10-Q 1 e10-q.txt FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q (Mark One) (X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Period Ended June 30, 2000. or ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition Period From to ---------------- ------------ Commission file number 0-21230 ------- Midwest Medical Insurance Holding Company -------------------------------------------------------- (Exact name of registrant as specified in its charter) Minnesota 41-1625287 ---------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 7650 Edinborough Way, Suite 400 Minneapolis, Minnesota 55435-5978 ----------------------------------- ---------------------- (Address of principal executive offices) (Zip Code) 952-838-6700 --------------------------------------------- (Registrant's telephone number, including area code) Not applicable --------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- The number of shares outstanding of the issuer's classes of common stock, as of June 30, 2000: Class A Common Stock, $.01 par value - 124,198 shares Class B Common Stock, $1,000 par value - 1 share Class C Common Stock, no par value - 0 shares 1 2 INDEX Midwest Medical Insurance Holding Company PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed consolidated balance sheets - June 30, 2000 and December 31, 1999 Condensed consolidated statements of income - Three months ended June 30, 2000 and 1999; Six months ended June 30, 2000 and 1999 Condensed consolidated statements of cash flows - Six months ended June 30, 2000 and 1999 Notes to condensed consolidated financial statements - June 30, 2000 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders Item 6. Exhibits and Reports on Form 8-K SIGNATURES 2 3 Part I. Financial Information Item 1. - Financial Statements MIDWEST MEDICAL INSURANCE HOLDING COMPANY and SUBSIDIARIES Condensed Consolidated Balance Sheets (Dollars in thousands)

See notes to condensed consolidated financial statements. 3 4 MIDWEST MEDICAL INSURANCE HOLDING COMPANY and SUBSIDIARIES Condensed Consolidated Statements of Income (Dollars in thousands, except per share amounts) (Unaudited)

See notes to condensed consolidated financial statements. 4 5 MIDWEST MEDICAL INSURANCE HOLDING COMPANY and SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Dollars in thousands) (Unaudited)

See notes to condensed consolidated financial statements. 5 6 MIDWEST MEDICAL INSURANCE HOLDING COMPANY and SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) June 30, 2000 NOTE A - BASIS OF PRESENTATION The accompanying unaudited interim condensed consolidated financial statements of Midwest Medical Insurance Holding Company and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for any interim period are not necessarily indicative of the results that may occur for the full year. These interim financial statements should be read in conjunction with the 1999 consolidated financial statements and notes thereto included in Midwest Holding's Annual Report on Form 10-K as filed with the Securities and Exchange Commission. The balance sheet at December 31, 1999 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. Certain amounts applicable to prior periods have been reclassified to conform to the classifications followed in the current year. All intercompany amounts have been eliminated. NOTE B - INCOME TAXES Midwest Holding calculates its income tax provision for interim periods by estimating its annual effective tax rate and applying this rate to the income of the interim period. The estimated annual effective tax rate used for the three and six-month periods ended June 30, 2000 and 1999 was 35%. During the second quarter of 2000, Midwest Medical Insurance Company received $4,418,000 in federal tax refunds including interest resulting from the IRS examinations for the 1992 to 1996 tax years. The tax refunds totaling $2,715,000 were recorded as an income tax benefit while the $1,703,000 of interest was recorded to other revenues. NOTE C - UNEARNED PREMIUMS, PREMIUMS RECEIVABLE and OTHER LIABILITIES The majority of Midwest Medical's insurance policies expire at December 31 and renew on January 1 of each year. As a result, the majority of the unearned premium amount at June 30, 2000 represents six months of unearned premium for every active policy renewed or newly written on January 1, 2000 with an expiration date of December 31, 2000. At December 31, 1999, most active 1999 policies expired and therefore had no unearned premium. 6 7 NOTE C - UNEARNED PREMIUMS, PREMIUMS RECEIVABLE and OTHER LIABILITIES (continued) Of the total unearned premium balance of $12,797,000 at December 31, 1999, $6,905,000 is reserved to recognize Midwest Medical's obligation to provide reporting endorsement coverage without additional premium upon the death, disability or retirement of policyholders. That same amount is also included in the unearned premium balance at June 30, 2000 and represents the actuarially determined present value of future benefits to be provided less the present value of future revenues to be received. The increase of $11,825,000 in premiums receivable from December 31, 1999 to June 30, 2000 is primarily due to the renewal of most active policies on January 1. The full year's premium is recorded as written and collectible at January 1. Premiums may be paid annually or quarterly and each year's premium is nearly all collected during the year. The receivable balance remaining at the end of the year primarily relates to the small number of policies underwritten by Midwest Medical that have other than December 31 expiration dates. Of the total other liabilities balance of $10,259,000 at December 31, 1999, $5,568,000 is for premium payments received from policyholders in advance of their January 1, 2000 policy renewal. No advance premium payments were recorded at June 30, 2000. NOTE D - POLICYHOLDER DIVIDENDS In 1999, Midwest Medical instituted a policyholder dividend program that replaced the previous retrospective premium credit program for physicians. To implement the policyholder dividend program, Midwest Medical issued participating policy endorsements to all active physician and clinic accounts during 1999 and will issue participating policy endorsements to all active hospital accounts during 2000. Participating policies represented 96% and 91% of total premiums in force and premium income at June 30, 2000 and December 31, 1999, respectively. The 1999 physician and clinic policyholder dividends of $10,100,000 were awarded proportionately based on annual premiums for physician and clinic policyholders that were insured by Midwest Medical in 1995 and remain insured throughout 2000. The dividend will be paid to physician and clinic policyholders in four equal installments in February, May, August and November 2000. The 1999 hospital policyholder dividends of $75,000 were awarded based on the number of years insured with Midwest Medical and will be paid within two months after the hospital policy renews in 2000. NOTE E - SEGMENT INFORMATION Midwest Holding is organized into five legal entity business segments. The segments are described under the "Background" section in Item 1 of the 1999 Annual Report on Form 10-K. The following financial information summarizes the results of operations and total assets reported by Midwest Holding's five business segments for the three and six-month periods ended June 30, 2000 and 1999 (in thousands). 7 8 NOTE E - SEGMENT INFORMATION (continued)

(1) Intersegment eliminations for revenues and expenses are primarily for management, administrative and investment services provided by Midwest Holding. Eliminations for assets consist primarily of investments in wholly-owned subsidiaries, intersegment receivables for management fees and reclassifications between assets and liabilities primarily for taxes. (2) Other revenues consist primarily of net realized capital gains. 11 12 NOTE F - COMPREHENSIVE INCOME The components of Midwest Holding's comprehensive income are net income and changes in net unrealized appreciation of investments. Total comprehensive income was $969,000 and $5,464,000 for the three and six-months ended June 30, 2000 and $(640,000) and $1,248,000 for the three and six-months ended June 30, 1999. NOTE G - EARNINGS PER SHARE DATA The following table sets forth the computation of basic and diluted earnings per share (in thousands, except for share and per share amounts):

Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations General The following analysis of the financial condition and results of operations of Midwest Holding and its wholly-owned subsidiaries, Midwest Medical, MMIHC Insurance Services, Inc., Midwest Medical Solutions, Inc., and MedPower Information Resources, Inc. should be read in conjunction with the condensed consolidated financial statements and notes thereto included in this report. Midwest Holding and its subsidiaries are collectively referred to as Midwest Holding unless the reference pertains to a specific entity. Capital Resources and Liquidity The majority of Midwest Holding's assets, 86% at June 30, 2000 and 87% at December 31, 1999, are invested in investment-grade bonds, equities and short-term instruments. Midwest Holding's investments in debt and equity securities are classified as available for sale 12 13 Capital Resources and Liquidity (continued) and are therefore carried at fair value with unrealized gains and losses, net of applicable taxes, reflected as a separate component of equity. Other investments consist of equity interests in non-traded real estate investment trusts (REIT) that are also classified as available for sale and are recorded at the fair value determined by the most recent independent appraisal. Prior to receiving the initial appraisal in the first quarter of 2000, Midwest Holding had recorded the REIT at cost. Operations generated $2,359,000 of positive cash flow during the first six months of 2000 compared to $(3,884,000) of negative cash flow for the same period of 1999. During the second quarter of 2000, reinsurers paid $5,208,000 to Midwest Medical for favorable experience adjustments on the 1992-1994 and 1995-1997 reinsurance contracts. Federal tax refunds including interest of $4,418,000 also contributed to the positive operating cash flow. These positive cash flows were partially offset by $5,073,000 of policyholder dividend payments made in the first six months of 2000. The negative operating cash flow in the first six months of 1999 was primarily due to the payment of $8,886,000 in retrospective premium credits. Midwest Holding believes that its cash, investments and internally generated funds will be sufficient to meet normal operating requirements. Total equity, consisting of redeemable stock and other shareholders' equity, increased by $5,219,000 during the first six months of 2000. Equity increased from net income of $8,228,000 and Class A stock issuances of $65,000. These increases were offset by net unrealized losses in the fair value of investments, net of deferred taxes, of $(2,764,000) and Class A stock redemptions of $(313,000). Results of Operations Net premiums earned increased $299,000 for the first six months of 2000 compared to the same period of 1999. Second quarter favorable experience adjustments on the 1992-1994 and 1995-1997 reinsurance contracts of $466,000 and $709,000, respectively, more than offset the $336,000 unfavorable experience adjustment recorded in the first quarter. New business generating approximately $762,000 of additional earned premium also contributed to the increase. Greater reinsurance costs on the current year partially offset the above increases in net premiums earned. These added reinsurance costs resulted from policyholders purchasing higher limits and the new, reinsured fraud & abuse program provided free of charge to Midwest Medical policyholders up to a $10,000 limit per policy. Net capital gains of $6,330,000 were realized during the first six months of 2000. Most of these capital gains resulted from the sale of appreciated technology common stocks in the first quarter as the outside, domestic equity investment manager trimmed holdings in the technology sector in order to maintain appropriate portfolio diversification. Future levels of realized capital gains or losses are difficult to predict as investment managers purchase and sell securities in response to investment policy guidelines and changing market conditions. 13 14 Results of Operations (continued) Other revenues increased $1,542,000 for the first six months of 2000 compared to the same period of 1999. Interest on federal tax refunds recorded in the second quarter primarily caused the increase. This was partially offset by a decrease in finance charges on premium billings to Midwest Medical policyholders. Losses and loss adjustment expenses increased $695,000 for the first six months of 2000 versus 1999. The increase in 2000 is largely in response to the growth in Midwest Medical business and the corresponding exposure in recent years. The 1996 accident year experienced favorable loss development in the second quarter reversing the majority of the unfavorable loss development recorded in the first quarter. Although the effects of interim claim frequency and severity statistics are not actuarially analyzed, nothing came to management's attention during the first six months of 2000 that would materially alter loss expectations for the remainder of the year. Underwriting, acquisition and insurance expenses increased $16,000 for the first six months of 2000 compared to the same period in 1999. Additional ceding commissions earned by Midwest Medical on the current year reinsurance contract nearly offset expense increases from staff additions and office rent. Other operating expenses increased $239,000 for the first six months of 2000 compared to the same period in 1999. Increases from staff additions, new main office rent and Solutions' project development costs were partially offset by efficiency gains from the new MedPower claim processing system. Income tax expense declined to $208,000 for the six months ending June 30, 2000 from $2,468,000 for the same period in 1999. The decline was due to the income tax benefit recorded in the second quarter of 2000 for federal tax refunds received on the 1992 to 1996 tax years. Excluding these federal tax refunds, the effective tax rate was approximately 35% for both six-month periods ending June 30, 2000 and 1999. As a result of the factors discussed above, Midwest Holding realized net income of $8,228,000 for the six months ended June 30, 2000 compared to net income of $4,580,000 for the same period of 1999. Basic net income per share increased to $66.81 from $36.21 for the six months ended June 30, 2000 and 1999, respectively. Diluted net income per share increased to $59.72 for the six months ended June 30, 2000 from the $32.53 per share reported a year ago. Year 2000 Update No significant Year 2000 problems have been encountered with respect to Midwest Holding's internal computer hardware and software, key business partners and vendors, and insurance policy exposure. As of the date of this report, no Year 2000 claims have been reported on policies issued by Midwest Medical. This, along with the overall success of businesses in dealing with Year 2000 issues, leads Midwest Holding to believe that it has little, if any, exposure to Year 2000 claims. 14 15 Year 2000 Update (continued) The potential does still exist, however, in a worst case scenario for claims to be made by Midwest Medical policyholders for Year 2000 failures they experience. In the event Year 2000 claims are made on policies written by Midwest Medical, Midwest Holding believes these claims will be without merit and will vigorously defend its position. Depending on whether such claims are deemed to have merit and to the extent these claims are awarded compensation, such claims could have a material adverse effect on Midwest Holding's business, financial condition and results of operations. Readers are reminded that forward looking statements contained in this description of Midwest Holding's treatment of the Year 2000 issue should be read in conjunction with Midwest Holding's following disclosures under the heading "Cautionary Note Regarding Forward Looking Statements." Cautionary Note Regarding Forward-Looking Statements Statements other than historical information contained in this report are considered to be "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as amended. All forward-looking statements address matters that involve risks and uncertainties. Accordingly, in addition to the factors discussed in this report, there are or will be other important factors that could cause actual results to differ materially from those indicated in such statements. These factors include but are not limited to: 1. the impact of changing market conditions on Midwest Holding's business strategy; 2. the effects of increased competition on pricing, coverage terms, retention of customers and ability to attract new customers; 3. greater severity or frequency of the types of losses insured by Midwest Medical; 4. faster or more adverse loss development experience than what Midwest Medical had based its underwriting, reserving, and investment practices; 5. developments in global financial markets which could adversely affect the performance of Midwest Holding's investment portfolio; 6. litigation, regulatory or tax developments which could adversely affect Midwest Holding's business; 7. risks associated with the introduction of new products and services; 8. dependence on key personnel; and 9. the impact of mergers and acquisitions. The facts set forth above should be considered in reviewing any forward-looking statement contained in this report. The important factors that could affect such forward-looking statements are subject to change, and Midwest Holding does not intend to update any forward-looking statement or the foregoing list of important factors. By this cautionary note, Midwest Holding intends to rely upon the safe harbor from liability with respect to forward-looking statements provided by Section 27A and Section 21E referred to above. 15 16 Item 3. - Quantitative and Qualitative Disclosures About Market Risk Market risk is the risk of loss that may occur when fluctuations in interest and foreign currency exchange rates and equity and commodity prices change the value of a financial instrument. Both derivative and nonderivative financial instruments have market risk. Midwest Holding is primarily exposed to interest rate risk on its investment in fixed maturities, equity price risk on its investment in equity securities, and foreign currency exchange rate risk on its investment in international equity securities. No material changes have occurred in any of Midwest Holding's market risks since the year ended December 31, 1999. Part II. Other Information Item 4. - Submission of Matters to a Vote of Security Holders (a) A special meeting of the class A shareholders of Midwest Holding was held on Thursday, June 29, 2000. (c) The special meeting of June 29, 2000 considered the adoption of a new Article 4.c to the Articles of Incorporation of Midwest Holding. Under the new Article 4.c, the Board of Directors is authorized to establish one or more additional series and classes of common or preferred stock, setting forth the designation of each such series or class, and fixing the relative rights and preferences of each such series or class. Class A shareholders of Midwest Holding approved the adoption of Article 4.c by the following vote: Yes 1,747 No 12 Abstain 15 ------------ Total 1,774 ============

Item 6. - Exhibits and Reports on Form 8-K (a) Exhibits 2A. Proxy Statement for a special meeting of Midwest Holding to be held on June 29, 2000. (Incorporated herein by reference to the Schedule 14A filed by Midwest Holding on April 26, 2000, SEC File No. 0-21230.) 2B. Offering Circular and all other exhibits to the Schedule TO filed by Midwest Holding on April 26, 2000, with respect to a tender offer commenced by Midwest Holding on May 12, 2000, as amended. (Incorporated by reference to the Schedule TO filed by Midwest Holding on April 26, 2000, SEC File No. 0-21230.) 27. Financial Data Schedule (electronic filing only) (b) Reports on Form 8-K None 16 17 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Midwest Medical Insurance Holding Company ----------------------------------------- (Registrant) Date August 14, 2000 /s/ David P. Bounk --------------------- ----------------------------------------- David P. Bounk President and Chief Executive Officer Date August 14, 2000 /s/ Niles Cole --------------------- ----------------------------------------- Niles Cole Vice President and Principal Financial Officer and Principal Accounting Officer 17

MIDWEST MEDICAL INSURANCE HOLDING CO 10-Q