The majority of the Company's assets are invested in investment-grade bonds, stocks, a real estate investment trust and short-term instruments. These investments totaled $277,976,000 and $264,761,000 at December 31, 1999 and 1998, respectively, which represented 86.8% and 89.6% of total assets. The main objectives of the Company's investment policy established by the
Investment Committee of the Board of Directors are the preservation of assets, maximizing pre-tax total portfolio return, and assuring adequate liquidity to meet operational requirements primarily the payment of insurance claims. Fixed maturity investments and equity securities are classified as available for sale and therefore are carried at fair value. The real estate investment trust and short-term instruments are recorded at cost which approximates fair value.
During 1997, the Company adopted a revised Investment Policy resulting in a portfolio restructuring designed to increase the pre-tax total return from investments. The benchmark total return goal set for the fixed portfolio manager was increased. This resulted in a turnover of most of the fixed income portfolio which included selling all municipal bonds. To further diversify the portfolio and maximize total return, the Company invested $10 million in a private placement real estate investment trust in September of 1997 and invested $15 million in international equities in January of 1998. These changes reflect the Company's strong capital position relative to the risks inherent in its business operations.
The Company's cash flow from operations was $2,187,000 in 1999 versus $(9,605,000) in 1998 and $4,002,000 in 1997. The 1999 cash flow from operations was favorably impacted by premium adjustments received from reinsurers on reinsurance contracts for prior years and greater premium received at the end of 1999 due to earlier billing of policies with January 2000 effective dates. The 1998 cash flow from operations was unfavorably impacted by premium adjustments paid to reinsurers on reinsurance contracts for prior years and less premium received at the end of 1998 due to later billing of policies with January 1999 effective dates. Also contributing to the unfavorable 1998 cash flow were increases in underwriting and other operating expenses. 1998 underwriting expenses increased primarily from additional staff needed to manage insurance business growth and added costs from the conversion to a new insurance company operating system. 1998 other operating expenses increased primarily from launching the operations of Solutions including the acquisition of MedPower. The positive 1997 cash flow from operations was primarily the result of a decrease in claim payments.
Premium rates in general have trended lower with rate decreases in regions where claims have developed favorably offset partially by rate increases in regions where claims have developed unfavorably. Increases in new premium written, however, have helped to keep cash receipts from policyholder premiums relatively level. Substantial amounts of premiums have also been returned to policyholders in the form of retrospective premium credits. In 1999, a policyholder dividend program replaced the previous retrospective premium program. While the retrospective premium credits were paid to policyholders in the first quarter of the year following approval by the Board of Directors, the majority of the policyholder dividends will be paid in four equal installments in February, May, August and November of the year following their declaration by the Board of Directors. Loss and operating expense payments have generally been met from policyholder premium receipts with any excess cash allocated to the investment portfolio. Management regularly analyzes loss liabilities to project the cash flow required in future years. Since the overall portfolio is highly liquid, exact matching of bond maturities and loss liabilities
is not a goal. Bond maturities are primarily selected to maximize total return. The Company believes that its cash and investments combined with its internally generated funds will be sufficient to meet its present and reasonably foreseeable operating and capital requirements and therefore will not need to borrow funds from external sources. The Company does maintain a $5,000,000 secured line of credit with its bank in the event of an urgent cash need. The Company had no material capital expenditure commitments as of December 31, 1999.
1. Effective 1999, a policyholder dividend program replaced the previous retrospective premium program. In 1998, retrospective premium credits of $6,719,000 were recorded for Minnesota, North Dakota and Iowa policyholders. The retrospective premium credits of $317,000 recorded in 1999 represented actual payments made that were greater than what had been previously estimated and accrued. The difference between years resulted in a $6,402,000 increase in 1999 net premiums earned.
3. Due to the increase in premium volume and policyholders purchasing higher limits, reinsurance costs on the current year were $2,115,000 greater in 1999 compared to 1998. This decreased 1999 net premiums earned.
Net premiums earned increased $2,098,000 in 1998 from 1997. Although policyholder rates remained relatively level, new business generated approximately $1,263,000 of additional earned premium. The remaining increase was the result of the following significant factors:
Other revenues increased $1,471,000 from $1,352,000 in 1998 to $2,823,000 in 1999. The increase was due to Services beginning active operations in January of 1999. 1999 other revenues includes $1,661,000 of commission income received by Services from insurance carriers. The commission income from Services was partially offset by a decline in finance charges on premiums owed to MMIC.
and loss adjustment expenses also include adjustments of prior years' estimates. These adjustments to the liability for loss and loss adjustment expense are evaluated by management and supported by an outside actuarial review performed at the conclusion of the year. As shown in Note 6 of the consolidated financial statements, these evaluations resulted in a reduction in estimated liabilities applicable to prior years of $4,474,000, $4,433,000 and $8,352,000, respectively in 1999, 1998 and 1997. The less favorable development on prior years is the primary reason for the greater incurred loss and loss adjustment expenses in 1998.
The following schedule summarizes the development of the liability for loss and loss adjustment expense from 1989 through 1999. This schedule is 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 beginning approximately in 1986 for the Company and across the industry, has resulted in redundancies in liabilities greater than expected. The table indicates that the redundancy in loss liabilities, which develop as actual results become known, has significantly decreased from the high at December 31, 1990. Loss and loss adjustment expense liabilities have not been discounted in the Company's financial statements.
Policyholder dividends of $10,175,000 were declared by the Board of Directors of MMIC in 1999 and will be paid to physician, clinic and hospital policyholders in 2000. As described in Note 4 of the consolidated financial statements, the policyholder dividend program was instituted in 1999 and replaced the previous retrospective premium program for physicians. The primary reasons MMIC switched to a policyholder dividend program were to allow greater flexibility in determining amounts to be refunded to policyholders and to more closely resemble programs of peer companies thus making the financial statement impact similar. The latter reason helps to eliminate confusion in the marketplace when comparing the financial performance of MMIC to its competitors.
Income before income taxes decreased to $2,552,000 in 1999 compared to $8,637,000 in 1998. The decrease resulted primarily from greater loss liabilities estimated for the current year, 1999 policyholder dividends that were greater than the 1998 retrospective premium credits and lower realized capital gains due to the capital losses sustained on the repositioning of the bond portfolio at the end of 1999.
Also due to the factors discussed above, the Company recorded net income of $5,948,000 for 1998 compared to $9,300,000 for 1997. Basic net income per share decreased to $48.36 for 1998 from $77.79 per share for 1997. Diluted net income per share decreased to $43.65 for 1998 from $70.23 per share for 1997.
A multi-departmental management team carefully studied and assessed the exposure that might exist in the policies issued by MMIC. The majority of the exposure is related to medical equipment that contains computer chips that could be affected by the Year 2000. This is primarily an exposure for the products liability carrier which insures the medical equipment manufacturer. All hospital policyholders were surveyed in 1999 and were found to be in
compliance with MMIC guidelines on medical equipment. No coverage change or exclusion was enacted for the medical malpractice professional liability policy. A Year 2000 exclusion became effective January 1, 1999 on all premises and general liability policies issued by MMIC. This exclusion will continue through the 2000 policy year. MMIC communicated its Year 2000 exposure preparedness to its reinsurers and they have fully supported the Company's plan and actions to date.
Statements other than historical information contained in this Form 10-K are considered to be "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as amended.
10. material claim payments awarded policyholders of the Company for Year 2000 failures they experienced.
The facts set forth above should be considered in connection with any forward-looking statement contained in this Form 10-K. The important factors that could affect such forward-looking statements are subject to change, and the Company does not intend to update any forward-looking statement or the foregoing list of important factors. By this cautionary note, the Company intends to avail itself of the safe harbor from liability with respect to forward-looking statements provided by Section 27A and Section 21E referred to above.
We have audited the accompanying consolidated balance sheets of Midwest Medical Insurance Holding Company and Subsidiaries as of December 31, 1999 and 1998, 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, 1999. 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.
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, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. 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.
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.
Effective January 1, 1998, Solutions purchased the assets and operations of MedPower Information Resources, Inc. (MedPower). MedPower processes and electronically submits medical claims for a network of over 100 provider entities. MedPower also provides various information consulting and network support services.
MMIHC Insurance Services, Inc. (Services) was incorporated in 1995 and began active operations in January 1999 with the acquisition of a book of business from Johnson-McCann Benefits, Inc. Services is an insurance agency specializing in providing clients with group insurance products such as health, dental, life, disability and workers' compensation.
MMIHC provides management and administrative services to MMIC, Solutions and MedPower for a fee generally equal to the cost of services provided plus 10%. Services operates independently with its own management and administrative staff and therefore does not have a management agreement with MMIHC.
MMIC provides professional liability insurance to physicians, clinics, hospitals and healthcare systems in Minnesota, Iowa, Nebraska, Wisconsin, Illinois, 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.
Hereafter, MMIHC, MMIC, Services, Solutions and MedPower shall be collectively referred to as the Company unless the reference pertains to a specific entity.
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.
Reinsurance receivables and recoverables and prepaid reinsurance premiums are reported as assets, and reserve liabilities are reported gross of reinsurance credits.
Other revenues are primarily comprised of commission income from insurance carriers for Services and electronic claims processing fees from healthcare providers for MedPower. Generally, such revenues are earned as the related services are provided or performed.
Basic earnings per share (EPS) is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the year. Diluted EPS reflects the potential dilution that could occur if earned but unissued shares of Class A common stock were issued.
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 14).
Components of net investment income are summarized as follows (in thousands):
The amortized cost and market value of fixed maturities at December 31, 1999, 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.
To implement the physician and clinic policyholder dividend program, MMIC issued participating policy endorsements to all active physician and clinic accounts during 1999. To implement the hospital policyholder dividend program, MMIC will issue participating policy endorsements to all active hospital accounts during 2000. Participating policies represented 91% of total premiums in force and premium income at December 31, 1999.
In the third quarter of 1999, MMIC's Board of Directors declared a $10,100,000 dividend to be paid to physician and clinic policyholders in four equal installments in February, May, August and November 2000. The dividend will be awarded proportionately based on annual premiums for physician and clinic policyholders that were insured by MMIC in 1995 and remain insured throughout 2000.
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.
The Company is organized into five legal entity business segments consisting of MMIHC, MMIC, Services, Solutions and MedPower. The business and accounting policies of the reportable segments are described in Note 1 to the Consolidated Financial Statements. Management evaluates the performance of each business segment based primarily on profit or loss from operations. With the exception of foreign stocks and bonds held as investments by MMIC, all business transactions are conducted in the United States. The following financial information summarizes the results of operations and total assets reported by the five business segments for the years ended 1999, 1998 and 1997 (in thousands).
(1) Intersegment eliminations for revenues and expenses are primarily for management, administrative and investment services provided by MMIHC. Eliminations for assets consist primarily of investments in wholly-owned subsidiaries, intersegment receivables for management fees and reclassifications between assets and liabilities for taxes and reinsurance.
The deferred income tax provision includes the following differences between financial and income tax reporting (in thousands):
The Company made income tax payments of $1,751,000, $3,041,000 and $1,518,000 in 1999, 1998 and 1997, respectively.
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, 1999. The Company evaluates the financial condition of its reinsurers and monitors concentration of credit risk arising from similar geographic regions, activities or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. Reinsurance recoverables on paid and unpaid losses of $15,648,000 and $13,215,000 are associated with a single reinsurer, General Reinsurance Corporation, at December 31, 1999 and 1998, respectively. The Company also holds collateral under related reinsurance agreements in the form of letters of credit totaling $2,612,000 that can be drawn upon in the event the applicable reinsuring company is unable to pay its obligation to MMIC.
Loss and loss adjustment expenses incurred are net of applicable reinsurance of $5,204,000, $2,240,000 and $2,455,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
In 1998, the Company commuted reinsurance treaties covering the period January 1, 1991 through December 31, 1991. Net premiums recovered as a result of these commutations of $789,000 have been included in net premiums earned in 1998. As a result of this and prior treaty commutations, the Company has no reinsurance coverage for the exposure period October 1, 1986 through December 31, 1991. Due to the nature of the Company's policies, there is no risk of incurring future losses related to this time period.
Substantially all employees at MMIHC are covered by a non-contributory defined contribution pension plan. Contributions to the plan are based upon each covered employee's salary. Substantially all employees at MMIHC are also covered by a 401(k) plan that provides a 50% match on employee contributions subject to certain limitations. Total contributions charged to expense for the years ended December 31, 1999, 1998 and 1997 were $581,000, $521,000 and $393,000, respectively.
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 accounting principles generally accepted in the United States.
Dividends that exceed the greater of 10% of MMIC's prior year-end policyholder surplus or MMIC's prior year net income excluding realized capital gains are considered extraordinary under Minnesota insurance statutes. Payment of extraordinary dividends are subject to the approval of the Commissioner of the Department of Commerce of the State of Minnesota. At December 31, 1999, the maximum dividend that may be paid by MMIC in 2000 without regulatory approval is approximately $16,476,000. MMIC paid cash dividends to MMIHC of $2,050,000 and $2,000,000 in 1999 and 1998, respectively.
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except for share and per share amounts):