Notes to Consolidated Financial Statements
(a)(2) The following consolidated financial statement schedules of Midwest
Medical Insurance Holding Company, Inc. required by Item 14(d) are
included in a separate section of this report:
II Condensed Financial Information of Registrant
IV Reinsurance
VI Supplemental Information Concerning Property/Casualty Insurance
Operations
All other schedules to the consolidated financial statements required by
Article 7 of Regulation S-X are not required under the related
instructions or are inapplicable and therefore have been omitted.
(a)(3) LISTING OF EXHIBITS
The Exhibits required to be a part of this report are listed in the
Index to Exhibits which follows the Financial Statement Schedules.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter of 1998.
61
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Midwest Medical Insurance Holding Company
-----------------------------------------------------
(Registrant)
By: /s/ David P. Bounk March 19, 1999
-------------------------------------- --------------
David P. Bounk Date
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ David P. Bounk Principal Executive Officer March 19, 1999
- ----------------------------
David P. Bounk
/s/ Niles Cole Principal Financial Officer and March 19, 1999
- ---------------------------- Principal Accounting Officer
Niles Cole
* Director, Chairman of the Board March 19, 1999
- ----------------------------
Andrew J.K. Smith, M.D.
* Director March 19, 1999
- ----------------------------
Michael Abrams
* Director March 19, 1999
- ----------------------------
John R. Balfanz, M.D.
* Director March 19, 1999
- ----------------------------
Gail P. Bender, M.D.
62
<PAGE>
* Director March 19, 1999
- ----------------------------
James R. Bishop, M.D.
* Director March 19, 1999
- ----------------------------
Roger L. Frerichs, M.D.
* Director March 19, 1999
- ----------------------------
Richard Geier, Jr., M.D.
* Director March 19, 1999
- ----------------------------
Anthony C. Jaspers, M.D.
- ---------------------------- Director March 19, 1999
Russel J. Kuzel, M.D.
* Director March 19, 1999
- ----------------------------
Wayne F. Leebaw, M.D.
* Director March 19, 1999
- ----------------------------
Steven A. McCue, M.D.
* Director March 19, 1999
- ----------------------------
William J. McMillan, Jr. M.D.
* Director March 19, 1999
- ----------------------------
Harold W. Miller, M.D.
* Director March 19, 1999
- ----------------------------
Anton S. Nesse, M.D.
* Director March 19, 1999
- ----------------------------
Mark D. Odlund, M.D.
63
<PAGE>
* Director March 19, 1999
- ----------------------------
G. William Orr, M.D.
* Director March 19, 1999
- ----------------------------
Norman Rinderknecht, M.D.
* Director March 19, 1999
- ----------------------------
Paul S. Sanders, M.D.
* Director, Secretary March 19, 1999
- ----------------------------
Richard D. Schmidt, M.D.
* Director March 19, 1999
- ----------------------------
Judith F. Shank, M.D.
* Director March 19, 1999
- ----------------------------
G. David Spoelhof, M.D.
* Director March 19, 1999
- ----------------------------
Tom D. Throckmorton, M.D.
* Director, Vice Chairman March 19, 1999
- ----------------------------
R. Bruce Trimble, M.D.
* By: /s/ David P Bounk March 19, 1999
----------------------------
David P. Bounk pursuant to
power of attorney
* David P. Bounk, on his own behalf and pursuant to Powers of Attorney, dated
prior to the date hereof, attested by the officers and directors listed above
and filed with the Securities and Exchange Commission, by signing his name
hereto does hereby sign and execute this Report of Midwest Medical Insurance
Holding Company on behalf of each of the officers and directors named above, in
the capacities in which the name of each appears above. The above persons
signing as directors constitute a majority of the directors.
64
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
(Parent Company)
Schedule II--Condensed Financial Information of Registrant
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
-----------------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Fixed maturities $ - $ 1,308
Short-term investments 1,310 2,730
Investment in subsidiaries 145,032 126,290
Accrued investment income - 40
Other 8,385 6,881
-----------------------
Total assets $154,727 $137,249
-----------------------
-----------------------
LIABILITIES, REDEEMABLE STOCK AND
OTHER SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable $ 43 $ 111
Accrued expenses and other liabilities 4,091 3,371
-----------------------
4,134 3,482
REDEEMABLE STOCK
Class A Common Stock 8,146 7,476
Class B Common Stock 1 1
-----------------------
8,147 7,477
OTHER SHAREHOLDERS' EQUITY
Additional paid-in capital 12,789 12,789
Retained earnings, comprised of undistributed
earnings of subsidiaries 98,695 93,643
Unrealized appreciation on investments, net
of income taxes 30,962 19,858
-----------------------
142,446 126,290
-----------------------
Total liabilities, redeemable stock and
other shareholders' equity $154,727 $137,249
-----------------------
-----------------------
</TABLE>
SEE ACCOMPANYING NOTE.
65
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
(Parent Company)
Schedule II--Condensed Financial Information of Registrant (continued)
Statements of Income
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
-------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES
Management fee from subsidiaries $14,038 $9,901 $8,706
Investment income 489 64 726
Other income 7 2 4
-------------------------------------
14,534 9,967 9,436
EXPENSES
Operating and administrative 14,267 9,535 8,357
-------------------------------------
Income before income taxes and other items 267 432 1,079
Income tax expense 104 162 9
-------------------------------------
Income before equity in undistributed income
of subsidiaries 163 270 1,070
Equity in undistributed income of subsidiaries 5,785 9,030 6,411
-------------------------------------
Net income $ 5,948 $9,300 $7,481
-------------------------------------
-------------------------------------
</TABLE>
SEE ACCOMPANYING NOTE.
66
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
(Parent Company)
Schedule II--Condensed Financial Information of Registrant (continued)
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
---------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net cash (used in) provided by operating
activities $ (366) $ (527) $ (877)
INVESTING ACTIVITIES
Purchase of fixed maturities (21,758) (38,979) (20,469)
Sales of fixed maturities 22,826 38,701 20,289
Calls and maturities of fixed maturities 250 - -
Sales of short-term investments, net 1,420 1,453 1,338
Capitalization of Solutions (3,850) - -
FINANCING ACTIVITIES
Redemption of Class A Common Stock (522) (648) (608)
Dividend from MMIC 2,000 - 327
---------------------------------------
Increase in cash - - -
Cash at beginning of year - - -
---------------------------------------
Cash at end of year $ - $ - $ -
---------------------------------------
---------------------------------------
</TABLE>
SEE ACCOMPANYING NOTE.
67
<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, 1998
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 2 to the consolidated financial statements of Midwest Medical Insurance
Holding Company and Subsidiaries for a description of the redeemable stock.
68
<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
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED TO
AMOUNT COMPANIES COMPANIES AMOUNT NET
- --------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998:
Insurance premiums:
Property/casualty insurance $37,518 $2,601 $97 $35,014 0.3%
Year ended December 31, 1997:
Insurance premiums:
Property/casualty insurance 36,511 3,595 - 32,916 N/A
Year ended December 31, 1996:
Insurance premiums:
Property/casualty insurance 34,006 2,829 - 31,177 N/A
</TABLE>
NOTE TO SCHEDULE IV:
Ceded premiums for the years ended December 31, 1998, 1997 and 1996 are net of
reductions (additions) in ceded premiums related to swing rated reinsurance
treaties of $2,550,000, $(3,688,000), and $748,000 respectively. Ceded premiums
in 1996 are also net of proceeds from commutations of reinsurance covering the
period January 1, 1989 through December 31, 1990 of $2,194,000. Ceded premiums
in 1998 are also net of proceeds from commutations of reinsurance covering the
period January 1, 1991 through December 31, 1991 of $789,000.
69
<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 COL. I COL. J COL. K
- ----------------------------------------------------------- ----------------------------------------------------------------------
LOSSES AND LOSS
ADJUSTMENT EXPENSES
RESERVES FOR INCURRED RELATED TO AMORTIZATION PAID
DEFERRED UNPAID LOSSES DISCOUNT, ------------------ OF DEFERRED LOSSES
AFFILIATION POLICY AND LOSS IF ANY, NET (1) (2) POLICY AND LOSS
WITH ACQUISITION ADJUSTMENT DEDUCTED IN UNEARNED EARNED INVESTMENT CURRENT PRIOR ACQUISITION ADJUSTMENT PREMIUMS
REGISTRANT COSTS EXPENSES COLUMN C PREMIUMS PREMIUMS INCOME YEAR YEAR COSTS EXPENSES WRITTEN
- -----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated
property/
casualty
entities
1998 N/A $110,964 N/A $8,173 $35,014 $10,919 $41,927 $(4,433) N/A $32,421 $39,431
1997 N/A 107,806 N/A 6,072 32,916 11,509 40,186 (8,352) N/A 32,782 35,722
1996 N/A 110,037 N/A 6,860 31,177 12,061 41,101 (8,844) N/A 38,339 31,167
</TABLE>
70
<PAGE>
ANNUAL REPORT ON FORM 10-K
ITEM 14(a)(3) AND 14(c)
EXHIBITS
Midwest Medical Insurance Holding Company
Index to Exhibits
<TABLE>
<CAPTION>
REGULATION
S-K
EXHIBIT TABLE SEQUENTIAL
ITEM REFERENCE PAGE NO.
- -----------------------------------------------------------------------------------
<S> <C> <C>
Restated Articles of Incorporation of the registrant 3A.(1)
(Form S-4, Exhibit 3C).
Bylaws of the registrant (Form S-4, Exhibit 3D). 3B.(1)
Voting Trust Agreement. 9.(1)
Governance Agreement between the registrant and the 10A.(1)
Minnesota Medical Association, holder of the
registrant's Class B Common Share, dated November 30,
1988.
Lease for office space between the registrant and 10B.(1)
Lexington Property Fund, L.P. Limited Partnership, dated
March 26, 1991.
Management Agreement between the registrant and Midwest 10C.(4)
Medical Insurance Company, dated November 30, 1988, as
amended January 1, 1990, January 1, 1991, and
January 1, 1996.
Agency Agreement with Vaaler Insurance, Inc. pursuant 10D.(1)
to which Vaaler acts as agent of the registrant in
North Dakota, dated April 21, 1989.
Agreement of Reinsurance between Midwest Medical 10E.(5)
Insurance Company and General Reinsurance Corporation,
effective January 1, 1998.
Letter of Employment Agreement between the registrant 10F.(2)
and David P. Bounk, President and Chief Executive
Officer of the registrant and Midwest Medical Insurance
Company, dated January 1, 1993.
</TABLE>
71
<PAGE>
Index to Exhibits (continued)
<TABLE>
<CAPTION>
REGULATION
S-K
EXHIBIT TABLE SEQUENTIAL
ITEM REFERENCE PAGE NO.
- -----------------------------------------------------------------------------------
<S> <C> <C>
1998 Officers Short-term Incentive Plan of the registrant. 10G.(5)
Supplemental Executive Retirement Plan of the registrant. 10H.(1)
Plan and Agreement of Merger, without exhibits. 10I.(1)
Agency Agreement with IMS Services pursuant to which IMS 10J.(3)
Services acts as agent of the registrant in Iowa, dated
July 1, 1993
Subsidiaries of the registrant. 21.(5)
Power of attorney. 24.(5)
Financial Data Schedule 27.(5)
</TABLE>
- --------------------------
(1) Filed with the Company's Registration Statement on Form S-4, as amended,
SEC File No. 33-55062 and incorporated herein by reference.
(2) Filed with the Company's Registration Statement Form S-1 SEC File No.
33-70182 and incorporated herein by reference.
(3) Filed with 1993 Annual Report on Form 10-K.
(4) Filed with 1996 Annual Report on Form 10-K.
(5) Filed with this Annual Report on Form 10-K.
72
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MEDICAL PROFESSIONAL LIABILITY EXCESS OF LOSS
REINSURANCE CONTRACT
EFFECTIVE: JANUARY 1, 1998
issued to
Midwest Medical Insurance Company
Minneapolis, Minnesota
(HEREINAFTER REFERRED TO AS THE "Company")
by
The Subscribing Reinsurer(s) Executing the
Interests and Liabilities Agreement(s)
Attached Hereto
(HEREINAFTER REFERRED TO AS THE "Reinsurer")
Article I - Classes of Business Reinsured
A. By this Contract the Reinsurer agrees to reinsure the excess liability
which may accrue to the Company under its policies, contracts and binders
of insurance or reinsurance (hereinafter called "policies") issued or
renewed on or after the effective date hereof, and classified by the
Company as follows:
1. Professional Liability business as respects physicians, surgeons,
dentists and ancillary health care professionals written on a claims
made basis;
2. General Liability business as respects physicians, surgeons, dentists
and ancillary health care professional entities written on an
occurrence basis; and
3. Primary and Umbrella Excess Health Care Systems Professional
Liability, General Liability and Employee Benefits Liability business
providing both claims made and occurrence basis coverages and issued
to health care facilities, it being understood that the combination of
the Company's primary and umbrella/excess policies issued to any one
health care facility shall be considered one policy. It is further
understood that the umbrella excess business covered hereunder shall
be written in excess of the following primary coverages:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Page 1
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
a. Professional and General Liability insurance with minimum limits of
liability of $1,000,000 as respects each claim or each occurrence (as
applicable) and in the aggregate;
b. Automobile Liability insurance with minimum limits of liability of
$500,000 as respects each accident, combined single limit;
c. Employers Liability insurance written under Workers' Compensation and
Employers Liability policies with minimum limits of liability of
$100,000 as respects each accident bodily injury by accident, $500,000
as respects policy limit bodily injury by disease, and $100,000 as
respects each employee bodily injury by disease.
in accordance with the Company original policies and subject to the terms,
conditions and limitations hereinafter set forth.
B. The Company may issue prior acts and extended reporting coverage in
accordance with its original policies. Any claim under extended reporting
coverage shall be deemed to have been reported on the day the original
policy expired or was canceled. Premium, if any, for such extended
reporting coverage period shall be considered fully earned by the Reinsurer
on the last full day the original policy was in force.
ARTICLE II - COMMENCEMENT AND TERMINATION
A. This Contract shall become effective on January 1, 1998, with respect to
losses occurring under policies allocated to underwriting years commencing
on or after that date (or, as respects policies written on a claims made
basis, claims made against and/or reported to the Company on or after that
date), and shall continue in force thereafter until terminated.
B. Either party may terminate this Contract on any December 31 by giving the
other party not less than 90 days prior written notice.
C. Unless the Company elects that the Reinsurer have no liability for losses
arising out of occurrences with dates of loss after the effective date of
termination, and so notifies the Reinsurer prior to or as promptly as
possible after the effective date of termination, reinsurance hereunder on
business in force on the effective date of termination shall remain in full
force and effect until expiration, cancellation or next premium anniversary
of such business, whichever first occurs, but in no event beyond 12 months
following the effective date of termination.
D. "Underwriting year" as used herein shall mean the period from January 1,
1998 through December 31, 1998, and each subsequent 12-month period shall
be a separate underwriting year. All premiums and losses from policies
allocated to an underwriting year shall be credited or charged,
respectively, to such underwriting year, regardless of the date said
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Page 2
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
premiums earn or such losses occur. It is understood that a policy will be
allocated to the underwriting year which is in effect as of:
1. As respects all new policies, the effective date of such policies;
2. As respects renewals of one year or less term policies, the renewal
date of such policies;
3. As respects continuous or greater than one year term policies, the
premium anniversary date of such policies.
Such policies shall remain in the same underwriting year, as originally
allocated, until the next renewal date or premium anniversary date, at
which time such policies shall be reallocated to the underwriting year in
effect as of such date as provided in subparagraphs 2 and 3 above.
ARTICLE III - TERRITORY
This Contract shall be worldwide in its geographical scope.
ARTICLE IV - EXCLUSIONS
A. This Contract does not apply to and specifically excludes the following:
1. Reinsurance assumed by the Company under obligatory reinsurance
agreements, except agency reinsurance where the policies involved are
to be reunderwritten in accordance with the underwriting standards of
the Company and reissued as Company policies at the next anniversary
or expiration date or reinsurance of "fronting carriers," including
Genesis Indemnity Insurance Company, where the policies involved are
underwritten, rated and administered by the Company.
2. Business written by the Company above self-insured retentions (SIRs).
3. Nuclear risks as defined in the "Nuclear Incident Exclusion Clause -
Liability - Reinsurance" attached to and forming part of this
Contract. However, this exclusion shall not apply to nuclear
exposures emanating from health care facilities.
4. Liability as a member, subscriber or reinsurer of any pool, syndicate
or association.
5. All liability of the Company arising by contract, operation of law, or
otherwise, from its participation or membership, whether voluntary or
involuntary, in any insolvency fund. "Insolvency fund" includes any
guaranty fund, insolvency fund, plan, pool, association, fund or other
arrangement, however denominated, established or governed,
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Page 3
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
which provides for any assessment of or payment or assumption by the
Company of part or all of any claim, debt, charge, fee or other
obligation of an insurer, or its successors or assigns, which has
been declared by any competent authority to be insolvent, or which
is otherwise deemed unable to meet any claims, debt, charge, fee or
other obligation in whole or in part.
6. Loss or damage caused by or resulting from war, invasion, hostilities,
acts of foreign enemies, civil war, rebellion, insurrection, military
or usurped power, or martial law or confiscation by order of any
government or public authority, but this exclusion shall not apply to
loss or damage covered under a standard policy with a standard War
Exclusion Clause.
7. Pollution under any General Liability policy written by the Company
which does not contain the pollution exclusion set forth in ISO
Commercial General Liability Coverage Form CG 00 01 (Ed. 11/88) or as
subsequently amended; however, this exclusion does not apply to any
risk located in a jurisdiction which has not approved the Insurance
Services Office exclusion or where other regulatory constraints
prohibit the Company from implementing such exclusion. If the Company
elects to implement an exclusion different from that of ISO, such
exclusion will be deemed a suitable substitute provided the Company
has submitted the wording to the Reinsurers and received the
Reinsurers' prior approval.
8. Business written on a co-indemnity basis.
9. Directors and Officers liability and managed care liability.
10. Any business obtained through Company merger or acquisition unless
submitted to the Reinsurer for special acceptance and accepted by the
Reinsurer.
B. Business falling within the scope of one or more of the exclusions set
forth in paragraph A may be submitted to the Reinsurer for special
acceptance and, if accepted by the Reinsurer, shall be subject to all the
terms of this Contract except as modified by the special acceptance.
ARTICLE V - RETENTION AND LIMIT
A. COVERAGE A: The Company shall retain and be liable for the first $750,000
of ultimate net loss as respects each insured, each occurrence. The
Reinsurer shall then be liable for the amount by which such ultimate net
loss exceeds the Company's retention, but the liability of the Reinsurer
shall not exceed $1,250,000 as respects each insured, each occurrence.
B. COVERAGE B: The Company shall retain and be liable for the first amount of
ultimate net loss as follows:
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Page 4
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
1. As respects policies with primary limits of $2,000,000 each occurrence
and $4,000,000 in the aggregate, $2,000,000 each insured, each
occurrence and $4,000,000 in the aggregate;
2. As respects policies with primary limits of $2,000,000 each occurrence
and in the aggregate, $2,000,000 each insured, each occurrence and in
the aggregate.
The Reinsurer shall then be liable for the amount by which such ultimate
net loss exceeds the Company's retention, but the liability of the
Reinsurer shall not exceed $10,000,000 as respects each insured, each
occurrence and in the aggregate, where applicable.
C. COVERAGE C: The Company shall retain and be liable for the first
$1,125,000 of ultimate net loss arising out of each loss event. The
Reinsurer shall then be liable for the amount by which such ultimate net
loss exceeds the Company's retention, but the liability of the Reinsurer
shall not exceed $5,000,000 as respects any one loss event.
It is understood that recoveries under individual facultative reinsurance
and under Coverages A and B of this Article shall inure to the benefit of
Coverage C.
D. COVERAGE D: The Company shall retain and be liable for the first $750,000
of the following as respects any one loss event:
1. The Company's initial retention of ultimate net loss under Coverage A
above; and then
2. Any loss in excess of policy limits and/or extra contractual
obligations (as defined in Article VI).
The Reinsurer shall then be liable for the amount of loss in excess of
policy limits and/or extra contractual obligations which exceeds the
Company's retention, but the liability of the Reinsurer shall not exceed
$5,000,000 as respects loss in excess of policy limits and/or extra
contractual obligations arising out of any one loss event.
E. As respects Coverages C and D, the maximum amount recoverable on a combined
basis shall be $5,000,000 as respects any one loss event.
ARTICLE VI - DEFINITIONS
A. "Ultimate net loss" as used herein is defined as the sum or sums (including
deductibles of $250,000 or less paid by the Company or the insured and any
loss adjustment expense, as hereinafter defined, which reduces the
Company's limit of liability under the policy involved) paid or payable by
the Company in settlement of claims and in satisfaction of judgments
rendered on account of such claims, after deduction of all salvage, all
recoveries and all claims on inuring insurance or reinsurance, whether
collectible or not. Nothing
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Page 5
<PAGE>
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- -------------------------------------------------------------------------------
herein shall be construed to mean that losses under this Contract are not
recoverable until the Company's ultimate net loss has been ascertained.
B. "Loss in excess of policy limits" and "extra contractual obligations" as
used herein shall be defined as follows:
1. "Loss in excess of policy limits" shall mean 90.0% of any amount paid
or payable by the Company in excess of its policy limits, but
otherwise within the terms of its policy, as a result of an action
against it by its insured or its insured's assignee to recover damages
the insured is legally obligated to pay to a third party claimant
because of the Company's alleged or actual negligence or bad faith in
rejecting a settlement within policy limits, or in discharging its
duty to defend or prepare the defense in the trial of an action
against its insured, or in discharging its duty to prepare or
prosecute an appeal consequent upon such an action.
2. "Extra contractual obligations" shall mean 90.0% of any punitive,
exemplary, compensatory or consequential damages, other than loss in
excess of policy limits, paid or payable by the Company as a result of
an action against it by its insured, its insured's assignee or a third
party claimant, which action alleges negligence or bad faith on the
part of the Company in handling a claim under a policy subject to this
Contract. An extra contractual obligation shall be deemed to have
occurred on the same date as the loss covered or alleged to be covered
under the policy.
Notwithstanding anything stated herein, this Contract shall not apply to
any loss in excess of policy limits or any extra contractual obligation
incurred by the Company as a result of any fraudulent and/or criminal act
by any officer or director or employee of the Company acting individually
or collectively or in collusion with any individual or corporation or any
other organization or party involved in the presentation, defense or
settlement of any claim covered hereunder.
C. "Insured" as used herein shall mean any party or parties provided with a
separate policy limit by the Company.
D. "Occurrence" shall have the same meaning as the term occurrence, claim,
medical incident, wrongful act or such similar term, as applicable, under
the Company's policy forms.
E. The term "Event" shall mean each accident, occurrence, medical incident,
wrongful act or series of accidents, occurrences, medical incidents or
wrongful acts arising out of one event, whether involving one or several of
the Company's policies or insureds. All bodily injury or property damage
arising out of continuous or repeated exposure to substantially the same
general conditions shall be considered as arising out of one event, whether
involving one or several of the Company's policies or insureds. The date
of event shall be deemed to be the following:
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Page 6
<PAGE>
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- -------------------------------------------------------------------------------
1. As respects a loss involving one or more coverages written on an
occurrence basis, the date on which bodily injury or property damage
occurs.
2. As respects a loss involving one or more coverages written on a
claims-made basis, the date when the claim is first made in accordance
with the policy terms, and any related claims reported subsequent to
such date shall be included in such loss. However, if the claim is
first made during an extended reporting period, the date of Event
shall be deemed to be the last day of the policy period.
3. As respects a loss involving one or more coverages written on an
occurrence basis and one or more coverages written on a claims-made
basis, the date on which bodily injury or property damage occurs, and
any related claims reported subsequent to such date shall be included
in such loss whether they are covered under occurrence or claims-made
policies.
F. "Loss adjustment expense" as used herein shall mean expenses assignable to
the appraisal, adjustment, settlement, litigation, investigation, defense
and/or appeal of specific claims, regardless of how such expenses are
classified for statutory reporting purposes. Loss adjustment expense shall
include, but not be limited to interest on judgments, legal expenses, costs
incurred in connection with coverage questions and legal actions connected
thereto and declaratory judgment expense, as outlined below, but shall not
include other salaries and expenses of the Company's employees or office
and normal overhead expenses.
G. "Declaratory judgment expense" as used herein shall mean all court costs,
attorney's fees and expense incurred by the Company during the underwriting
year in contesting insurance coverage on policies reinsured hereunder and
shall be further limited as follows:
1. Expenses associated with unsuccessful actions shall constitute loss
adjustment expense;
2. Expenses associated with successful or compromised actions shall be
recoverable at 80.0%, and shall be subject to a $75,000 deductible per
action, which shall be retained by the Company.
Declaratory judgment expenses shall be deemed to have occurred on the same
date as the loss covered or alleged to be covered under the policy.
It is understood and agreed the maximum reinsurance recovery, as respects
all declaratory judgment expense arising out of all business reinsured
hereunder, shall be limited to $1,000,000 for each underwriting year.
ARTICLE VII - CLAIMS AND LOSS ADJUSTMENT EXPENSE
A. Whenever a claim is reserved by the Company for an amount greater than
66.0% of its retention hereunder and/or whenever a claim appears likely to
result in a claim under this
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Page 7
<PAGE>
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- -------------------------------------------------------------------------------
Contract, the Company shall notify the Reinsurer. All cases of serious
injury which, regardless of considerations of liability or coverage,
might result in a claim under this Contract, shall be reported to the
Reinsurer, including but not limited to the following:
1. Brain injury with significant cognitive, behavioral or physical
residual damages;
2. Quadriplegia or paraplegia including Cauda Equina Syndrome;
3. Fatalities or significantly diminished life expectancy of wage earners
or women with minor children;
4. Significant burns (i.e., third degree burns over 33.0% of body surface
area or second degree burns over 66.0% of body surface area),
including over-exposure to radiation;
5. Any other serious injury which, in the judgment of the Company, might
involve the Reinsurer;
6. Any action alleging extra contractual obligations against the Company;
7. Any declaratory judgment action brought by or against the Company.
The Company will provide quarterly updates on reported claims to the
Reinsurer in bordereau format. The Reinsurer shall have the right to
participate, at its own expense, in the defense or control of any claim or
suit or proceeding involving this reinsurance.
B. All claim settlements made by the Company, provided they are within the
terms of this Contract, shall be binding upon the Reinsurer, and the
Reinsurer agrees to pay all amounts for which it may be liable immediately
upon receipt of reasonable evidence of the amount paid by the Company.
C. In the event of loss hereunder, loss adjustment expense incurred by the
Company in connection therewith which does not reduce the Company's limit
of liability under the policy involved shall be shared by the Company and
the Reinsurer in the proportion the ultimate net loss paid or payable by
the Reinsurer bears to the total loss paid or payable by the Company, prior
to any reinsurance recoveries, but after deduction of all salvage,
subrogation and other recoveries. However, if a verdict or judgment is
reduced by any process other than by the trial court, resulting in an
ultimate saving to the Reinsurer, or a judgment is reversed outright, the
expenses incurred in securing such reduction or reversal shall be shared by
the Company and the Reinsurer in the proportion that each benefits from
such reduction or reversal, and the expenses incurred up to the time of the
original verdict or judgment shall be shared in proportion to each party's
interest in such original verdict or judgment. The Reinsurer's liability
for such loss adjustment expense shall be in addition to its liability for
ultimate net loss.
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Page 8
<PAGE>
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ARTICLE VIII - SUBROGATION
The Reinsurer shall be credited with recoveries from subrogation (i.e.,
reimbursement obtained or recovery made by the Company, less the actual cost,
excluding salaries of officials and employees of the Company and sums paid to
attorneys as retainer, of obtaining such reimbursement or making such recovery)
on account of claims and settlements involving reinsurance hereunder.
Recoveries therefrom shall always be used to reimburse the excess carriers in
the reverse order of their priority according to their participation before
being used in any way to reimburse the Company for its primary loss. The
Company hereby agrees to enforce its rights to subrogation relating to any loss,
a part of which loss was sustained by the Reinsurer, and to prosecute all claims
arising out of such rights.
ARTICLE IX - REINSURANCE PREMIUM
A. COVERAGE A
As premium for the reinsurance provided hereunder during each underwriting
year, the Company shall pay the Reinsurer a provisional and deposit premium
of $2,800,000 for the underwriting year in four equal installments of
$700,000 on March 31, June 30, September 30 and December 31 of each
underwriting year.
B. COVERAGE B
1. As premium for the reinsurance provided hereunder during each
underwriting year, the Company shall pay the Reinsurer the percentage
of its excess limits earned premium set forth in Schedule A, subject
to the minimum premiums, net of ceding commission, for health care
facilities set forth below:
a. As respects hospitals with at least 100 occupied beds, $2,000 per
$1,000,000 of policy limit;
b. As respects hospitals with less than 100 occupied beds, $1,500
per $1,000,000 of policy limit;
c. As respects non-hospital health care exposures, $1,500 per
$1,000,000 of policy limit;
d. As respects nursing homes or long-term care facilities, $1,000
per $1,000,000 of policy limit.
2. The Company shall pay the Reinsurer a provisional and deposit premium
of $600,000 for the underwriting year in four equal installments of
$150,000 on March 31, June 30, September 30 and December 31 of each
underwriting year.
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3. As soon as possible after the end of each underwriting year, the
Company shall report its excess limits earned premium for the
underwriting year. Any additional premium due the Reinsurer, at the
rate shown in subparagraph 1 of paragraph B, shall be paid by the
Company with its report, and any return premium due the Company shall
be remitted promptly.
C. COVERAGES C AND D
1. As premium for the reinsurance provided hereunder during each
underwriting year, the Company shall pay the Reinsurer 0.7% of its net
earned premium applicable to all subject business for the underwriting
year.
2. The Company shall pay the Reinsurer a deposit premium of $294,000 in
four equal installments of $73,500 on March 31, June 30, September 30
and December 31 of each underwriting year.
3. As soon as possible after the end of each underwriting year, the
Company shall provide a report to the Reinsurer setting forth the
premium due hereunder for the underwriting year, computed in
accordance with subparagraph 1 of paragraph C, and any additional
premium due the Reinsurer or return premium due the Company shall be
remitted promptly.
4. "Net earned premium" as used in this paragraph C is defined as all
gross earned premium of the Company for the classes of business
reinsured hereunder, less the earned portion of premiums ceded by the
Company for facultative reinsurance which inures to the benefit of
these Coverages C and D. Net earned premium shall include such
premium for extended reporting periods, which shall be considered
fully earned by the Company on the last day of the policy period.
ARTICLE X - COMMISSION - COVERAGE B
A. As respects Coverage B business only, the Reinsurer shall allow the Company
a 25% commission on all premiums ceded to the Reinsurer hereunder. The
Company shall allow the Reinsurer return commission on return premiums at
the same rate.
B. It is expressly agreed that the ceding commission allowed the Company
includes provision for all dividends, commissions, taxes, assessments, and
all other expenses of whatever nature, except loss adjustment expense.
ARTICLE XI - PREMIUM ADJUSTMENT - COVERAGE A
A. As respects Coverage A business only, the provisional and deposit premium
paid by the Company shall be adjusted periodically in accordance with the
provisions set forth herein.
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<PAGE>
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The first adjustment period shall be from the effective date of this
Contract through December 31, 2000, and each subsequent 36-month period
shall be a separate adjustment period. However, if this Contract is
terminated, the final adjustment period shall be from the beginning of
the then current adjustment period through the date of termination.
B. The adjusted premium for each adjustment period shall be equal to the
Reinsurer's losses incurred for the adjustment period, plus 1.27% of the
Company's net earned premium for the same adjustment period, but the
adjusted premium shall not exceed an amount equal to 9.21% of the Company's
net earned premium for the adjustment period, nor be less than 1.27% of the
Company's net earned premium for the adjustment period.
C. Within 45 days after 24 months following the beginning of each underwriting
year within each adjustment period, the Company shall calculate and report
the adjusted premium for the period from the beginning of the then current
adjustment period through the underwriting year under consideration, based
on the Reinsurer's losses incurred and the Company's net earned premium for
the adjustment period as of the date of the calculation. If the adjusted
premium exceeds the reinsurance premiums previously paid for the same
period, the Company shall remit the difference to the Reinsurer with its
report. If the adjusted premium is less than reinsurance premiums
previously paid for the adjustment period, the Reinsurer shall remit the
difference to the Company as promptly as possible after receipt and
verification of the Company's report.
D. The Company shall calculate and report the adjusted premium for each
adjustment period within 45 days after 12 months following the end of the
adjustment period, and within 45 days after the end of each 12-month period
thereafter until all losses under policies with effective or renewal dates
during the adjustment period have been finally settled. If the adjusted
premium exceeds the reinsurance premiums previously paid for the adjustment
period, the Company shall remit the difference to the Reinsurer with its
report. If the adjusted premium is less than reinsurance premiums
previously paid for the adjustment period, the Reinsurer shall remit the
difference to the Company as promptly as possible after receipt and
verification of the Company's report.
E. "Net Earned Premium" as used in this Article is defined as the gross earned
premium of the Company for primary policy limits of $2,000,000 or less for
the classes of business reinsured hereunder, including policies with
effective or renewal dates during the adjustment period, as set forth in
the Company's report entitled "Subject Premium by Limit," less the earned
portion of premiums ceded by the Company for reinsurance which inures to
the benefit of this Coverage A, if any. Net earned premium shall include
such premium for extended reporting periods, which shall be considered
fully earned by the Company on the last day of the policy period.
F. "Losses incurred" as used herein shall mean losses and loss adjustment
expense paid by the Reinsurer as of the effective date of calculation, plus
the ceded reserves for losses and loss adjustment expense outstanding as of
the same date, it being understood and agreed that all losses under
policies with effective or renewal dates during an adjustment period shall
be
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<PAGE>
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charged to that adjustment period, regardless of the date said losses
actually occur, unless this Contract is terminated on a "cutoff" basis, in
which event the Reinsurer shall have no liability for losses occurring
after the effective date of termination.
ARTICLE XII - OFFSET
The Company and the Reinsurer shall have the right to offset any balance or
amounts due from one party to the other under the terms of this Contract or any
other contract heretofore or hereafter entered into between the Company, whether
acting as assuming reinsurer or ceding company. The party asserting the right
of offset may exercise such right any time whether the balances due are on
account of premiums or losses or otherwise.
ARTICLE XIII - ACCESS TO RECORDS
The Reinsurer or its designated representatives shall have access at any
reasonable time to all records of the Company which pertain in any way to this
reinsurance.
ARTICLE XIV - NET RETAINED LINES
A. This Contract applies only to that portion of any policy which the Company
retains net for its own account, and in calculating the amount of any loss
hereunder and also in computing the amount or amounts in excess of which
this Contract attaches, only loss or losses in respect of that portion of
any policy which the Company retains net for its own account shall be
included.
B. The amount of the Reinsurer's liability hereunder in respect of any loss or
losses shall not be increased by reason of the inability of the Company to
collect from any other reinsurer(s), whether specific or general, any
amounts which may have become due from such reinsurer(s), whether such
inability arises from the insolvency of such other reinsurer(s) or
otherwise.
ARTICLE XV - ERRORS AND OMISSIONS
Inadvertent delays, errors or omissions made in connection with this Contract or
any transaction hereunder shall not relieve either party from any liability
which would have attached had such delay, error or omission not occurred,
provided always that such error or omission is rectified as soon as possible
after discovery.
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<PAGE>
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ARTICLE XVI - CURRENCY
A. Whenever the word "Dollars" or the "$" sign appears in this Contract, they
shall be construed to mean United States Dollars and all transactions under
this Contract shall be in United States Dollars.
B. Amounts paid or received by the Company in any other currency shall be
converted to United States Dollars at the rate of exchange at the date such
transaction is entered on the books of the Company.
ARTICLE XVII - TAXES
In consideration of the terms under which this Contract is issued, the Company
will not claim a deduction in respect of the premium hereon when making tax
returns, other than income or profits tax returns, to any state or territory of
the United States of America or the District of Columbia.
ARTICLE XVIII - FEDERAL EXCISE TAX
(Applicable to those reinsurers, excepting Underwriters at Lloyd's London and
other reinsurers exempt from Federal Excise Tax, who are domiciled outside the
United States of America.)
A. The Reinsurer has agreed to allow for the purpose of paying the Federal
Excise Tax the applicable percentage of the premium payable hereon as
imposed under Section 4371 of the Internal Revenue Code to the extent such
premium is subject to the Federal Excise Tax.
B. In the event of any return of premium becoming due hereunder the Reinsurer
will deduct the applicable percentage from the return premium payable
hereon and the Company or its agent should take steps to recover the tax
from the United States Government.
ARTICLE XIX - INSOLVENCY
A. In the event of the insolvency of the Company, this reinsurance shall be
payable directly to the Company or to its liquidator, receiver, conservator
or statutory successor immediately upon demand, with reasonable provision
for verification, on the basis of the liability of the Company without
diminution because of the insolvency of the Company or because the
liquidator, receiver, conservator or statutory successor of the Company has
failed to pay all or a portion of any claim. It is agreed, however, that
the liquidator, receiver, conservator or statutory successor of the Company
shall give written notice to the Reinsurer of the pendency of a claim
against the Company indicating the policy or bond reinsured which claim
would involve a possible liability on the part of the Reinsurer within a
reasonable time after such claim is filed in the conservation or
liquidation proceeding or in the receivership,
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<PAGE>
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and that during the pendency of such claim, the Reinsurer may investigate
such claim and interpose, at its own expense, in the proceeding where
such claim is to be adjudicated, any defense or defenses that it may deem
available to the Company or its liquidator, receiver, conservator or
statutory successor. The expense thus incurred by the Reinsurer shall be
chargeable, subject to the approval of the Court, against the Company
as part of the expense of conservation or liquidation to the extent of a
pro rata share of the benefit which may accrue to the Company solely as
a result of the defense undertaken by the Reinsurer.
B. Where two or more reinsurers are involved in the same claim and a majority
in interest elect to interpose defense to such claim, the expense shall be
apportioned in accordance with the terms of this Contract as though such
expense had been incurred by the Company.
C. It is further understood and agreed that, in the event of the insolvency of
the Company, the reinsurance under this Contract shall be payable directly
by the Reinsurer to the Company or to its liquidator, receiver or statutory
successor, except as provided by Section 4118(a) of the New York Insurance
Law or except (1) where this Contract specifically provides another payee
of such reinsurance in the event of the insolvency of the Company or
(2) where the Reinsurer with the consent of the direct insured or insureds
has assumed such policy obligations of the Company as direct obligations of
the Reinsurer to the payees under such policies and in substitution for the
obligations of the Company to such payees.
ARTICLE XX - ARBITRATION (BRMA 6M)
A. As a condition precedent to any right of action hereunder, any dispute
arising out of the interpretation, performance or breach of this Contract,
including the formation or validity thereof, shall be submitted for
decision to a panel of three arbitrators. Notice requesting arbitration
will be in writing and sent certified or registered mail, return receipt
requested.
B. One arbitrator shall be chosen by each party and the two arbitrators shall,
before instituting the hearing, choose an impartial third arbitrator who
shall preside at the hearing. If either party fails to appoint its
arbitrator within 30 days after being requested to do so by the other
party, the latter, after 30 days notice by certified or registered mail of
its intention to do so, may appoint the second arbitrator.
C. If the two arbitrators are unable to agree upon the third arbitrator within
30 days of their appointment, the third arbitrator shall be selected from a
list of six individuals (three named by each arbitrator) by a judge of the
federal district court having jurisdiction over the geographical area in
which the arbitration is to take place, or if the federal court declines to
act, the state court having general jurisdiction in such area.
D. All arbitrators shall be disinterested active or former executive officers
of insurance or reinsurance companies or Underwriters at Lloyd's, London.
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<PAGE>
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E. Within 30 days after notice of appointment of all arbitrators, the panel
shall meet and determine timely periods for briefs, discovery procedures
and schedules for hearings.
F. The panel shall be relieved of all judicial formality and shall not be
bound by the strict rules of procedure and evidence. Unless the panel
agrees otherwise, arbitration shall take place in Minneapolis, Minnesota,
but the venue may be changed when deemed by the panel to be in the best
interest of the arbitration proceeding. Insofar as the arbitration panel
looks to substantive law, it shall consider the law of the State of
Minnesota. The decision of any two arbitrators when rendered in writing
shall be final and binding. The panel is empowered to grant interim relief
as it may deem appropriate.
G. The panel shall make its decision considering the custom and practice of
the applicable insurance and reinsurance business as promptly as possible
following the termination of the hearings. Judgment upon the award may be
entered in any court having jurisdiction thereof.
H. Each party shall bear the expense of its own arbitrator and shall jointly
and equally bear with the other party the cost of the third arbitrator.
The remaining costs of the arbitration shall be allocated by the panel.
The panel may, at its discretion, award such further costs and expenses as
it considers appropriate, including but not limited to attorneys fees, to
the extent permitted by law.
ARTICLE XXI - SERVICE OF SUIT
(Applicable if the Reinsurer is not domiciled in the United States of America,
and/or is not authorized in any State, Territory or District of the United
States where authorization is required by insurance regulatory authorities)
A. It is agreed that in the event the Reinsurer fails to pay any amount
claimed to be due hereunder, the Reinsurer, at the request of the Company,
will submit to the jurisdiction of a court of competent jurisdiction within
the United States. Nothing in this Article constitutes or should be
understood to constitute a waiver of the Reinsurer's rights to commence an
action in any court of competent jurisdiction in the United States, to
remove an action to a United States District Court, or to seek a transfer
of a case to another court as permitted by the laws of the United States or
of any state in the United States.
B. Further, pursuant to any statute of any state, territory or district of the
United States which makes provision therefor, the Reinsurer hereby
designates the party named in its Interests and Liabilities Agreement, or
if no party is named therein, the Superintendent, Commissioner or Director
of Insurance or other officer specified for that purpose in the statute, or
his successor or successors in office, as its true and lawful attorney upon
whom may be served any lawful process in any action, suit or proceeding
instituted by or on behalf of the Company or any beneficiary hereunder
arising out of this Contract.
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Page 15
<PAGE>
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE PAGE
<S> <C>
I Classes of Business Reinsured 1
II Commencement and Termination 2
III Territory 3
IV Exclusions 3
V Retention and Limit 4
VI Definitions 5
VII Claims and Loss Adjustment Expense 8
VIII Subrogation 9
IX Reinsurance Premium 9
X Commission - Coverage B 10
XI Premium Adjustment - Coverage A 11
XII Offset 12
XIII Access to Records 12
XIV Net Retained Lines 12
XV Errors and Omissions 12
XVI Currency 13
XVII Taxes 13
XVIII Federal Excise Tax 13
XIX Insolvency 13
XX Arbitration (BRMA 6M) 14
XXI Service of Suit 15
Schedule A
</TABLE>
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<PAGE>
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SCHEDULE A
MEDICAL PROFESSIONAL LIABILITY EXCESS OF LOSS
REINSURANCE CONTRACT
EFFECTIVE: JANUARY 1, 1998
issued to
Midwest Medical Insurance Company
Minneapolis, Minnesota
<TABLE>
<CAPTION>
COVERAGE PERCENTAGE OF
BY LAYER PRECEDING
$1,000,000 PREMIUM
<S> <C>
$1,000,000 excess of 50.0%
$2,000,000
$1,000,000 excess of 55.0%
$3,000,000
$1,000,000 excess of 60.0%
$4,000,000
$1,000,000 excess of 65.0%
$5,000,000
$1,000,000 excess of 70.0%
$6,000,000
$1,000,000 excess of 70.0%
$7,000,000
$1,000,000 excess of 70.0%
$8,000,000
$1,000,000 excess of 70.0%
$9,000,000
$1,000,000 excess of 70.0%
$10,000,000
$1,000,000 excess of 70.0%
$11,000,000
</TABLE>
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<PAGE>
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GENERAL LIABILITY POLLUTION EXCLUSION APPENDIX
In accordance with the provisions of Article IV - Exclusions, this exclusion
applies:
1. To bodily injury or property damage arising out of the actual, alleged or
threatened discharge, dispersal, release or escape of pollutants:
a. at or from premises owned, rented or occupied by a named insured;
b. at or from any site or location used by or for a named insured or
others for the handling, storage, disposal, processing or treatment of
waste;
c. which are at any time transported, handled, stored, treated,
disposed of, or processed as waste by or for a named insured or any
person or organization for whom a named insured may be legally
responsible; or
d. at or from any site or location on which a named insured or any
contractors or subcontractors working directly or indirectly on behalf
of a named insured are performing operations;
i. if the pollutants are brought on or to the site or location
in connection with such operations; or
ii. if the operations are to test for, monitor, clean up,
remove, contain, treat, detoxify, or neutralize the pollutants.
2. To any loss, cost or expense arising out of any governmental direction or
request that a named insured test for, monitor, clean up, remove, contain,
treat, detoxify or neutralize pollutants.
Pollutants means any solid, liquid, gaseous or thermal irritant or contaminant,
including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste
includes materials to be recycled, reconditioned or reclaimed.
Subparagraphs (a) and (d)(i) of paragraph (1) do not apply to bodily injury or
property damage caused by heat, smoke or fumes from a hostile fire. As used in
this exclusion, a hostile fire means one which becomes uncontrollable or breaks
out from where it was intended to be.
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<PAGE>
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MEDICAL PROFESSIONAL LIABILITY EXCESS OF LOSS
REINSURANCE CONTRACT
EFFECTIVE: JANUARY 1, 1998
issued to
Midwest Medical Insurance Company
Minneapolis, Minnesota
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<PAGE>
EXHIBIT 10G.
1998
OFFICERS SHORT-TERM
INCENTIVE PLAN
<PAGE>
MIDWEST MEDICAL INSURANCE COMPANY
1998 SHORT TERM INCENTIVE PLACE DESIGN
1. PLAN PARTICIPANTS
- President
- Senior Vice President
- Vice President
2. PERFORMANCE MEASURES AND WEIGHTINGS
- Combined Ratio 50%
- Retention 20%
- Growth 20%
- Budget 10%
3. PLAN TRIGGER
- The Threshold for Combined Ratio must be attained for the plan to
activate and awards to be made under any performance measure.
4. PARTICIPATION LEVELS
- Tier I - President
- Tier II - Senior Vice President
- Tier III - Vice President
5. GOAL/TARGET AWARDS (% OF BASE SALARY)
- Tier I 35%
- Tier II 30%
- Tier III 25%
6. AWARD CALCULATIONS
- Each performance measure is set up with a series of "cliffs".
- Performance between "cliffs" would result in an award based on the
lower "cliff".
- Performance below Threshold will result in no award being made.
- Performance beyond Maximum will not increase the award.
AWARD SUMMARY *
<TABLE>
<CAPTION>
Threshold Goal Maximum
--------- ---- -------
<S> <C> <C> <C>
Tier I 15.75% 35.00% 50.75%
Tier II 13.50% 30.00% 43.50%
Tier III 11.25% 25.00% 36.25%
</TABLE>
* Assumes all performance measures are Threshold, Goal, Maximum. "Budget"
counted only on Goal and Maximum.
2
<PAGE>
PLAN ADMINISTRATION
1. PURPOSE
The primary purpose of the Midwest Medical Insurance Holding Company Short
Term Incentive Plan is to provide a means whereby key executives may be
rewarded according to their impact on, and contribution to, the operating
success of the organization.
2. DEFINITIONS
"Base Salary" is the Plan Participant's salary in effect as of the end of
the Plan Year.
"Threshold" is the minimum level of performance required to generate an
award. Performance below Threshold will result in no award being granted.
"Goal" is the level of performance that reflects 100% attainment of the
performance measure, thus triggering a target (or 100%) award.
"Maximum" is the level of performance resulting in the maximum award
available under the Plan being granted. Performance beyond Maximum will not
increase the award.
"Combined Ratio" is defined as a ratio which signifies the impact of all
aspects of the Company's operation, premiums, losses, expenses, etc. The
Threshold for Combined Ratio must be attained for the Plan to activate and
awards to be made under any performance measure.
"Retention" refers to the number of policy renewals retained subsequent to
January 1, 1999.
"Growth" refers to the number of new policyholders from new accounts
generated during fiscal 1998.
"Budget" is the 1998 MMIHC Corporate Operating Expense Budget.
"Committee" refers to the Compensation Committee of the Board of Directors.
3. PLAN ADMINISTRATOR
The Plan Administrator will be the Chairman of the Committee. The actions
of the Plan Administrator are subject to the approval of the Committee, as
appropriate.
4. PLAN ADMINISTRATION
The Plan Administrator will be responsible for all matters relative to the
effective administration of the Plan, including its interpretation, and
resolution of issues where the Plan is silent. The Plan Administrator's
actions in all material matters will be subject to the Committee's review.
5. PLAN PARTICIPATION
Participation in the Plan is at the discretion of the Plan Administrator.
Participation in any one year does not guarantee participation in future
years or participation at the same Tier (or award level).
3
<PAGE>
6. AWARD LEVELS
Award Levels under the Plan are specified under the Plan Design section.
7. EFFECTIVE DATE
The effective date of the Plan is January 1, 1998.
8. PLAN YEAR
The Plan Year is the Company's fiscal year.
9. TERMINATION OF EMPLOYMENT
A Participant who terminates their employment or whose employment is
terminated by the Company forfeits all rights under the Plan.
10. DEATH, DISABILITY, RETIREMENT
In the event of death, permanent disability, or retirement, a prorated
award will be made based on the active time in the Plan and the level of
performance attained. The Plan Administrator may use discretion in
determining awards under these circumstances.
11. EMPLOYMENT
The Plan is not an employment contract, nor is there any intent to confer a
right to employment to a Plan Participant.
The Plan does not, in any way, restrict the Company's right to terminate a
Participant's employment.
12. AMENDMENT OF THE PLAN
The Plan Administrator is free to amend the Plan at any time, subject to
the approval of the Committee, concerning material matters. If the
amendment materially impacts the interests of the Participant, they will be
notified as soon as possible.
13. TERMINATION OF THE PLAN
The Plan Administrator, with the approval of the Committee, is free to
terminate the Plan at any time. Under these circumstances, a prorated award
will be made. The basis for the level of performance attained at the time
of termination.
14. RIGHTS OF THE PARTICIPANT
Plan Participants have no rights under the Plan that may be pledged,
borrowed against, or sold.
4
<PAGE>
MMIC COMBINED RATIO
Goal based upon actual amounts in the 1998 Business Plan approved by Board
November 12, 1997. The goal combined ratio excludes retrospective premium
credits and any premium adjustments from the IA or NE merger from the
calculation. (see attached)
<TABLE>
<CAPTION>
Performance Award
Goal Level Level
---- ----------- -----
<S> <C> <C> <C>
Maximum 97.9 85% 150%
106.6 92.5 125
Goal/Target 115.2 100. 100
123.8 107.5 75
Threshold 132.5 115. 50
</TABLE>
(Plan trigger - This threshold combined ratio must be attained
to receive any award under the entire plan)
<TABLE>
<CAPTION>
COMBINED RATIO TARGET AWARD
---------------------------
<S> <C>
Tier I 17.50% of salary
II 15.00 of salary
III 12.50 of salary
</TABLE>
5
<PAGE>
MMIC COMBINED RATIO
EXPLANATION
(in thousands of $)
<TABLE>
<CAPTION>
1998 Combined 1998 Combined
Budget Ratio Modified Ratio
------ -------- -------- --------
<S> <C> <C> <C> <C>
Direct Premium Earned 45,000 45,000
Retro & IA Merger Refund (3,900) ---
Reinsurance Ceded - Current Year (6,500) (6,500)
Reinsurance Ceded - Prior Year 600 600
------ -----
Net Earned Premium 35,200 39,100
------ ------
Loss & ALAE Incurred 32,980 32,980
ULAE Incurred 5,669 5,669
Underwriting Expense Incurred 6,399 6,399
----- -----
Total Expenses 45,048 128.0 45,048 115.2
------ ------
--- (5,948)
Retro & IA Merger Refund --- (3,900)
-------
Net Underwriting (loss) (9,848) (9,848)
------ ------
------ ------
</TABLE>
Finance Charges ($756) included with Direct Premium.
6
<PAGE>
RETENTION
Percentage of December 31, 1998 Physician Policies in force which are available
for renewal and are retained at the January 1, 1999 renewal. January 1, 1999
retirements and those not offered a renewal policy for Underwriting reasons are
not available for renewal.
<TABLE>
<CAPTION>
Performance Award
Goal Level Level
---- ----------- -----
<S> <C> <C> <C>
Maximum 99.75% 105% 150%
97.38 102.5 125
Goal/Target 95.0 100. 100
92.63 97.5 75
Threshold 90.25 95. 50
</TABLE>
RETENTION TARGET AWARD
----------------------
<TABLE>
<S> <S>
Tier I 7% of salary
II 6 of salary
III 5 of salary
</TABLE>
7
<PAGE>
GROWTH
1998 New Business premium written for all lines of business, physician,
hospital, SIR, etc. Excludes new adds to existing accounts.
<TABLE>
<CAPTION>
Performance Award
Goal Level Level
---- ---------- -----
<S> <C> <C> <C>
Maximum $3,170M 125% 150%
2,853M 112.5 125
Goal/Target 2,536M 100. 100
2,219M 87.5 75
Threshold 1,902M 75. 50
</TABLE>
GROWTH TARGET AWARD
-------------------
<TABLE>
<S> <C>
Tier I 7% of salary
II 6 of salary
III 5 of salary
</TABLE>
8
<PAGE>
BUDGET
Attain 1998 MMIHC budget as approved in the 1998 Business Plan.
<TABLE>
<CAPTION>
Performance Award
Goal Level Level
---- ----------- -----
<S> <C> <C>
$10,522M 95-105% 100%
</TABLE>
(Performance outside of this range results in no award)
<TABLE>
BUDGET TARGET AWARD
-------------------
<S> <C>
Tier I 3.5% of salary
II 3.0 of salary
III 2.5 of salary
</TABLE>
9
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
(Parent Company)
Exhibit 21--Subsidiaries of the Registrant
<TABLE>
<CAPTION>
PERCENT STATE OF
ENTITY DESCRIPTION OWNED FEIN INCORPORATION
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Midwest Medical Insurance Holding Company Registrant n/a 41-1625287 Minnesota
Midwest Medical Insurance Company Tier 1 Subsidiary 100% 41-1625288 Minnesota
MMIHC Insurance Services, Inc. Tier 1 Subsidiary 100% 41-1819825 Minnesota
Midwest Medical Solutions, Inc. Tier 1 Subsidiary 100% 41-1896304 Minnesota
MedPower Information Resources, Inc. Tier 2 Subsidiary 100% 41-1895576 Minnesota
</TABLE>
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
EXHIBIT 24--POWERS OF ATTORNEY
I, __________________________________, do hereby constitute and appoint David P.
Bounk and Niles A. Cole, or either of them, my attorneys in fact for the
purposes of signing in my name and on my behalf as a Director of Midwest Medical
Insurance Holding Company, the filing of the annual 10K Form which provides
additional information as required by the SEC.
Dated: January_____, 1999 ____________________________________________
1
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
EXHIBIT 24--POWERS OF ATTORNEY
I, ________________________________, do hereby constitute and appoint David P.
Bounk, my attorney 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 _____, 1999 ________________________________________________
2
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<PAGE>
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