ITEM 1. BUSINESS
BACKGROUND
Midwest Medical Insurance Holding Company (MMIHC) is an insurance holding company organized under the laws of the State of Minnesota. Midwest Medical Insurance Company (MMIC) is a wholly-owned subsidiary of MMIHC and is MMIHC's primary operating asset.
MMIC's primary business is selling and issuing policies of medical professional liability insurance to: (1) individual physicians, (2) partnerships or professional corporations comprised of physicians, (3) clinics, (4) hospitals, and (5) health plans. In addition, MMIC writes business liability insurance providing coverage for claims against a medical business entity resulting from acts by the employees who work for the entity, and office premises liability insurance providing coverage for claims arising out of the ownership, maintenance or use of office premises of the insured.
MMIC originally was organized in 1980 under the auspices of the Minnesota Medical Association (the "MMA") to provide professional liability (malpractice) insurance to Minnesota physicians who are members of the MMA. The business was reorganized on November 30, 1988 into a stock insurance company (MMIC), wholly owned by a holding company (MMIHC), which could pursue other business opportunities. MMIHC has not engaged in any such activities to any material extent. The reorganization also was effected to give physicians a limited equity interest in their malpractice insurer while preserving MMIC's capital and surplus. As of July 1, 1993, the Iowa physician-owned malpractice insurer, Iowa Physicians Mutual Insurance Trust (IPMIT), was merged with and into MMIC. As of June 5, 1996, the Nebraska physician-owned malpractice insurer, Medical Liability Mutual Insurance Company of Nebraska (MLM) was merged with and into MMIC. MMIC now provides malpractice insurance to physicians and physician groups in Minnesota, Iowa, North Dakota, South Dakota, Nebraska, Illinois and Wisconsin on a claims-made basis. MMIC has had the sponsorship of the MMA since inception and also has the sponsorship of the Iowa Medical Society (IMS) and North Dakota Medical Association. Professional liability, general liability, and umbrella excess liability insurance is also available to hospitals, nursing homes and extended care facilities through MMIC.
MMIC has no employees. Instead, MMIHC provides all management and administrative services to MMIC for a fee based upon the cost of providing services. For insurance operational expenses, a ten percent administrative surcharge is added.
Hereafter, MMIHC and MMIC shall be collectively referred to as the Company unless the reference pertains to a specific entity. Further, due to the nature of the relationship between MMIHC and MMIC, the insurance operations of MMIC will be discussed as though they are the operations of the registrant.
ITEM 1. BUSINESS (CONTINUED)
ELIGIBLE PHYSICIANS
An individual physician must meet the following criteria in order to be eligible to obtain insurance coverage from MMIC:
1. An applicant must be licensed to practice medicine, surgery or osteopathy in Minnesota, Iowa, Nebraska, North Dakota, South Dakota, Nebraska, Illinois, or Wisconsin;
2. An applicant must conduct a majority of his or her practice in Minnesota, Iowa, Nebraska, North Dakota, South Dakota, Nebraska, Illinois or Wisconsin.
ELIGIBLE GROUPS
MMIC also provides professional liability insurance to entities including partnerships, professional corporations and other associations through which qualifying physicians practice medicine, surgery or osteopathy.
A group must meet the following criteria in order to be eligible to be insured by MMIC:
1. The entity must have its principal place of business in Minnesota, Iowa, Nebraska, North Dakota, South Dakota, Nebraska, Illinois or Wisconsin; and
2. The group must demonstrate that a majority of the individual physicians practicing medicine, surgery or osteopathy on a full-time basis through such clinic are, or intend to be, insured by MMIC.
ELIGIBLE HOSPITALS, NURSING HOMES AND OTHER EXTENDED CARE FACILITIES
MMIC also provides professional liability, general liability and umbrella excess liability to hospitals, nursing homes and other extended care facilities which provide medical services to patients on more than an outpatient basis.
A business must meet the following criteria in order to be eligible to be insured by MMIC:
1. The entity must have its principal place of business in Minnesota, Iowa, Nebraska, North Dakota, South Dakota, Illinois or Wisconsin; and
2. The facility must be a licensed hospital, nursing home, hospice or other extended care facility.
ITEM 1. BUSINESS (CONTINUED)
POLICY FORMS
MMIC offers a "claims-made" medical malpractice liability insurance policy. Under a claims-made policy, coverage is provided for claims asserted and reported to MMIC while the policy is in effect relating to occurrences which took place during the period in which the policyholder had coverage with MMIC. For purposes of policy coverage, a claim includes any lawsuit, allegation of liability or other notice of patient dissatisfaction with services performed that is communicated to MMIC as required by the policy. The policy also covers prior acts (i.e., claims first made during the policy period with respect to occurrences which took place prior to the date the insured initially secured coverage from MMIC) for physicians previously insured under a claims-made policy with another professional liability insurer. Prior acts coverage is not available from MMIC for physicians who have not been continuously insured prior to obtaining coverage from MMIC.
MMIC also offers reporting endorsements ("tails") which provide coverage of subsequent claims (i.e., claims first made subsequent to the date the insured terminates basic insurance coverage with MMIC, but with respect to occurrences which took place while the insurance coverage was in effect prior to such termination date) made against its former insureds who have voluntarily terminated insurance coverage with MMIC. In the event of death, permanent disability, or retirement at age 55 or older after five years of continuous coverage with MMIC, the reporting endorsement is provided at no additional premium.
MMIC offers basic limits of coverage from $1,000,000 for each claim, subject to $3,000,000 annual aggregate, up to $5,000,000 for each claim, subject to $7,500,000 annual aggregate. Excess coverage above the basic limits is available from MMIC's reinsurers on a facultative basis.
The basic office premises liability limits offered are $100,000 for each occurrence for bodily injury and $100,000 for each occurrence for property damage. Limits up to $1,000,000 for each occurrence are also available.
The basic liability limits for coverage of employees and assistants cannot exceed the limits purchased by the insured physician or clinic.
MARKETING AND DISTRIBUTION
Marketing of MMIC policies in Minnesota, South Dakota, Nebraska, Illinois and Wisconsin is handled principally by MMIC through salaried marketing representatives. MMIC has also made marketing arrangements with a select group of large national brokers to assist MMIC in the production of large accounts and in the production of new coverages as they are developed. These brokers will work in all states. MMIC has appointed an exclusive independent agent in Iowa in order to enhance marketing efforts there. In 1997 MMIC canceled the contract of the exclusive agent in North Dakota. MMIC does not believe that the loss of any exclusive agent has
ITEM 1. BUSINESS (CONTINUED)
had a material adverse effect on its business because other agents are available and MMIC has the in-house capacity to market directly in the area. MMIC approves all policies (and their terms) sold by agents prior to their becoming effective, and no commissions are earned by agents until such approval has been granted.
Distribution of policies is handled through a processing system which MMIC has utilized for several years. Since most policies have a common expiration date, it is essential that MMIC's policy processing operations be highly efficient. MMIC consistently has been able to provide policy processing on a timely basis. In 1997 the Company committed to implementation of an entirely new operating system which will expand its capacity and efficiency.
REINSURANCE
MMIC purchases reinsurance in order to reduce its liability on individual risks. A reinsurance transaction takes place when an insurance company transfers or "cedes" to another insurer a portion of its exposure on insurance it writes. The reinsurer assumes the exposure in return for a portion of the premium. The reinsurer's liability is limited to losses it assumes that are in excess of the portion retained by MMIC. However, in the event the reinsurer is unable or otherwise fails to pay, MMIC remains primarily liable for the loss.
Historically, entering into reinsurance agreements permitted MMIC to issue policies having greater liability limits than otherwise would have been allowed under Minnesota insurance law, which prohibits an insurer from retaining a risk on any one claim that is greater than 10 percent of its surplus. As MMIC's surplus has grown, MMIC now utilizes reinsurance primarily to limit its risk on any single claim. Such limits of risk assumed by MMIC for physician coverage have increased from $150,000 in the first year of operations to $750,000 as of January 1, 1995. The single claim limit of risk assumed is $750,000 for hospital coverage. The reinsurer will pay losses in excess of the amount of risk retained by MMIC, not to exceed the limits of liability of the policies issued by MMIC.
MMIC currently operates under an excess-of-loss reinsurance treaty with General Reinsurance Corporation of Stamford, Connecticut (85%) and Hanover Reinsurance Company of Hanover, Germany (15%), whereby the reinsurers insure against losses in excess of the of loss limit retained by MMIC. General Reinsurance Corporation is the largest reinsurer of medical professional liability in the United States and one of the largest in the world and has received the highest rating of A++ by A.M. Best & Company, Inc. Hanover Reinsurance Company is rated A+ by A.M. Best & Company, Inc. Coverage under the treaty was initially issued on October 1, 1986, and is continuous until canceled by either party. MMIC commuted the reinsurance treaties covering the period from October 1, 1986 through December 31, 1990. As a result, there is no longer any reinsurance coverage for those report years. As of December 31, 1997, there also are no open cases pertaining to those report years. Previous reinsurance treaties, which remain in
ITEM 1. BUSINESS (CONTINUED)
effect for pre-1986 incidents, were with various domestic and foreign reinsurers, all of whom have maintained their obligations to MMIC and appear to be financially sound. MMIC currently cedes about $3,500,000 of premium per year under the reinsurance treaty.
INVESTMENTS
MMIC's investment portfolio is under the direction of the Board of Directors acting through the Investment Committee. The Investment Committee establishes MMIC's investment policy which, in summary, is to assist in maintaining MMIC's financial stability through the preservation of assets and the maximizing of after-tax investment income. In 1997, the Committee changed the investment guidelines to maximize pre-tax income and to extend the duration of the fixed income investments. Adequate liquidity is maintained to assure that MMIC has the ability to meet its insurance operational requirements, in particular the payment of claims. MMIC employs outside investment managers who manage the portfolio on a discretionary basis consistent with the policies set by MMIC. In addition, the Investment Committee utilizes the services of a separate outside consultant who calculates performance measures and provides an independent opinion on the overall results being obtained by the investment managers.
MMIC's investment portfolio consists primarily of fixed income instruments, including United States Government, governmental agency bonds, and corporate bonds. MMIC's investment policy also permits the inclusion of equity securities. Equity securities currently comprise approximately 20% of the portfolio. Due to the 1996 and 1997 increase in market values, the equity percent of the portfolio rose from 12.3% at December 31, 1995 to 20% at December 31, 1997. No additional funds were committed to equities in either year.
RATING
A.M. Best & Company, Inc. ("Best's"), publisher of BEST'S INSURANCE REPORTS, PROPERTY-CASUALTY, 1997 Edition, has assigned MMIC an "A", or excellent, rating in 1997. This is the highest rating given to any company that specializes in medical malpractice. Best's ratings are based on an analysis of the financial condition and operation of an insurance company as compared with the industry in general. MMIHC believes that a favorable rating has a positive effect since customers and their advisors often review Best's ratings when selecting an insurer and are more apt to purchase insurance from a company with a positive rating because of the greater security and stability associated with a positive rating. A positive rating relates to the ability of an insurer to meet its insurance obligations and does not directly relate to the value of the insurer's securities.
ITEM 1. BUSINESS (CONTINUED)
GOVERNMENT REGULATION
MMIC is subject to governmental regulation in the states in which it conducts its business (Minnesota, Iowa, North Dakota, South Dakota, Nebraska, Illinois, and Wisconsin). Such regulation is conducted by state agencies having broad administrative power dealing with all aspects of MMIC's business, including policy terms, rates, dividends and retrospective premium credits to policyholders, and dividends to the parent corporation, MMIHC.
Without prior approval from the Minnesota Commissioner of Commerce, annual dividends to MMIHC cannot exceed 10 percent of unassigned surplus of MMIC or the prior year's net income from operations of MMIC, whichever is greater. MMIC is also subject to statutes that require it to file periodic information with state regulatory authorities and is subject to periodic financial and business conduct examinations. MMIHC is also subject to statutes governing insurance holding company systems in Minnesota, which relate primarily to the acquisition of control of insurance companies directly or through a holding company.
COMPETITION
MMIC's major competitor in all states in which it conducts its business is The St. Paul Companies. The St. Paul Companies is a major national property-casualty insurance company, the largest writer of medical professional liability insurance in the United States, and is many times larger than MMIC. In addition to The St. Paul Companies, several other national companies have become active competitors in the last several years, including Medical Protective Insurance Company, CNA Insurance Company, Zurich Insurance Company, Fireman's Fund Insurance Company, and the MMI group. At this time they have achieved limited market penetration, but represent an increasing competitive pressure for the future. In addition several other physician-owned specialty carriers have entered the market, but have yet to be a significant factor in MMIC's area. Finally, over the past several years several large self-insured hospitals in Minneapolis and Des Moines have purchased MMIC insured clinics, and other physician practices have been purchased by large, self-insured clinics such as the Mayo Clinic. This trend decreased significantly in 1996 and even more in 1997. The trends are causing a contraction in the available market for MMIC's primary malpractice insurance. MMIC is the only carrier endorsed by local medical societies in Minnesota, Iowa and North Dakota and owned by its physician-insureds, which management believes gives MMIC a competitive advantage in marketing to physicians.
The market for medical professional liability insurance is changing, especially with the dramatic changes proposed and occurring in the broader health care industry. Various changes in the market for medical professional liability insurance are possible as a result of developments such as practice consolidation and integration, physician-hospital organizations, various forms of managed health care, various forms of alliances between providers, proposals for enterprise
ITEM 1. BUSINESS (CONTINUED)
liability, and many others. Management of MMIC believes it is developing new programs and products which will allow it to remain an industry leader as such change occurs, although no assurance can be given to that effect.
EMPLOYEES
As of December 31, 1997, MMIHC employed 65 persons, of whom 5 were executives, 45 were supervisory employees or specialists, and 15 were clerical employees. None of the employees of MMIHC is covered by a collective bargaining agreement and management believes that relations with employees are good.
ITEM 2.
ITEM 2. PROPERTIES
MMIHC owns the following fixed assets, all of which are used in the conduct of its business:
The Company owns no real estate. MMIHC leases approximately 15,765 square feet of office space in Edina, Minnesota under a 10-year lease that expires in 2001, subject to the option for MMIHC to renew the lease for an additional five years after the original term. Four-thousand and sixty square feet of office space is leased in West Des Moines, Iowa under a 10-year lease that expires in 2000, with an option for MMIHC to extend the term for an additional five years after the original term. An additional 1,249 square feet of office space is leased in Omaha, Nebraska under a three year lease that expires November 30, 2000. Annual rent expense was $427,646 for 1997 and $392,282 for 1996.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any pending or threatened legal proceedings which could have a material adverse effect on its operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
(a) There is no market for the Company's Class A or Class B Common Stock. Class A shares are issued only to insured individual physicians or individual physicians jointly with the legal entities in which they practice. The shares are restricted and cannot be sold to any person other than MMIHC and are subject to mandatory redemption at the time that the physician terminates his or her insurance coverage for any reason.
(b) As of March 30, 1998, there were 121,322 shares of Class A Common stock outstanding held by 3,450 physicians and 1 share of Class B Common Stock held by the Minnesota Medical Association.
(c) MMIHC has never paid a shareholder dividend nor does it intend to within the foreseeable future. Without prior approval from the Minnesota Commissioner of Commerce, annual dividends to MMIHC from MMIC cannot exceed 10% of unassigned surplus of MMIC or the prior year's net income from operations of MMIC, whichever is greater.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Following is the selected financial data of MMIHC for the five years ended December 31, 1997. This data should be read in conjunction with the consolidated financial statements and notes thereto appearing under Item 8 of this Form 10-K.
ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)
ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)
___________________________
(1) Amounts derived from audited consolidated financial statements of MMIHC included in Item 8 of this Form 10-K.
(2) Amounts derived from audited consolidated financial statements of MMIHC.
(3) Includes pro forma shares computed to give retroactive effect to the merger of MMIHC/MMIC with MLM. See Note 1 to the consolidated financial statements included in Item 8 of this Form 10-K.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The Company's bylaws require that MMIHC Class A Common Stock issued to MMIC policyholders be redeemed when a physician ceases to be insured by MMIC for any reason. The redemption value per share is calculated by dividing the net book value of the Company, excluding the net book value of MMIC (other shareholders' equity) from the calculation, by the number of MMIHC Class A Common Shares outstanding. More detail about the redeemable stock and the actual redemptions during the years 1997, 1996 and 1995 are found in Note 2 to the consolidated financial statements. This limited redemption value preserves the capital of MMIC as other shareholders' equity. The consolidated statements of changes in other shareholders' equity found in the accompanying financial statements provide the details of additions to and reductions in other shareholders' equity.
From time to time the Board of Directors of MMIC declares dividends payable to MMIHC to maintain the redemption value of the Company's Class A Common Stock. A $260,000 dividend in November 1995 was declared in accordance with that principle and paid in February of 1996. In July 1996, a dividend of $327,000 was paid to MMIHC as required by a provision of the MMIC/MLM merger agreement. Per the merger agreement, the amount was sufficient to maintain the per share redemption value of MMIHC's Class A Common Stock at the same per share value immediately after the merger as immediately before the merger. There were no dividends declared or paid by MMIC to MMIHC in 1997.
IMPACT OF YEAR 2000
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 miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send billings, or engage in similar normal business activities.
Recently, in response to other business issues, the Company decided to replace all significant application software with new purchased applications. A key criteria in vendor selection was Year 2000 readiness of the software. The new applications are currently being installed and are scheduled to be fully operational prior to December 31, 1998. As a result, management believes that is has adequately addressed the Year 2000 issue as it relates to internal use software.
Management continues to evaluate the Year 2000 readiness of significant vendors and business partners and will develop contingency plans as deemed necessary.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LOSS AND LOSS ADJUSTMENT EXPENSE
RECONCILIATION OF LIABILITY FOR LOSS AND LOSS ADJUSTMENT EXPENSE (THOUSANDS OF DOLLARS)
The second to the last line on the preceding reconciliation reports the amount of reinsurance recoverables for unpaid losses which are included in the 1997, 1996 and 1995 balance sheet liability "Unpaid losses and loss adjustment expenses." Except for adding the reinsurance recoverables, the reconciliation is presented net of reinsurance which coincides with the manner of presentation of the income statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The current year's provision for loss and loss adjustment expense, which is based upon policyholder exposure, expected frequency of losses, and severity of losses, was fairly stable for the years 1997, 1996 and 1995. The loss and loss adjustment expenses reflected in the consolidated financial statements, and shown in the Reconciliation of Liability for Loss and Loss Adjustment Expense as total incurred loss and loss adjustment expense, include adjustments of prior years' estimates.
Incurred loss and loss adjustment expenses for 1997 and 1996 of $31,834,000 and $32,257,000, respectively, are significantly less than the $37,560,000 in 1995. During the course of each year and particularly at each year end, management reevaluates the liability for loss and loss adjustment expense. This evaluation is supported by outside actuarial evaluation at year end. During 1997 and 1996 these evaluations resulted in a reduction is estimated liabilities applicable to prior years of $8,352,000 and $8,844,000, respectively. A smaller reduction of $2,287,000 was recorded in 1995. This difference is the primary reason for the lower incurred loss and loss adjustment expense in 1997 and 1996.
The schedule which follows summarizes the development of the liability for loss and loss adjustment expense from 1987 through 1997. This schedule is also presented net of reinsurance which the Company believes best explains the development as it affects operating results. The Company has a conservative loss reserving policy which, when coupled with a moderation of malpractice insurance losses which began in approximately 1986 for the Company and across the industry, has resulted in redundancies in liabilities larger than expected. The table indicates that the redundancy in loss liabilities, which developed when more actual results were known, has been significantly reduced from the high at December 31, 1990. Loss and loss adjustment expense liabilities have not been discounted in the Company's financial statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
NET PREMIUMS EARNED increased $1,749,000 in 1997 from 1996 while policyholders' rate levels remained relatively level for 1996 and 1997. An increase in the number of policyholders in 1997 increased premium by $500,000. The remaining increase was the result of the several increase/decrease factors listed below:
1. The estimated reinsurance premium applicable to the treaty years 1992-1994 and 1995-1997, which is based in part on reinsured claims experience, was reduced resulting in a net INCREASE in premium between years of $3,875,000.
2. The Company recorded an increase of $1,171,000 in the Iowa Development Experience Liability account in 1997. A similar increase of $2,901,000 was recorded in 1996. While these increased liabilities both reduce premium, the difference in the amounts between years causes an INCREASE in net premium from 1996 to 1997 of $1,730,000.
3. In 1996 $2,194,000 was received from the commutation of a reinsurance treaty covering the years 1989 and 1990. This increased 1996 premiums. Since there was no counterpart in 1997 it causes a DECREASE in premiums from 1996 to 1997 of $2,194,000.
4. A number of other prior year reinsurance premium adjustments recorded in 1996 increased 1996 premiums by $2,143,000. With no counterpart in 1997, the difference between years is a DECREASE in 1997 of $2,143,000.
INVESTMENT INCOME has remained relatively level during the last three years. While invested assets on a cost basis did increase by $6,980,000 during 1997, almost all of that increase occurred in the last quarter when the fixed portfolio was restructured to meet a new benchmark return which was referred to earlier under Liquidity and Capital Resources. Restructuring the fixed portfolio resulted in realized capital gains of $4,916,000.
NET PREMIUMS EARNED increased $2,248,000 in 1996 from 1995 while the number of insured policyholders and rate levels were relatively the same. The primary reasons for this increase are:
1. In 1996, $2,194,000 was received from the commutation of a reinsurance treaty covering the years 1989 and 1990. This increases 1996 net premiums. There was no similar item in 1995.
2. Several other reinsurance treaty adjustments involving prior years retrospective reinsurance treaties resulted in reducing 1996 reinsurance costs by $1,740,000, thereby increasing net premium earned. The years involved ranged from 1987-1995. Most of these treaties originated with IPMIT prior to its merger into MMIC on July 1, 1993.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
3. Offsetting these two major reasons for the increase in 1996 net premiums was one significant item which caused a decrease. The Company recorded an increase of $2,901,000 in an Iowa development experience liability account in 1996. A similar increase of $646,000 was recorded in 1995. The difference between the 1996 and 1995 amounts decreased net premium $2,255,000. Under terms of the MMIC/IPMIT July 1, 1993 merger agreement, if the financial results for the years prior to 1993 are more favorable than expected at December 31, 1992, that favorable development must be returned to the prior IPMIT policyholders who renew coverage with MMIC.
REALIZED CAPITAL GAINS of $1,771,000 in 1996 and $1,646,000 in 1995 were due to active management of both the bond and equity sections of the portfolio. During 1997 the Company restructured the fixed portfolio and in this process experienced realized capital gains of $4,916,000. In addition, normal investment transactions resulted in additional realized capital gains of $1,568,000 for a total of $6,484,000. The Company employs two outside professional advisors to manage the portfolio, one to manage fixed income securities and a separate manager for equities. The managers operate within the Company's adopted investment policy. This policy was revised in 1997 as previously discussed under Liquidity and Capital Resources. The Investment Committee meets with the outside managers approximately four times per year.
OTHER UNDERWRITING EXPENSES increased $1,056,000 form 1996 to 1997. Approximately $425,000 of the increase was due to payments to state medical societies, for the first time in 1997, under license and endorsement agreements. The remainder of the increase reflects the increase in overall cost of operating the Company.
INCOME TAXES. In 1997 the Company's book net income before taxes was $13,763,000. Deductions from book income, primarily tax exempt interest income from municipal bonds reduces income subject to tax. This current year's tax based on taxable earnings was increased by a reduction in deferred taxes of $1,494,000 to arrive at the income tax charged to operations $4,463,000 as shown in the financial statements.
Deferred tax effects are provided whenever expense items are recorded in the accompanying financial statements in a time period different from those in the Company's tax returns.
NET INCOME for the Company during the last three years totaled $18,506,000 which was added to retained earnings. A significant portion of net income for these years resulted from the reversal of loss liabilities established in prior years and realized capital gains on investments.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of Midwest Medical Insurance Holding Company and Subsidiary are presented on pages 21 through 47 of this Annual Report on Form 10-K following.
Midwest Medical Insurance Holding Company and Subsidiaries
Consolidated Financial Statements
Years ended December 31, 1997, 1996 and 1995
CONTENTS
Report of Independent Auditors
Board of Directors Midwest Medical Insurance Holding Company and Subsidiaries
We have audited the accompanying consolidated balance sheets of Midwest Medical Insurance Holding Company and Subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in other shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. Our audits also included the financial statement schedules listed in the index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Midwest Medical Insurance Holding Company and Subsidiaries at December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth herein.
/s/ Ernst & Young LLP
Minneapolis, Minnesota February 2, 1998
Midwest Medical Insurance Holding Company and Subsidiaries
Consolidated Balance Sheets
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
SEE ACCOMPANYING NOTES.
Midwest Medical Insurance Holding Company and Subsidiaries
Consolidated Statements of Income
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
SEE ACCOMPANYING NOTES.
Midwest Medical Insurance Holding Company and Subsidiaries
Consolidated Statements of Changes in Other Shareholders' Equity
(IN THOUSANDS)
SEE ACCOMPANYING NOTES.
Midwest Medical Insurance Holding Company and Subsidiaries
Consolidated Statements of Cash Flows
(IN THOUSANDS)
SEE ACCOMPANYING NOTES.
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
1. ACCOUNTING POLICIES
ORGANIZATION AND OPERATIONS
The Minnesota Medical Insurance Exchange (Exchange) began operations in October 1980 as a reciprocal or inter-insurance exchange organized under Chapter 71A of the Minnesota Statutes. Minnesota Medical Management, Inc. (MMMI) was the Exchange's attorney-in-fact and was responsible for management of the Exchange.
On November 30, 1988, the Exchange was reorganized into a stock insurance company, Midwest Medical Insurance Company (MMIC), under the statutes of the State of Minnesota. Concurrently, MMMI merged with the Midwest Medical Insurance Holding Company (MMIHC) which then acquired all outstanding shares of the reorganized stock company.
Effective July 1, 1993, MMIC merged with Iowa Physicians Mutual Insurance Trust (IPMIT), a physician-owned professional liability insurance company providing insurance coverage to Iowa physicians. As provided for in the agreement and plan of merger, IPMIT was merged into MMIC. The merger was accounted for as a pooling-of-interests.
During 1995, MMIHC formed MMIHC Services, Inc. to provide agency services for the distribution of complementary insurance products and services to physicians, clinics and hospitals.
Effective June 5, 1996, MMIC merged with Medical Liability Mutual Insurance Company of Nebraska (MLM), a physician-owned professional liability insurance company providing insurance coverage to Nebraska physicians. As provided for in the agreement and plan of merger, MLM was merged into MMIC. The merger was accounted for as a pooling-of-interests and, accordingly, the consolidated financial statements include the combined financial position and results of operations of MMIHC and MLM for all periods presented.
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
MMIHC provides management and administrative services to MMIC for a fee generally equal to the cost of services provided plus ten percent. The insurance company provides professional liability insurance to physicians in Minnesota, Iowa, Nebraska, North Dakota and South Dakota.
Insurance policies issued by MMIC are on a "claims made" basis and provide coverage for the policyholder for claims first made against the policyholder and reported to MMIC during the policy period for claims which occurred on or after the retroactive date stated in the policy.
MMIC provides, upon payment of an additional premium, a reporting endorsement which extends the period in which claims otherwise covered by the "claims made" policy may be reported to MMIC. In the event of death or permanent disability of a policyholder, the reporting endorsement is issued without additional premium. Upon retirement, as defined in the policy, a policyholder with at least five years of consecutive coverage with MMIC is eligible for a credit toward the additional premium for the reporting endorsement.
Prior acts coverage may be purchased by policyholders who were previously insured under a "claims made" policy with another professional liability insurer for an additional premium at the option of the insured in lieu of purchasing reporting endorsement coverage from the previous insurer.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of MMIHC and its wholly-owned subsidiaries, MMIC and MMIHC Services, Inc. All transactions between MMIHC and its subsidiaries have been eliminated in consolidation with the exception of the distribution of capital to MMIHC by MMIC in the form of dividends.
Hereafter, MMIHC, MMIC and MMIHC Services, Inc. shall be collectively referred to as the Company unless the reference pertains to a specific entity.
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
BASIS OF PRESENTATION
The consolidated financial statements have been presented in conformity with generally accepted accounting principles, which differ in certain respects from statutory accounting practices followed by MMIC in reporting to the Department of Commerce of the State of Minnesota (see Note 10).
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates.
INVESTMENTS
The Company manages its investment portfolio to achieve its long-term investment objective of providing for the financial stability of the Company through preservation of assets and maximization of total portfolio return. Although management believes the Company has the ability to hold its fixed maturity investment portfolio to maturity, these investments are classified as "available for sale" as management may take advantage of opportunities to increase total return through sales of selected securities in response to changing market conditions.
Consistent with management's classification of its investment in debt and equity securities as available for sale, such investments are carried at fair value with unrealized holding gains and losses reflected as a separate component of equity, net of applicable deferred taxes.
Fair values are based on quoted market prices, where available. For fixed maturity investments not actively traded, fair values are estimated using values obtained from independent pricing services.
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
Short-term investments are principally money market funds backed by U.S. government securities and are recorded at cost which approximates fair value.
Other investments are equity interests in non-traded real estate investment trusts and are recorded at cost which approximates fair value.
Realized gains and losses on sales of investments are reported on a pre-tax basis as a component of income and are determined on the specific identification basis.
LOSSES AND LOSS ADJUSTMENT EXPENSES
The liability for unpaid losses and loss adjustment expenses represents an estimate of the ultimate cost of all such amounts which are unpaid at the balance sheet dates. The liability is based on both case-by-case estimates and statistical analysis and projections using the historical loss experience of MMIC, and gives effect to estimates of trends in claim severity and frequency. These estimates are continually reviewed and, as adjustments become necessary, such adjustments are included in current operations. MMIC believes that the estimate of the liability for losses and loss adjustment expenses is reasonable.
PREMIUMS
Premiums received are recorded as earned ratably over the lives of the policies to which they apply. A portion of premiums received is deferred to recognize MMIC's obligation to provide reporting endorsement coverage without additional premium upon the death, disability or retirement of policyholders. This amount is recorded as an unearned premium reserve and represents the actuarially determined present value of future benefits to be provided less the present value of future revenues to be received.
MMIC has a retro premium program whereby physicians may receive credits against future premiums based upon loss experience of MMIC. Amounts to be returned under the program are accrued when approved by the Board of Directors and reflected as a reduction in net premium earned.
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
REINSURANCE
MMIC cedes reinsurance in order to reduce its liability on individual risks and to enable it to write business at limits it otherwise would be unable to accept. All reinsurance contracts are excess-of-loss contracts which indemnify MMIC for losses in excess of a stated retention limit up to the policy limits.
Reinsurance receivables and recoverables and prepaid reinsurance premiums are reported as assets and reserve liabilities are reported gross of reinsurance credits.
UNDERWRITING EXPENSES
Underwriting costs are expensed when incurred. Due to the nature of its operations, MMIC does not pay significant amounts in commissions.
INCOME TAXES
The Company uses the asset and liability method of accounting for income taxes. Deferred income tax assets or liabilities are recognized for the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for income tax purposes.
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128, EARNINGS PER SHARE. Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of all earned but unissued shares of Class A common stock (see Note 2). Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented and, where appropriate, restated to conform to the Statement 128 requirements.
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain amounts in the prior years' financial statements have been reclassified to conform with the current year presentation.
2. REDEEMABLE STOCK
Effective November 30, 1988, MMIC policyholders earn Class A Common Shares for each month of service pursuant to a stock allocation formula based on underwriting risk classification. Shares earned by new policyholders are not issued until the end of five years of continuous coverage under an MMIC policy (the vesting date). The Company does not record any amounts related to unissued Class A Common Shares. At the vesting date, the issued shares are recorded at the then current redemption value (see Note 12).
The Company accounts for these shares by increasing Common Stock by the par value ($.01 per share) of the newly issued shares, increasing paid-in capital by the excess of the redemption value over par and charging stock compensation expense for the full redemption value. Once vested, policyholders will continue to earn shares for each month they remain insured with MMIC according to the stock allocation formula. The Company accounts for additional shares issued to vested policyholders by increasing Common Stock for the par value of the shares and decreasing retained earnings by the same amount.
MMIC policyholders whose initial effective date was on or before the November 30, 1988 reorganization, IPMIT policyholders whose initial effective date was on or before December 31, 1992 and MLM policyholders whose initial effective date was on or before December 31, 1995 became fully vested upon initial receipt of their shares without regard to their length of coverage. These policyholders will continue to earn and receive additional Class A shares for each month they remain insured with MMIC. The Company accounts for these shares similar to additional shares issued to other fully vested shareholders.
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. REDEEMABLE STOCK (CONTINUED)
In accordance with the Articles of Incorporation and By-laws of MMIHC, only active policyholders of MMIC may own shares of Class A Common Stock of MMIHC. At each meeting of the shareholders, every Class A shareholder having the right to vote shall be entitled to one vote, either in person or by proxy, regardless of the number of Class A shares held by the individual.
Class A shareholders are required to redeem their shares with MMIHC upon termination as policyholders of MMIC. The net redemption value (NRV) of the shares is equal to the net book value of MMIHC, excluding the amount of net book value that is attributable to MMIC, divided by the number of outstanding Class A Common Shares of MMIHC at the semi-annual valuation dates of June 30 and December 31 of each year. The amount paid upon redemption is the redemption value determined at the most recent semi-annual valuation.
MMIHC has issued one share of Class B voting stock which carries with it the right to elect the Board of Directors of MMIHC. The voting rights are currently exercised by the Minnesota Medical Association and the Iowa Medical Society. A majority of the Class A shareholders may at any time, by a two-thirds vote, elect to redeem the Class B share at cost.
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. REDEEMABLE STOCK (CONTINUED)
Following is the detail of changes in redeemable stock for each of the three years in the period ended December 31, 1997 (in thousands, except for share and per share amounts):
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. REDEEMABLE STOCK (CONTINUED)
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS
Components of net investment income are summarized as follows (in thousands):
The cost (amortized cost for fixed maturities) and fair value of available for sale investments are as follows (in thousands):
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
The components of the unrealized appreciation on available for sale securities as of December 31 are as follows (in thousands):
In addition to the unrealized gains and losses per the above schedule, MMIHC has unrealized gains on certain investments in mutual funds. The mutual fund assets are classified as other assets in the consolidated balance sheet and are held to coordinate with
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
the Supplemental Executive Retirement Plan obligation (Note 9). At December 31, 1997 and 1996, respectively, gross unrealized gains related to these assets were $122,000 and $103,000. Deferred taxes related to these unrealized gains were $43,000 and $37,000, respectively.
The amortized cost and market value of fixed maturities at December 31, 1997, by contractual maturity, are shown below (in thousands). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Proceeds from sales of available for sale investments and the related gross realized gains and losses are as follows (in thousands):
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
Net unrealized appreciation of fixed maturities (decreased) increased by $(2,197,000), $(4,691,000) and $12,000 and net unrealized appreciation of equity securities increased by $11,400,000, $7,123,000 and $6,078,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
4. RETROSPECTIVE PREMIUMS
The components of retrospective premiums at December 31 are as follows (in thousands):
A provision of the agreement and plan of merger between IPMIT and the Company requires that any favorable development of certain pre-merger liabilities of IPMIT be paid to the former IPMIT policyholders who remain active MMIC insureds as of the date of payment through a retrospective premium credit. The agreement further stipulates that any amounts due under this provision must be settled no later than December 31, 1998. Actual payments of $2,501,000 and $2,330,000 were made to former IPMIT policyholders in 1997 and 1996, respectively. Actual retrospective premium credits applied to Minnesota policyholder accounts in 1997 and 1996 were $4,803,000 and $5,198,000, respectively.
A provision of the agreement and plan of merger between MLM and the Company requires that any favorable development of certain pre-merger liabilities of MLM be paid to the former MLM policyholders who remain active MMIC insureds as of the date of payment through a retrospective premium credit. The agreement further stipulates that
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. RETROSPECTIVE PREMIUMS (CONTINUED)
any amounts due under this provision must be settled no later than June 5, 2001. As of December 31, 1997, there has been no favorable development and therefore there is no accrual related to this provision.
5. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
The reconciliation of the liability for unpaid losses and loss adjustment expenses is as follows (in thousands):
The Company continually evaluates emerging trends in the development of loss liabilities including the trends related to the pre-merger IPMIT and MLM business. Based on this analysis, management periodically adjusts their estimates of ultimate losses. See Note 4 regarding retrospective premium credits paid and accrued.
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. INCOME TAXES
Components of income taxes are as follows (in thousands):
The Company's income taxes differ from the federal statutory rate applied to income before tax as follows (in thousands):
The deferred income tax (benefit) provision includes the following differences between financial and income tax reporting (in thousands):
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. INCOME TAXES (CONTINUED)
The Company made income tax payments of $1,518,000, $3,260,000 and $832,000 in 1997, 1996 and 1995, respectively.
The components of the net deferred income tax (liability) asset as of December 31 are as follows (in thousands):
Management has determined that no valuation allowances were necessary for unrealizable portions of deferred tax assets. This was supported primarily through the presence of taxable income in carryback years and reversals of existing temporary differences which provide taxable income in future years. A portion of the deferred tax assets was supported through reliance on available tax planning strategies which could be implemented at no cost.
7. REINSURANCE
To reduce overall risk, including exposure to large losses, the Company participates in various reinsurance programs. MMIC would only become liable for losses in excess of stipulated amounts in the event that any reinsuring company were unable to meet its obligations under the existing agreement. Management is not aware of any such default at
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. REINSURANCE (CONTINUED)
December 31, 1997. Reinsurance recoverables on paid and unpaid losses of $16,141,000 and $17,485,000 are associated with a single reinsurer at December 31, 1997 and 1996, respectively.
MMIC is authorized to issue policies with limits not to exceed $5,000,000 for each claim and $5,000,000 in the aggregate under each policy in any one policy year. Limits in excess of $5,000,000 for each claim and $5,000,000 annual aggregate are available to physicians and clinics through reinsurance placed on a facultative basis by MMIC. The Company generally retains the first $750,000 of each claim and reinsures the remainder through a treaty under which premiums are subject to adjustment based on experience.
Total ceded reinsurance premiums, before the effects of treaty commutations, for the years ended December 31, 1997, 1996 and 1995 were $3,329,000, $6,416,000 and $7,544,000, respectively. Loss and loss adjustment expenses incurred are net of applicable reinsurance of $2,455,000, $2,459,000 and $7,873,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
In 1996, the Company commuted reinsurance treaties covering the period January 1, 1989 through December 31, 1990. Net premiums recovered as a result of these commutations of $2,194,000 have been included in net premiums earned in 1996.
8. OTHER COMMITMENTS
In the normal course of claim settlement, MMIC negotiates structured settlements including the purchase of annuities from life insurance companies with an A+ rating from A.M. Best (an industry rating organization) at the date of issue and a minimum of $100 million in surplus. These annuities guarantee a stream of payments to the claimant holding the annuity. The majority of these settlements have been assigned to the life insurance company which releases MMIC from any future contractual liability to the claimant. MMIC and its reinsurers could only become liable for ultimate settlement of those claims which have not been assigned. At December 31, 1997 and 1996, respectively, non-assigned structured settlements guaranteed $12,299,000 and $5,926,000 of payments under annuity contracts for which MMIC and its reinsurers paid $4,726,000
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. OTHER COMMITMENTS (CONTINUED)
and $3,208,000. In the event that the insurance company issuing the annuity was unable to meet its obligation under the terms provided, MMIC would be liable for the ultimate settlement.
9. BENEFIT PLANS
The Company has a non-contributory defined contribution pension plan covering substantially all employees. Contributions to the plan are based upon each covered employee's salary. The Company also sponsors a 401(k) plan covering substantially all employees and provides a fifty percent match on employee contributions subject to certain limitations. Total contributions charged to expense for the years ended December 31, 1997, 1996 and 1995 were $393,000, $371,000 and $294,000, respectively.
The Company provides an unfunded Supplemental Executive Retirement Plan (SERP) which is a non-qualified, defined benefit retirement plan covering certain Company officers. Benefits are based upon years of service and compensation. Although the plan is technically unfunded, the Company has purchased life insurance contracts for each officer, the cash value of which is designed to coordinate with the projected benefit payments under the SERP. The cash value of these contracts is included in other assets. The net periodic pension cost for this plan was $363,000, $323,000 and $292,000 for the years ended December 31, 1997, 1996 and 1995, respectively. The liability recognized in the consolidated balance sheets at December 31, 1997 and 1996 related to this plan was $2,192,000 and $1,909,000, respectively.
The Company also provides medical benefits to retirees through a defined benefit post-retirement plan which covers substantially all employees. The net periodic post-retirement benefit cost for the years ended December 31, 1997, 1996 and 1995 was $27,000, $30,000 and $25,000, respectively. As of December 31, 1997 and 1996, the net post-retirement benefit plan asset (liability) recognized in the consolidated balance sheets was $4,000 and $12,000, respectively. The plan is funded through contributions to mutual funds.
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. RECONCILIATION WITH STATUTORY ACCOUNTING PRINCIPLES
The following is a reconciliation of net income and shareholders' equity under generally accepted accounting principles with that reported for MMIC on a statutory basis (in thousands):
Net Income
Shareholders' Equity
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. RECONCILIATION WITH STATUTORY ACCOUNTING PRINCIPLES (CONTINUED)
The equity of MMIHC, exclusive of the carrying value of its investment in MMIC, is subject to redemption and therefore reported outside of shareholders' equity under the caption redeemable stock. As a result, consolidated other shareholders' equity as reported on the balance sheets represents equity of MMIC only under generally accepted accounting principles.
Under Minnesota insurance statutes, MMIC is required to maintain statutory surplus in excess of ten times its per occurrence reinsurance retention limit. The minimum level is $7,500,000 for 1997 and 1996.
11. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except for share and per share amounts):
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. NET REDEMPTION VALUE
The net redemption value per share of the Class A common shares was as follows:
* Includes pro forma shares related to merger.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The names and ages of the directors of MMIHC and MMIC, the year each first became a director, and the number of Class A Common Shares owned by each as of December 31, 1997, are as follows:
The Bylaws of MMIHC provide that MMIHC's Board of Directors shall include the following: (1) up to 20 physicians divided into three classes and elected for staggered three-year terms; (2) for as long as the Class B Common Share is outstanding, the Chief Executive Officer of the MMA and the Executive Vice President of the IMS, both of
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)
whom shall be ex-officio directors; (3) the President of MMIHC as an ex-officio director; and (4) such additional ex-officio and advisory members as the Board of Directors may determine. At least two-thirds of the voting members of the Board of Directors must be physician directors. All physician directors must be members of a state medical association and insured by MMIC. The MMA, which has the exclusive right to elect directors, has agreed to elect the directors nominated by a committee of the Board of Directors.
The Bylaws of MMIC provide that the directors of MMIHC shall also serve as the directors of MMIC, with the exception of any outside directors of MMIHC. Outside directors are persons who are not policyholders of MMIC or members of any state medical society. There are currently no outside directors of MMIHC so the Boards of MMIHC and MMIC are identical at this time.
Pursuant to the merger with IPMIT, the Bylaws of MMIHC were amended to provide for the election of directors who are members of the IMS in a number, when compared to the total number of directors, which is proportionate to the number of Iowa insureds compared to the total number of MMIC insureds, subject to a minimum of two Iowa directors, one of whom shall be the Executive Vice President of the IMS, for as long as the Class B Common Share is outstanding. The MMA has placed the Class B Voting Share in a voting trust which requires the trustee to vote the share for the election of the Iowa directors nominated by the IMS.
Directors serve until their successors are elected and qualified, or until their prior resignation, removal, death or disqualification.
As of December 31, 1997, the directors of MMIHC, as a group, owned 1,234 Class A Common Shares or 1.0 percent of the total Class A Common Shares outstanding as of such date. No executive officer owned any Class A Common Shares as of such date.
All of the directors have been principally engaged in the practice of medicine for more than five years, except for Dr. Sanders who has been the Executive Vice President of the MMA since 1990, Michael Abrams who has been the Executive Vice President of the Iowa Medical Society beginning in 1996 and David P. Bounk who has been the President and CEO of MMIHC since 1991. Prior to 1990, Dr. Sanders was principally engaged in the practice of medicine. Prior to 1996 Michael Abrams was Director, Government Relations of the Indiana Medical Association for nine years.
The Chairman of the Board of Directors (currently Dr. Smith) is paid an annual fee of $31,500. All members of the Board of Directors currently are paid $750 for each meeting of the Board of Directors they attend. In addition, members of the Executive Committee currently are paid $750 for each meeting of the Executive Committee they attend, and
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)
committee chairmen are paid $600 for each meeting of the standing committee they chair. Other members of standing committees currently are paid between $300 and $500, depending upon distance traveled, for each committee meeting they attend.
EXECUTIVE OFFICERS
The names, ages and positions of the executive officers of MMIHC and MMIC are as follows:
Mr. Bounk has over 29 years experience in the insurance industry and joined MMIHC and MMIC as President and Chief Executive Officer in August 1990. From July 1982 through July 1990, he was Executive Vice President and Chief Operating Officer of Missouri Medical Insurance Company, a corporation providing malpractice insurance to physicians in Missouri. Mr. Bounk has an MBA degree in finance.
Mr. Bounk has an employment agreement which renews annually for successive calendar-year terms unless it is terminated by either party at least 60 days prior to any renewal date. The agreement provides that Mr. Bounk's base salary will be adjusted annually by the Executive Committee. If the agreement is terminated by MMIHC for cause or by Mr. Bounk voluntarily, he is entitled to receive his base salary for 30 days thereafter. If the agreement is terminated by MMIHC without cause, Mr. Bounk is entitled to receive his base salary for six months thereafter, plus one additional month for each year of service, subject to a maximum of 12 additional months, and then only until he
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)
commences new employment or self-employment. The agreement also prohibits Mr. Bounk from competing with MMIHC for one year following his termination of employment.
Effective January 1, 1997, the Company entered into termination agreements with the executive officers. These agreements provide a severance package to these executives in the event of termination of employment without cause.
Mr. Bretzman has over 40 years experience in the insurance industry, including 23 years with Blue Cross/Blue Shield of Minnesota prior to joining the Exchange (MMIC's predecessor) in 1983. He has been in his current position since March 1986. He has a BA degree in accounting.
Mr. Kleven has over 25 years experience in medical malpractice claims adjusting and management. He joined the Exchange in 1983, and has held his current position since March 1986. Prior to joining the Exchange, he was a liability manager at The St. Paul Companies for six years. He has a BS degree in business.
Ms. Lincoln has over 15 years experience in medical professional liability risk management. She joined the Exchange in 1982, and has held her current position since January 1990. She has a law degree.
Mr. Rutz has over 19 years experience in the insurance industry, including 10 years in medical malpractice. From June 1986 through April 1994, he was Senior Regional Underwriting Manager with St. Paul Fire and Marine Insurance Company. From May 1994 through April 1995, he was Vice President with Alexander and Alexander, insurance brokers. He joined the Company in May 1995 as Vice President-Underwriting. He has a BS degree in resource management.
Officers serve until their successors are appointed by the Board of Directors, or until their prior resignation, removal or death.
BENEFICIAL OWNERSHIP REPORTING
Section 16 of the Securities Exchange Act of 1934 requires officers and directors of reporting companies to file reports disclosing ownership of, and transactions in, securities of the Company. During 1997, required forms were not filed for the new directors. This failure was cured by filings made after the end of the year.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table summarizes compensation paid by MMIHC to its five most highly compensated executive officers for services rendered in all capacities during the last three years.
(a) Includes employer contributions to qualified retirement plans and the term and cash surrender value of supplemental life insurance premiums.
MMIHC also maintains a Supplemental Executive Retirement Plan ("SERP") which provides an annual retirement benefit for an executive officer who retires at age 65 with 10 years of service of 70% of the officer's final average salary. Benefits are reduced for years of service less than 10 and retirement prior to age 65. The annual benefit payable under the SERP is reduced by 50% of the officer's primary Social Security benefit and by the annual benefit (expressed in the form of an annuity) of the officer's accrued benefits under MMIHC's current money purchase pension plan and a predecessor plan. The estimated annual benefits payable upon retirement at normal retirement age for the executive officers in the Summary Compensation table are as follows: Mr. Bounk--$149,800; Mr. Bretzman--$90,900; Mr. Kleven--$101,100; Ms. Lincoln--$58,700; and
ITEM 11. EXECUTIVE COMPENSATION (CONTINUED)
Mr. Rutz--$92,600. The estimated annual retirement benefits were calculated assuming salary increases of six percent per year, discounted four percent per year for future inflation to express the estimated benefits in today's dollars.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this item is contained in Item 10.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements of Midwest Medical Insurance Holding Company, Inc. for the year ended December 31, 1996 are included in this annual report (Form 10-K) in Item 8:
Report of Independent Auditors Consolidated Balance Sheets as of December 31, 1997 and 1996 Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Changes in Other Shareholders' Equity for the years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements
(a)(2) The following consolidated financial statement schedules of Midwest Medical Insurance Holding Company, Inc. required by Item 14(d) are included in a separate section of this report:
II Condensed Financial Information of Registrant IV Reinsurance VI Supplemental Information Concerning Property/Casualty Insurance Operations
All other schedules to the consolidated financial statements required by Article 7 of Regulation S-X are not required under the related instructions or are inapplicable and therefore have been omitted.
(a)(3) LISTING OF EXHIBITS
The Exhibits required to be a part of this report are listed in the Index to Exhibits which follows the Financial Statement Schedules.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter of 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Midwest Medical Insurance Holding Company ----------------------------------------------- (Registrant)
By: /s/ David P. Bounk March 20, 1998 --------------------------- ------------------ David P. Bounk Date President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ David P. Bounk Principal Executive Officer March 20, 1998 - --------------------------- David P. Bounk
/s/ Merlin R. Bretzman Principal Financial Officer and March 20, 1998 - --------------------------- Principal Accounting Officer Merlin R. Bretzman
* Director, Chairman of the Board March 20, 1998 - --------------------------- Andrew J.K. Smith, M.D.
* Director March 20, 1998 - --------------------------- Michael Abrams, M.D.
* Director March 20, 1998 - --------------------------- John R. Balfanz, M.D.
* Director March 20, 1998 - --------------------------- Gail P. Bender, M.D.
* Director March 20, 1998 - --------------------------- James R. Bishop, M.D.
* Director, Secretary March 20, 1998 - --------------------------- E. Duane Engstrom, M.D.
* Director March 20, 1998 - --------------------------- Roger L. Frerichs, M.D.
* Director March 20, 1998 - --------------------------- Richard Geier, Jr., M.D.
* Director March 20, 1998 - --------------------------- Anthony C. Jaspers, M.D.
Director March 20, 1998 - --------------------------- Russel J. Kuzel, M.D.
* Director March 20, 1998 - --------------------------- Wayne F. Leebaw, M.D.
* Director March 20, 1998 - --------------------------- Steven A. McCue, M.D.
* Director March 20, 1998 - --------------------------- William J. McMillan, Jr. M.D.
* Director March 20, 1998 - --------------------------- Harold W. Miller, M.D.
Director March 20, 1998 - --------------------------- Anton S. Nesse, M.D.
Director March 20, 1998 - --------------------------- Mark D. Odlund, M.D.
Director March 20, 1998 - --------------------------- G. William Orr, M.D.
* Director March 20, 1998 - --------------------------- Norman Rinderknecht, M.D.
* Director March 20, 1998 - --------------------------- Paul S. Sanders, M.D.
* Director March 20, 1998 - --------------------------- Richard D. Schmidt, M.D.
* Director March 20, 1998 - --------------------------- Mark B. Siegel, M.D.
* Director March 20, 1998 - --------------------------- G. David Spoelhof, M.D.
* Director March 20, 1998 - --------------------------- Tom D. Throckmorton, M.D.
* Director, Vice Chairman March 20, 1998 - --------------------------- R. Bruce Trimble, M.D.
* By: /s/ David P Bounk March 20, 1998 - -------------------------------------- David P. Bounk pursuant to power of attorney
* David P. Bounk, on his own behalf and pursuant to Powers of Attorney, dated prior to the date hereof, attested by the officers and directors listed above and filed with the Securities and Exchange Commission, by signing his name hereto does hereby sign and execute this Report of Midwest Medical Insurance Holding Company on behalf of each of the officers and directors named above, in the capacities in which the name of each appears above. The above persons signing as directors constitute a majority of the directors.
Midwest Medical Insurance Holding Company and Subsidiaries (Parent Company)
Schedule II--Condensed Financial Information of Registrant
Balance Sheets
SEE ACCOMPANYING NOTE.
Midwest Medical Insurance Holding Company and Subsidiaries (Parent Company)
Schedule II--Condensed Financial Information of Registrant (continued)
Statements of Income
SEE ACCOMPANYING NOTE.
Midwest Medical Insurance Holding Company and Subsidiaries (Parent Company)
Schedule II--Condensed Financial Information of Registrant (continued)
Statements of Cash Flows
SEE ACCOMPANYING NOTE.
Midwest Medical Insurance Holding Company and Subsidiaries (Parent Company)
Schedule II--Condensed Financial Information of Registrant (continued)
Note to Condensed Financial Statements
December 31, 1996
The accompanying condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto of Midwest Medical Insurance Holding Company and Subsidiaries.
See Note 2 to the consolidated financial statements of Midwest Medical Insurance Holding Company and Subsidiaries for a description of the redeemable stock.
Midwest Medical Insurance Holding Company and Subsidiaries
Schedule IV--Reinsurance
NOTE TO SCHEDULE IV:
Ceded premiums for the years ended December 31, 1997, 1996 and 1995 are net of reductions (additions) in ceded premiums related to swing rated reinsurance treaties of $(3,688,000), $748,000 and $(260,000), respectively. Ceded premiums in 1996 are also net of proceeds from commutations of reinsurance covering the period January 1, 1987 through December 31, 1990 of $2,194,000.
Midwest Medical Insurance Holding Company and Subsidiaries
Schedule VI--Supplemental Information Concerning Property/Casualty Insurance Operations
ANNUAL REPORT ON FORM 10-K
ITEM 14(a)(3) AND 14(c) EXHIBITS
Midwest Medical Insurance Holding Company
Index to Exhibits
Index to Exhibits (continued)
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(1) Filed with the Company's Registration Statement on Form S-4, as amended, SEC File No. 33-55062 and incorporated herein by reference.
(2) Filed with the Company's Registration Statement Form S-1 SEC File No. 33-70182 and incorporated herein by reference.
(3) Filed with 1993 Annual Report on Form 10-K.
(4) Filed with 1996 Annual Report on Form 10-K.
(5) Filed with this Annual Report on Form 10-K.