(4) Includes pro forma shares computed to give retroactive effect to the merger of MMIHC/MMIC with MLM. See Note 2 to the consolidated financial statements included in Item 8 of this Form 10-K.
The second to the last line on the preceding reconciliation reports the amount of reinsurance recoverables for unpaid losses which are included in the 1996, 1995 and 1994 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.
1. A $5,200,000 retrospective premium credit was declared in 1995 for Minnesota policyholders who were insured during 1992, 1993 and 1994 and renew with the Company on January 1, 1996. A similar premium credit of $6,000,000 was declared in 1994. The 1995 credit was lower by $800,000 and caused 1995 net premium to be higher by this amount. These premium credits were paid to policyholders in early March of 1995 and 1996, respectively.
INVESTMENT INCOME has remained level during the last three years. Invested assets as shown in the Balance Sheet at fair value increased by $3,317,000 from December 31, 1995 to December 31, 1996. On a cost basis, the amount of investments increased by $885,000.
OTHER UNDERWRITING EXPENSES decreased by $725,000 from 1995 to 1996. This decrease was primarily due to a reallocation of costs under the Company's amended management agreement for 1996 filed herein. In 1995 the majority of this expense was included in other underwriting expense. The increase from 1994 to 1995 was primarily due to a $520,000 reduction in reinsurance ceding commission received. The reduction occurred in connection with the Company increasing its retention from $500,000 per claim to $750,000 per claim and changing the method by which final reinsurance premium is determined for coverage up to $2,000,000 per claim.
INCOME TAXES. In 1996 the Company's book net income before taxes was $8,939,000. 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 $298,000 to arrive at the income tax charged to operations as shown in the financial statements.
The consolidated financial statements of Midwest Medical Insurance Holding Company and Subsidiary are presented on pages 22 through 49 of this Annual Report on Form 10-K following.
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, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, 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 therein.
LIABILITIES, REDEEMABLE STOCK AND OTHER SHAREHOLDERS' EQUITY Liabilities: Unpaid losses and loss adjustment expenses $110,037 $120,264 Unearned premiums 6,860 7,033 Retrospective premiums (NOTE 5) 10,838 10,864 Amounts due reinsurers 7,274 7,818 Other liabilities 8,102 8,338 -------------------------- Total liabilities 143,111 154,317
Redeemable stock (NOTES 3 AND 12): Class A Common Stock--authorized 300,000 shares, issued and outstanding 118,209 shares in 1996 and 116,251 shares in 1995 7,603 6,974 Class B Common Stock--authorized, issued and outstanding 1 share 1 1 -------------------------- 7,604 6,975
Other shareholders' equity (NOTES 3 AND 11) 111,278 103,292 -------------------------- Total liabilities, redeemable stock and other shareholders' equity $261,993 $264,584 -------------------------- -------------------------- SEE ACCOMPANYING NOTES.
YEAR ENDED DECEMBER 31 1996 1995 1994 -------------------------------------- Revenues: Net premiums earned (NOTE 8) $32,046 $29,798 $26,246 Net investment income (NOTE 4) 12,212 12,211 11,995 Realized capital gains (losses) 1,771 1,646 (455) Other 857 334 (31) -------------------------------------- 46,886 43,989 37,755
Income per common share and common share equivalent $ 58.33 $ 13.74 $114.84 -------------------------------------- --------------------------------------
Number of shares used in per share calculation 128,259 125,536 126,222 -------------------------------------- --------------------------------------
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 (see Note 2).
The holding company provides management and administrative services to the insurance company 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.
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. From time to time the Board of Directors of MMIC may declare dividends payable to MMIHC in lieu of adjusting the management fee rate.
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 11).
The Company has a retro premium program whereby physicians may receive credits against future premiums based upon loss experience of the Company. 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.
Earnings per share is computed using weighted average issued and outstanding Class A common shares as well as Class A common share equivalents. All earned but unissued shares of Class A Common Stock (see Note 3) are considered common share equivalents for purposes of the earnings per share computation.
Certain amounts in the prior years' financial statements have been reclassified to conform with the 1996 presentation.
DECEMBER 31 1995 1994 1993 ---------------------------- Redeemable stock and other shareholders' equity of MMIHC and subsidiaries $104,667 $92,365 $81,173 Divided by MMIHC Class A Common Shares outstanding 110,804 111,067 108,945 ---------------------------- Net book value per share $944.61 $831.62 $745.08 ---------------------------- ----------------------------
DECEMBER 31 1995 1994 1993 ---------------------------- Capital and surplus of MLM $5,145 $4,814 $4,683 Divided by MMIHC net book value per share $944.61 $831.62 $745.08 ---------------------------- Shares to be issued to MLM policyholders 5,447 5,788 6,285 Multiplied by net redemption value of MMIHC Class A Shares $60.00 $66.00 $66.00 ---------------------------- Dividend from MMIC to MMIHC to maintain pre-merger net redemption value $327 $382 $415 ---------------------------- ----------------------------
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.
Following is the detail of changes in redeemable stock for the three years ended December 31, 1996 (in thousands, except for share and per share amounts):
1996 1995 1994 -------------------------------- Fixed maturities $11,561 $11,716 $11,953 Equity securities 380 338 288 Short-term investments 904 923 487 -------------------------------- 12,845 12,977 12,728 Investment expenses (633) (766) (733) -------------------------------- $12,212 $12,211 $11,995 -------------------------------- --------------------------------
DECEMBER 31, 1996 ----------------------------------------------- GROSS GROSS UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE ----------------------------------------------- Fixed maturities: MMIHC: Industrial and other $ 1,031 $ 4 $ (2) $ 1,033 MMIC: United States Government 92,365 2,075 (797) 93,643 State and other political subdivisions 57,968 1,885 (45) 59,808 Industrial and other 28,615 648 (186) 29,077 ----------------------------------------------- Total $179,979 $ 4,612 $(1,030) $183,561 ----------------------------------------------- -----------------------------------------------
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 the Supplemental Executive Retirement Plan obligation (Note 10). At December 31, 1996 and 1995, respectively, gross unrealized gains related to these assets were $103,000 and $84,000. Deferred taxes related to these unrealized gains were $37,000 and $31,000, respectively.
GROSS GROSS PROCEEDS REALIZED REALIZED FROM SALES GAINS LOSSES -------------------------------------- Year ended December 31, 1996: Fixed maturities $46,735 $ 803 $(214) Equity securities 7,558 1,347 (165) Year ended December 31, 1995: Fixed maturities 43,387 1,012 (254) Equity securities 9,158 1,356 (468) Year ended December 31, 1994: Fixed maturities 37,647 509 (652) Equity securities 6,969 472 (784)
Paid related to: Current year 4,885 2,484 3,445 Prior years 33,454 26,879 25,251 --------------------------------------- Total paid 38,339 29,363 28,696 ---------------------------------------
Income before tax at the federal statutory rate of 35% $3,129 $ 5 $7,319 Tax-exempt income (net of proration adjustment) (1,452) (1,090) (1,104) State income taxes, net of federal tax benefit 50 (42) 603 Proceeds on life insurance (368) - - Benefit for prior year income taxes - (660) (316) Other 99 76 (85) --------------------------------------- $1,458 $(1,711) $6,417 --------------------------------------- ---------------------------------------
Discounting of post-1986 unpaid losses and loss adjustment expenses $1,190 $232 $1,540 Liabilities not currently deductible (274) 481 (1,571) Unearned premiums 6 22 277 Alternative minimum tax carryforwards (496) - - Other (128) (253) 180 --------------------------------------- $ 298 $482 $ 426 --------------------------------------- ---------------------------------------
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 December 31, 1996. Reinsurance recoverables on paid and unpaid losses of $17,485,000 and $18,967,000 are associated with a single reinsurer at December 31, 1996 and 1995, 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 handled by MMIC. The Company generally retains the first $750,000 of each claim and reinsures the remainder. In years prior to 1995, retention levels for a portion of MMIC's business varied from $200,000 to $500,000.
Total ceded reinsurance premiums, before the effects of treaty commutations, for the years ended December 31, 1996, 1995 and 1994 were $6,416,000, $7,544,000 and $8,704,000, respectively. Loss and loss adjustment expenses incurred are net of applicable reinsurance of $2,459,000, $7,873,000 and $8,025,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
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, 1996 and 1995, respectively, non-assigned structured settlements guaranteed $5,926,000 and $4,087,000 of payments under annuity contracts for which MMIC and its reinsurers paid $3,208,000 and $1,833,000. 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.
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, 1996, 1995 and 1994 was $30,000, $25,000 and $38,000, respectively. As of December 31, 1996 and 1995, the net post-retirement benefit plan asset recognized in the consolidated balance sheets was $12,000 and $116,000, respectively. The plan is funded through contributions to mutual funds.
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 1996 and 1995.
December 31, 1993 $7,605 115,230* $66.00 ---------- ---------- ---------- ---------- December 31, 1994 $7,712 116,855* $66.00 ---------- ---------- ---------- ---------- December 31, 1995 $6,975 116,251* $60.00 ---------- ---------- ---------- ---------- December 31, 1996 $7,604 118,209* $64.33 ---------- ---------- ---------- ----------