<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 June 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
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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
---------------------------------- ----------------------
(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
June 30, 2000:
Class A Common Stock, $.01 par value - 124,198 shares
Class B Common Stock, $1,000 par value - 1 share
Class C Common Stock, no par value - 0 shares
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INDEX
Midwest Medical Insurance Holding Company
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets - June 30, 2000 and
December 31, 1999
Condensed consolidated statements of income - Three months ended June
30, 2000 and 1999; Six months ended June 30, 2000 and 1999
Condensed consolidated statements of cash flows - Six months ended
June 30, 2000 and 1999
Notes to condensed consolidated financial statements - June 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
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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>
June 30 December 31
2000 1999
--------------------- ---------------------
(Unaudited) (Note A)
<S> <C> <C>
ASSETS
Fixed maturities at fair value (cost:
2000 $150,321; 1999 $159,464) $ 143,700 $ 153,950
Equity securities at fair value (cost:
2000 $55,515; 1999 $46,216) 110,297 104,898
Short-term investments 18,426 9,128
Other investments 10,916 10,000
--------------------- ---------------------
283,339 277,976
Cash 653 1,821
Accrued investment income 2,196 2,317
Premiums receivable - Note C 18,968 7,143
Reinsurance recoverable on paid and unpaid losses 15,547 19,285
Amounts due from reinsurers - 3,833
Other assets 8,988 7,801
--------------------- ---------------------
Total assets $ 329,691 $ 320,176
===================== =====================
LIABILITIES, REDEEMABLE STOCK AND OTHER
SHAREHOLDERS' EQUITY
LIABILITIES
Unpaid losses and loss adjustment expenses $ 113,802 $ $119,141
Unearned premiums - Note C 31,292 12,797
Policyholder dividends - Note D 5,102 10,175
Deferred income taxes 10,801 12,201
Amounts due reinsurers 1,019 -
Other liabilities - Note C 6,853 10,259
--------------------- ---------------------
168,869 164,573
REDEEMABLE STOCK
Class A Common Stock; authorized 300,000 shares, issued and
outstanding 124,198 shares in 2000 and 123,509 shares in 1999 7,524 7,802
Class B Common Stock; authorized, issued and outstanding 1 share 1 1
--------------------- ---------------------
7,525 7,803
OTHER SHAREHOLDERS' EQUITY
Paid-in capital 12,789 12,789
Retained earnings 108,356 100,095
Accumulated other comprehensive income:
Net unrealized appreciation of investments 32,152 34,916
--------------------- ---------------------
153,297 147,800
--------------------- ---------------------
Total liabilities, redeemable stock and other shareholders' equity $ 329,691 $ 320,176
===================== =====================
</TABLE>
See notes to condensed consolidated financial statements.
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MIDWEST MEDICAL INSURANCE HOLDING COMPANY and SUBSIDIARIES
Condensed Consolidated Statements of Income
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
------------------------------- -----------------------------------
2000 1999 2000 1999
----------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Net premiums earned $ 11,072 $ 10,275 $ 21,085 $ 20,786
Net investment income 3,088 2,932 6,041 5,806
Net realized capital gains (losses) (185) (242) 6,330 6,068
Other 2,522 865 3,274 1,732
----------- --------------- --------------- ---------------
16,497 13,830 36,730 34,392
Losses and expenses:
Losses and loss adjustment expenses 10,194 10,462 20,643 19,948
Underwriting, acquisition and insurance expenses 1,613 1,761 4,294 4,278
Other operating expenses 1,598 1,591 3,357 3,118
----------- --------------- --------------- ---------------
13,405 13,814 28,294 27,344
----------- --------------- --------------- ---------------
Income before income tax expense (benefit) 3,092 16 8,436 7,048
Income tax expense (benefit) - Note B (1,642) 5 208 2,468
----------- --------------- --------------- ---------------
Net income $ 4,734 $ 11 $ 8,228 $ 4,580
=========== =============== =============== ===============
Income per common share $ 38.34 $ 0.09 $ 66.81 $ 36.21
=========== =============== =============== ===============
Income per common share - assuming dilution $ 34.17 $ 0.08 $ 59.72 $ 32.53
=========== =============== =============== ===============
</TABLE>
See notes to condensed consolidated financial statements.
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MIDWEST MEDICAL INSURANCE HOLDING COMPANY and SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30
---------------------------------------
2000 1999
---------------- ----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 8,228 $ 4,580
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Increase in premiums receivable (11,825) (18,578)
(Decrease) increase in unpaid losses and loss adjustment expenses (5,339) 1,799
Increase in unearned premiums 18,495 24,708
Decrease in policyholder dividends (5,073) -
Decrease in retrospective premiums - (8,543)
Net realized capital gains (6,330) (6,068)
Other changes, net 4,203 (1,782)
--------------- ---------------
2,359 (3,884)
INVESTING ACTIVITIES
Purchases of fixed maturity investments and equity securities (53,150) (106,718)
Sales of fixed maturity investments and equity securities 55,479 115,427
Maturities and calls of fixed maturity investments 3,755 -
Net purchase of short-term investments (9,298) (4,844)
--------------- ---------------
(3,214) 3,865
FINANCING ACTIVITIES
Redemption of Class A Common Stock (313) (504)
--------------- ---------------
Increase (decrease) in cash (1,168) (523)
Cash at beginning of year 1,821 647
--------------- ---------------
CASH AT JUNE 30 $ 653 $ 124
=============== ===============
</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)
June 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 - 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 six-month periods ended June 30, 2000 and 1999 was 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.
NOTE C - 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 June 30, 2000 represents six 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.
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NOTE C - UNEARNED PREMIUMS, PREMIUMS RECEIVABLE and OTHER LIABILITIES
(continued)
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 June 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 $11,825,000 in premiums receivable from December 31, 1999 to
June 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 $10,259,000 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 June 30, 2000.
NOTE D - 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 June 30, 2000 and December 31,
1999, respectively.
The 1999 physician and clinic policyholder dividends of $10,100,000 were awarded
proportionately based on annual premiums for physician and clinic policyholders
that were insured by Midwest Medical in 1995 and remain insured throughout 2000.
The dividend will be paid to physician and clinic policyholders in four equal
installments in February, May, August and November 2000.
The 1999 hospital policyholder dividends of $75,000 were awarded based on the
number of years insured with Midwest Medical and will be paid within two months
after the hospital policy renews in 2000.
NOTE E - 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 six-month periods ended June 30, 2000 and
1999 (in thousands).
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NOTE E - SEGMENT INFORMATION (continued)
<TABLE>
<CAPTION>
Three months ended June 30, 2000
--------------------------------------------------------------------------------------------
Midwest Midwest
Holding Medical Services Solutions MedPower Eliminations(1) Consolidated
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
External customers $ - $ 11,252 $ 529 $ 20 $ 77 $ - $ 11,878
Intersegment 4,004 - - 3 - (4,007) -
Net investment income (245) 3,041 1 3 3 285 3,088
Other(2) 11 1,520 - - - - 1,531
----------------------------------------------------------------------------------------------
3,770 15,813 530 26 80 (3,722) 16,497
Total expenses 3,875 12,062 463 517 210 (3,722) 13,405
----------------------------------------------------------------------------------------------
Income (loss) before income taxes (105) 3,751 67 (491) (130) - 3,092
Income tax expense (benefit) (33) (1,420) 22 (167) (44) - (1,642)
----------------------------------------------------------------------------------------------
Net income (loss) $ (72) $ 5,171 $ 45 $ (324) $ (86) $ - $ 4,734
==============================================================================================
Total assets $165,430 $323,494 $2,258 $2,557 $ 1,315 $(165,363) $329,691
==============================================================================================
</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.
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NOTE E - SEGMENT INFORMATION (continued)
<TABLE>
<CAPTION>
Three months ended June 30, 1999
---------------------------------------------------------------------------------------------
Midwest Midwest
Holding Medical Services Solutions MedPower Eliminations(1) Consolidated
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
External customers $ - $ 10,532 $ 492 $ - $ 116 $ - $ 11,140
Intersegment 4,028 - - - 7 (4,035) -
Net investment income (209) 2,887 6 4 4 240 2,932
Other(2) 19 (261) - - - - (242)
---------------------------------------------------------------------------------------------
3,838 13,158 498 4 127 (3,795) 13,830
Total expenses 3,840 12,483 409 410 467 (3,795) 13,814
---------------------------------------------------------------------------------------------
Income (loss) before income taxes (2) 675 89 (406) (340) - 16
Income tax expense (benefit) (1) 236 31 (142) (119) - 5
---------------------------------------------------------------------------------------------
Net income (loss) $ (1) $ 439 $ 58 $ (264) $ (221) $ - $ 11
=============================================================================================
Total assets $155,635 $306,752 $ 1,593 $2,428 $ 1,728 $(156,595) $311,541
=============================================================================================
</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.
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NOTE E - SEGMENT INFORMATION (continued)
<TABLE>
<CAPTION>
Six months ended June 30, 2000
---------------------------------------------------------------------------------------------
Midwest Midwest
Holding Medical Services Solutions MedPower Eliminations(1) Consolidated
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
External customers $ - $ 21,569 $ 889 $ 30 $ 156 $ - $ 22,644
Intersegment 8,378 - - 10 - (8,388) -
Net investment income (458) 5,944 6 5 9 535 6,041
Other(2) 94 7,951 - - - - 8,045
---------------------------------------------------------------------------------------------
8,014 35,464 895 45 165 (7,853) 36,730
Total expenses 8,248 25,478 896 1,089 436 (7,853) 28,294
---------------------------------------------------------------------------------------------
Income (loss) before income taxes (234) 9,986 (1) (1,044) (271) - 8,436
Income tax expense (benefit) (72) 727 - (355) (92) - 208
---------------------------------------------------------------------------------------------
Net income (loss) $ (162) $ 9,259 $ (1) $ (689) $ (179) $ - $ 8,228
=============================================================================================
Total assets $165,430 $323,494 $ 2,258 $ 2,557 $1,315 $(165,363) $329,691
=============================================================================================
</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.
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NOTE E - SEGMENT INFORMATION (continued)
<TABLE>
<CAPTION>
Six months ended June 30, 1999
---------------------------------------------------------------------------------------------
Midwest Midwest
Holding Medical Services Solutions MedPower Eliminations(1) Consolidated
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
External customers $ - $ 21,469 $ 838 $ - $ 208 $ - $ 22,515
Intersegment 8,060 - - - 7 (8,067) -
Net investment income (420) 5,710 9 12 9 486 5,806
Other(2) 23 6,048 - - - - 6,071
---------------------------------------------------------------------------------------------
7,663 33,227 847 12 224 (7,581) 34,392
Total expenses 7,684 24,743 777 809 912 (7,581) 27,344
---------------------------------------------------------------------------------------------
Income (loss) before income taxes (21) 8,484 70 (797) (688) - 7,048
Income tax expense (benefit) (6) 2,969 25 (279) (241) - 2,468
---------------------------------------------------------------------------------------------
Net income (loss) $ (15) $ 5,515 $ 45 $ (518) $ (447) $ - $ 4,580
=============================================================================================
Total assets $155,635 $306,752 $1,593 $2,428 $1,728 $(156,595) $311,541
=============================================================================================
</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.
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NOTE F - 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 $969,000 and $5,464,000 for the three and six-months ended June 30,
2000 and $(640,000) and $1,248,000 for the three and six-months ended June 30,
1999.
NOTE G - 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 Six Months Ended
June 30 June 30
------------------------------- -------------------------
2000 1999 2000 1999
---------------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
Numerator for basic and dilutive earnings per share
available to common shareholders $ 4,734 $ 11 $ 8,228 $ 4,580
================ ============= ============ ===========
Denominator:
Denominator for basic earnings per share--weighted
average shares 123,457 126,505 123,161 126,484
Effect of dilutive securities:
Unvested shares 15,102 14,662 14,623 14,293
---------------- ------------- ------------- -----------
Denominator for dilutive earnings per share--adjusted
weighted average shares and assumed conversions 138,559 141,127 137,785 140,777
================ ============= ============= ===========
Basic earnings per share $ 38.34 $ 0.09 $ 66.81 $ 36.21
================ ============= ============= ===========
Diluted earnings per share $ 34.17 $ 0.08 $ 59.72 $ 32.53
================ ============= ============= ===========
</TABLE>
Item 2. - Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The following analysis of the financial condition and results of operations of
Midwest 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, 86% at June 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
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Capital Resources and Liquidity (continued)
and are therefore carried at fair value with unrealized gains and losses, net of
applicable taxes, reflected as a separate component of 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 $2,359,000 of positive cash flow during the first six
months of 2000 compared to $(3,884,000) of negative cash flow for the same
period of 1999. During the second quarter of 2000, reinsurers paid $5,208,000 to
Midwest Medical for favorable experience adjustments on the 1992-1994 and
1995-1997 reinsurance contracts. Federal tax refunds including interest of
$4,418,000 also contributed to the positive operating cash flow. These positive
cash flows were partially offset by $5,073,000 of policyholder dividend payments
made in the first six months of 2000. The negative operating cash flow in the
first six months of 1999 was primarily due to the payment of $8,886,000 in
retrospective premium credits. Midwest Holding believes that its cash,
investments and internally generated funds will be sufficient to meet normal
operating requirements.
Total equity, consisting of redeemable stock and other shareholders' equity,
increased by $5,219,000 during the first six months of 2000. Equity increased
from net income of $8,228,000 and Class A stock issuances of $65,000. These
increases were offset by net unrealized losses in the fair value of investments,
net of deferred taxes, of $(2,764,000) and Class A stock redemptions of
$(313,000).
Results of Operations
Net premiums earned increased $299,000 for the first six months of 2000 compared
to the same period of 1999. Second quarter favorable experience adjustments on
the 1992-1994 and 1995-1997 reinsurance contracts of $466,000 and $709,000,
respectively, more than offset the $336,000 unfavorable experience adjustment
recorded in the first quarter. New business generating approximately $762,000 of
additional earned premium also contributed to the increase. Greater reinsurance
costs on the current year partially offset the above increases in net premiums
earned. 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.
Net capital gains of $6,330,000 were realized during the first six months of
2000. Most of these capital gains resulted from the sale of appreciated
technology common stocks in the first quarter as the outside, domestic equity
investment manager trimmed holdings in the technology sector in order to
maintain appropriate portfolio diversification. 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.
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Results of Operations (continued)
Other revenues increased $1,542,000 for the first six months of 2000 compared to
the same period of 1999. Interest on federal tax refunds recorded in the second
quarter primarily caused the increase. This was partially offset by a decrease
in finance charges on premium billings to Midwest Medical policyholders.
Losses and loss adjustment expenses increased $695,000 for the first six 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. The
1996 accident year experienced favorable loss development in the second quarter
reversing the majority of the unfavorable loss development recorded in the first
quarter. Although the effects of interim claim frequency and severity statistics
are not actuarially analyzed, nothing came to management's attention during the
first six months of 2000 that would materially alter loss expectations for the
remainder of the year.
Underwriting, acquisition and insurance expenses increased $16,000 for the first
six months of 2000 compared to the same period in 1999. Additional ceding
commissions earned by Midwest Medical on the current year reinsurance contract
nearly offset expense increases from staff additions and office rent.
Other operating expenses increased $239,000 for the first six months of 2000
compared to the same period in 1999. Increases from staff additions, new main
office rent and Solutions' project development costs were partially offset by
efficiency gains from the new MedPower claim processing system.
Income tax expense declined to $208,000 for the six months ending June 30, 2000
from $2,468,000 for the same period in 1999. The decline was due to the income
tax benefit recorded in the second quarter of 2000 for federal tax refunds
received on the 1992 to 1996 tax years. Excluding these federal tax refunds, the
effective tax rate was approximately 35% for both six-month periods ending June
30, 2000 and 1999.
As a result of the factors discussed above, Midwest Holding realized net income
of $8,228,000 for the six months ended June 30, 2000 compared to net income of
$4,580,000 for the same period of 1999. Basic net income per share increased to
$66.81 from $36.21 for the six months ended June 30, 2000 and 1999,
respectively. Diluted net income per share increased to $59.72 for the six
months ended June 30, 2000 from the $32.53 per share reported a year ago.
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.
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<PAGE> 15
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.
Readers are reminded that forward looking statements contained in this
description of Midwest Holding's treatment of the Year 2000 issue should be read
in conjunction with Midwest Holding'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 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.
15
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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
16
<PAGE> 17
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 August 14, 2000 /s/ David P. Bounk
--------------------- -----------------------------------------
David P. Bounk
President and Chief Executive Officer
Date August 14, 2000 /s/ Niles Cole
--------------------- -----------------------------------------
Niles Cole
Vice President and
Principal Financial Officer and
Principal Accounting Officer
17
