The Company owns no real estate. Prior to October 1, 1999, MMIHC leased approximately 15,765 square feet of office space in Edina, Minnesota under a 10-year lease that expires in 2001. Effective October 1, 1999, the Company moved to new offices in Edina, Minnesota with total square feet of 26,069. The Company sublet the former office space effective December 1, 1999 for the duration of that lease. The new leased space has a term of 6 years, 2 months. 4,060 square feet of office space is leased in West Des Moines, Iowa under a 10-year lease that expires in 2000, with an option for MMIHC to extend the term for an additional five years after the original term. An additional 1,249 square feet of office space is leased in Omaha, Nebraska under a three year lease that expires November 30, 2000. Solutions and MedPower operate out of a separate 3,149 square foot facility also located in Edina, Minnesota. This lease is set to expire in 2001. Services operates out of a separate 4,000 square foot facility located in Shoreview, Minnesota. This lease expires in 2000. Annual rent expense was $637,585 in 1999 and $501,032 in 1998.
Following is the selected financial data of the Company for the five years ended December 31, 1999. This data should be read in conjunction with the consolidated financial statements and notes thereto appearing under Item 8 of this Form 10-K.
The financial statements of MMIHC and its subsidiaries are presented on a consolidated basis. In future references in this analysis, which should be read together with the 1999 consolidated financial statements and notes thereto appearing under Item 8 in this Form 10-K, MMIHC and its subsidiaries are referred to collectively as the Company unless the reference pertains to a separate entity.
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 details about the redeemable stock and the actual redemptions during the years 1999, 1998 and 1997 are found in Note 2 to the consolidated financial statements. This limited redemption value preserves the capital of MMIC which is separately disclosed as other shareholders' equity in the consolidated financial statements. The consolidated statements of changes in other shareholders' equity found in the accompanying consolidated financial statements provide the details of the increases and decreases in other shareholders' equity.
Periodically, the Board of Directors of MMIC declares dividends payable to MMIHC to maintain the redemption value of the Company's Class A Common Stock and to provide capital for non-insurance business operations including new business ventures. Dividends totaling $2,050,000 were declared and paid in 1999. A dividend of $2,000,000 was declared and paid in 1998. No dividends were declared or paid by MMIC to MMIHC in 1997.
2. 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 $5,920,000 on a net basis in 1999. This compares to a net reduction for those treaty years of $2,550,000 in 1998 resulting in a net increase in premium between years of $3,370,000.
4. A 5% rate decrease in regions with favorable claims experience resulted in a decrease of approximately $1,250,000 in 1999 net premiums earned.
5. Accounts that did not renew in 1999 resulted in a decrease of approximately $538,000 in 1999 net premiums earned.
1. The estimated reinsurance premium applicable to the treaty years 1992-1994 and 1995-1997, which is based in part on reinsured claims experience, was reduced $2,550,000 on a net basis in 1998. This compares to a net reduction for those treaty years of $2,950,000 in 1997 resulting in a net decrease in premium between years of $400,000.
2. The Company negotiated lower rates on its 1998 reinsurance contract that reduced ceded premiums by $1,031,000 compared to 1997. This increased 1998 net premiums earned.
3. In 1998, $789,000 was received from the commutation of a reinsurance treaty covering the 1991 year. Since no reinsurance commutation occurred in 1997, premiums increased from 1997 to 1998 by $789,000.
4. Retrospective premiums credits of $5,200,000 for Minnesota policyholders and $280,000 for North Dakota policyholders were recorded in 1998. The premium credits for 1997 were $5,000,000 for Minnesota policyholders only. The difference between years resulted in a $480,000 decrease in 1998 net premiums earned.
Net investment income decreased $8,000 in 1999 from 1998 and $632,000 in 1998 from 1997. The decrease in 1999 was primarily driven by additional fees paid to equity managers due to the appreciation in the Company's equity securities. The decrease in 1998 was primarily due to the decrease in the fixed maturity component of invested assets due to the Company's efforts to maximize total return and diversify the portfolio as referred to earlier under the Liquidity and Capital Resources section. Since it is the largest contributor to the Company's investment income, the decrease in fixed maturity investments in 1998 drove the decline in investment income.
Realized capital gains decreased $1,861,000 to $7,220,000 in 1999 and increased $2,552,000 to $9,081,000 in 1998. During 1999, sales of equity securities realized $10,312,000 of net capital gains while sales of bonds realized $(3,092,000) of net capital losses. Approximately $(1,757,000) of the net realized capital losses on bonds came from the repositioning of the bond portfolio during the last two months of 1999. The Company's new fixed income manager, who assumed management of the portfolio on November 2, 1999, recommended repositioning the bond portfolio primarily to shorten its duration. All other 1999 realized capital gains and losses resulted from the management of the portfolio on a pre-tax total return basis within the parameters set by the Investment Committee of the Board of Directors. During 1998, approximately $1,175,000 of net capital gains were realized through the allocation of $15,000,000 to international equities in January of 1998. The remaining $7,906,000 of 1998 net realized capital gains resulted from the management of the portfolio on a pre-tax total return basis. During 1997, the fixed income portfolio was restructured to pursue the newly adopted pre-tax total return objective resulting in net realized capital gains of $4,916,000. An additional $1,613,000 of net capital gains were realized in 1997 in the normal course of managing the investment portfolio. The Company employs three outside professional advisors to manage the portfolio: one to manage investment-grade fixed income securities, one to manage large-cap domestic equities, and one to manage international equities. The managers operate within the Company's adopted investment policy as approved by the Investment Committee of the Board of Directors. This policy was revised in 1997 as previously discussed under the Liquidity and Capital Resources section. The Investment Committee meets with outside investment managers approximately four times per year.
Other revenues increased $208,000 from $1,144,000 in 1997 to $1,352,000 in 1998. The increase was primarily due to the acquisition of MedPower by Solutions in January of 1998. MedPower's main source of revenues is electronic claims processing fees received from healthcare providers.
Losses and loss adjustment expenses are the costs associated with the settlement of insurance claims and are the Company's principal expense. Incurred loss and loss adjustment expenses were $41,468,000 for 1999 compared to $37,494,000 in 1998 and $31,834,000 in 1997. This resulted in an increase of 10.6% in 1999 and an increase of 17.8% in 1998. As shown in Note 6 of the consolidated financial statements, the current year's provision for loss and loss adjustment expense, which is based upon policyholder exposure, expected frequency of losses, and severity of losses, increased by $4,015,000 in 1999 and $1,741,000 in 1998. The increase in 1999 was primarily driven by additional policyholder exposure from the increase in premium volume particularly from the newer business lines such as large, healthcare systems and hospitals. Loss
Underwriting, acquisition and insurance expenses increased $499,000 from $6,698,000 in 1998 to $7,197,000 in 1999. Approximately $706,000 of the increase came from additional management fees for staff additions, maintenance of and enhancements to the new operating system and moving the Company's main office. An additional $311,000 of payments to medical societies for license and endorsement agreements also contributed to the increase. A portion of these payments are tied to premium volume thus causing the increase. These increases were offset partially by additional ceding commissions earned by MMIC resulting from the increase in premiums ceded to the current year reinsurance contract on higher limit policies.
Other operating expenses increased $2,608,000 from $3,589,000 in 1998 to $6,197,000 in 1999. Approximately $1,648,000 of the increase was from the Services subsidiary that began active operations in January 1999 as described in Item 1 of this Form 10-K. Services primary expenses are commissions and salaries paid to its staff. The remaining increase resulted largely from greater salary expenses incurred by Solutions, added equipment and depreciation costs incurred by MedPower and new product development costs incurred by MMIHC.
Other operating expenses increased $2,503,000 from $1,086,000 in 1997 to $3,589,000 in 1998. Approximately $2,344,000 of the increase was from operating two new, non-insurance companies, Solutions and MedPower, as described in Item 1 of this Form 10-K. Salaries, benefits, outside consulting, and equipment costs are the main operating expenses charged to Solutions and MedPower by MMIHC in the form of management fees. The remaining increase resulted primarily from greater salary and benefits costs of operating the holding company MMIHC.
Income before income taxes decreased to $8,637,000 in 1998 compared to $13,763,000 in 1997. The decrease resulted primarily from less favorable development on loss liabilities estimated in prior years and added expenses from operating two non-insurance companies newly formed at the beginning of 1998.
Income taxes decreased to $816,000 for 1999 compared to $2,689,000 for 1998. The effective tax rates for 1999 and 1998 were 32.0% and 31.1%, respectively. The principal factor in the increase in the effective tax rate was a lower recovery of prior year taxes recorded in 1999 compared to 1998.
Income taxes decreased to $2,689,000 for 1998 compared to $4,463,000 for 1997. The effective tax rates for 1998 and 1997 were 31.1% and 32.4%, respectively. The principal factor in the decline in the effective tax rate was a recovery of prior year taxes recorded in 1998.
Net income earned by the Company decreased to $1,736,000 for 1999 compared to $5,948,000 for 1998 due to the factors discussed above. Basic net income per share decreased to $13.92 for 1999 from $48.36 per share for 1998. Diluted net income per share decreased to $12.53 for 1999 from $43.65 per share for 1998.
No significant Year 2000 problems have been encountered with respect to the Company's internal computer hardware and software, key business partners and vendors and insurance policy exposure. The Company's Year 2000 Task Force, however, continues to monitor the potential for insurance policy exposure relative to Year 2000 issues.
3. greater severity or frequency of the types of losses that the Company insure;
4. faster or more adverse loss development experience than that on which the Company based its underwriting, reserving, and investment practices;
5. developments in global financial markets which could adversely affect the performance of the Company's investment portfolio;
7. risks associated with the introduction of new products and services;
The consolidated financial statements of Midwest Medical Insurance Holding Company and Subsidiaries are presented on the following pages 24 through 57 of this Annual Report on Form 10-K.
Consolidated Balance Sheets ................................................ 26 Consolidated Statements of Income .......................................... 27 Consolidated Statements of Changes in Other Shareholders' Equity ........... 28 Consolidated Statements of Cash Flows ...................................... 29 Notes to Consolidated Financial Statements ................................. 30
We conducted our audits in accordance with auditing standards generally accepted in the United States. 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.
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.
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.
The consolidated financial statements have been presented in conformity with accounting principles generally accepted in the United States, 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 12).
Other investments are less than 20% equity interests in non-traded real estate investment trusts and are recorded at cost, which approximates fair value.
Prior to 1999, MMIC had a retrospective premium program whereby physicians may have received credits against future premiums based upon the loss experience of MMIC. Amounts returned under the program were accrued when approved by the Board of Directors and reflected as a reduction in net premiums earned. Beginning in 1999, the retrospective premium program was replaced by a policyholder dividend program. Policyholder dividends are accrued when approved by the Board of Directors and are recorded as a separate component of losses and expenses in the consolidated statements of income.
The Company files a consolidated tax return with its subsidiaries. Income tax expense is allocated to the subsidiaries based upon separate company taxable income under a tax-sharing agreement. The Company uses the asset and liability method of accounting for income taxes. Deferred income tax assets or liabilities are recognized for the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for income tax purposes.
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.
Following is the detail of changes in redeemable stock for each of the three years in the period ended December 31, 1999 (in thousands, except for share and per share amounts):
In the fourth quarter of 1999, MMIC's Board of Directors declared a $75,000 dividend to be paid to hospital policyholders for policies that were written from 1995 through 1998 and that renew in 2000. The dividend will be awarded based on the number of years insured with MMIC and will be paid within two months after the hospital policy renews in 2000.
Effective January 1, 1999, MMIC replaced its retrospective premium program with a policyholder dividend arrangement as discussed in Note 4. As of December 31, 1998, MMIC had accrued retrospective premium credits of $5,200,000, $280,000 and $3,063,000 related to Minnesota, North Dakota and Iowa policyholders, respectively.
A provision of the agreement and plan of merger between IPMIT and MMIC required 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. This agreement stipulated that any amounts due under this provision be finalized using financial information as of December 31, 1998. During 1999, final payments of $3,058,000 were made to former IPMIT policyholders under the terms of the agreement. During 1998, retrospective premium payments of $3,073,000 were made to former IPMIT policyholders. Actual retrospective premium payments made to Minnesota and North Dakota policyholders in 1999 and 1998 were $5,802,000 and $5,008,000, respectively.
A provision of the agreement and plan of merger between MLM and MMIC requires that any favorable development of certain pre-merger liabilities of MLM be paid to the former MLM policyholders who remain active MMIC insureds as of the date of payment through a retrospective premium credit. The agreement further stipulates that any amounts due under this provision must be settled no later than June 5, 2001. As of December 31, 1999, there has been no favorable development and, therefore, there is no accrual related to this provision.
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, 1999 and 1998, respectively, non-assigned structured settlements guaranteed $3,489,000 and $5,820,000 of payments under annuity contracts for which MMIC and its reinsurers paid $2,241,000 and $2,627,000. 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.
MMIHC provides an unfunded Supplemental Executive Retirement Plan (SERP) which is a non-qualified, defined benefit retirement plan covering certain Company officers. Benefits are based upon years of service and compensation. Although the plan is technically unfunded, the Company invests in specified assets which are designed to coordinate with the projected obligation under the SERP. The net periodic pension cost for this plan was $441,000, $404,000 and $363,000 for the years ended December 31, 1999, 1998 and 1997, respectively. The liability recognized in the consolidated balance sheets at December 31, 1999 and 1998 related to this plan was $2,704,000 and $2,439,000, respectively.
MMIHC 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, 1999, 1998 and 1997 was $23,000, $41,000 and $27,000, respectively. As of December 31, 1999, the net post-retirement benefit plan liability was $19,000. As of December 31, 1998, the plan was fully funded.
The net redemption value per share of the Class A common shares was as follows: