<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Period Ended September 30, 2000.
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 of (I.R.S. Employer
incorporation or organization) Identification No.)
7650 Edinborough Way, Suite 400
Minneapolis, Minnesota 55435-5978
----------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
952-838-6700
--------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not applicable
--------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the issuer's classes of common stock as of
September 30, 2000:
Class A Common Stock, $.01 par value - 6,898 shares
Class B Common Stock, $1,000 par value - 1 share
Class C Common Stock, no par value - 7,009 shares
1
<PAGE> 2
INDEX
Midwest Medical Insurance Holding Company
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets - September 30, 2000 and
December 31, 1999
Condensed consolidated statements of income - Three months
ended September 30, 2000 and 1999; Nine months ended September
30, 2000 and 1999
Condensed consolidated statements of cash flows - Nine months
ended September 30, 2000 and 1999
Notes to condensed consolidated financial statements -
September 30, 2000
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 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
2
<PAGE> 3
Part I. Financial Information
Item 1. - Financial Statements
MIDWEST MEDICAL INSURANCE HOLDING COMPANY and SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30 December 31
2000 1999
--------------------- ---------------------
(Unaudited) (Note A)
<S> <C> <C>
ASSETS
Fixed maturities at fair value (cost:
2000 $151,437; 1999 $159,464) $ 146,094 $ 153,950
Equity securities at fair value (cost:
2000 $56,423; 1999 $46,216) 102,008 104,898
Short-term investments 20,313 9,128
Other investments 10,915 10,000
--------------------- ---------------------
279,330 277,976
Cash 30 1,821
Accrued investment income 2,140 2,317
Premiums receivable - Note D 12,070 7,143
Reinsurance recoverable on paid and unpaid losses 15,417 19,285
Amounts due from reinsurers - 3,833
Other assets 9,027 7,801
--------------------- ---------------------
Total assets $ 318,014 $ 320,176
===================== =====================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Unpaid losses and loss adjustment expenses $ 117,240 $ $119,141
Unearned premiums - Note D 22,444 12,797
Policyholder dividends - Note E 10,564 10,175
Deferred income taxes 9,147 12,201
Amounts due reinsurers 1,760 -
Other liabilities - Note D 5,719 9,893
Class A common stock redemptions payable - Note B 6,917 366
Class A redeemable common stock - Note B 455 7,802
--------------------- ---------------------
174,246 172,375
SHAREHOLDERS' EQUITY
Class B Common Stock; authorized, issued and
outstanding 1 share - Note B 1 1
Class C Common Stock; authorized 300,000 shares,
issued and outstanding 7,009 shares in 2000
and 0 shares in 1999 - Note B - -
Paid-in capital 12,789 12,789
Retained earnings 103,902 100,095
Accumulated other comprehensive income:
Net unrealized appreciation of investments 27,076 34,916
--------------------- ---------------------
143,768 147,801
--------------------- ---------------------
Total liabilities and shareholders' equity $ 318,014 $ 320,176
===================== =====================
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
MIDWEST MEDICAL INSURANCE HOLDING COMPANY and SUBSIDIARIES
Condensed Consolidated Statements of Income
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
---------------------------- ---------------------------
2000 1999 2000 1999
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Revenues:
Net premiums earned $ 11,025 $ 14,576 $ 32,110 $35,363
Net investment income 3,056 3,047 9,097 8,853
Net realized capital gains 3,778 1,649 10,108 7,716
Other 675 495 3,949 2,227
-------- -------- -------- -------
18,534 19,767 55,264 54,159
Losses and expenses:
Losses and loss adjustment expenses 10,190 9,717 30,833 29,664
Policyholder dividends - Note E 8,000 10,100 8,000 10,100
Underwriting, acquisition and
insurance expenses 1,630 1,847 5,924 6,126
Other operating expenses 2,547 1,435 5,904 4,553
-------- -------- -------- -------
22,367 23,099 50,661 50,443
-------- -------- -------- -------
Income (loss) before income tax
expense (benefit) (3,833) (3,332) 4,603 3,716
Income tax expense (benefit) -
Note C (274) (1,109) (66) 1,360
-------- -------- -------- -------
Net income (loss) $ (3,559) $ (2,223) $ 4,669 $ 2,356
======== ======== ======== =======
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
MIDWEST MEDICAL INSURANCE HOLDING COMPANY and SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30
-----------------------------------
2000 1999
--------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 4,669 $ 2,356
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Increase in premiums receivable (4,927) (11,566)
(Increase) decrease in reinsurance recoverable
on paid and unpaid losses 3,868 (161)
Decrease in amounts due from reinsurers 3,833 399
Increase in unearned premiums 9,647 14,511
Increase in policyholder dividends 389 10,100
Decrease in retrospective premiums -- (8,543)
Decrease in other liabilities (4,174) (1,218)
Net realized capital gains (10,108) (7,716)
Other changes, net 1,016 (166)
-------- ---------
4,213 (2,004)
INVESTING ACTIVITIES
Purchases of fixed maturity investments and
equity securities (80,295) (129,200)
Sales of fixed maturity investments and equity
securities 83,914 135,249
Maturities and calls of fixed maturity investments 4,184 2,000
Net purchase of short-term investments (11,184) (5,488)
-------- ---------
(3,381) 2,561
FINANCING ACTIVITIES
Increase in Class A stock redemptions payable 6,551 457
Redemption of Class A Common Stock (9,174) (904)
-------- ---------
(2,623) (447)
-------- ---------
Increase (decrease) in cash (1,791) 110
Cash at beginning of year 1,821 647
-------- ---------
CASH AT SEPTEMBER 30 $ 30 $ 757
======== =========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
MIDWEST MEDICAL INSURANCE HOLDING COMPANY and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 30, 2000
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial statements
of Midwest Medical Insurance Holding Company and its subsidiaries have been
prepared in accordance with accounting principles generally accepted in the
United States 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 accounting principles generally
accepted in the United States 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 occur for the full year. These interim financial statements should be
read in conjunction with the 1999 consolidated financial statements and notes
thereto included in Midwest Holding's Annual Report on Form 10-K as filed with
the Securities and Exchange Commission.
The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by accounting principles generally accepted in the United
States 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 - CAPITAL STRUCTURE
Midwest Holding is in the process of redeeming all Class A shares according to
the terms of the tender offer as filed with the Securities and Exchange
Commission (see Item 6(a). Exhibit 2B. of this report). As of September 30,
2000, shareholders owning over 95% of the Class A shares had accepted the tender
offer. Upon accepting the tender offer, all of the shareholder's Class A shares
are exchanged for $66.00 for each Class A share owned, plus one Class C share.
Thus, of the 300,000 authorized Class A shares, only 6,898 Class A shares were
issued and outstanding as of September 30, 2000 compared to 123,509 shares as of
December 31, 1999. Like the Class A shares, Class C shares are not publicly or
privately traded. Class C shareholders, however, do not accrue additional shares
and the Class C shares have no redemption value. Class C shares are returned to
Midwest Holding upon termination of the shareholder's insurance coverage with
Midwest Medical.
As a result of the above, Midwest Holding has recorded a Class A common stock
redemptions payable to shareholders who have accepted the tender offer. Payments
to shareholders are being processed as soon as administratively feasible and are
anticipated to be substantially completed by the end of the year. The remaining
Class A shareholders who have yet to tender their shares are classified as
redeemable common stock under the liabilities section of the balance sheet.
Midwest Holding anticipates that these shareholders will eventually tender their
shares. The one Class B share and the Class C shares are recorded as components
of shareholders' equity.
6
<PAGE> 7
NOTE C - INCOME TAXES
Midwest Holding calculates its income tax provision for interim periods by
estimating its annual effective tax rate and applying this rate to the income of
the interim period. The estimated annual effective tax rate used for the three
and nine-month periods ended September 30, 2000 and 1999 was approximately 35%.
During the second quarter of 2000, Midwest Medical Insurance Company received
$4,418,000 in federal tax refunds including interest resulting from the IRS
examinations for the 1992 to 1996 tax years. The tax refunds totaling $2,715,000
were recorded as an income tax benefit while the $1,703,000 of interest was
recorded to other revenues. During the third quarter of 2000, Midwest Medical
revised the estimated tax rate used to calculate the deferred tax on
non-investment assets and liabilities. The estimated tax rate was lowered to 34%
from 39.46% to eliminate the state income tax component. Due to Midwest
Medical's increase in premium volume in recent years, state premium tax credits
nearly offset state income taxes. The revision resulted in Midwest Medical
recording an additional $1,050,000 of deferred tax expense in the third quarter.
NOTE D - UNEARNED PREMIUMS, PREMIUMS RECEIVABLE and OTHER LIABILITIES
The majority of Midwest Medical's insurance policies expire at December 31 and
renew on January 1 of each year. As a result, the majority of the unearned
premium amount at September 30, 2000 represents three months of unearned premium
for every active policy renewed or newly written on January 1, 2000 with an
expiration date of December 31, 2000. At December 31, 1999, most active 1999
policies expired and therefore had no unearned premium.
Of the total unearned premium balance of $12,797,000 at December 31, 1999,
$6,905,000 is reserved to recognize Midwest Medical's obligation to provide
reporting endorsement coverage without additional premium upon the death,
disability or retirement of policyholders. That same amount is also included in
the unearned premium balance at September 30, 2000 and represents the
actuarially determined present value of future benefits to be provided less the
present value of future revenues to be received.
The increase of $4,927,000 in premiums receivable from December 31, 1999 to
September 30, 2000 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 each year's premium is
nearly all collected during the year. The receivable balance remaining at the
end of the year primarily relates to the small number of policies underwritten
by Midwest Medical that have other than December 31 expiration dates.
Of the total other liabilities balance of $9,893,000 at December 31, 1999,
$5,568,000 is for premium payments received from policyholders in advance of
their January 1, 2000 policy renewal. No advance premium payments were recorded
at September 30, 2000.
7
<PAGE> 8
NOTE E - POLICYHOLDER DIVIDENDS
In 1999, Midwest Medical instituted a policyholder dividend program that
replaced the previous retrospective premium credit program for physicians.
To implement the policyholder dividend program, Midwest Medical issued
participating policy endorsements to all active physician and clinic accounts
during 1999 and will issue participating policy endorsements to all active
hospital accounts during 2000. Participating policies represented 96% and 91% of
total premiums in force and premium income at September 30, 2000 and December
31, 1999, respectively.
During the third quarter of 2000, Midwest Medical's Board of Directors declared
an $8,000,000 dividend to be paid to physician and clinic policyholders in 2001.
The dividends will be awarded proportionately based on annual premiums for
physician and clinic policyholders that were insured by Midwest Medical in 1996
and remain insured throughout 2001. The dividend will be paid to physician and
clinic policyholders in four equal installments in February, May, August and
November 2001.
NOTE F - SEGMENT INFORMATION
Midwest Holding is organized into five legal entity business segments. The
segments are described under the "Background" section in Item 1 of the 1999
Annual Report on Form 10-K. The following financial information summarizes the
results of operations and total assets reported by Midwest Holding's five
business segments for the three and nine-month periods ended September 30, 2000
and 1999 (in thousands).
8
<PAGE> 9
NOTE F - SEGMENT INFORMATION (continued)
<TABLE>
<CAPTION>
Three months ended September 30, 2000
----------------------------------------------------------------------------------------------------------
Midwest Midwest
Holding Medical Services Solutions MedPower Eliminations(1) Consolidated
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
External customers $ - $ 11,129 $ 382 $ 111 $ 76 $ - $ 11,698
Intersegment 3,983 - - 2 - (3,985) -
Net investment income (230) 2,998 1 8 10 269 3,056
Other(2) 38 3,742 - - - - 3,780
----------------------------------------------------------------------------------------------------------
3,791 17,869 383 121 86 (3,716) 18,534
Total expenses 4,865 20,083 441 501 193 (3,716) 22,367
----------------------------------------------------------------------------------------------------------
Income (loss) before
income taxes (1,074) (2,214) (58) (380) (107) - (3,833)
Income tax expense
(benefit) (365) 275 (18) (129) (37) - (274)
----------------------------------------------------------------------------------------------------------
Net income (loss) $ (709) $(2,489) $ (40) $(251) $ (70) $ - $ (3,559)
==========================================================================================================
Total assets $155,606 $311,580 $2,214 $2,242 $1,246 $(154,874) $ 318,014
=========================================================================================================
</TABLE>
(1) Intersegment eliminations for revenues and expenses are primarily for
management, administrative and investment services provided by Midwest
Holding. Eliminations for assets consist primarily of investments in
wholly-owned subsidiaries, intersegment receivables for management fees
and reclassifications between assets and liabilities primarily for
taxes.
(2) Other revenues consist primarily of net realized capital gains and
interest received on federal income tax refunds.
9
<PAGE> 10
NOTE F - SEGMENT INFORMATION (continued)
<TABLE>
<CAPTION>
Three months ended September 30, 1999
--------------------------------------------------------------------------------------------------------
Midwest Midwest
Holding Medical Services Solutions MedPower Eliminations(1) Consolidated
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
External customers $ -- $ 14,589 $ 372 $ -- $ 108 $ -- $ 15,069
Intersegment 4,395 -- -- -- 5 (4,400) --
Net investment income (203) 3,004 6 3 2 235 3,047
Other(2) 31 1,620 -- -- -- -- 1,651
--------------------------------------------------------------------------------------------------------
4,223 19,213 378 3 115 (4,165) 19,767
Total expenses 4,218 21,958 394 287 407 (4,165) 23,099
--------------------------------------------------------------------------------------------------------
Income (loss) before
income taxes 5 (2,745) (16) (284) (292) -- (3,332)
Income tax expense
(benefit) 30 (953) (6) (88) (92) -- (1,109)
--------------------------------------------------------------------------------------------------------
Net income (loss) $ (25) $ (1,792) $ (10) $ (196) $ (200) $ -- $ (2,223)
========================================================================================================
Total assets $ 150,656 $ 295,358 $ 1,577 $ 1,985 $ 1,439 $(148,234) $ 302,781
========================================================================================================
</TABLE>
(1) Intersegment eliminations for revenues and expenses are primarily for
management, administrative and investment services provided by Midwest
Holding. Eliminations for assets consist primarily of investments in
wholly-owned subsidiaries, intersegment receivables for management fees
and reclassifications between assets and liabilities primarily for
taxes.
(2) Other revenues consist primarily of net realized capital gains.
10
<PAGE> 11
NOTE F - SEGMENT INFORMATION (continued)
<TABLE>
<CAPTION>
Nine months ended September 30, 2000
-------------------------------------------------------------------------------------------------------
Midwest Midwest
Holding Medical Services Solutions MedPower Eliminations(1) Consolidated
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
External customers $ -- $ 32,698 $ 1,271 $ 141 $ 232 $ -- $ 34,342
Intersegment 12,361 -- -- 12 -- (12,373) --
Net investment income (688) 8,942 7 13 19 804 9,097
Other(2) 132 11,693 -- -- -- -- 11,825
-------------------------------------------------------------------------------------------------------
11,805 53,333 1,278 166 251 (11,569) 55,264
Total expenses 13,113 45,561 1,337 1,590 629 (11,569) 50,661
-------------------------------------------------------------------------------------------------------
Income (loss) before
income taxes (1,308) 7,772 (59) (1,424) (378) -- 4,603
Income tax expense
(benefit) (437) 1,002 (18) (484) (129) -- (66)
-------------------------------------------------------------------------------------------------------
Net income (loss) $ (871) $ 6,770 $ (41) $ (940) $ (249) $ -- $ 4,669
=======================================================================================================
Total assets $ 155,606 $ 311,580 $ 2,214 $ 2,242 $ 1,246 $(154,874) $ 318,014
=======================================================================================================
</TABLE>
(1) Intersegment eliminations for revenues and expenses are primarily for
management, administrative and investment services provided by Midwest
Holding. Eliminations for assets consist primarily of investments in
wholly-owned subsidiaries, intersegment receivables for management fees
and reclassifications between assets and liabilities primarily for
taxes.
(2) Other revenues consist primarily of net realized capital gains and
interest received on federal income tax refunds.
11
<PAGE> 12
NOTE F - SEGMENT INFORMATION (continued)
<TABLE>
<CAPTION>
Nine months ended September 30, 1999
-----------------------------------------------------------------------------------------------
Midwest Midwest
Holding Medical Services Solutions MedPower Eliminations(1) Consolidated
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
External customers $ -- $ 36,058 $1,210 $ -- $ 316 $ -- $ 37,584
Intersegment 12,455 -- -- -- 12 (12,467) --
Net investment income (623) 8,714 15 15 11 721 8,853
Other(2) 54 7,668 -- -- -- -- 7,722
-----------------------------------------------------------------------------------------------
11,886 52,440 1,225 15 339 (11,746) 54,159
Total expenses 11,902 46,701 1,171 1,096 1,319 (11,746) 50,443
-----------------------------------------------------------------------------------------------
Income (loss) before
income taxes (16) 5,739 54 (1,081) (980) -- 3,716
Income tax expense
(benefit) 25 2,016 19 (367) (333) -- 1,360
-----------------------------------------------------------------------------------------------
Net income (loss) $ (41) $ 3,723 $ 35 $ (714) $ (647) $ -- $ 2,356
===============================================================================================
Total assets $ 150,656 $295,358 $1,577 $ 1,985 $ 1,439 $(148,234) $302,781
===============================================================================================
</TABLE>
(1) Intersegment eliminations for revenues and expenses are primarily for
management, administrative and investment services provided by Midwest
Holding. Eliminations for assets consist primarily of investments in
wholly-owned subsidiaries, intersegment receivables for management fees
and reclassifications between assets and liabilities primarily for
taxes.
(2) Other revenues consist primarily of net realized capital gains.
12
<PAGE> 13
NOTE G - COMPREHENSIVE INCOME
The components of Midwest Holding's comprehensive income are net income and
changes in net unrealized appreciation of investments. Total comprehensive
income was $(8,635,000) and $(3,171,000) for the three and nine-months ended
September 30, 2000 and $(5,912,000) and $(4,664,000) for the three and
nine-months ended September 30, 1999.
NOTE H - DISCONTINUANCE OF EARNINGS PER SHARE DATA
In the event of a liquidation, sale or similar transaction, Class C shareholders
would participate according to a formula not based upon the number of Class C
shares owned (refer to the Offering Circular filing per Item 6(a). Exhibit 2B.).
This, along with the other unique characteristics of Class C shares as described
in Note B, results in a distorted earnings per share that does not reflect the
income available to Class C common shareholders. Consequently, Midwest Holding
has discontinued the disclosure of earnings per share data to avoid misleading
readers of its financial statements.
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 Holding and its wholly-owned subsidiaries, Midwest Medical, MMIHC
Insurance Services, Inc., Midwest Medical Solutions, Inc., and MedPower
Information Resources, Inc. should be read in conjunction with the condensed
consolidated financial statements and notes thereto included in this report.
Midwest Holding and its subsidiaries are collectively referred to as Midwest
Holding unless the reference pertains to a specific entity.
Capital Resources and Liquidity
The majority of Midwest Holding's assets, 88% at September 30, 2000 and 87% at
December 31, 1999, are invested in investment-grade bonds, equities and
short-term instruments. Midwest Holding's investments in debt and equity
securities are classified as available for sale and are therefore carried at
fair value with unrealized gains and losses, net of applicable taxes, reflected
as a separate component of shareholders' equity. Other investments consist of
equity interests in non-traded real estate investment trusts (REIT) that are
also classified as available for sale and are recorded at the fair value
determined by the most recent independent appraisal. Prior to receiving the
initial appraisal in the first quarter of 2000, Midwest Holding had recorded the
REIT at cost.
Operations generated $4,213,000 of positive cash flow during the first nine
months of 2000 compared to $(2,004,000) of negative cash flow for the same
period of 1999. During the first nine months of 2000, reinsurers paid $5,408,000
to Midwest Medical for favorable experience adjustments on the 1992-1994 and
1995-1997 reinsurance contracts. Federal tax refunds of $4,418,000 including
interest also contributed to the positive operating cash flow. These positive
cash flows were partially offset by $7,611,000 of policyholder dividend payments
made in the first nine months of 2000. The negative operating cash flow in the
first nine months of 1999 was primarily due to the payment of $8,886,000 in
retrospective premium credits.
13
<PAGE> 14
Capital Resources and Liquidity (continued)
Effective July 31, 2000, the Executive Committee of the Board of Directors of
Midwest Holding approved the exchange and redemption of all Class A shares
tendered. Class A shareholders who tender their shares will receive $66.00 for
each Class A share owned, plus one Class C share. The cash payment in connection
with the tender offer redemption of all outstanding Class A shares will total
approximately $9,400,000 and will be funded from Midwest Medical's investment
portfolio. As of September 30, 2000, payments of approximately $2,051,000 had
been made to shareholders for tender offer stock redemptions.
Midwest Holding believes that its cash, investments and internally generated
funds will be sufficient to meet normal operating requirements and the
redemption of Class A common stock per the tender offer.
Shareholders' equity decreased by $4,033,000 during the first nine months of
2000. Net income of $4,669,000 was offset by net unrealized losses in the fair
value of investments, net of deferred taxes, of $(7,840,000).
Results of Operations
Net premiums earned decreased $3,253,000 for the first nine months of 2000
compared to the same period of 1999. Favorable experience adjustments on the
1992-1994 and 1995-1997 reinsurance contracts totaled $946,000 in 2000 compared
to $4,337,000 of favorable experience adjustments in 1999. Greater reinsurance
costs of approximately $978,000 on the current year also caused net premiums
earned to decrease. These added reinsurance costs resulted from policyholders
purchasing higher limits and the new, reinsured fraud & abuse program provided
free of charge to Midwest Medical policyholders up to a $10,000 limit per
policy. New business generating approximately $1,580,000 of additional earned
premium partially offset the above decreases.
Net capital gains of $10,108,000 were realized during the first nine months of
2000. In addition to first quarter sales of appreciated technology common stocks
to maintain appropriate diversification, the outside, domestic equity investment
manager began selling selected equities in the third quarter to fund Midwest
Holding's tender offer redemption of Class A shares. Future levels of realized
capital gains or losses are difficult to predict as investment managers purchase
and sell securities in response to investment policy guidelines and changing
market conditions.
Other revenues increased $1,722,000 for the first nine months of 2000 compared
to the same period of 1999. Interest on federal tax refunds recorded in the
second quarter primarily caused the increase. Revenues from the new information
technology consulting division of Solutions also contributed to the increase.
These increases were partially offset by a decrease in finance charges on
premium billings to Midwest Medical policyholders.
14
<PAGE> 15
Results of Operations (continued)
Losses and loss adjustment expenses increased $1,169,000 for the first nine
months of 2000 versus 1999. The increase in 2000 is largely in response to the
growth in Midwest Medical business and the corresponding exposure in recent
years. Although the effects of interim claim frequency and severity statistics
are not actuarially analyzed, nothing came to management's attention during the
first nine months of 2000 that would materially alter loss expectations for the
remainder of the year.
Policyholder dividends of $8,000,000 were declared in the third quarter of 2000
by Midwest Medical's Board of Directors. This compares to $10,100,000 declared
in the third quarter of 1999. The decrease is primarily due to less favorable
loss experience on the 1996 year compared to the 1995 year on which the
respective policyholder dividends were based. Policyholder dividends represent a
return of prior years' profits that were greater than anticipated due to
favorable claims and investment experience.
Underwriting, acquisition and insurance expenses decreased $202,000 for the
first nine months of 2000 compared to the same period in 1999. Additional ceding
commissions earned by Midwest Medical on the current year reinsurance contract
primarily drove the decrease.
Other operating expenses increased $1,351,000 for the first nine months of 2000
compared to the same period in 1999. Charges related to Midwest Holding's tender
offer to Class A shareholders accounted for most of the increase. Staff
additions, new main office rent and Solutions' project development costs also
contributed to the increase. These increases were partially offset by efficiency
gains from the new MedPower claim processing system.
The first nine months of 2000 incurred an income tax benefit of $66,000 compared
to an income tax expense of $1,360,000 for the same period in 1999. The decline
was primarily due to the federal tax refunds received in the second quarter of
2000 on the 1992 to 1996 tax years. This was partially offset by additional
deferred tax expense recorded by Midwest Medical in the third quarter of 2000
for a revision in the estimated deferred tax rate. Excluding these adjustments,
the effective tax rate was approximately 35% for the nine-month period ending
September 30, 2000.
As a result of the factors discussed above, Midwest Holding realized net income
of $4,669,000 for the nine months ended September 30, 2000 compared to net
income of $2,356,000 for the same period of 1999.
Year 2000 Update
No significant Year 2000 problems have been encountered with respect to Midwest
Holding's internal computer hardware and software, key business partners and
vendors, and insurance policy exposure.
As of the date of this report, no Year 2000 claims have been reported on
policies issued by Midwest Medical. This, along with the overall success of
businesses in dealing with Year 2000 issues, leads Midwest Holding to believe
that it has little, if any, exposure to Year 2000 claims.
15
<PAGE> 16
Year 2000 Update (continued)
The potential does still exist, however, in a worst case scenario for claims to
be made by Midwest Medical policyholders for Year 2000 failures they experience.
In the event Year 2000 claims are made on policies written by Midwest Medical,
Midwest Holding believes these claims will be without merit and will vigorously
defend its position. Depending on whether such claims are deemed to have merit
and to the extent these claims are awarded compensation, such claims could have
a material adverse effect on Midwest Holding's business, financial condition and
results of operations.
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:
1. the impact of changing market conditions on Midwest Holding's business
strategy;
2. the effects of increased competition on pricing, coverage terms,
retention of customers and ability to attract new customers;
3. greater severity or frequency of the types of losses insured by Midwest
Medical;
4. faster or more adverse loss development experience than what Midwest
Medical had based its underwriting, reserving, and investment
practices;
5. developments in global financial markets which could adversely affect
the performance of Midwest Holding's investment portfolio;
6. litigation, regulatory or tax developments which could adversely affect
Midwest Holding's business;
7. risks associated with the introduction of new products and services;
8. dependence on key personnel; and
9. the impact of mergers and acquisitions.
The facts set forth above should be considered in reviewing any forward-looking
statement contained in this report. The important factors that could affect such
forward-looking statements are subject to change, and Midwest Holding does not
intend to update any forward-looking statement or the foregoing list of
important factors. By this cautionary note, Midwest Holding intends to rely upon
the safe harbor from liability with respect to forward-looking statements
provided by Section 27A and Section 21E referred to above.
16
<PAGE> 17
Item 3. - Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of loss that may occur when fluctuations in interest and
foreign currency exchange rates and equity and commodity prices change the value
of a financial instrument. Both derivative and nonderivative financial
instruments have market risk. Midwest Holding is primarily exposed to interest
rate risk on its investment in fixed maturities, equity price risk on its
investment in equity securities, and foreign currency exchange rate risk on its
investment in international equity securities.
No material changes have occurred in any of Midwest Holding's market risks since
the year ended December 31, 1999.
Part II. Other Information
Item 4. - Submission of Matters to a Vote of Security Holders
(a) A special meeting of the class A shareholders of Midwest
Holding was held on Thursday, June 29, 2000.
(c) The special meeting of June 29, 2000 considered the adoption
of a new Article 4.c to the Articles of Incorporation of
Midwest Holding. Under the new Article 4.c, the Board of
Directors is authorized to establish one or more additional
series and classes of common or preferred stock, setting forth
the designation of each such series or class, and fixing the
relative rights and preferences of each such series or class.
Class A shareholders of Midwest Holding approved the adoption
of Article 4.c by the following vote:
<TABLE>
<S> <C>
Yes 1,747
No 12
Abstain 15
------------
Total 1,774
============
</TABLE>
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits
2A. Proxy Statement for a special meeting of Midwest
Holding to be held on June 29, 2000. (Incorporated
herein by reference to the Schedule 14A filed by
Midwest Holding on April 26, 2000, SEC File No.
0-21230.)
2B. Offering Circular and all other exhibits to the
Schedule TO filed by Midwest Holding on April 26,
2000, with respect to a tender offer commenced by
Midwest Holding on May 12, 2000, as amended.
(Incorporated by reference to the Schedule TO filed
by Midwest Holding on April 26, 2000, SEC File No.
0-21230.)
27. Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K
None
17
<PAGE> 18
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Midwest Medical Insurance Holding Company
-------------------------------------------
(Registrant)
Date November 10, 2000 /s/ David P. Bounk
-------------------- -------------------------------------
David P. Bounk
President and Chief Executive Officer
Date November 10, 2000 /s/ Niles Cole
-------------------- -------------------------------------
Niles Cole
Vice President and
Principal Financial Officer and
Principal Accounting Officer
18
