<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Period Ended March 31, 1999.
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From ________________to____________
Commission file number 0-21230
Midwest Medical Insurance Holding Company
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Minnesota 41-1625287
- ------------------------------------ --------------------------------
(State or other jurisdiction (I.R.S. Employer of
incorporation or organization) Identification No.)
6600 France Ave., So., Suite 245
Minneapolis, Minnesota 55435-1891
- ------------------------------------ --------------------------------
(Address of principal executive offices) (Zip Code)
612-922-5445
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(Registrant's telephone number, including area code)
Not applicable
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(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
----- -----
The number of shares outstanding of the issuer's classes of common stock, as
of March 31, 1999:
Class A Common Stock $.01 Par Value 127,873 shares
Class B Common Stock $1,000 Par Value-1 share
1
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INDEX
Midwest Medical Insurance Holding Company
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets- March 31, 1999 and
December 31, 1998
Condensed consolidated statements of income - Three months ended
March 31, 1999 and 1998
Condensed consolidated statements of cash flows - Three months ended
March 31, 1999 and 1998
Notes to condensed consolidated financial statements - March 31, 1999
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
2
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Part I. Financial Information
Item 1. - Financial Statements
MIDWEST MEDICAL INSURANCE HOLDING COMPANY and SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31 December 31
1999 1998
(Unaudited) (Note A)
---------- -----------
<S> <C> <C>
ASSETS
Fixed maturity investments at fair value
(amortized cost: 1999 $156,947;
1998 $161,430) $ 156,862 $ 164,652
Equity securities at fair value (cost:
1999 $42,890; 1998 $41,907) 86,718 86,553
Short-term investments 8,703 3,556
Other investments 10,000 10,000
---------- ---------
262,283 264,761
Cash 1,454 647
Accrued investment income 1,740 1,739
Reinsurance recoverable 16,805 16,499
Uncollected premiums - Note C 31,159 2,023
Amounts due from reinsurers 2,981 3,191
Other assets 7,254 6,623
---------- ---------
$ 323,676 $ 295,483
---------- ---------
---------- ---------
LIABILITIES, REDEEMABLE STOCK AND OTHER
SHAREHOLDERS' EQUITY
LIABILITIES
Unpaid losses and loss adjust. expenses $ 111,612 $ 110,964
Unearned premiums - Note C 43,986 8,173
Retrospective premiums - 8,543
Deferred income taxes 9,521 10,966
Other liabilities 6,087 6,244
---------- ---------
171,206 144,890
REDEEMABLE STOCK
Class A Common Stock; authorized 300,000 shares,
shares issued and outstanding 127,873 and
125,682 in 1999 and 1998, respectively 7,629 8,146
Class B Common Stock; authorized, issued and
outstanding 1 share 1 1
---------- ---------
7,630 8,147
OTHER SHAREHOLDERS' EQUITY
Paid-in capital 12,789 12,789
Retained earnings 103,771 98,695
Accumulated other comprehensive income:
Net unrealized appreciation of investments 28,280 30,962
---------- ---------
144,840 142,446
---------- ---------
$ 323,676 $ 295,483
---------- ---------
---------- ---------
</TABLE>
See notes to condensed consolidated financial statements.
3
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MIDWEST MEDICAL INSURANCE HOLDING COMPANY and SUBSIDIARIES
Condensed Consolidated Statements of Income
(Dollars in thousands, except per share dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
-----------------------------
1999 1998
-------- --------
<S> <C> <C>
Revenues:
Net premiums earned $ 10,512 $ 10,291
Net investment income 2,873 2,980
Net realized capital gains 6,309 3,064
Other 867 393
-------- --------
20,561 16,728
Losses and expenses:
Losses and loss adj. exp. 9,485 9,285
Underwriting, acquisition and
insurance expenses 2,517 2,242
Other operating expenses 1,527 736
-------- --------
13,529 12,263
-------- --------
Income before income taxes 7,032 4,465
Incomes taxes - Note B 2,463 1,563
-------- --------
Net income $ 4,569 $ 2,902
-------- --------
-------- --------
Income per common share $ 36.03 $ 24.01
-------- --------
-------- --------
Income per common share -
assuming dilution $ 32.45 $ 21.68
-------- --------
-------- --------
</TABLE>
See notes to condensed consolidated financial statements.
4
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MIDWEST MEDICAL INSURANCE HOLDING COMPANY and SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
-----------------------------
1999 1998
-------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 4,569 $ 2,902
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Increase in uncollected premiums (29,136) (26,164)
Increase in unearned premiums 35,813 31,474
Decrease in retrospective premiums (8,543) (8,073)
(Decrease) increase in other liabilities (157) (6,103)
Net realized capital gains (6,309) (3,064)
Other changes (60) (269)
-------- ---------
(3,823) (9,297)
INVESTING ACTIVITIES
Purchases of fixed maturity investments and equity
securities (59,619) (176,645)
Sales of fixed maturity investments and equity
securities 69,461 177,972
Net (purchases) sales of short-term investments (6,646) 2,903
Capitalization of MMIHC Insurance Services, Inc. 1,500 -
Capitalization of Midwest Medical Solutions, Inc. - 1,850
-------- ---------
4,696 6,080
FINANCING ACTIVITIES
Redemption of Class A Common Stock (66) (132)
-------- ---------
INCREASE (DECREASE) IN CASH 807 (3,349)
Cash at beginning of year 647 2,378
-------- ---------
CASH AT MARCH 31 $ 1,454 $ (971)
-------- ---------
-------- ---------
</TABLE>
See notes to condensed consolidated financial statements.
5
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MIDWEST MEDICAL INSURANCE HOLDING COMPANY and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 31, 1999
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial
statements of Midwest Medical Insurance Holding Company and its subsidiaries
(the "Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and notes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for any interim period are not necessarily indicative of
the results that may be expected for the full year. These interim financial
statements should be read in conjunction with the 1998 consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K as filed with the Securities and Exchange Commission.
The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements.
Certain amounts applicable to prior periods have been reclassified to conform
to the classifications followed in the current year. All intercompany amounts
have been eliminated.
NOTE B--INCOME TAXES
The Company calculates its income tax provision for interim periods by
estimating its annual effective tax rate and applying this rate to the income
of the interim period. The estimated annual effective tax rate used for the
three months ended March 31, 1999 and 1998 was approximately 35%.
NOTE C--UNEARNED PREMIUMS and UNCOLLECTED PREMIUMS
The majority of the Company's insurance policies expire at December 31 and
renew on January 1 of each year. As a result, the majority of the unearned
premium amount at March 31, 1999 represents nine months of unearned premium
for every active policy renewed or newly written with an expiration date of
December 31, 1999. At December 31, 1998, most active 1998 policies expired
and therefore had no unearned premium.
Of the total unearned premium balance of $8,173,000 at December 31, 1998,
$6,520,000 is reserved to recognize the Company's obligation to provide
reporting endorsement coverage without additional premium upon the death,
disability or retirement of policyholders. That same amount is also included
in the unearned premium balance at March 31, 1999 and represents the
actuarially determined present value of future benefits to be provided less
the present value of future revenues to be received.
6
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NOTE C--UNEARNED PREMIUMS and UNCOLLECTED PREMIUMS (continued)
The increase of $29,136,285 in uncollected premiums from December 31, 1998 to
March 31, 1999 is primarily due to the renewal of most active policies on
January 1. The full year's premium is recorded as written and collectible at
January 1. Premiums may be paid annually or quarterly and the majority of
each year's premium is collected during the year. The uncollected balance
remaining at the end of the year primarily relates to the few policies
underwritten by the Company that have other than December 31 expiration dates.
NOTE D--COMPREHENSIVE INCOME
The components of the Company's comprehensive income are net income and changes
in unrealized appreciation of investments. Total comprehensive income for the
three-month periods ended March 31, 1999 and 1998 was $1,887,000 and $6,955,000,
respectively.
NOTE E--EARNINGS PER SHARE DATA
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except for share and per share amounts):
<TABLE>
<CAPTION>
Three Months Ended
March 31
------------------------------------
1999 1998
----------------- ----------------
<S> <C> <C>
Numerator for basic and dilutive earnings per share
available to common shareholders
$4,569 $2,902
----------------- ----------------
----------------- ----------------
Denominator:
Denominator for basic earnings per share--weighted
average shares 126,811 120,853
Effect of dilutive securities:
Unvested shares 13,991 13,028
----------------- ----------------
Denominator for dilutive earnings per share--adjusted 140,802 133,881
weighted-average shares and assumed conversions ----------------- ----------------
----------------- ----------------
Basic earnings per share $36.03 $24.01
----------------- ----------------
----------------- ----------------
Diluted earnings per share $32.45 $21.68
----------------- ----------------
----------------- ----------------
</TABLE>
7
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Item 2. - Management's Discussion and Analysis of Financial Condition and
Results of Operations
GENERAL
The following analysis of the financial condition and results of operations
of Midwest Medical Insurance Holding Company (MMIHC) and its wholly-owned
subsidiaries, Midwest Medical Insurance Company (MMIC), Midwest Medical
Solutions, Inc. (Solutions), MedPower Information Resources, Inc. (MedPower),
and MMIHC Insurance Services, Inc. (Services), should be read in conjunction
with the consolidated financial statements and notes thereto included
elsewhere in this Report. Midwest Medical Insurance Holding Company and its
subsidiaries are collectively referred to as the Company.
The primary business of MMIC, MMIHC's principal operating subsidiary, 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.
Solutions is a business development company formed to strengthen and promote
the independence and interdependencies of physicians, clinics and hospitals
that MMIC serves. Business development opportunities being considered include
practice enhancement, strategic consulting, and electronic processing and
integration services and support. MedPower is a wholly-owned subsidiary of
Solutions formed through a purchase of assets in January 1998. MedPower
processes and electronically submits medical claims for over 100 healthcare
providers in the Upper Midwest. MedPower also provides various information
consulting and network support services. Together, Solutions and MedPower had
assets of less than $3,000,000 at March 31, 1999 and at December 31, 1998 and
had revenues of less than $106,000 for the three months ended March 31, 1999
and less than $400,000 for the year ended December 31, 1998.
Services was incorporated in 1995 and began active operations in January 1999
with the acquisition of a book of business from Johnson-McCann Benefits, Inc.
(JMB). MMIHC provided $1,500,000 of capital to Services to fund the first of
three installment payments on the JMB purchase as well as to provide
additional funds for future agency acquisitions. The remaining two
installment payments will be made to JMB in 2000 and 2001 with the payment
amounts tied to the previous year's performance of Services. Services is an
insurance agency specializing in providing clients with group insurance
products such as health, dental, life, and disability. Commission income from
insurance carriers is the principal source of revenue. Services had assets of
approximately $1,512,000 at March 31, 1999 and had revenues of approximately
$349,000 for the three months ended March 31, 1999.
8
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CAPITAL RESOURCES AND LIQUIDITY
The majority of the Company's assets, 81%, continue to be invested in
investment-grade bonds, equities and short-term instruments. Under Statement
of Financial Accounting Standards (SFAS) No. 115 "Accounting for Certain
Investments in Debt and Equity Securities", the Company's investments in debt
and equity securities are classified as available for sale and therefore
carried at fair value with unrealized gains and losses, net of applicable
taxes, reflected as a separate component of equity. Other investments are
equity interests in non-traded real estate investment trusts and are recorded
at cost which approximates fair value.
The retrospective premium liability of $8,543,000 at December 31, 1998
consisted of two items. One represented amounts due to policyholders under a
retrospective premium rating plan. This liability consisted of $5,480,000 due
to Minnesota and North Dakota policyholders. The second component represented
amounts due to Iowa policyholders under terms of the Midwest Medical
Insurance Company/Iowa Physicians Mutual Insurance Trust (MMIC/IPMIT) July 1,
1993 merger agreement. The merger agreement provided that if financial
results for years prior to 1993 are more favorable than expected, the
favorable development must be returned to former IPMIT policyholders who were
insured by IPMIT on December 31, 1992 and who renew their coverage with MMIC.
This second liability totaled $3,063,000. Both the retrospective and merger
premium liabilities were paid to policyholders in the first quarter of 1999.
Cash flow from operations was negative during the first three months of both
1999 and 1998, $(3,823,000) and $(9,297,000) respectively. The primary reason
for the negative cash flows was the payment, in the first quarter of both
years, of the retrospective premium credit and the premium credit under the
terms of the MMIC/IPMIT merger agreement. These payments totaled $8,889,000
in 1999 and $8,100,000 in 1998. The merger premium credit of $3,063,000 paid
to Iowa policyholders during the first quarter of 1999 was the final payment
under the terms of the MMIC/IPMIT merger agreement. The negative cash flow
was lower in the first three months of 1999 compared to the same period in
1998 primarily due to greater premium receipts. Fewer policyholders paid
premiums in advance of 1/1/99 policy renewals due to later policy billings.
Consequently, more policy premiums were paid after January 1 rather than
prior to that date compared to the same period the previous year.
Total equity consisting of redeemable stock and other shareholders' equity,
increased by $1,877,000 during the first three months of 1999. Equity
increases were from net income of $4,569,000 and Class A stock issuances of
$56,000. These increases were offset by net unrealized depreciation in the
fair value of investments, net of deferred taxes, of $(2,682,000) and Class A
stock redemptions of $(66,000).
9
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RESULTS OF OPERATIONS
Net premiums earned increased $221,000 over the same period of 1998 primarily
as a result of writing approximately $3,500,000 of new business. The new
business was generated primarily from sales of policies to large, healthcare
systems. The increase from new business was offset by a 5% decrease in 1999
premium rate levels for policyholders in Minnesota, North Dakota, and South
Dakota. Also negatively impacting first quarter 1999 premiums were greater
retrospective premium credits paid during the first quarter to Minnesota and
North Dakota policyholders than what had been estimated and accrued at
December 31, 1998. The additional retrospective premium credit payments
recognized in the first quarter of 1999 totaled approximately $346,000.
Finally, the first quarter of 1998 contained a favorable premium adjustment
of approximately $789,000 for the commutation of a 1991 reinsurance contract.
The first quarter of 1999 did not contain a similar type of premium
adjustment.
Net capital gains of $6,309,000 were realized during the first three months
of 1999. Most of these capital gains resulted from the sale of common stock
to fund the payment of retrospective and MMIC/IPMIT merger premium credits
during the first quarter. The Company's investment portfolio is managed by
professional, outside investment advisors on a total return basis under
guidelines set by the Investment Committee of the Company's Board of
Directors. As such, the Company's investment managers may take advantage of
opportunities to increase total return through sales of selected securities
in response to changing market conditions. Consequently, management has no
estimate for future levels of realized capital gains or losses.
Other revenues consist primarily of finance charges on MMIC premium billings,
commission income from Services, and claim processing fees from MedPower. The
increase for the first three months of 1999 over the same period of 1998 is
primarily due to Services beginning active operations in January 1999.
Losses and loss adjustment expenses increased $200,000 for the first three
months of 1999 versus 1998. The increase in 1999 was primarily driven by the
increase in premium volume as interim period losses are estimated based on a
ratio of net premiums earned. The estimated loss ratio was developed while
determining 1999 premium rates. At year-end, an outside actuarial analysis of
losses is completed. Although the effects of interim claim frequency and
severity statistics are not analyzed, management did not observe any
discernable loss trends during the first three months of 1999 that would
materially alter loss expectations.
Underwriting, acquisition and insurance expenses increased $275,000 for the
first three months of 1999 compared to the same period in 1998. The majority
of the increase is due to staff additions to handle MMIC business growth and
the continuing implementation of a new insurance company operating system.
Other operating expenses increased $791,000 for the first three months of
1999 compared to the same period in 1998. The increase can be attributed
primarily to Services beginning active operations in January 1999 and
additional salary, benefits, and outside consulting expenses incurred by
Solutions from intensifying its business development efforts.
10
<PAGE>
RESULTS OF OPERATIONS (continued)
As a result of the factors discussed above, the Company realized net income
of $4,569,000 for the three months ended March 31, 1999 compared to net
income of $2,902,000 for the same period of 1998. Basic net income per share
increased to $36.03 from $24.01 for the three months ended March 31, 1999 and
1998, respectively. Diluted net income per share increased to $32.45 for the
three months ended March 31, 1999 from the $21.68 per share reported a year
ago.
YEAR 2000 UPDATE
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any 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.
The Company's Year 2000 Task Force continues to monitor and evaluate the Year
2000 issue, identify the causes and consequences to the Company, and develop
courses of action including contingency plans as deemed necessary. The
following key areas are assessed: 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.
Medpower's operating system 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 the end of June 1999 with a total conversion cost
estimated at $250,000. The conversion was approximately 85% completed and had
expenditures of approximately $210,000 as of the date of this Form 10-Q
filing. As a result of the above evaluation, the Company believes that the
Year 2000 issue has been adequately addressed with respect to internal use
hardware and software.
A Year 2000 compliance inquiry was prepared and mailed in October of 1998 to
all of the Company's key business partners and service vendors. Responses
have been evaluated and follow-up has begun on approximately twenty key
vendors that either did not respond to the Company's first inquiry or
responded that they were not yet compliant. Letters were sent to these
vendors asking either for an initial response or an update on the status
previously reported. The Company intends to complete its follow-up efforts on
these vendors by the end of June. At that time, management will decide
whether a change in vendors is necessary and what additional contingency
measures need to be taken. Despite the above efforts, no assurances 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.
11
<PAGE>
YEAR 2000 UPDATE (continued)
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.
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.
12
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YEAR 2000 UPDATE (continued)
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 disclosures under the heading "Cautionary
Note Regarding Forward-Looking Statements" below.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements other than historical information contained in this Report are
considered to be "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Act of 1934, as amended.
All forward-looking statements address matters that involve risks and
uncertainties. Accordingly, in addition to the factors discussed in this
Report, there are or will be other important factors that could cause actual
results to differ materially from those indicated in such statements. These
factors include but are not limited to:
i. the impact of changing market conditions on the Company's business
strategy;
ii. the effects of increased competition on pricing, coverage terms, retention
of customers and ability to attract new customers;
iii. greater severity or frequency of the types of losses that the Company
insure;
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 in connection with such compliance.
The facts set forth above should be considered in connection with any
forward-looking statement contained in this Report. The important factors
that could affect such forward-looking statements are subject to change, and
the Company does not intend to update any forward-looking statement or the
forgoing list of important factors. By this cautionary note, the Company
intends to avail itself of the safe harbor from liability with respect to
forward-looking statements provided by Section 27A and Section 21E referred
to above.
13
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Item 3. - Quantitative and Qualitative Disclosure 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 previously disclosed, the Company's fixed maturity and equity investments
are classified as available for sale and are managed to preserve assets,
maximize pre-tax total return, and assure adequate liquidity to meet the
funding needs of the Company. Under the current investment policy, management
does not use derivative instruments to manage exposure to 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.
Based on the effective duration of the fixed maturity investment portfolio,
an abrupt 100 basis point increase in interest rates along the entire
interest rate yield curve would adversely affect the fair value of fixed
maturity investments by approximately $8,300,000 at March 31, 1999 and
$8,500,000 at December 31, 1998. Based primarily on past annual performance
relative to the Standard & Poors 500 Market Index (S&P 500), an abrupt ten
percent decrease in the S&P 500 would adversely affect the fair value of
equity securities by approximately $10,100,000 at March 31, 1999 and
$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.
14
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Part II. Other Information
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits
(27) Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K
None
15
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Midwest Medical Insurance Holding Company
-----------------------------------------
(Registrant)
Date May 12, 1999 /s/ David P. Bounk
-----------------------------------------
David P. Bounk
President and Chief Executive Officer
Date May 12, 1999 /s/ Niles Cole
-----------------------------------------
Niles Cole
Vice President and
Principal Financial Officer and
Principal Accounting Officer
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<DEBT-HELD-FOR-SALE> 156,862
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 86,718
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 253,580
<CASH> 10,157
<RECOVER-REINSURE> 16,805
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 323,676
<POLICY-LOSSES> 111,612
<UNEARNED-PREMIUMS> 43,986
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 7,630
<OTHER-SE> 144,840
<TOTAL-LIABILITY-AND-EQUITY> 323,676
10,512
<INVESTMENT-INCOME> 2,873
<INVESTMENT-GAINS> 6,309
<OTHER-INCOME> 867
<BENEFITS> 9,485
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 2,517
<INCOME-PRETAX> 7,032
<INCOME-TAX> 2,463
<INCOME-CONTINUING> 4,569
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,569
<EPS-PRIMARY> 36.03
<EPS-DILUTED> 32.45
<RESERVE-OPEN> 0<F1>
<PROVISION-CURRENT> 0<F1>
<PROVISION-PRIOR> 0<F1>
<PAYMENTS-CURRENT> 0<F1>
<PAYMENTS-PRIOR> 0<F1>
<RESERVE-CLOSE> 0<F1>
<CUMULATIVE-DEFICIENCY> 0<F1>
<FN>
<F1>Not available for quarterly interim financial statements.
</FN>
</TABLE>
