-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Fb5aymlwivjeMyUSmAjWnckYc7xKFiI+i3JuqQ8My6m+EJ51GYrTIyi2VfvUUBjQ zt7DqC1JUYnsWYNKkLq/sQ== 0000950124-00-001438.txt : 20000323 0000950124-00-001438.hdr.sgml : 20000323 ACCESSION NUMBER: 0000950124-00-001438 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000322 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MIDWEST MEDICAL INSURANCE HOLDING CO CENTRAL INDEX KEY: 0000894353 STANDARD INDUSTRIAL CLASSIFICATION: SURETY INSURANCE [6351] IRS NUMBER: 411625287 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-21230 FILM NUMBER: 575383 BUSINESS ADDRESS: STREET 1: 7650 EDINBOROUGH WAY STREET 2: STE 400 CITY: MINNEAPOLIS STATE: MN ZIP: 55435-5978 BUSINESS PHONE: 6129225445 MAIL ADDRESS: STREET 1: 6600 FRANCES AVE SOUTH STE 245 CITY: MINNEAPOLIS STATE: MN ZIP: 554351891 10-K 1 FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Fee Required) For the fiscal year ended December 31, 1999 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (No Fee Required) 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 incorporation or organization) (I.R.S. Employer Identification No.) 7650 Edinborough Way, Suite 400 Minneapolis, Minnesota 55435-5978 - ---------------------------------------------------------------------------- ----------------------------------------- (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 838-6700 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class Name of Each Exchange on Which Registered ------------------- ---------------------------------------------------------- Class A Common Stock $.01 par value N/A
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 ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value (based on December 31, 1999 Net Redemption Value per share) of the voting stock held by non-affiliates of the registrant as of March 16, 2000 was $7,740,976. The number of shares outstanding of the issuer's classes of common stock, as of March 16, 2000: Class A Common Stock $.01 par value - 123,509 shares Class B Common Stock $1,000 par value - 1 share DOCUMENTS INCORPORATED BY REFERENCE None. 1 2 PART I ITEM 1. BUSINESS BACKGROUND Midwest Medical Insurance Holding Company (MMIHC) is a holding company organized under the laws of the State of Minnesota. Midwest Medical Insurance Company (MMIC), Midwest Medical Solutions, Inc. (Solutions), which includes its wholly-owned subsidiary, MedPower Information Resources, Inc. (MedPower), and MMIHC Insurance Services, Inc. (Services) are wholly-owned subsidiaries of MMIHC. MMIHC and its subsidiaries are referred to collectively as the Company unless the reference pertains to a specific entity. The Company's principal business operation is MMIC. MMIC's primary business is selling and issuing policies of medical professional liability insurance to: (1) individual physicians, (2) partnerships or professional corporations composed of physicians, (3) clinics, (4) hospitals, and (5) health plans. 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 were 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. Another purpose of the reorganization was 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 the North Dakota Medical Association. Professional liability, general liability, and umbrella excess liability insurance is also available to hospitals and other healthcare facilities throughout MMIC's territory. During 1997, MMIHC formed Solutions as a business development company to strengthen and promote the independence and interdependencies of physicians, clinics and hospitals that MMIC serves. Business development opportunities being considered include practice enhancement, strategic consulting, and technology services and support. Effective January 1, 1998, Solutions purchased the assets and operations of MedPower. MedPower processes and electronically submits medical claims for over 100 healthcare providers in the Upper Midwest. MedPower also provides various information consulting and network support services. 2 3 ITEM 1. BUSINESS (CONTINUED) 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 Upper Midwest 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 a surcharge of 10%. Services operates independently with its own management and administrative staff and therefore does not have a management agreement with MMIHC. 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, North Dakota, South Dakota, Nebraska, Illinois, or Wisconsin; 2. An applicant must conduct a majority of his or her practice in Minnesota, Iowa, 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, 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 AND OTHER HEALTHCARE FACILITIES MMIC also provides professional liability, general liability and umbrella excess liability to hospitals and other healthcare facilities. 3 4 ITEM 1. BUSINESS (CONTINUED) 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, North Dakota, South Dakota, Nebraska, Illinois or Wisconsin; and 2. The facility must be a licensed hospital or other healthcare facility. 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 $12,000,000 for each claim, subject to $14,000,000 annual aggregate. Excess coverage above the basic limits is available from MMIC's reinsurers on a facultative basis. MARKETING AND DISTRIBUTION Marketing of MMIC policies is handled principally by MMIC through salaried marketing representatives. MMIC has also made marketing arrangements with a select group of brokers to assist MMIC in the production of large accounts and in the production of new coverages as they are developed. 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. 4 5 ITEM 1. BUSINESS (CONTINUED) Distribution of policies is handled through a processing system which MMIC updated in 1998. 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. 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 currently. 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's current reinsurance contract is in effect over the three-year period of 1998 through 2000. The primary layer of coverage provides $1,250,000 of coverage in excess of $750,000 of retention per insured. The premium ceded for this coverage is based upon the losses paid under the contract limited to a minimum of 1.27% and a maximum of 9.21% of the underlying MMIC subject premium. MMIC has utilized this "swing-rated" treaty mechanism since 1992. These treaties do not include a commutation clause, but rather develop over time as claims are handled. There are no claims outstanding from years prior to 1992. All contracts for years prior to 1992 have been commuted. For limits of liability greater than $2,000,000 MMIC "cedes" all premium and exposure to the reinsurers and collects a ceding commission of 25%. The reinsurers, their participation percentages, and their A.M. Best rating are listed below. - General Reinsurance Corporation, (80%), A++ - Hannover Reinsurance Company, (7%), A+ - Transatlantic Reinsurance Company, (6.5%), A+ - CNA Re, UK, (6.5%), A 5 6 ITEM 1. BUSINESS (CONTINUED) 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 pre-tax investment income. 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 investment grade fixed income instruments, including United States Government, governmental agency, and corporate bonds. Fixed income investments comprised approximately 55% of total invested assets at December 31, 1999 compared to 62% at December 31, 1998. MMIC's investment policy also permits the inclusion of equity securities. Equity securities comprised approximately 37% of total invested assets at December 31, 1999 compared to 33% at December 31, 1998. The increase in the proportion of equity securities was due to an increase in equity market values and a decrease in market values of fixed-income securities. The remainder of MMIC's investment portfolio, 8% and 5% at December 31, 1999 and 1998, respectively, was invested in a real estate investment trust and short-term instruments. RATING A.M. Best & Company, Inc. ("Best's"), publisher of Best's Insurance Reports, Property-Casualty, 1998 Edition, has assigned MMIC an "A", or excellent, rating in 1999. This is the highest rating currently assigned to any company that specializes in medical malpractice insurance. 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. 6 7 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 policyholder surplus of MMIC or the prior year's net income from operations of MMIC excluding realized capital gains, 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 American Continental Insurance Company (commonly referred to as MMI). 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 market area. Finally, in the mid-nineties several large self-insured hospitals in Minneapolis and Des Moines purchased MMIC insured clinics, and other physician practices were purchased by large, self-insured clinics such as the Mayo Clinic. In response to the consolidation occurring among healthcare providers, MMIC expanded its underwriting capability by partnering with its reinsurers to provide the types of coverages needed by larger healthcare organizations. MMIC is also 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 healthcare 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, and various forms of 7 8 ITEM 1. BUSINESS (CONTINUED) managed care. 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, 1999, MMIHC employed 83 persons, of whom 9 were executives, 51 were supervisory employees or specialists, and 23 were clerical employees. As of December 31, 1999, Services employed 10 persons, of whom 1 was an executive, 8 were supervisory employees or specialists, and 1 was a clerical employee. No employees of MMIHC and Services are covered by a collective bargaining agreement and management believes that relations with employees are good. ITEM 2. PROPERTIES The Company owns the following fixed assets, all of which are used in the conduct of its business:
NET BOOK VALUE DECEMBER 31, 1999 --------------------- Office furniture and equipment $ 726,517 Leasehold improvements at leased premises 156,043 Computer hardware 465,033 Computer system software 1,453,310 --------- Total $2,800,903 ==========
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. 8 9 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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders. 9 10 PART II 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 16, 2000, there were 123,509 shares of Class A Common Stock outstanding held by 3,481 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 policyholder surplus of MMIC or the prior year's net income from operations of MMIC excluding realized capital gains, whichever is greater. ITEM 6. SELECTED FINANCIAL DATA 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.
YEAR ENDED DECEMBER 31 OPERATIONS DATA 1999(1) 1998(1) 1997(1) 1996(2) 1995(2) - -------------------------------------------------------------------------------------------------------------------- (Amounts in thousands, except per share data) Net premiums earned $46,583 $35,014 $32,916 $31,177 $29,798 Net investment and other income 21,006 21,404 19,276 15,558 14,258 ------------------------------------------------------------------- Total revenue 67,589 56,418 52,192 46,735 44,056 Loss and loss adjustment expenses 41,468 37,494 31,834 32,257 37,560 Policyholder dividends 10,175 - - - - Underwriting and other operating expenses 13,394 10,287 6,595 5,539 6,482 ------------------------------------------------------------------- 65,037 47,781 38,429 37,796 44,042 ------------------------------------------------------------------- Income before income taxes 2,552 8,637 13,763 8,939 14 Income taxes (benefit) 816 2,689 4,463 1,458 (1,711) ------------------------------------------------------------------- Net income $ 1,736 $ 5,948 $ 9,300 $ 7,481 $ 1,725 ===================================================================
10 11 ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)
YEAR ENDED DECEMBER 31 1999(1) 1998(1) 1997(1) 1996(2) 1995(2) ------------------------------------------------------------------------- (Amounts in thousands, except per share data) Net income per common share - assuming dilution $12.53 $43.65 $70.23 $58.33 $13.74 Number of shares used in per share calculation 138,517 136,251 132,427 128,259 125,536(3) Net income/total revenue 2.6% 10.5% 17.8% 16.0% 3.9% Return on average equity 1.1% 4.2% 7.4% 6.5% 1.7% DECEMBER 31 FINANCIAL CONDITION 1999(1) 1998(1) 1997(2) 1996(2) 1995(2) - -------------------------------------------------------------------------------------------------------------------- (Amounts in thousands, except per share data) ASSETS Fixed maturities at fair value $153,950 $164,652 $171,975 $183,561 $182,817 Equity securities at fair value 104,898 86,553 49,759 38,001 28,311 Short-term investments 9,128 3,556 13,909 7,898 15,015 Other 10,000 10,000 10,000 - - ------------------------------------------------------------------- Total investments 277,976 264,761 245,643 229,460 226,143 Reinsurance recoverable on paid and unpaid losses 19,285 16,499 19,117 22,174 25,112 Other assets 22,915 14,223 10,755 10,359 13,329 ------------------------------------------------------------------- Total assets $320,176 $295,483 $275,515 $261,993 $264,584 =================================================================== LIABILITIES Unpaid losses and loss adjustment expenses $119,141 $110,964 $107,806 $110,037 $120,264 Other liabilities 45,432 33,926 33,942 33,074 34,053 ------------------------------------------------------------------- 164,573 144,890 141,748 143,111 154,317 REDEEMABLE STOCK Class A and Class B Common Stock at redemption value 7,803 8,147 7,477 7,604 6,975 OTHER SHAREHOLDERS' EQUITY 147,800 142,446 126,290 111,278 103,292 ------------------------------------------------------------------- Total liabilities, redeemable stock and shareholders' equity $320,176 $295,483 $275,515 $261,993 $264,584 ===================================================================
11 12 ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)
DECEMBER 31 1999(1) 1998(1) 1997(1) 1996(2) 1995(2) ------------------------------------------------------------------------ (Amounts in thousands, except per share data) Midwest Medical Insurance Holding Company: Class A Common Shares issued and outstanding 123,509 125,682 121,322 118,209 116,251(3) Redemption value per share $ 63.18 $ 64.81 $ 61.63 $ 64.33 $ 60.00 Class A Common Shares redeemed 15,024 9,005 10,306 10,272 12,424 Amount paid to terminating policyholders upon redemption $ 954 $ 523 $ 648 $ 608 $ 829
- --------------------------------------- (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. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MANNER OF PRESENTATION 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. LIQUIDITY AND CAPITAL RESOURCES 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 12 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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 13 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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. 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. RESULTS OF OPERATIONS Net premiums earned increased $11,569,000 in 1999 from 1998. New business generated approximately $5,700,000 of additional earned premium. The remaining increase was the result of the following significant factors: 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. 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. 14 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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. 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. 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: 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. 15 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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 $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. 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 16 17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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. 17 18 Development of Liability for Loss and Loss Adjustment Expense (Thousands of Dollars)
1989 1990 1991 1992 1993 1994 1995 1996 --------------------------------------------------------------------------------------------- Liability for unpaid loss and loss adjustment expense $ 89,630 $ 97,375 $100,167 $ 98,617 $105,589 $ 88,227 $ 96,424 $ 90,342 Cumulative amount of liability paid through: 1 year later 10,585 13,973 19,112 21,422 25,251 26,879 33,454 30,097 2 years later 21,890 28,643 32,798 37,498 42,685 46,925 53,132 44,562 3 years later 30,869 35,305 39,906 45,227 51,087 55,534 59,568 54,411 4 years later 35,015 37,624 42,752 46,226 53,594 57,129 63,915 5 years later 35,115 38,298 43,994 46,823 53,288 58,856 6 years later 35,187 39,505 44,370 46,810 54,709 7 years later 35,295 39,861 44,420 47,218 8 years later 35,295 39,862 44,634 9 years later 35,295 39,923 10 years later 35,297 Liability re-estimated as of: 1 year later 73,244 83,359 83,991 94,633 80,960 85,595 87,580 81,990 2 years later 62,056 64,876 74,883 69,490 75,364 76,365 79,665 76,542 3 years later 52,010 56,351 53,538 65,568 64,586 67,891 77,294 70,228 4 years later 44,582 42,075 52,833 56,426 57,851 65,794 73,979 5 years later 37,872 41,771 45,892 52,388 56,785 63,958 6 years later 37,617 39,519 43,760 53,014 55,358 7 years later 35,882 38,929 43,563 52,469 8 years later 35,882 38,929 43,633 9 years later 35,882 38,967 10 years later 35,884 Cumulative redundancy 53,746 58,408 56,534 46,148 50,231 24,269 22,445 20,114 1997 1998 1999 ------------------------------------------ Liability for unpaid loss and loss adjustment expense $ 89,394 $ 94,467 $ 99,894 Cumulative amount of liability paid through: 1 year later 28,755 33,787 2 years later 48,437 3 years later 4 years later 5 years later 6 years later 7 years later 8 years later 9 years later 10 years later Liability re-estimated as of: 1 year later 84,961 89,992 2 years later 78,679 3 years later 4 years later 5 years later 6 years later 7 years later 8 years later 9 years later 10 years later Cumulative redundancy 10,715 4,475
18 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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. 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. Underwriting, acquisition and insurance expenses increased $1,189,000 from $5,509,000 in 1997 to $6,698,000 in 1998. Approximately $469,000 of the increase came from increases in variable expenses such as commissions and premiums taxes. The remaining increase was largely due to additional management fees for staff needed to expand MMIC market share and added costs from the conversion to a new insurance company operating system. 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. 19 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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. 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. 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. YEAR 2000 ISSUE 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. 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 20 21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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. Based on the due diligence performed above, the overall success of businesses in dealing with Year 2000 issues, and no Year 2000 claims reported as of the date of this report, the Company believes it has little, if any, exposure to Year 2000 claims. The potential does still exist, however, in a worst case scenario for claims to be made by MMIC policyholders for Year 2000 failures they experience. In the event Year 2000 claims are made on policies written by MMIC, the Company 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 the Company's business, financial condition and results of operations. Readers are reminded that forward-looking statements contained in this description of the Company's treatment of the Year 2000 issue should be read in conjunction with the Company'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 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. All forward-looking statements address matters that involve risks and uncertainties. Accordingly, in addition to the factors discussed in this Form 10-K, 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 the Company'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 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; 21 22 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 5. developments in global financial markets which could adversely affect the performance of the Company's investment portfolio; 6. litigation, regulatory or tax developments which could adversely affect the Company's business; 7. risks associated with the introduction of new products and services; 8. dependence on key personnel; 9. the impact of mergers and acquisitions; and 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. ITEM 7A. QUALITATIVE AND QUANTITATIVE 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. The Company 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. As disclosed in Items 1 and 7 of this Form 10-K, the Company's fixed maturity and equity investments are classified as available for sale and are managed to preserve assets, maximize pre-tax total return, and assure adequate liquidity to meet the funding needs of the Company. Professional outside investment firms manage the Company's investment portfolios according to the above objectives and within parameters set by the Company's investment policy as approved by the Investment Committee of the Board of Directors. Under the current investment policy, the only derivative instrument the Company uses is covered call options. A call option gives the purchaser a right to buy a stock at a specified price within a specified time. In the fourth quarter of 1999, the Company began writing call options on a limited basis on equity securities it owns 22 23 ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED) (a "covered" call option) to manage exposure to equity price risk and enhance investment returns. Two covered call options were written on highly appreciated technology equity securities. One option expired in November and the other option was settled in November thus no call options were outstanding as of December 31, 1999. The two covered call options written resulted in a net realized capital loss of $16,000. Based on the effective duration of the fixed maturity investment portfolio, an abrupt 100 basis point increase in interest rates along the entire interest rate yield curve would adversely affect the fair value of fixed maturity investments by approximately $7,900,000 at December 31, 1999 and $8,500,000 at December 31, 1998. Based primarily on past annual performance relative to the Standard & Poors 500 Market Index (S&P 500), an abrupt ten percent decrease in the S&P 500 would adversely affect the fair value of equity securities by approximately $12,400,000 at December 31, 1999 and $10,000,000 at December 31, 1998. A hypothetical ten percent weakening of all foreign currencies relative to the U.S. dollar would adversely affect the fair value of the Company's investment in international equity securities by approximately $1,900,000 at December 31, 1999 and $1,600,000 at December 31, 1998. The Company believes that there would be no material effect on its net income and cash flows in any of the above scenarios. This effect on net income and cash flows does not consider the possible effects a change in economic activity could have in such an environment. Investors, customers, regulators and legislators could respond to these fluctuations in ways the Company cannot foresee. Because the Company cannot be certain what specific actions would be taken and their effects, the above sensitivity analyses assume no significant changes in the Company's financial structure. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 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. 23 24 Midwest Medical Insurance Holding Company and Subsidiaries Consolidated Financial Statements Years ended December 31, 1999, 1998 and 1997 CONTENTS Report of Independent Auditors ............................................. 25 Consolidated Financial Statements 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 24 25 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, 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. 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. 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. /s/ Ernst & Young LLP Minneapolis, Minnesota February 1, 2000 25 26 Midwest Medical Insurance Holding Company and Subsidiaries Consolidated Balance Sheets (In Thousands, Except for Share Amounts)
DECEMBER 31 1999 1998 --------------------------------- ASSETS Investments: Fixed maturities at fair value (cost: 1999--$159,464; 1998--$161,430) $153,950 $164,652 Equity securities at fair value (cost: 1999--$46,216; 1998--$41,907) 104,898 86,553 Short-term 9,128 3,556 Other 10,000 10,000 --------------------------------- 277,976 264,761 Cash 1,821 647 Accrued investment income 2,317 1,739 Premiums receivable 7,143 2,023 Reinsurance recoverable on paid and unpaid losses 19,285 16,499 Amounts due from reinsurers 3,833 3,191 Other assets 7,801 6,623 --------------------------------- Total assets $320,176 $295,483 ================================= LIABILITIES, REDEEMABLE STOCK AND OTHER SHAREHOLDERS' EQUITY Liabilities: Unpaid losses and loss adjustment expenses $119,141 $110,964 Unearned premiums 12,797 8,173 Policyholder dividends 10,175 - Retrospective premiums - 8,543 Deferred income taxes 12,201 10,966 Other liabilities 10,259 6,244 --------------------------------- Total liabilities 164,573 144,890 Redeemable stock: Class A Common Stock--authorized 300,000 shares, issued and outstanding 123,509 shares in 1999 and 125,682 shares in 1998 7,802 8,146 Class B Common Stock--authorized, issued and outstanding 1 share 1 1 --------------------------------- 7,803 8,147 Other shareholders' equity 147,800 142,446 --------------------------------- Total liabilities, redeemable stock and other shareholders' equity $320,176 $295,483 =================================
See accompanying notes. 26 27 Midwest Medical Insurance Holding Company and Subsidiaries Consolidated Statements of Income (In Thousands, Except for Per Share Amounts)
YEAR ENDED DECEMBER 31 1999 1998 1997 ------------------------------------------------------ Revenues: Net premiums earned $46,583 $35,014 $32,916 Net investment income 10,963 10,971 11,603 Realized capital gains 7,220 9,081 6,529 Other 2,823 1,352 1,144 ------------------------------------------------------ 67,589 56,418 52,192 Losses and expenses: Losses and loss adjustment expenses 41,468 37,494 31,834 Policyholder dividends 10,175 - - Underwriting, acquisition and insurance expenses 7,197 6,698 5,509 Other operating expenses 6,197 3,589 1,086 ------------------------------------------------------ 65,037 47,781 38,429 ------------------------------------------------------ Income before income taxes 2,552 8,637 13,763 Income taxes 816 2,689 4,463 ------------------------------------------------------ Net income $ 1,736 $ 5,948 $ 9,300 ====================================================== Income per common share $ 13.92 $ 48.36 $ 77.79 ====================================================== Income per common share--assuming dilution $ 12.53 $ 43.65 $ 70.23 ======================================================
See accompanying notes. 27 28 Midwest Medical Insurance Holding Company and Subsidiaries Consolidated Statements of Changes in Other Shareholders' Equity (In Thousands)
ACCUMULATED OTHER PAID-IN RETAINED COMPREHENSIVE TOTAL CAPITAL EARNINGS INCOME ---------------------------------------------------------- Balance at December 31, 1996 $111,278 $12,789 $ 84,615 $13,874 Comprehensive income: Net income 9,300 - 9,300 - Other comprehensive income: Unrealized gains on securities net of $5,491 in taxes 10,199 - - 10,199 Reclassification adjustment for gains included in net income net of $2,269 in taxes (4,215) - - (4,215) -------------- Total comprehensive income 15,284 Net income of non-insurance entities includable in Class A Common Stock redemption value (272) - (272) - --------------------------------------------------------- Balance at December 31, 1997 126,290 12,789 93,643 19,858 Comprehensive income: Net income 5,948 - 5,948 - Other comprehensive income: Unrealized gains on securities net of $9,111 in taxes 16,921 - - 16,921 Reclassification adjustment for gains included in net income net of $3,132 in taxes (5,817) - - (5,817) -------------- Total comprehensive income 17,052 Dividend paid by Midwest Medical Insurance Company to Midwest Medical Insurance Holding Company (2,000) - (2,000) - Net loss of non-insurance entities includable in Class A Common Stock redemption value 1,104 - 1,104 - --------------------------------------------------------- Balance at December 31, 1998 142,446 12,789 98,695 30,962 Comprehensive income: Net income 1,736 - 1,736 - Other comprehensive income: Unrealized gains on securities net of $3,708 in taxes 8,600 - - 8,600 Reclassification adjustment for gains included in net income net of $2,394 in taxes (4,646) - - (4,646) -------------- Total comprehensive income 5,690 Dividend paid by Midwest Medical Insurance Company to Midwest Medical Insurance Holding Company (2,050) - (2,050) - Net loss of non-insurance entities includable in Class A Common Stock redemption value 1,714 - 1,714 - --------------------------------------------------------- Balance at December 31, 1999 $147,800 $12,789 $100,095 $34,916 =========================================================
See accompanying notes. 28 29 Midwest Medical Insurance Holding Company and Subsidiaries Consolidated Statements of Cash Flows (In Thousands)
YEAR ENDED DECEMBER 31 1999 1998 1997 -------------------------------------------- OPERATING ACTIVITIES Net income $ 1,736 $ 5,948 $ 9,300 Adjustments to reconcile net income to net cash provided by (used in) operating activities: (Increase) decrease in accrued investment income (578) 602 437 (Increase) decrease in premiums receivable (5,120) (1,489) 50 (Increase) decrease in reinsurance recoverable (2,786) 2,618 3,057 Increase in amounts due from reinsurers (642) (3,191) - (Increase) decrease in other assets (1,178) (2,224) 1,468 Deferred tax provision (90) 1,354 1,494 Increase (decrease) in unpaid losses and loss adjustment expenses 8,177 3,158 (2,231) Increase (decrease) in unearned premiums 4,624 2,101 (788) Increase in policyholder dividends 10,175 - - Decrease in retrospective premiums (8,543) (1,362) (933) Decrease in amounts due reinsurers - (2,984) (4,290) Increase (decrease) in other liabilities 4,015 (5,145) 3,287 Accretion of bond discount, net of premium amortization (636) (134) (573) Realized capital gains (7,220) (9,081) (6,529) Compensation expense for vested Class A common shares 253 224 253 -------------------------------------------- 2,187 (9,605) 4,002 INVESTING ACTIVITIES Purchases of fixed maturity investments and equity securities (171,139) (401,922) (311,947) Sales of fixed maturity investments and equity securities 174,651 398,717 316,982 Calls and maturities of fixed maturity investments 2,000 1,250 - Net sales (purchases) of short-term investments (5,572) 10,352 (6,011) -------------------------------------------- (60) 8,397 (976) FINANCING ACTIVITIES Redemption of Class A Common Stock (953) (523) (648) -------------------------------------------- Increase (decrease) in cash 1,174 (1,731) 2,378 Cash at beginning of year 647 2,378 - -------------------------------------------- Cash at end of year $ 1,821 $ 647 $ 2,378 ============================================
See accompanying notes. 29 30 Midwest Medical Insurance Holding Company and Subsidiaries Notes to Consolidated Financial Statements December 31, 1999 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. 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. During 1997, MMIHC formed Midwest Medical Solutions, Inc. (Solutions) as a business development company to strengthen and promote the independence and interdependencies of physicians, clinics and hospitals that MMIC serves. Business development opportunities being pursued include practice enhancement, strategic consulting and technology services and support. 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. 30 31 Midwest Medical Insurance Holding Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. ACCOUNTING POLICIES (CONTINUED) 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. 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. 31 32 Midwest Medical Insurance Holding Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. ACCOUNTING POLICIES (CONTINUED) PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of MMIHC and its wholly-owned subsidiaries, MMIC, Services and Solutions, which includes Solution's wholly-owned subsidiary, MedPower. 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, Services, Solutions and MedPower shall be collectively referred to as the Company unless the reference pertains to a specific entity. BASIS OF PRESENTATION 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). USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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. 32 33 Midwest Medical Insurance Holding Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. ACCOUNTING POLICIES (CONTINUED) 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 component of other comprehensive income, 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. 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 less than 20% 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. 33 34 Midwest Medical Insurance Holding Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. ACCOUNTING POLICIES (CONTINUED) PREMIUMS AND POLICYHOLDER DIVIDENDS 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. 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. 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. ACQUISITION COSTS Acquisition costs are expensed when incurred. Due to the nature of its operations, MMIC does not pay significant amounts in commissions. 34 35 Midwest Medical Insurance Holding Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. ACCOUNTING POLICIES (CONTINUED) OTHER REVENUES 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. INCOME TAXES 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. EARNINGS PER SHARE 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. 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 14). 35 36 Midwest Medical Insurance Holding Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. REDEEMABLE STOCK (CONTINUED) 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. 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. 36 37 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, 1999 (in thousands, except for share and per share amounts):
CLASS A COMMON STOCK CLASS B MMIHC -------------------------- COMMON PAID-IN TOTAL SHARES AMOUNT STOCK CAPITAL ---------------------------------------------------------------- Balance at December 31, 1996 $ 7,604 118,209 $1 $1 $4,490 Comprehensive income: Net income of non-insurance entities includable in Class A Common Stock redemption value 272 - - - - Other comprehensive income: Unrealized gains on securities net of $6 in taxes 11 - - - - ------- Total comprehensive income 283 Redemption of shares due to policyholder terminations by effective date: January 1, 1997 to June 30, 1997; NRV of $64.33 (278) (4,363) - - (165) July 1, 1997 to December 31, 1997; NRV of $62.12 (370) (5,943) (1) - (220) Issuance of shares to vested policyholders - 9,406 1 - - Initial issuance of shares to policyholders upon vesting 253 4,013 - - 253 Other (15) - - - - ---------------------------------------------------------------- Balance at December 31, 1997 (carried forward) 7,477 121,322 1 1 4,358 ACCUMULATED MMIHC OTHER RETAINED COMPREHENSIVE EARNINGS INCOME ------------------------------------ Balance at December 31, 1996 $3,044 $ 68 Comprehensive income: Net income of non-insurance entities includable in Class A Common Stock redemption value 272 - Other comprehensive income: Unrealized gains on securities net of $6 in taxes - 11 Total comprehensive income Redemption of shares due to policyholder terminations by effective date: January 1, 1997 to June 30, 1997; NRV of $64.33 (113) - July 1, 1997 to December 31, 1997; NRV of $62.12 (149) - Issuance of shares to vested policyholders (1) - Initial issuance of shares to policyholders upon vesting - - Other (15) - ------------------------------------ Balance at December 31, 1997 (carried forward) 3,038 79
37 38 2. REDEEMABLE STOCK (CONTINUED)
CLASS A COMMON STOCK CLASS B MMIHC -------------------------- COMMON PAID-IN TOTAL SHARES AMOUNT STOCK CAPITAL -------------------------------------------------------------- Balance at December 31, 1997 (brought forward) $ 7,477 121,322 $1 $1 $4,358 Comprehensive income: Net loss of non-insurance entities includable in Class A Common Stock redemption value (1,104) - - - - Other comprehensive income: Unrealized gains on securities net of $39 in taxes 73 - - - - ------- Total comprehensive income (1,031) Redemption of shares due to policyholder terminations by effective date: January 1, 1998 to June 30, 1998; NRV of $61.63 (251) (4,070) - - (147) July 1, 1998 to December 31, 1998; NRV of $54.70 (272) (4,935) (1) - (160) Issuance of shares to vested policyholders - 9,437 1 - - Initial issuance of shares to policyholders upon vesting 224 3,928 - - 224 Dividend from MMIC 2,000 - - - 2,000 -------------------------------------------------------------- Balance at December 31, 1998 (carried forward) 8,147 125,682 1 1 6,275 ACCUMULATED MMIHC OTHER RETAINED COMPREHENSIVE EARNINGS INCOME -------------------------------------- Balance at December 31, 1997 (brought forward) $3,038 $ 79 Comprehensive income: Net loss of non-insurance entities includable in Class A Common Stock redemption value (1,104) - Other comprehensive income: Unrealized gains on securities net of $39 in taxes - 73 Total comprehensive income Redemption of shares due to policyholder terminations by effective date: January 1, 1998 to June 30, 1998; NRV of $61.63 (104) - July 1, 1998 to December 31, 1998; NRV of $54.70 (111) - Issuance of shares to vested policyholders (1) - Initial issuance of shares to policyholders upon vesting - - Dividend from MMIC - - -------------------------------------- Balance at December 31, 1998 (carried forward) 1,718 152
38 39 Midwest Medical Insurance Holding Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. Redeemable Stock (continued)
CLASS A COMMON STOCK CLASS B MMIHC -------------------------- COMMON PAID-IN TOTAL SHARES AMOUNT STOCK CAPITAL ---------------------------------------------------------------- Balance at December 31, 1998 (brought forward) $8,147 125,682 $1 $1 $6,275 Comprehensive income: Net loss of non-insurance entities includable in Class A Common Stock redemption value (1,714) - - - - Other comprehensive income: Unrealized gains on securities net of $11 in taxes 20 - - - - -------- Total comprehensive income (1,694) Redemption of shares due to policyholder terminations by effective date: January 1, 1999 to June 30, 1999; NRV of $64.81 (504) (7,784) - - (341) July 1, 1999 to December 31, 1999; NRV of $60.10 (450) (7,240) (1) - (304) Issuance of shares to vested policyholders 1 8,702 1 - - Initial issuance of shares to policyholders upon vesting 253 4,149 - - 253 Dividend from MMIC 2,050 - - - 2,050 ---------------------------------------------------------------- Balance at December 31, 1999 $7,803 123,509 $1 $1 $7,933 ================================================================ ACCUMULATED MMIHC OTHER RETAINED COMPREHENSIVE EARNINGS INCOME ------------------------------------ Balance at December 31, 1998 (brought forward) $ 1,718 $152 Comprehensive income: Net loss of non-insurance entities includable in Class A Common Stock redemption value (1,714) - Other comprehensive income: Unrealized gains on securities net of $11 in taxes - 20 Total comprehensive income Redemption of shares due to policyholder terminations by effective date: January 1, 1999 to June 30, 1999; NRV of $64.81 (163) - July 1, 1999 to December 31, 1999; NRV of $60.10 (145) - Issuance of shares to vested policyholders - - Initial issuance of shares to policyholders upon vesting - - Dividend from MMIC - - ------------------------------------ Balance at December 31, 1999 $ (304) $172 ====================================
39 40 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):
1999 1998 1997 ------------------------------------------------------ Fixed maturities $ 9,836 $ 9,340 $10,901 Equity securities 866 820 523 Short-term investments 466 926 939 Other investments 1,015 907 94 ------------------------------------------------------ 12,183 11,993 12,457 Investment expenses (1,220) (1,022) (854) ------------------------------------------------------ $10,963 $10,971 $11,603 ======================================================
The cost (amortized cost for fixed maturities) and fair value of available for sale investments are as follows (in thousands):
DECEMBER 31, 1999 ------------------------------------------------------------ GROSS GROSS UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE ------------------------------------------------------------ Fixed maturities: MMIC: United States Government $ 74,387 $ 25 $(2,717) $ 71,695 Public utilities 1,450 - (205) 1,245 Industrial and other 83,627 31 (2,648) 81,010 ------------------------------------------------------------ Total $ 159,464 $ 56 $(5,570) $153,950 ============================================================ Equity securities: MMIHC: Common stock: Industrial, miscellaneous and other $ 282 $ 266 $ - $ 548 MMIC: Common stock: Banks, trusts and insurance companies 3,375 4,703 - 8,078 Industrial, miscellaneous and other 42,559 55,504 (1,791) 96,272 ------------------------------------------------------------ Total $ 46,216 $ 60,473 $(1,791) $104,898 ============================================================
40 41 Midwest Medical Insurance Holding Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. INVESTMENTS (CONTINUED)
DECEMBER 31, 1998 ------------------------------------------------------------ GROSS GROSS UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE ------------------------------------------------------------ Fixed maturities: MMIC: United States Government $110,729 $ 2,729 $ (70) $113,388 Public utilities 1,609 5 - 1,614 Industrial and other 49,092 651 (93) 49,650 ------------------------------------------------------------ Total $161,430 $ 3,385 $(163) $164,652 ============================================================ Equity securities: MMIHC: Common stock: Industrial, miscellaneous and other $ 520 $ 234 $ - $ 754 MMIC: Common stock: Banks, trusts and insurance companies 3,749 3,873 - 7,622 Industrial, miscellaneous and other 37,638 41,424 (885) 78,177 ------------------------------------------------------------ Total $41,907 $45,531 $(885) $ 86,553 ============================================================
The components of the unrealized appreciation on available for sale securities as of December 31 are as follows (in thousands):
1999 1998 ---------------------------------- ----------------------------- MMIHC MMIC MMIHC MMIC ---------------------------------- ----------------------------- Fixed maturities: Gross unrealized gains $ - $ 56 $ - $ 3,385 Gross unrealized losses - (5,570) - (163) Equity securities: Gross unrealized gains 266 60,207 234 45,297 Gross unrealized losses - (1,791) - (885) ---------------------------------- ----------------------------- 266 52,902 234 47,634 Deferred income taxes (94) (17,986) (82) (16,672) ---------------------------------- ---------------------------- $172 $34,916 $152 $30,962 ================================== =============================
41 42 \ Midwest Medical Insurance Holding Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. INVESTMENTS (CONTINUED) 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.
AMORTIZED MARKET COST VALUE ------------------------------------ Due in one year or less $ 4,822 $ 4,821 Due after one year through five years 31,224 30,596 Due after five years through ten years 45,090 43,274 Due after ten years 78,328 75,259 ==================================== $159,464 $153,950 ====================================
Proceeds from sales of available for sale investments and the related gross realized gains and losses are as follows (in thousands):
GROSS GROSS PROCEEDS FROM REALIZED REALIZED SALES GAINS LOSSES ----------------------------------------------------- Year ended December 31, 1999: Fixed maturities $154,388 $ 608 $(3,700) Equity securities 20,263 11,292 (980) Year ended December 31, 1998: Fixed maturities 382,048 3,600 (769) Equity securities 16,669 6,536 (286) Year ended December 31, 1997: Fixed maturities 310,235 5,806 (884) Equity securities 6,747 2,168 (561)
42 43 Midwest Medical Insurance Holding Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. INVESTMENTS (CONTINUED) Net unrealized appreciation of fixed maturities increased (decreased) by $(8,736,000), $1,837,000 and $(2,197,000) and net unrealized appreciation of equity securities increased by $14,036,000, $15,360,000 and $11,417,000 for the years ended December 31, 1999, 1998 and 1997, respectively. 4. POLICYHOLDER DIVIDENDS In 1999, MMIC instituted a policyholder dividend program which replaced the previous retrospective premium credit program for physicians. 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. 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. 43 44 Midwest Medical Insurance Holding Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 4. POLICYHOLDER DIVIDENDS (CONTINUED) Prior to 1999, retrospective premium credits were deducted from net premiums earned. Under the new policyholder dividend program, dividends are recorded as a component of losses and expenses. The following illustrates what net premiums earned would have been had retrospective premium credits been issued as policyholder dividends.
1999 1998 1997 ---------------------------------------------- Net premiums earned per consolidated statements of income $46,583 $35,014 $32,916 Retrospective premium credits 317 6,719 6,371 ---------------------------------------------- Pro forma net premiums earned $46,900 $41,733 $39,287 ==============================================
5. RETROSPECTIVE PREMIUMS 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. 44 45 Midwest Medical Insurance Holding Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 5. RETROSPECTIVE PREMIUMS (CONTINUED) 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. 6. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES The reconciliation of the liability for unpaid losses and loss adjustment expenses is as follows (in thousands):
1999 1998 1997 -------------------------------------------- Balance as of January 1, net of reinsurance recoverables $ 94,467 $ 89,394 $ 90,342 Incurred related to: Current year 45,942 41,927 40,186 Prior years (4,474) (4,433) (8,352) -------------------------------------------- Total incurred 41,468 37,494 31,834 Paid related to: Current year 2,253 3,666 2,685 Prior years 33,788 28,755 30,097 -------------------------------------------- Total paid 36,041 32,421 32,782 -------------------------------------------- Balance as of December 31, net of reinsurance recoverables 99,894 94,467 89,394 Reinsurance recoverables at December 31 19,247 16,497 18,412 -------------------------------------------- Balance as of December 31, gross $ 119,141 $ 110,964 $ 107,806 ============================================
45 46 Midwest Medical Insurance Holding Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 6. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES (CONTINUED) 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. 7. SEGMENT INFORMATION 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). 46 47 Midwest Medical Insurance Holding Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 7. SEGMENT INFORMATION (CONTINUED)
1999 --------------------------------------------------------------------------------------------- MMIHC MMIC SERVICES SOLUTIONS MEDPOWER ELIMINATIONS (1) CONSOLIDATED --------------------------------------------------------------------------------------------- Revenues: External customers $ - $ 47,181 $ 1,661 $ - $ 410 $ - $ 49,252 Intersegment 16,273 - - - 13 (16,286) - Net investment income (696) 10,780 21 17 13 828 10,963 Other (2) 185 7,041 - - - 148 7,374 --------------------------------------------------------------------------------------------- 15,762 65,002 1,682 17 436 (15,310) 67,589 Total expenses 15,584 59,904 1,648 1,408 1,803 (15,310) 65,037 --------------------------------------------------------------------------------------------- Income (loss) before income taxes 178 5,098 34 (1,391) (1,367) - 2,552 Income taxes 91 1,648 15 (473) (465) - 816 --------------------------------------------------------------------------------------------- Net income (loss) $ 87 $ 3,450 $ 19 $ (918) $ (902) $ - $ 1,736 ============================================================================================= Total assets $160,848 $311,367 $ 1,634 $ 1,539 $ 1,123 $(156,335) $320,176 =============================================================================================
(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. (2) Other revenues consist primarily of net realized capital gains. 47 48 Midwest Medical Insurance Holding Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 7. SEGMENT INFORMATION (CONTINUED)
1998 --------------------------------------------------------------------------------------------- MMIHC MMIC SERVICES SOLUTIONS MEDPOWER ELIMINATIONS (1) CONSOLIDATED --------------------------------------------------------------------------------------------- Revenues: External customers $ - $ 35,771 $ - $ - $ 387 $ - $ 36,158 Intersegment 14,038 - - - - (14,038) - Net investment income (429) 10,731 - 3 2 664 10,971 Other (2) 139 8,944 - - - 206 9,289 --------------------------------------------------------------------------------------------- 13,748 55,446 - 3 389 (13,168) 56,418 Total expenses 13,481 45,126 - 916 1,426 (13,168) 47,781 --------------------------------------------------------------------------------------------- Income (loss) before income taxes 267 10,320 - (913) (1,037) - 8,637 Income taxes 104 3,268 - (320) (363) - 2,689 --------------------------------------------------------------------------------------------- Net income (loss) $ 163 $ 7,052 $ - $ (593) $ (674) $ - $ 5,948 ============================================================================================= Total assets $154,727 $287,639 $ 3 $ 2,728 $ 1,693 $(151,307) $295,483 =============================================================================================
(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. (2) Other revenues consist primarily of net realized capital gains. 48 49 Midwest Medical Insurance Holding Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 7. SEGMENT INFORMATION (CONTINUED)
1997 ------------------------------------------------------------------------------------------------ MMIHC MMIC SERVICES SOLUTIONS MEDPOWER ELIMINATIONS (1) CONSOLIDATED ------------------------------------------------------------------------------------------------ Revenues: External customers $ - $ 33,795 $- $- $- $ - $ 33,795 Intersegment 9,901 - - - - (9,901) - Net investment income 19 11,160 - - - 424 11,603 Other (2) 47 6,482 2 - - 263 6,794 -------------------------------------------------------------------------------------------- 9,967 51,437 2 - - (9,214) 52,192 Total expenses 9,535 38,108 - - - (9,214) 38,429 -------------------------------------------------------------------------------------------- Income before income taxes 432 13,329 2 - - - 13,763 Income taxes 162 4,301 - - - - 4,463 -------------------------------------------------------------------------------------------- Net income $ 270 $ 9,028 $2 $- $- $ - $ 9,300 ============================================================================================ Total assets $ 137,247 $261,780 $5 $- $- $(123,517) $275,515 ============================================================================================
(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. (2) Other revenues consist primarily of net realized capital gains. 49 50 Midwest Medical Insurance Holding Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 8. INCOME TAXES Components of income taxes are as follows (in thousands):
1999 1998 1997 ----------------------------------------- Current provision $906 $1,335 $2,969 Deferred tax provision (90) 1,354 1,494 ----------------------------------------- $816 $2,689 $4,463 =========================================
The Company's income taxes differ from the federal statutory rate applied to income before tax as follows (in thousands):
1999 1998 1997 -------------------------------- Income before tax at the federal statutory rate (34% - 1999, 35% - 1998 and 1997) $868 $3,023 $4,817 Tax-exempt income (net of proration adjustment) - - (775) Dividends received deductions (net of proration adjustment) (81) (99) (89) State income taxes, net of federal tax benefit 86 37 198 Payment of prior year taxes - - 300 Recovery of prior year taxes (59) (267) - Other 2 (5) 12 -------------------------------- $816 $2,689 $4,463 ================================
The deferred income tax provision includes the following differences between financial and income tax reporting (in thousands):
1999 1998 1997 --------------------------------- Discounting of post-1986 unpaid losses and loss adjustment expenses $ 167 $ 842 $ 323 Liabilities not currently deductible (121) 596 636 Unearned premiums (256) (151) 57 Investment income not currently taxable 156 - - Utilization of alternative minimum tax carryforwards - - 496 Other (36) 67 (18) --------------------------------- $ (90) $1,354 $1,494 =================================
50 51 Midwest Medical Insurance Holding Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 8. INCOME TAXES (CONTINUED) The Company made income tax payments of $1,751,000, $3,041,000 and $1,518,000 in 1999, 1998 and 1997, respectively. The components of the net deferred income tax (liability) asset as of December 31 are as follows (in thousands):
1999 1998 -------------------------- Deferred tax assets: Unpaid losses and loss adjustment expenses $ 3,990 $ 4,154 Liabilities not currently deductible 1,200 1,079 Unearned premiums 884 628 Other 730 550 -------------------------- 6,804 6,411 Deferred tax liabilities: Unrealized gains (18,077) (16,754) Other (928) (623) -------------------------- (19,005) (17,377) -------------------------- $ (12,201) $(10,966) ==========================
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. 51 52 Midwest Medical Insurance Holding Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 9. 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 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. MMIC is authorized to issue policies with limits not to exceed $12,000,000 for each claim and $14,000,000 in the aggregate under each policy in any one policy year. Limits in excess of $12,000,000 for each claim and $14,000,000 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. The effect of reinsurance on premiums written and earned for 1999, 1998 and 1997 is as follows (in thousands):
1999 1998 1997 ----------------------------- ----------------------------- ----------------------------- WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED ----------------------------- ----------------------------- ----------------------------- Direct $51,672 $47,048 $39,431 $37,329 $35,722 $36,511 Assumed 48 48 97 97 - - Ceded (1,897) (513) (2,601) (2,412) (3,595) (3,595) ----------------------------- ----------------------------- ----------------------------- Net $49,823 $46,583 $36,927 $35,014 $32,127 $32,916 ============================= ============================= =============================
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. 52 53 Midwest Medical Insurance Holding Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 9. REINSURANCE (CONTINUED) 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. 10. 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, 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. 11. BENEFIT PLANS 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. 53 54 Midwest Medical Insurance Holding Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 11. BENEFIT PLANS (CONTINUED) 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. 12. RECONCILIATION WITH STATUTORY ACCOUNTING PRINCIPLES The following is a reconciliation of net income and shareholders' equity under accounting principles generally accepted in the United States (US GAAP) with that reported for MMIC on a statutory basis (in thousands): Net Income
YEAR ENDED DECEMBER 31 1999 1998 1997 ------------------------------------- As reported under US GAAP $1,736 $5,948 $ 9,300 Loss (income) of non-insurance entities 1,714 1,104 (272) ------------------------------------- On the basis of US GAAP, MMIC only 3,450 7,052 9,028 Additions (deductions): Deferred income taxes 37 1,390 1,525 ------------------------------------- On the basis of statutory accounting principles $3,487 $8,442 $10,553 =====================================
54 55 Midwest Medical Insurance Holding Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 12. RECONCILIATION WITH STATUTORY ACCOUNTING PRINCIPLES (CONTINUED) Shareholders' Equity
DECEMBER 31 1999 1998 1997 ---------------------------------------- As reported under US GAAP $147,800 $142,446 $126,290 Additions (deductions): Deferred income taxes 12,878 11,526 4,158 Unrealized (gain) loss on fixed maturities 5,514 (3,222) (1,385) Non-admitted assets (1,000) - - Prescribed market value differences (253) - - Other (179) (34) (3) ---------------------------------------- On the basis of statutory accounting principles $164,760 $150,716 $129,060 ========================================
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. Under Minnesota insurance statutes, MMIC is required to maintain statutory surplus in excess of ten times its per risk reinsurance retention limit. Since MMIC limited its retention to $750,000 on any single risk, the minimum statutory surplus level was $7,500,000 for 1999 and 1998. 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. 55 56 Midwest Medical Insurance Holding Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 13. 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):
1999 1998 1997 ---------------------------------------------- Numerator for basic and dilutive earnings per share available to common shareholders $ 1,736 $ 5,948 $ 9,300 ============================================== Denominator: Denominator for basic earnings per share-- weighted average shares 124,725 123,004 119,554 Effect of dilutive securities: Unvested shares 13,792 13,247 12,873 ---------------------------------------------- Denominator for dilutive earnings per share-- adjusted weighted-average shares and assumed conversions 138,517 136,251 132,427 ============================================== Basic earnings per share $ 13.92 $ 48.36 $ 77.79 ============================================== Diluted earnings per share $ 12.53 $ 43.65 $ 70.23 ==============================================
56 57 14. NET REDEMPTION VALUE The net redemption value per share of the Class A common shares was as follows:
CLASS A NET REDEMPTION MMIHC COMMON SHARES VALUE PER NET EQUITY OUTSTANDING SHARE ---------------------------------------------------------------- (000s) December 31, 1995 $6,975 116,251* $60.00 ===================== ====================== December 31, 1996 $7,604 118,209 $64.33 ===================== ====================== December 31, 1997 $7,477 121,322 $61.63 ===================== ====================== December 31, 1998 $8,147 125,682 $64.81 ===================== ====================== December 31, 1999 $7,803 123,509 $63.18 ===================== ======================
* Includes pro forma shares related to merger. 57 58 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 58 59 PART III 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, 1999, are as follows:
CLASS A COMMON DIRECTOR PRINCIPAL SHARES NAME AGE SINCE OCCUPATION OWNED - ------------------------------------------------------------------------------------------------- Michael Abrams 38 1996 Exec V.P. Iowa Medical Society - John R. Balfanz, M.D. 54 1995 Physician 16 Gail P. Bender, M.D. 52 1996 Physician 25 James R. Bishop, M.D. 58 1994 Physician - David P. Bounk 53 1995 President and CEO - Thomas C. Evans, M.D. 44 1999 Physician 30 Roger L. Frerichs, M.D. 60 1988 Surgeon 92 Richard Geier, Jr., M.D. 59 1995 Physician 28 Anthony C. Jaspers, M.D. 52 1996 Physician 54 Russel J. Kuzel, M.D. 47 1997 Physician 29 Wayne F. Leebaw, M.D. 56 1994 Physician 26 Mark O. Liaboe, M.D. 46 1999 Physician 7 Steven A. McCue, M.D. 58 1995 Physician 133 Harold W. Miller, M.D. 52 1996 Physician 29 Anton S. Nesse, M.D. 61 1989 Radiologist 56 Mark D. Odlund, M.D. 47 1996 Physician 94 G. William Orr, M.D. 64 1996 Physician 57 Paul S. Sanders, M.D. 55 1984 CEO-MN Medical Assoc. - Richard D. Schmidt, M.D. Secretary 56 1990 Physician 158 Judith F. Shank, M.D. 57 1999 Physician 16 Andrew J. K. Smith, M.D. Chairman of Board 57 1990 Neurological Surgeon - G. David Spoelhof, M.D. 46 1989 Physician 51 Tom D. Throckmorton, M.D. 54 1997 Physician 76 R. Bruce Trimble, M.D. Vice Chair of Board 59 1993 Physician -
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 whom shall be ex-officio directors; (3) the President of MMIHC as an ex-officio director; and (4) such additional ex-officio and 59 60 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED) 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, 1999, the directors of MMIHC, as a group, owned 977 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 $41,707. 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 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. 60 61 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED) EXECUTIVE OFFICERS The names, ages and positions of the executive officers of MMIHC and MMIC are as follows:
PERIOD OF SERVICE POSITION AS PRINCIPAL NAME AGE WITH COMPANY AN OFFICER OCCUPATION - ------------------------------------------------------------------------------------------------------------------- David P. Bounk 53 President and Chief Executive 8/1/90 to date President and Chief Executive Officer - MMIHC Officer - MMIHC Niles A. Cole 38 Vice President-Finance, 1998 to date Vice President-Finance, Treasurer and Chief Financial Treasurer and Chief Financial Officer Officer Jack L. Kleven 53 President - MMIC and Chief 1986 to date President - MMIC and Chief Operating Officer Operating Officer Elizabeth S. Lincoln 46 Vice President-Law and Health 1990 to date Vice President-Law and Health Policy Policy Thomas H. Lee 56 Vice President - Information 7/99 to date Vice President - Information Systems Systems Gerald M. O'Connell 45 Vice President - Marketing 1998 to date Vice President - Marketing Michael G. Rutz 46 Vice President-Underwriting 5/15/95 to date Vice President-Underwriting Jerry A. Zeitlin 49 Vice President - Claims 7/99 to date Vice President - Claims
Mr. Bounk has over 30 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. 61 62 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED) 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 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. Cole has over 16 years experience in the insurance industry, including 6 years as Vice President and Controller of Washington State Physician's Insurance Association. He has been in his current position since March 1998. He has BS degrees in accounting and finance. Mr. Kleven has over 25 years experience in medical malpractice claims adjusting and management. He joined the Exchange in 1983, and was Vice President, Claims since March 1986. He was promoted to Chief Operating Officer on January 1, 1998. He was promoted to CEO/President of MMIC effective September 1, 1999. 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 16 years experience in medical professional liability risk management. She joined the Exchange in 1982, and was Vice President, Risk Management since January 1990. She transferred to Vice President, Law and Health Policy, effective January 1, 1998. She has a law degree. Mr. Lee has over 25 years experience in the insurance industry. Prior to joining MMIHC in 1998 he owned an insurance related technology consulting business. From 1971 to 1989 he was Senior Vice President - Administration of American Hardware Mutual Insurance Company. He has BA degrees in mathematics and statistics. Mr. Rutz has over 21 years experience in the insurance industry, including 11 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. 62 63 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED) Mr. O'Connell has over 23 years in the medical malpractice segment of the insurance industry. From 1977 to 1995, he was with St. Paul Fire and Marine Insurance Company holding various marketing and underwriting management positions. He joined the Company in October 1996. He has a BS in Agriculture Business Management with an emphasis in Insurance. Mr. Zeitlin has over 26 years of claims experience in the property-casualty insurance industry. Prior to joining MMIHC in 1993 he was Liability Supervisor for The St. Paul Companies from 1979 to 1993. He has a BS degree in Liberal Arts. 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 1999, required Forms 3 were not filed for the new directors and officers. This failure was cured by filings of Forms 5 made after the end of the year. 63 64 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.
CASH COMPENSATION ALL OTHER NAME OF INDIVIDUAL CAPACITIES IN --------------------------- OR NUMBER IN GROUP WHICH SERVED SALARY BONUS COMPENSATION(A) - -------------------------------------------------------------- ------------------------------------------------ David P. Bounk President and Chief 1999 $213,981 $85,830 $34,348 Executive Officer - 1998 200,187 56,126 32,272 MMIHC 1997 187,088 51,024 20,963 Jack L. Kleven President - MMIC and 1999 177,624 61,636 32,066 Chief Operating Officer 1998 167,716 43,752 30,847 1997 145,840 39,796 17,193 Michael G. Rutz Vice President- 1999 125,000 36,694 31,377 Underwriting 1998 119,816 34,233 31,406 1997 114,110 32,604 14,113 Gerald M. O'Connell Vice President-Marketing 1999 117,196 34,749 29,864 1998 109,000 11,530 21,739 1997 95,077 2,423 17,850 Elizabeth S. Lincoln Vice President-Law 1999 113,332 33,080 26,826 and Health Policy 1998 108,015 30,861 29,242 1997 102,871 29,106 13,286
(A) Includes employer contributions to qualified retirement plans, car allowances 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 62 with 10 years of service of 70% (55% for new officers after 1997) of the officer's final average salary. Benefits are reduced for years of service less than 10 and retirement prior to age 62. 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--$201,500; Mr. Kleven--$125,900; Mr. Rutz--$147,100; Mr. O'Connell--$96,400 and Ms. Lincoln--$82,000. The estimated annual retirement benefits were calculated assuming salary increases of five percent per year, discounted four percent per year for future inflation to express the estimated benefits in today's dollars. 64 65 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The response to this item is contained in Item 10. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. 65 66 PART IV 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 for the year ended December 31, 1999 are included in this annual report (Form 10-K) in Item 8: Report of Independent Auditors Consolidated Balance Sheets as of December 31, 1999 and 1998 Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997 Consolidated Statements of Changes in Other Shareholders' Equity for the years ended December 31, 1999, 1998 and 1997 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 Notes to Consolidated Financial Statements (a)(2) The following consolidated financial statement schedules of Midwest Medical Insurance Holding Company 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 1999. 66 67 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 15, 2000 ------------------------------ ------------------ 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 15, 2000 - --------------------------------------- David P. Bounk /s/ Niles Cole Principal Financial Officer and March 15, 2000 - --------------------------------------- Niles Cole Principal Accounting Officer * Director, Chairman of the Board March 15, 2000 - --------------------------------------- Andrew J.K. Smith, M.D. * Director March 15, 2000 - --------------------------------------- Michael Abrams * Director March 15, 2000 - --------------------------------------- John R. Balfanz, M.D. * Director March 15, 2000 - --------------------------------------- Gail P. Bender, M.D.
67 68 * Director March 15, 2000 - --------------------------------------- James R. Bishop, M.D. * Director March 15, 2000 - --------------------------------------- Thomas C. Evans, M.D. * Director March 15, 2000 - --------------------------------------- Roger L. Frerichs, M.D. * Director March 15, 2000 - --------------------------------------- Richard Geier, Jr., M.D. * Director March 15, 2000 - --------------------------------------- Anthony C. Jaspers, M.D. * Director March 15, 2000 - --------------------------------------- Russel J. Kuzel, M.D. * Director March 15, 2000 - --------------------------------------- Wayne F. Leebaw, M.D. * Director March 15, 2000 - --------------------------------------- Mark O. Liaboe, M.D. * Director March 15, 2000 - --------------------------------------- Steven A. McCue, M.D. * Director March 15, 2000 - --------------------------------------- Harold W. Miller, M.D. * Director March 15, 2000 - --------------------------------------- Anton S. Nesse, M.D.
68 69 * Director March 15, 2000 - --------------------------------------- Mark D. Odland, M.D. * Director March 15, 2000 - --------------------------------------- G. William Orr, M.D. * Director March 15, 2000 - --------------------------------------- Paul S. Sanders, M.D. * Director, Secretary March 15, 2000 - --------------------------------------- Richard D. Schmidt, M.D. * Director March 15, 2000 - --------------------------------------- Judith F. Shank, M.D. * Director March 15, 2000 - --------------------------------------- G. David Spoelhof, M.D. * Director March 15, 2000 - --------------------------------------- Tom D. Throckmorton, M.D. * Director, Vice Chairman March 15, 2000 - --------------------------------------- R. Bruce Trimble, M.D. * By: /s/ David P Bounk March 15, 2000 ----------------------------------- 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. 69 70 Midwest Medical Insurance Holding Company and Subsidiaries (Parent Company) Schedule II--Condensed Financial Information of Registrant Balance Sheets
DECEMBER 31 1999 1998 -------------------------------- (In Thousands) ASSETS Short-term investments $ 1,107 $ 1,310 Cash 6 - Investment in subsidiaries 150,734 145,032 Other 9,001 8,385 -------------------------------- Total assets $160,848 $154,727 ================================ LIABILITIES, REDEEMABLE STOCK AND OTHER SHAREHOLDERS' EQUITY LIABILITIES Accounts payable $ 214 $ 43 Accrued expenses and other liabilities 5,031 4,091 -------------------------------- 5,245 4,134 REDEEMABLE STOCK Class A Common Stock 7,802 8,146 Class B Common Stock 1 1 -------------------------------- 7,803 8,147 OTHER SHAREHOLDERS' EQUITY Additional paid-in capital 12,789 12,789 Retained earnings, comprised of undistributed earnings of subsidiaries 100,095 98,695 Unrealized appreciation on investments, net of income taxes 34,916 30,962 -------------------------------- 147,800 142,446 -------------------------------- Total liabilities, redeemable stock and other shareholders' equity $160,848 $154,727 ================================
See accompanying note. 70 71 Midwest Medical Insurance Holding Company and Subsidiaries (Parent Company) Schedule II--Condensed Financial Information of Registrant (continued) Statements of Income
YEAR ENDED DECEMBER 31 1999 1998 1997 --------------------------------------------- (In Thousands) REVENUES Management fee from subsidiaries $16,273 $14,038 $9,901 Net investment income (696) (429) 19 Realized capital gains 179 137 47 Other income 6 2 - --------------------------------------------- 15,762 13,748 9,967 EXPENSES Operating and administrative 15,584 13,481 9,535 --------------------------------------------- Income before income taxes and other items 178 267 432 Income tax expense 91 104 162 --------------------------------------------- Income before equity in undistributed income of subsidiaries 87 163 270 Equity in undistributed income of subsidiaries 1,649 5,785 9,030 --------------------------------------------- Net income $1,736 $ 5,948 $9,300 =============================================
See accompanying note. 71 72 Midwest Medical Insurance Holding Company and Subsidiaries (Parent Company) Schedule II--Condensed Financial Information of Registrant (continued) Statements of Cash Flows
YEAR ENDED DECEMBER 31 1999 1998 1997 --------------------------------------------- (In Thousands) Net cash (used in) provided by operating activities $ 856 $ (366) $ (527) INVESTING ACTIVITIES Purchase of fixed maturities - (21,758) (38,979) Sales of fixed maturities - 22,826 38,701 Calls and maturities of fixed maturities - 250 - Sales of short-term investments, net 203 1,420 1,453 Capitalization of Services (1,500) - - Capitalization of Solutions (650) (3,850) - FINANCING ACTIVITIES Redemption of Class A Common Stock (953) (522) (648) Dividend from MMIC 2,050 2,000 - --------------------------------------------- Increase in cash 6 - - Cash at beginning of year - - - --------------------------------------------- Cash at end of year $ 6 $ - $ - =============================================
See accompanying note. 72 73 Midwest Medical Insurance Holding Company and Subsidiaries (Parent Company) Schedule II--Condensed Financial Information of Registrant (continued) Note to Condensed Financial Statements December 31, 1999 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. Certain amounts in the prior year's financial statements have been reclassified to conform to the current year presentation. 73 74 Midwest Medical Insurance Holding Company and Subsidiaries Schedule IV--Reinsurance
COL. A COL. B COL. C COL. D COL. E COL. F - -------------------------------------------------------------------------------------------------------------------- PERCENTAGE CEDED TO ASSUMED OF AMOUNT GROSS OTHER FROM OTHER NET ASSUMED TO AMOUNT COMPANIES COMPANIES AMOUNT NET - -------------------------------------------------------------------------------------------------------------------- (In Thousands) Year ended December 31, 1999: Insurance premiums: Property/casualty insurance $47,048 $ 513 $48 $46,583 0.1% Year ended December 31, 1998: Insurance premiums: Property/casualty insurance 37,329 2,412 97 35,014 0.3% Year ended December 31, 1997: Insurance premiums: Property/casualty insurance 36,511 3,595 - 32,916 N/A
NOTE TO SCHEDULE IV: Ceded premiums for the years ended December 31, 1999, 1998 and 1997 are net of reductions (additions) in ceded premiums related to swing rated reinsurance treaties of $5,205,000, $2,550,000 and $2,950,000, respectively. Ceded premiums in 1999 are also net of proceeds from contingent commission on reinsurance covering the period January 1, 1992 through December 31, 1994 of $715,000. Ceded premiums in 1998 are also net of proceeds from commutations of reinsurance covering the period January 1, 1991 through December 31, 1991 of $789,000. 74 75 Midwest Medical Insurance Holding Company and Subsidiaries Schedule VI--Supplemental Information Concerning Property/Casualty Insurance Operations
DECEMBER 31 ------------------------------------------------------- COL. A COL. B COL. C COL. D COL. E - ----------------------------------------------------------------------------- RESERVES FOR DEFERRED UNPAID LOSSES DISCOUNT, AFFILIATION POLICY AND LOSS IF ANY, WITH ACQUISITION ADJUSTMENT DEDUCTED IN UNEARNED REGISTRANT COSTS EXPENSES COLUMN C PREMIUMS - ----------------------------------------------------------------------------- (In Thousands) Consolidated property/ casualty entities 1999 N/A $119,141 N/A $12,797 1998 N/A 110,964 N/A 8,173 1997 N/A 107,806 N/A 6,072 YEAR ENDED DECEMBER 31 --------------------------------------------------------------------------------------------- COL. F COL. G COL. H COL. I COL. J COL. K --------------------------------------------------------------------------------------------- LOSSES AND LOSS ADJUSTMENT EXPENSES INCURRED RELATED TO AMORTIZATION PAID ------------------------ OF DEFERRED LOSSES NET (1) (2) POLICY AND LOSS EARNED INVESTMENT CURRENT PRIOR ACQUISITION ADJUSTMENT PREMIUMS PREMIUMS INCOME YEAR YEAR COSTS EXPENSES WRITTEN -------------------------------------------------------------------------------------------- Consolidated property/ casualty entities 1999 $46,583 $10,886 $45,942 $(4,474) N/A $36,041 $51,672 1998 35,014 10,828 41,927 (4,433) N/A 32,421 39,431 1997 32,916 11,430 40,186 (8,352) N/A 32,782 35,722
75 76 ANNUAL REPORT ON FORM 10-K ITEM 14(a)(3) AND 14(c) EXHIBITS Midwest Medical Insurance Holding Company Index to Exhibits
REGULATION S-K EXHIBIT TABLE SEQUENTIAL ITEM REFERENCE PAGE NO. - ----------------------------------------------------------------------------------------------------------- Restated Articles of Incorporation of the registrant 3A.(1) (Form S-4, Exhibit 3C). Bylaws of the registrant (Form S-4, Exhibit 3D). 3B.(1) Voting Trust Agreement. 9.(1) Governance Agreement between the registrant and the 10A.(1) Minnesota Medical Association, holder of the registrant's Class B Common Share, dated November 30, 1988. Lease for office space between registrant and Centennial 10B.(4) Lakes IV, L.L.C., dated July 30, 1999 Amended and Restated Management Agreement between 10C.(4) the registrant and Midwest Medical Insurance Company, dated July 1, 1999 Agreement of Reinsurance between Midwest Medical 10D.(3) Insurance Company and General Reinsurance Corporation, effective January 1, 1998. Letter of Employment Agreement between the registrant 10E.(2) and David P. Bounk, President and Chief Executive Officer of the registrant and Midwest Medical Insurance Company, dated January 1, 1993.
76 77 Index to Exhibits (continued)
REGULATION S-K EXHIBIT TABLE SEQUENTIAL ITEM REFERENCE PAGE NO. - ----------------------------------------------------------------------------------------------------------- 1999 Officers Short-term Incentive Plan of the registrant. 10F.(4) Supplemental Executive Retirement Plan of the registrant. 10G.(1) Amended and Restated Endorsement Agreement between Midwest Medical 10H.(4) Insurance Company and Iowa Medical Society, dated January 1, 1999 Subsidiaries of the registrant. 21.(4) Power of attorney. 24.(4) Financial Data Schedule 27.(4) - ---------------------------------
(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 1998 Annual Report on Form 10-K. (4) Filed with this Annual Report on Form 10-K. 77 EX-10.B 2 LEASE BETWEEN REGISTRANT AND CENTENNIAL LAKES IV 1 EXHIBIT 10B STANDARD OFFICE LEASE AGREEMENT (NET) THIS LEASE AGREEMENT (hereafter called the "LEASE AGREEMENT") made as of the 30th, day of July, 1999 by and between CENTENNIAL LAKES IV, L.L.C., a Delaware limited liability company having offices at Suite 200, 3500 West 80th Street, Bloomington, Minnesota 55431 (hereafter called the "LANDLORD"), and MIDWEST MEDICAL INSURANCE HOLDING COMPANY, a Minnesota corporation (hereafter called the "TENANT"). WITNESSETH FOR AND IN CONSIDERATION of the sum of One Dollar ($1.00) in hand paid by each of the parties to the other, and other good and valuable consideration, receipt and sufficiency of which is hereby acknowledged, the parties hereby agree as follows: ARTICLE 1 - PREMISES AND TERM A. Landlord does hereby lease and let unto Tenant, and Tenant does hereby hire, lease and take from Landlord, that area outlined in red or otherwise described on Exhibit A-1 attached hereto, and by this reference incorporated herein, and described as Suite 400 consisting of the entire fourth (4th) floor and containing approximately 26,069 rentable square feet (the "PREMISES") of the Building at 7650 Edinborough Way in the City of Edina, County of Hennepin, State of Minnesota. The term "BUILDING" as it is used herein shall consist of the above building at 7650 Edinborough Way together with the land accompanying such building as depicted on Exhibit A-2 attached hereto, and by this reference incorporated herein. B. To have and to hold said Premises for a term of seventy-four (74) months commencing October 1, 1999 and terminating November 30, 2005 (hereafter called the "TERM") upon the rentals and subject to the conditions set forth in this Lease Agreement, and the Exhibits attached hereto. The commencement and termination dates are specifically subject to the provisions of Article 5 hereof. ARTICLE 2 - USE The Premises shall be used by the Tenant solely for the following purposes: General office use ARTICLE 3 - RENTALS Tenant agrees to pay to Landlord as minimum rental (hereafter called "MINIMUM RENTAL") for the Premises, without notice, set-off or demand, the following amounts per month: Month of Term Annual Rate Per RSF Monthly Minimum Rental 1 to 26, inclusive* $16.15 $35,084.53 27 to 74, inclusive $16.65 $36,170.74 *Notwithstanding the foregoing, Landlord shall abate the payment of Minimum Rental by Tenant for the first two (2) months of the Term of this Lease Agreement. Said monthly installments shall be due and payable by Tenant in advance on the first day of each calendar month during the Term of this Lease Agreement, or any extension or renewal thereof, at the office of Landlord set forth in the preamble to this Lease Agreement or at such other place as Landlord may designate. In the event of any fractional calendar month, Tenant shall pay for each day in such partial month a rental equal to 1/30 of the Minimum Rental. Tenant agrees to pay, as Additional Rent, which shall be collectible to the same extent as Minimum Rental, all amounts which may become due to Landlord hereunder and any tax, charge or fee that may be levied, assessed or imposed upon or measured by the rents reserved hereunder by any governmental authority acting under any present or future law before any fine, penalty, interest or costs may be added thereto for non-payment. The parties further agree that in lieu of the monthly payments of Operating Expenses and Real Estate Taxes that would otherwise be payable under Article 6 of this Lease Agreement by Tenant during calendar year 1999, Tenant shall pay Landlord an additional $14,663.81 ($6.75 per rentable square foot of Premises annually) per month during calendar year 1999 (the "ADDITIONAL 1999 PAYMENTS") on the same day monthly payments of Minimum Rental are due under this Lease Agreement. Notwithstanding the foregoing, Landlord shall abate the payment of the Additional 1999 Payments by Tenant for the first (2) months of the Term of this Lease Agreement. Effective January 1, 2000 and thereafter during the Term of this Lease Agreement, Tenant shall pay Operating Expenses and Real Estate Taxes pursuant to the provisions of Article 6 of this Lease Agreement. ARTICLE 4 - CONSTRUCTION A. This Lease Agreement contemplates construction and/or completion of the Building of which the Premises are a part. Landlord shall, at its own cost and expense, construct and complete the Building ("LANDLORD'S WORK"). The Landlord's Work shall include completion of those portions of the Premises included within the "SHELL BUILDING" and as specified on Exhibit B attached hereto. Those portions of the Premises which are in addition to the Shell Building shall be constructed pursuant to Paragraphs B and C of this Article 4. B. All improvements to the Premises beyond the Shell Building shall be deemed and constitute the "TENANT IMPROVEMENTS". The Tenant Improvements (with the exceptions set forth below) shall be built by Landlord according to plans and specifications to be prepared by Walsh Bishop (herein referred to as the "TENANT ARCHITECT"). It is acknowledged by the parties that preliminary space plans and specifications (the "PRELIMINARY PLANS") for the Tenant Improvements have been prepared by the Tenant Architect and delivered by Tenant to Landlord, which Preliminary Plans have been approved by Landlord. Tenant shall cause the Tenant Architect to prepare final plans, including a full set of construction drawings (hereafter referred to as "PLANS") for the Tenant Improvements, which Plans shall be consistent with, except for mutually agreed upon changes, the Preliminary Plans and submit such Plans to Landlord for its review and approval no later than July 15, 1999, time being of the essence. A written approval of the Plans shall be given by each party affixing the signature or initials of an authorized officer or employee of such party on duplicate sets of the Plans, each to be marked "record set" and which shall be by this reference incorporated herein, it being agreed by the parties that for purposes of the foregoing, the authorized signatory for the Landlord shall be Richard Student and the authorized signatory for the Tenant shall be David Bounk. Both parties agree to not unreasonably withhold their approval of the final Plans. Any objections to or approvals of the Preliminary Plans or the final Plans shall be given as quickly as possible and not later than three (3) business days from the date submitted. If Tenant and Landlord fail to agree to final Plans, Landlord shall have the option of completing the Landlord's Work allowing Tenant to complete the Tenant Improvements, in which case Article 12 shall govern the performance of such work by Tenant, in lieu of this Paragraph 4B. C. Landlord and Tenant have agreed that the costs of the Tenant Improvements shall be paid by Tenant, although Landlord shall provide Tenant an allowance of up to $495,311.00 ($19.00 per rentable square foot of Premises) to be utilized toward the cost of the Tenant Improvements (hereafter called the "T. I. ALLOWANCE"). The T. I. Allowance shall be used only for the payment of costs relating to the construction of the Tenant Improvements (including the cost of preparing the Preliminary Plans and final Plans, consulting services and cabling costs and a construction management fee payable to Landlord's construction manager in the amount of three percent (3%) for profit and five percent (5%) for overhead, of the total cost of the Tenant Improvements), which costs Landlord shall pay directly out of the T. I. Allowance, for the credit of Tenant, and in no event shall any part of the T. I. Allowance be paid to or 1 2 payable to Tenant. Any costs of the Tenant Improvements which exceed the T. I. Allowance shall be paid by Tenant to Landlord without demand within fifteen (15) days of the day of submission by Landlord to Tenant of a statement of said costs. Any improvements to the Premises, other than as shown on the Plans, and the furnishing of the Premises, shall be made by Tenant at the sole cost and expense of Tenant, subject to all other provisions of this Lease Agreement, including compliance with all applicable governmental laws, ordinances and regulations. If the Tenant Improvements cannot be substantially completed prior to the commencement of the Term, then the provisions of Article 5 shall apply. "SUBSTANTIAL COMPLETION" of the Tenant Improvements shall mean that the Tenant Improvements have been constructed pursuant to the Plans except for minor "punch list" items, but to such an extent that Tenant is able to take possession of the Premises and conduct its business operations therefrom. D. Upon completion and approval of the final Plans, Landlord's construction manager shall obtain bids for construction of the Tenant Improvements from at least three (3) reputable subcontractors for each Major Subcontract (a "MAJOR SUBCONTRACT" shall be deemed any subcontract in excess of $5,000.00). For each such Major Subcontract, Tenant shall have the right to suggest subcontractors from whom Landlord shall solicit bids. All Major Subcontract bids and the total costs of constructing the Tenant Improvements shall be disclosed and reviewed with Tenant, and Tenant shall have the right to "value engineer" the Plans by making changes which will reduce the costs, subject to Landlord's approval, which approval shall not be unreasonably withheld. The Tenant Improvements shall be constructed by Landlord in accordance with the approved Plans in a good and workmanlike manner and using new materials and provided the Plans so comply, in compliance with all applicable local, state and federal codes, ordinances and laws, including, without limitation, Title III of the Americans with Disabilities Act of 1990 ("ADA"). Upon reasonable prior notice to Landlord, Tenant or its authorized representative shall be allowed to enter the Premises at reasonable times for the limited purpose of inspecting the construction of the Tenant Improvements, provided that Tenant does not interfere with the construction work or any contractor or subcontractor. In no event shall Tenant direct, interfere with or give instructions to any contractors, subcontractors or other persons working on the construction of the Tenant Improvements. ARTICLE 5 - POSSESSION Except as otherwise provided, Landlord shall deliver possession of the Premises with the Tenant Improvements substantially completed on or before the date hereinabove specified for commencement of the Term, but delivery of possession prior to such commencement date shall not affect the expiration date of this Lease Agreement. Failure of Landlord to deliver possession of the Premises by the date hereinabove provided, due to any cause beyond Landlord's control, or time required for construction delays due to labor or material shortages, strikes, or acts of God, shall automatically postpone the date of commencement of the Term of this Lease Agreement and shall extend the termination date by periods equal to those which shall have elapsed between and including the date hereinabove specified for commencement of the Term hereof and the date on which possession of the Premises is delivered to the Tenant. Subject to the abatement of rent for the first two (2) months of the Term of this Lease Agreement as provided in Article 3 above, the rentals herein reserved shall commence on the first day of the Term, provided, however, in the event of any occupancy by Tenant prior to the beginning of the Term for the purpose of conducting its business operations therein, such occupancy shall in all respects be the same as that of a tenant under this Lease Agreement, and the rental shall commence as of the date that the Tenant Improvements are substantially completed by Landlord and Tenant enters into such occupancy of the Premises; provided further, however, the Tenant may enter the Premises rent-free during the Move-in Period (as defined below) only for the purposes described below. Provided further, that if Landlord shall be delayed in delivery of the Premises to Tenant due to Tenant's failure to agree to the Plans or any delay caused by a party employed by or the agent of Tenant, or by Tenant's failure to pay for the costs of the Tenant Improvements in excess of the T. I. Allowance, then in such case the rental shall be accelerated by the number of days of such delay, and the rentals shall commence the same as if occupancy had been taken by Tenant. So long as Tenant shall not interfere with the completion of the Tenant Improvements, Landlord shall allow Tenant to commence fixturing, wiring for its telecommunications/computer equipment, installing work stations and otherwise moving its personal property, furniture and equipment into the Premises two (2) weeks prior to the commencement of the Term (the "MOVE-IN PERIOD"). During the Move-in Period and any other time prior to the commencement of the Term, Landlord shall have no responsibility or liability for loss or damage to fixtures, facilities or equipment installed or left on the Premises. By occupying the Premises as a Tenant, or to install fixtures, facilities or equipment, or to perform finishing work, Tenant shall be conclusively deemed to have accepted the same and to have acknowledged that the Premises are in the condition required by this Lease Agreement, except items which are not in compliance with the Plans and for which Tenant has given Landlord a written "punch list" within thirty (30) days of Tenant's first occupancy of the Premises. Should the commencement of the rental obligations of Tenant under this Lease Agreement occur for any reason on a day other than the first day of a calendar month, then in that event solely for the purposes of computing the Term of this Lease Agreement, the commencement date of the Term shall become and be the first day of the first full calendar month following the date when Tenant's rental obligation commences, or the first day of the first full calendar month following the commencement date set out in Article 1 (if such is other than the first date of a calendar month), whichever date is later, and the termination date shall be adjusted accordingly; provided however, that the termination date shall be the last day of a calendar month, which date shall in no event be earlier than the termination date set out in Article 1. Immediately after Tenant's occupancy of the Premises the Landlord and Tenant shall execute a ratification agreement which shall set forth the final commencement and termination dates for the Term and shall acknowledge the Minimum Rental, the rentable square footage of the Premises, and delivery of the Premises in the condition required by this Lease Agreement. ARTICLE 6 - TENANT'S PRO RATA SHARE OF REAL ESTATE TAXES AND OPERATING EXPENSES A. During each full or partial calendar year during the Term of this Lease Agreement, Tenant shall pay to Landlord, as Additional Rental, an amount equal to the "Real Estate Taxes" and "Operating Expenses" (both as hereafter defined) per square foot of rentable area in the Building multiplied by the number of square feet of rentable area in the Premises prorated for the period that Tenant occupied the Premises. In the event that during all or any portion of any calendar year, the Building is not fully rented and occupied, Landlord may make an appropriate adjustment to Operating Expenses (but restricted to those portions of Operating Expenses which are occupancy-related) for such year for the purpose of avoiding distortion of the amount of such Operating Expenses to be attributed to Tenant by reason of variation in total occupancy of the Building, by employing sound accounting and management principles to determine Operating Expenses that would have been paid or incurred by Landlord had the Building been ninety-five percent (95%) rented and occupied, and the amount so determined shall be deemed to have been Operating Expenses for such year. B. Landlord shall, each year during the Term of this Lease Agreement, give Tenant an estimate of Operating Expenses and Real Estate Taxes payable per square foot of rentable area for the coming calendar year. Tenant shall pay, as Additional Rental, along with its monthly Minimum Rental payments required hereunder, one-twelfth (1/12) of such estimated Operating Expenses and Real Estate Taxes and such Additional Rental shall be payable until subsequently adjusted for the following year pursuant to this Article. C. As soon as possible after the expiration of each calendar year, but in no event later than April 30, Landlord shall determine and certify to Tenant the actual Operating Expenses and Real Estate Taxes for the previous year per square foot of rentable area in the Building and the amount applicable to the Premises. If such statement shows that Tenant's share of Operating Expenses and Real Estate Taxes exceeds Tenant's estimated monthly payments for the previous calendar year, then Tenant shall, within twenty (20) days after receiving Landlord's certification, pay such deficiency to Landlord. In the event of an overpayment by Tenant, such overpayment shall be refunded to Tenant, at the time of certification, in the form of an adjustment in the Additional Rental next coming due, or if at the end of the Term by a refund. D. For the purposes of this Article, the term "REAL ESTATE TAXES" means the total of all taxes, fees, charges and assessments, general and special, ordinary and extraordinary, foreseen or unforeseen, which become due or payable upon the Building. All costs and expenses incurred by Landlord during negotiations for or contests of the amount of Real Estate Taxes shall be included within the term "Real Estate Taxes." For purposes of this Article, the term "OPERATING EXPENSES" shall be deemed to mean all costs and expenses directly related to the Building incurred by Landlord in the repair, operation, management and maintenance of the Building including interior and exterior and common area maintenance, management fees, cleaning expenses, energy expenses, insurance premiums, and the amortization of capital investments made to reduce operating costs or that are necessary due to governmental 2 3 requirements, all in accordance with generally accepted accounting principles. Operating Expenses shall specifically include the Building's pro rata portion of any costs and expenses incurred pursuant to cross easement and/or covenants agreements in which the Building/Landlord obtains the use or benefit of other or adjoining facilities, parks and/or amenities. Notwithstanding anything herein to the contrary, the term "Operating Expenses" shall not be deemed to include any of the costs or expenses set forth on Exhibit C attached hereto. E. Landlord may at any time designate a fiscal year in lieu of a calendar year and in such event, at the time of such a change, there may be a billing for the fiscal year which is less than 12 calendar months. In the event Landlord owns buildings in addition to the Building and/or such buildings are under common management, Landlord shall have the option for purposes of managing and administrating the Building and the calculation of Tenant's pro rata share of Operating Expenses to combine such additional building(s) with the Building (the "COMPLEX OPTION") and in such case, all such Operating Expenses shall be combined, but Tenant's Pro Rata Share of the same shall be reduced by using the total rentable area of all buildings in the Complex Option rather than just the Building for purposes of determining Tenant's Pro Rata Share pursuant to this Article. F. Landlord reserves, and Tenant hereby assigns to Landlord, the sole and exclusive right to contest, protest, petition for review, or otherwise seek a reduction in the Real Estate Taxes. G. The total rentable area of the Building shall be determined in the same manner as used in determining the rentable area of the Premises as set forth in Paragraph 1B above. For purposes of this Article 6, Tenant's Pro Rata Share shall equal a fraction, the numerator of which is the rentable square feet of the Premises and the denominator of which is the total rentable square feet in the Building. If at any time the rentable area of the Building or the rentable area of the Premises shall change, then Tenant's Pro Rata Share shall also be correspondingly revised. Tenant's Pro Rata Share is currently 12.437%. H. Notwithstanding anything herein to the contrary, Tenant shall make no payments of Operating Expenses and Real Estate Taxes under this Article 6 during calendar year 1999, it being acknowledged and agreed that subject to the abatement of rent for the first two (2) months of the Term of this Lease Agreement as provided in Article 3 above, the Additional 1999 Payments payable by Tenant pursuant to the last paragraph of said Article 3 shall be made in lieu of such payments of Operating Expenses and Real Estate Taxes. ARTICLE 7 - UTILITIES AND SERVICE A. Landlord agrees to furnish water, electricity, elevator service, and janitorial services in accordance with the specifications attached hereto as Exhibit D. In the event Tenant's requirements and/or usage of such utilities and services is substantially greater than is customarily supplied to a typical tenant in the Building, Landlord or Tenant may request that the difference in such requirement and/or usage be determined and that appropriate adjustments be made in the Minimum Rental provided for in Article 3 of this Lease Agreement. B. Landlord agrees to furnish heat during the usual heating season and air conditioning during the usual air conditioning season, all during normal business hours as defined in this Lease Agreement. Notwithstanding the foregoing, upon reasonable advance notice by Tenant to Landlord, HVAC shall be available to the Premises after normal business hours, at a charge to Tenant not to exceed Landlord's actual costs therefor, which cost is currently approximately $1.00 per hour per zone. C. No temporary interruption or failure of such services incidental to the making of repairs, alterations or improvements, or due to accidents or strike or conditions or events not under Landlord's control, shall be deemed as an eviction of the Tenant or relieve the Tenant from any of the Tenant's obligations hereunder. Notwithstanding the foregoing, in the event (i) either (x) such interruption or failure of services is caused by the negligence or willful misconduct of Landlord or (y) Landlord fails to take commercially reasonable steps to restore such services as soon as reasonably possible, (ii) the interruption or failure of services continues for a period of five (5) consecutive business days following notice by Tenant to Landlord, and (iii) as a result of such interruption or failure of services, the Premises are rendered untenantable and, in fact, the Tenant does not use the Premises for said period of time, then in such case, the payment of Minimum Rental and Additional Rental under Article 6 of the Lease Agreement (or the Additional 1999 Payments made in lieu thereof pursuant to the last paragraph of Article 3) shall thereafter abate until such time as such services are restored to the Premises. D. For the purposes of this Article 7, normal business hours shall be deemed to mean the periods of time between 7:00 a.m. and 6:00 p.m., Monday through Friday and between 8:00 a.m. and 1:00 p.m. on Saturdays, and specifically excluding Sundays and legal holidays. E. Landlord shall be deemed to have observed and performed the terms and conditions to be performed by Landlord under this Lease Agreement, including the furnishing of the services under this Article 7, if in doing so, it acts in accordance with a directive, policy, or request of a governmental or quasi-governmental authority serving the public interest in the fields of energy, conservation or security. F. Landlord agrees that during the Term of this Lease Agreement, a security firm shall be retained to provide one (1) security guard to patrol the Centennial Lakes office complex of which the Building is a part, from 4:00 p.m. to 12:00 a.m. and from 12:00 a.m. to 8:00 a.m. Monday through Friday and for eight (8) hours on Saturdays. Nothing in this Article 7 F. shall be construed so as to place any liability on Landlord, in tort or otherwise, for loss, damage or injury to person or property, and under no circumstances shall Landlord be responsible for any failure by said security firm to perform as it has agreed. Landlord may at its option and without any obligation to do so, elect to expand the scope of the services provided by said security firm. ARTICLE 8 - NON-LIABILITY OF LANDLORD Except in the event of negligence or willful misconduct of Landlord, its agents, employees or contractors, Landlord shall not be liable for any loss or damage for failure to furnish heat, air conditioning, electricity, elevator service, water, sprinkler system or janitorial service. Landlord shall not be liable for personal injury, death or any damage from any cause about the Premises or the Building except if caused by Landlord's gross negligence. ARTICLE 9 - CARE OF PREMISES A. Tenant agrees: 1. To keep the Premises in as good condition and repair as they were in at the time Tenant took possession of same, reasonable wear and tear and damage from fire and other casualty for which insurance is normally procured excepted; 2. To keep the Premises in a clean and sanitary condition; 3. Not to commit any nuisance or waste on the Premises, overload the Premises or the electrical, water and/or plumbing facilities in the Premises or Building, throw foreign substances in plumbing facilities, or waste any of the utilities furnished by Landlord; 4. To abide by such rules and regulations as may from time to time be reasonably promulgated by Landlord, a true and correct copy of the current rules and regulations being attached hereto as Exhibit E; 5. To preserve and protect all carpeted areas and to provide and use carpet protector mats in all locations within the Premises where chairs with castors are used; and 6. To obtain Landlord's prior approval of the interior design of any portion of the Premises visible from the common areas or from the outside of the Building, which approval shall not be unreasonably withheld. "Interior design" as used in the preceding sentence shall include but not be limited to floor and wall coverings, furniture, office design, artwork and color scheme. B. If Tenant shall fail to keep and preserve the Premises in the state of condition required by the provisions of this Article 9, the Landlord may at 3 4 its option put or cause the same to be put into the condition and state of repair agreed upon, and in such case the Tenant, on demand, shall pay the cost thereof. C. Subject to (i) Landlord's right to be paid for any Operating Expenses incurred by Landlord that may properly apply and be payable in accordance with Article 6 above and (ii) the obligations of Tenant under Article 9 A. above, Landlord shall maintain the Building in a manner consistent with Class A office buildings in the southwest suburban area. ARTICLE 10 - NON-PERMITTED USE Tenant agrees to use the Premises only for the purposes set forth in Article 2 hereof. Tenant further agrees not to commit or permit any act to be performed on the Premises or any omission to occur which shall be in violation of any statute, regulation or ordinance of any governmental body or which will increase the insurance rates on the Building or which will be in violation of any insurance policy carried on the Building by the Landlord. Tenant, at its expense, shall comply with all governmental laws, ordinances, rules and regulations applicable to the use of the Premises and its occupancy and shall promptly comply with all governmental orders, rulings and directives for the correction, prevention and abatement of any violation upon, or in connection with the Premises or Tenant's use or occupancy of the Premises, including the making of any alterations or improvements to the Premises, all at Tenant's sole cost and expense. The Tenant shall not disturb other occupants of the Building by making any undue or unseemly noise or otherwise and shall not do or permit to be done in or about the Premises anything which will be dangerous to life or limb. ARTICLE 11 - INSPECTION A. The Landlord or its employees or agents shall have the right, upon reasonable verbal or written notice to Tenant (except for routine janitorial services and except in the case of an emergency, in which case no notice need be given) and without any diminution of rent or other charges payable hereunder by Tenant to enter the Premises at all reasonable times for the purpose of exhibiting the Premises to prospective tenants (during the last nine (9) months of the Term only), mortgagees or purchasers, inspection, cleaning, repairing, testing, altering or improving the same or said Building, but nothing contained in this Article shall be construed so as to impose any obligation on the Landlord to make any repairs, alterations or improvements. In exercising its rights under this Article 11 A., Landlord shall not unreasonably interfere with Tenant' s use and occupancy of the Premises. B. Excepted from the Premises and reserved to Landlord are i) the roof and exterior walls of the Building and all utility lines, pipes, facilities and other appearences serving other portions of the Building, including those portions which may be located below the floor covering or above the finished ceiling of the Premises; and ii) so long as Tenant's use and occupancy of the Premises is not unreasonably interfered with, the right to place in the Premises (below the floor, above the finished ceiling or within the walls) utility lines, pipes, and the like, to serve premises other than the Premises, and to replace, maintain and repair such lines, pipes and the like as may have been or may be installed in the Building. ARTICLE 12 - ALTERATIONS Tenant will not make any alterations, repairs, additions or improvements (collectively, the "ALTERATIONS") in or to the Premises or add, disturb or in any way change any plumbing, wiring (other than Tenant's Wiring as defined in Article 19 below), life/safety or mechanical systems, locks, or structural portions of the Building without the prior written consent of the Landlord as to the character of the Alterations to be made, the manner of doing the work, and the contractor doing the work. Such consent shall not be unreasonably withheld or delayed, if such Alterations are required of Tenant or are the obligation of Tenant pursuant to this Lease Agreement. Notwithstanding anything herein to the contrary, Tenant may without the consent of Landlord make Alterations of a non-structural nature costing no more than $3,000.00 in any one instance so long as the plumbing, wiring (other than Tenant's Wiring), life/safety and mechanical systems of the Building are not disturbed or changed in any way and Tenant gives Landlord at least fifteen (15) days' written notice prior to making such Alterations describing in reasonable detail the nature of same. All such work shall comply with all applicable governmental laws, ordinances, rules and regulations. The Landlord as a condition to said consent may require a surety performance and/or payment bond from the Tenant for said actions. Tenant agrees to indemnify and hold Landlord free and harmless from any liability, loss, cost, damage or expense (including attorney's fees) by reasons of any said alteration, repairs, additions or improvements. ARTICLE 13 - SIGNS Tenant agrees that no signs or other advertising materials shall be erected, attached or affixed to any portion of the interior or exterior of the Premises or the Building without the express prior written consent of Landlord. Notwithstanding the foregoing, Tenant shall be entitled to (i) the Building-standard suite-entry signage, the cost of which may be paid from the T.I. Allowance and (ii) to have its name included in the directory for the Building. ARTICLE 14 - COMMON AREAS A. Tenant agrees that the use of all corridors, passageways, elevators, toilet rooms, parking areas and landscaped area in and around said Building, by the Tenant or Tenant's employees, visitors or invitees, shall be subject to such rules and regulations as may from time to time be made by Landlord for the safety, comfort and convenience of the owners, occupants, tenants and invitees of said Building. Tenant agrees that no awnings, curtains, drapes or shades shall be used upon the Premises except as may be approved by Landlord. B. In addition to the Premises, Tenant shall have the right of non-exclusive use, in common with others, of (a) all unrestricted automobile parking areas, driveways and walkways, and (b) loading facilities, freight elevators and other facilities as may be constructed in the Building, all to be subject to the terms and conditions of this Lease Agreement and to reasonable rules and regulations for the use thereof as prescribed from time to time by Landlord. Landlord represents to Tenant that parking will be available at the Building at a ratio of 4.56 parking spaces for each 1,000 usable square feet of space in the Building. C. Landlord shall have the right to make changes or revisions in the site plan and in the Building so as to provide additional leasing area. Landlord shall also have the right to construct additional buildings on the land described on Exhibit A-2 for such purposes as Landlord may deem appropriate. Landlord also reserves all airspace rights above, below and to all sides of the Premises, including the right to make changes, alterations or provide additional leasing areas. Landlord's rights under this Article 14 C. shall be exercised in such a way so as not to materially and adversely affect Tenant's use and occupancy of the Premises, Tenant's ingress and egress to and from the Premises or the Building or the required level of parking at the Building. D. Landlord and Tenant agree that Landlord will not be responsible for any loss, theft or damage to vehicles, or the contents thereof, parked or left in the parking areas of the Building and Tenant agrees to so advise its employees, visitors or invitees who may use such parking areas. The parking areas shall include those areas designated by Landlord, in its sole discretion, as either restricted or unrestricted parking areas. Any restricted parking areas shall be leased only by separate license agreement with Landlord. Tenant further agrees not to use or permit its employees, visitors or invitees to use the parking areas for continuous overnight storage of vehicles. E. Pursuant to a separate parking license agreement to be entered into between Landlord and Tenant, Tenant shall be entitled to use up to eight (8) climate-controlled parking stalls, three (3) located in the lower level of the Building and five (5) located in the executive parking area of the parking ramp, at a license fee in effect during the initial Term of this Lease Agreement of $100.00 per month per parking stall. In addition, Tenant shall be entitled to use a ninth (9th) climate-controlled parking stall on a month-to-month basis. Notwithstanding the foregoing, for each such parking stall, Landlord shall abate the payment of the monthly license fee payable for the first two (2) months of the Term of this Lease Agreement. 4 5 F. Pursuant to a separate storage license agreement to be entered into between Landlord and Tenant, Tenant shall have the right to use up to 200 square feet of storage space in the lower level of the Building at a gross annual rate in effect during the initial Term of this Lease Agreement of $11.00 per square foot, payable monthly. G. Pursuant to a separate license agreement to be entered into between Landlord and Tenant, during the Term of this Lease Agreement Tenant shall be permitted to erect and maintain on the roof of the Building, rent-free, a satellite dish, antenna or other telecommunications device. ARTICLE 15 - ASSIGNMENT AND SUBLETTING A. Tenant agrees not to assign, sublet, license, mortgage or encumber this Lease Agreement, the Premises, or any part thereof, whether by voluntary act, operation of law, or otherwise, without the specific prior written consent of Landlord in each instance, which consent shall not be unreasonably withheld or delayed by Landlord. If Tenant is a corporation or a partnership, transfer of a controlling interest of Tenant shall be considered an assignment of this Lease Agreement for purposes of this Article. Notwithstanding anything herein to the contrary, Tenant may assign this Lease Agreement or sublet all or any part of the Premises, without the consent of Landlord, to an Affiliate of Tenant. As used herein, an "AFFILIATE" of Tenant shall be deemed to be any entity which either controls, is controlled by or is under common control with Tenant, with "control" meaning the power to direct the management and policies, directly or indirectly, through the ownership of voting securities. Consent by Landlord in one such instance shall not be a waiver of Landlord's rights under this Article as to requiring consent for any subsequent instance. In the event Tenant desires to sublet a part or all of the Premises, or assign this Lease Agreement, whether to an Affiliate, Tenant shall give written notice to Landlord at least thirty (30) days prior to the proposed commencement date of the subletting or assignment, which notice shall state the name of the proposed subtenant or assignee, the terms of any sublease or assignment documents and if proposed to a person or entity other than an Affiliate, copies of financial reports or other relevant financial information of the proposed subtenant or assignee. At Landlord's option, any and all payments by the proposed assignee or sublessee with respect to the assignment of sublease shall be paid directly to Landlord. In any event no subletting or assignment, regardless of whether to an Affiliate, shall release Tenant of its obligation to pay the rent and to perform all other obligations to be performed by Tenant hereunder for the Term of this Lease Agreement. The acceptance of rent by Landlord from any other person shall not be deemed to be a waiver by Landlord of any provision hereof. At Landlord's option, Landlord may terminate the Lease Agreement in lieu of giving its consent to any proposed assignment of this Lease Agreement or subletting of all of the Premises (which termination may be contingent upon the execution of a new lease with the proposed assignee or subtenant). B. Landlord's right to assign this Lease Agreement is and shall remain unqualified upon any sale or transfer of the Building and, providing the purchaser succeeds to the interests of Landlord under this Lease Agreement, Landlord shall thereupon be entirely freed of all obligations of the Landlord hereunder and shall not be subject to any liability resulting from any act or omission or event occurring after such conveyance. ARTICLE 16 - LOSS BY CASUALTY If the Building is destroyed by fire or other casualty or is damaged by fire or other casualty to such an extent that such damage can not be repaired within ninety (90) days of the date of such damage as reasonably determined by Landlord, the Landlord shall have the right to terminate this Lease Agreement, provided it gives written notice thereof to the Tenant within ninety (90) days after such damage or destruction. If a portion of the Premises is damaged by fire or other casualty, and Landlord does not elect to terminate this Lease Agreement, the Landlord shall, at its expense, restore the Premises to as near the condition which existed immediately prior to such damage or destruction, as reasonably possible, and the rentals shall abate during such period of time as the Premises are untenantable, in the proportion that the untenantable portion of the Premises bears to the entire Premises. ARTICLE 17 - WAIVER OF SUBROGATION Landlord and Tenant hereby release the other from any and all liability or responsibility to the other or anyone claiming through or under them by way of subrogation or otherwise for any loss or damage to property caused by fire or any of the extended coverage or supplementary contract casualties, even if such fire or other casualty shall have been caused by the fault or negligence of the other party, or anyone for whom such party may be responsible. ARTICLE 18 - EMINENT DOMAIN If the entire Building is taken by eminent domain, this Lease Agreement shall automatically terminate as of the date of taking. If a portion of the Building is taken by eminent domain, the Landlord shall have the right to terminate this Lease Agreement, provided it gives written notice thereof to the Tenant within ninety (90) days after the date of taking. If a portion of the Premises is taken by eminent domain and this Lease Agreement is not terminated by Landlord, the Landlord shall, at its expense, restore the Premises to as near the condition which existed immediately prior to the date of taking as reasonably possible, and the rentals shall abate during such period of time as the Premises are untenantable, in the proportion that the untenantable portion of the Premises bears to the entire Premises. All damages awarded for such taking under the power of eminent domain shall belong to and be the sole property of Landlord, irrespective of the basis upon which they are awarded, provided, however, that nothing contained herein shall prevent Tenant from making a separate claim to the condemning authority for its moving expenses and trade fixtures. For purposes of this Article, a taking by eminent domain shall include Landlord's giving of a deed under threat of condemnation. ARTICLE 19 - SURRENDER On the last day of the Term of this Lease Agreement or on the sooner termination thereof in accordance with the terms hereof, Tenant shall peaceably surrender the Premises in good condition and repair consistent with Tenant's duty to make repairs as provided in Article 9 hereof. On or before said last day, Tenant shall at its expense remove all of its equipment from the Premises, repairing any damage caused thereby, and any property not removed shall be deemed abandoned. All alterations, additions and fixtures other than Tenant's trade fixtures, which have been made or installed by either Landlord or Tenant upon the Premises shall remain as Landlord's property and shall be surrendered with the Premises as a part thereof, or shall be removed by Tenant, at the option of Landlord, in which event Tenant shall at its expense repair any damage caused thereby; provided, however, Tenant shall have no obligation hereunder to remove the initial Tenant Improvements made to the Premises pursuant to Article 4 above (other than Wiring as described below) or to remove any Alteration made subsequently to the Premises unless as a condition of Landlord's consent thereto under Article 12 above, Tenant was notified by Landlord that such Alteration must be so removed by Tenant or if Landlord's consent to such Alteration was not required under Article 12, Landlord notifies Tenant within ten (10) days of Tenant's notice to Landlord under Article 12 above that such Alteration will be made, that said Alteration must be so removed by Tenant. It is specifically agreed that any and all telephonic, coaxial, ethernet, or other computer, wordprocessing, facsimile, or electronic wiring installed by Tenant within the Premises (hereafter "WIRING") shall be removed at Tenant's cost at the expiration of the Term, unless Landlord has specifically requested in writing that said Wiring shall remain, whereupon said Wiring shall be surrendered with the Premises as Landlord's property. If the Premises are not surrendered at the end of the Term or the sooner termination thereof, Tenant shall indemnify Landlord against loss or liability resulting from delay by Tenant in so surrendering the Premises, including, without limitation, claims made by any succeeding tenant founded on such delay. Tenant shall promptly surrender all keys for the Premises to Landlord at the place then fixed for payment of rental and shall inform Landlord of combinations on any locks and safes on the Premises. ARTICLE 20 - NON-PAYMENT OF RENT, DEFAULTS If any one or more of the following occurs: (1) a rent payment or any other payment due from Tenant to Landlord shall be and remain unpaid in whole or in part for more than ten (10) days after same is due and payable; (2) Tenant shall violate or default on any of the other covenants, agreements, stipulations or conditions herein, or in any parking agreement(s) or other agreements between Landlord and Tenant relating to the Premises, and such violation or default shall continue for a period of thirty (30) days (or such additional period of time, not to exceed an additional thirty (30) days, as is reasonable under the circumstances if such violation or default can not reasonably be cured within thirty (30) days and Tenant promptly commences such 5 6 cure and at all times diligently pursues same) after written notice from Landlord of such violation or default; or (3) if Tenant shall commence or have commenced against Tenant proceedings under a bankruptcy, receivership, insolvency or similar type of action; then it shall be optional for Landlord, without further notice or demand, to cure such default or to declare this Lease Agreement forfeited and the said Term ended, or to terminate only Tenant's right to possession of the Premises, and to re-enter the Premises, with or without process of law, using such force as may be necessary to remove all persons or chattels therefrom, and Landlord shall not be liable for damages by reason of such re-entry or forfeiture; but notwithstanding re-entry by Landlord or termination only of Tenant's right to possession of the Premises, the liability of Tenant for the rent and all other sums provided herein shall not be relinquished or extinguished for the balance of the Term of this Lease Agreement and Landlord shall be entitled to periodically sue Tenant for all sums due under this Lease Agreement or which become due prior to judgment, but such suit shall not bar subsequent suits for any further sums coming due thereafter. Tenant shall be responsible for, in addition to the rentals and other sums agreed to be paid hereunder, the cost of any necessary maintenance, repair, restoration, reletting (including related cost of removal or modification of tenant improvements) or cure as well as reasonable attorney's fees incurred or awarded in any suit or action instituted by Landlord to enforce the provisions of this Lease Agreement, regain possession of the Premises, or the collection of the rentals due Landlord hereunder. Tenant shall also be liable to Landlord for the payment of a late charge in the amount of 5% of the rental installment or other sum due Landlord hereunder if said payment has not been received within ten (10) days from the date said payment becomes due and payable, or cleared by Landlord's bank within three (3) business days after deposit. Tenant agrees to pay interest at the rate of 12% per annum, on all rentals and other sums due Landlord hereunder not paid within ten (10) days from the date same become due and payable. Each right or remedy of Landlord provided for in this Lease Agreement shall be cumulative and shall be in addition to every other right or remedy provided for in this Lease Agreement now or hereafter existing at law or in equity or by statute or otherwise. If the Tenant vacates the Premises for any reason, such vacation alone shall not be deemed a default by Tenant under this Lease Agreement. However, in the event Tenant shall vacate all of the Premises for a period of sixty (60) consecutive days, Landlord shall have the right, but not the obligation, to terminate this Lease Agreement by giving written notice to Tenant. ARTICLE 21 - LANDLORD'S DEFAULT Landlord shall not be deemed to be in default under this Lease Agreement until Tenant has given Landlord written notice specifying the nature of the default and Landlord does not cure such default within thirty (30) days after receipt of such notice or within such reasonable time thereafter as may be necessary to cure such default where such default is of such a character as to reasonably require more than thirty (30) days to cure. ARTICLE 22 - HOLDING OVER Tenant will, at the expiration of this Lease Agreement, whether by lapse of time or termination, give up immediate possession to Landlord. If Tenant fails to give up possession the Landlord may, at its option, serve written notice upon Tenant that such holdover constitutes either one of (i) creation of a month-to-month tenancy or (ii) creation of a tenancy at sufferance. If Landlord does not give said notice, Tenant's holdover shall create a tenancy at sufferance. In any such event the tenancy shall be upon the terms and conditions of this Lease Agreement, except that the Minimum Rental shall be one hundred fifty percent (150%) of the Minimum Rental Tenant was obligated to pay Landlord under this Lease Agreement immediately prior to termination (in the case of tenancy at sufferance such Minimum Rental shall be prorated on the basis of a 365 day year for each day Tenant remains in possession); excepting further that in the case of a tenancy at sufferance, no notices shall be required prior to commencement of any legal action to gain repossession of the Premises. In the case of a tenancy at sufferance, Tenant shall also pay to Landlord all damages sustained by Landlord resulting from retention of possession by Tenant. The provisions of this paragraph shall not constitute a waiver by Landlord of any right of re-entry as otherwise available to Landlord; nor shall receipt of any rent or any other act in apparent affirmance of the tenancy operate as a waiver of the right to terminate this Lease Agreement for a breach by Tenant hereof. ARTICLE 23 - SUBORDINATION A. Tenant agrees that this Lease Agreement shall be subordinate to any mortgage(s) that may now or hereafter be placed upon the Building or any part thereof, and to any and all advances to be made thereunder, and to the interest thereon, and all renewals, replacements, and extensions thereof, provided the mortgagee named in such mortgage(s) shall agree to recognize this Lease Agreement and Tenant in the event of foreclosure provided the Tenant is not in default. In confirmation of such subordination, Tenant shall promptly execute and deliver any instrument, in recordable form, as reasonably required by Landlord's mortgagee. In the event of any mortgagee electing to have the Lease Agreement a prior incumbrance to its mortgage, then and in such event upon such mortgagee notifying Tenant to that effect, this Lease Agreement shall be deemed prior in incumbrance to the said mortgage, whether this Lease Agreement is dated prior to or subsequent to the date of said mortgage. B. Tenant agrees that this Lease Agreement shall be subordinate to any existing or future agreements with the City of Edina and/or the Housing and Redevelopment Authority of Edina, Minnesota ("CITY AGREEMENTS") provided such City Agreements bind the Land upon which the Building is or will be constructed and the present and future owners of the Building. In confirmation of such subordination, Tenant shall promptly execute and deliver any instrument, in recordable form, as may be required in connection with such City Agreements. Landlord represents to Tenant that the City Agreements do not conflict with the terms and conditions of this Lease Agreement and Landlord is not in default under the City Agreements. ARTICLE 24 - INDEMNITY, INSURANCE AND SECURITY A. Tenant will keep in force at its own expense for so long as this Lease Agreement remains in effect public liability insurance with respect to the Premises in which Landlord shall be named as an additional insured, in companies and in form acceptable to Landlord with a minimum combined limit of liability of Two Million Dollars ($2,000,000.00). This limit shall apply per location. Said insurance shall also provide for contractual liability coverage by endorsement. Tenant shall further provide for business interruption insurance to cover a period of not less than six (6) months. Tenant will further deposit with Landlord the policy or policies of such insurance or certificates thereof, or other acceptable evidence that such insurance is in effect, which evidence shall provide that Landlord shall be notified in writing thirty (30) days prior to cancellation, material change, or failure to renew the insurance. Tenant further covenants and agrees to indemnify and hold Landlord and Landlord's manager of the Building harmless for any claim, loss or damage, including reasonable attorney's fees, suffered by Landlord, Landlord's manager or Landlord's other tenants caused by: i) any act or omission by Tenant, Tenant's employees or anyone claiming through or by Tenant in, at, or around the Premises or the Building; ii) the conduct or management of any work or thing whatsoever done by Tenant in or about the Premises; or iii) Tenant's failure to comply with any and all governmental laws, rules, ordinances or regulations applicable to the use of the Premises and its occupancy. If Tenant shall not comply with its covenants made in this Article 24, Landlord may, at its option, cause insurance as aforesaid to be issued and in such event Tenant agrees to pay the premium for such insurance promptly upon Landlord's demand. B. Tenant shall be responsible for the security and safeguarding of the Premises and all property kept, stored or maintained in the Premises. Landlord will make available to Tenant, at Tenant's request, the plans and specifications for construction of the Building and the Premises. Tenant represents that it is satisfied that the construction of the Building and the Premises, including the floors, walls, windows, doors and means of access thereto are suitable for the particular needs of Tenant's business. Tenant further represents that it is satisfied with the security of said Building and Premises for the protection of any property which may be owned, held, stored or otherwise caused or permitted by Tenant to be present upon the Premises. The placement and sufficiency of all safes, vaults, cash or security drawers, cabinets or the like placed upon the Premises by Tenant shall be at the sole responsibility and risk of Tenant. Tenant shall maintain in force throughout the Term, insurance upon all contents of the Premises, including that owned by others and Tenant's equipment and any alterations, additions, fixtures, or improvements in the Premises acknowledged by Landlord to be the Tenant's. 6 7 C. Landlord shall carry and cause to be in full force and effect a fire and extended coverage insurance policy on the Building, but not contents owned, leased or otherwise in possession of Tenant. The cost of such insurance shall be an Operating Expense. ARTICLE 25 - NOTICES All notices from Tenant to Landlord required or permitted by any provisions of this Lease Agreement shall be directed to Landlord postage prepaid, certified or registered mail, at the address provided for Landlord in the preamble to this Lease Agreement or at such other address as Tenant shall be advised to use by Landlord. All notices from Landlord to Tenant required or permitted by any provision of this Lease Agreement shall be directed to Tenant, postage prepaid, certified or registered mail, at the Premises and at the address, if any, set forth on the signature page of this Lease Agreement. Landlord and Tenant shall each have the right at any time and from time to time to designate one (1) additional party to whom copies of any notice shall be sent. ARTICLE 26 - APPLICABLE LAW This Lease Agreement shall be construed under the laws of the State of Minnesota. ARTICLE 27 - MECHANICS' LIEN In the event any mechanic's lien shall at any time be filed against the Premises or any part of the Building by reason of work, labor, services or materials performed or furnished to Tenant or to anyone holding the Premises through or under Tenant, Tenant shall forthwith cause the same to be discharged of record. If Tenant shall fail to cause such lien forthwith to be discharged within five (5) days after being notified of the filing thereof, then, in addition to any other right or remedy of Landlord, Landlord may, but shall not be obligated to, discharge the same by paying the amount claimed to be due, or by bonding, and the amount so paid by Landlord and all costs and expenses, including reasonable attorney's fees incurred by Landlord in procuring the discharge of such lien, shall be due and payable in full by Tenant to Landlord on demand. ARTICLE 28 - SECURITY INTEREST (INTENTIONALLY OMITTED) ARTICLE 29 - BROKERAGE Each of the parties represents and warrants that except as hereinafter provided, there are no claims for brokerage commissions or finder's fees (collectively, "LEASING COMMISSIONS") in connection with this Lease Agreement, and agrees to indemnify the other against, and hold it harmless from all liabilities arising from any such claim, including without limitation, the cost of attorney's fees in connection therewith. Landlord agrees to pay any Leasing Commission payable to Landlord's broker, United Properties Brokerage LLC on account of this Lease Agreement. Landlord further agrees to pay a Leasing Commission to Tenant's broker, CB Richard Ellis in the total amount of $3.00 per rentable square foot of Premises initially being leased by Tenant under Article 1 of this Lease Agreement, payable one half (1/2) upon full execution of this Lease Agreement and one half (1/2) upon occupancy of the Premises by Tenant following the Move-in Period. ARTICLE 30 - SUBSTITUTION (INTENTIONALLY OMITTED) ARTICLE 31 - ESTOPPEL CERTIFICATES A. Each party hereto agrees that at any time, and from time to time during the Term of this Lease Agreement, within ten (10) days after request by the other party hereto, it will execute, acknowledge and deliver to such other party or to any prospective purchaser, assignee or mortgagee designated by such other party, an estoppel certificate in a form acceptable to Landlord. Tenant agrees to provide Landlord (but not more often than twice in any calendar year), within ten (10) days of request, the then most current financial statements of Tenant and any guarantors of this Lease Agreement, which shall be certified by Tenant, and if available, shall be audited and certified by a certified public accountant. Landlord shall keep such financial statements confidential, except Landlord shall, in confidence, be entitled to disclose such financial statements to existing or prospective mortgagees or purchasers of the Building. B. Tenant acknowledges that the Building is in a tax increment financing district, and pursuant to Minnesota Statutes ss.116J.991 an annual report to the State is required regarding jobs and wages. Tenant agrees, within 60 days subsequent to each calendar year during the Term, to certify to the Housing and Redevelopment Authority of Edina, Minnesota ("HRA"): i) the number of employees employed at the Premises, ii) whether any such employees are new and if so whether the new employee is replacing a former employee or is increasing the employment at the Premises, iii) the hourly wages paid to such employees (or if said employees are paid on a salaried basis, then the salary range of such employee, but if over $40,000 then identifying said salary as $40,000 plus), specifically including identifying the wages or salaries for any such new employees. Such certification shall be on such form as may reasonably be required by the HRA. ARTICLE 32 - EXCULPATION Tenant agrees to look solely to Landlord's interest in the Building for the recovery of any judgment from Landlord, it being agreed that Landlord and Landlord's partners, whether general or limited (if Landlord is a partnership) or its directors, governors, officers, managers, members or shareholders (if Landlord is a limited liability company or corporation), shall never be personally liable for any such judgment. ARTICLE 33 - SECURITY DEPOSIT (INTENTIONALLY OMITTED) ARTICLE 34 - EXPANSION RIGHTS A. Landlord agrees that subject to the remaining provisions of this Article 34, at Landlord's option, no less than 2,000 contiguous rentable square feet and no more than 5,000 contiguous rentable square feet, of space on the third (3rd) floor of the Building (for purposes of this Article 34, the "OPTION SPACE") shall be leased by Landlord to no more than one third party tenant at any one time, it being acknowledged and agreed by the parties that the size (i.e., between 2,000 and 5,000 contiguous rentable square feet, at Landlord's option) and location of the Option Space on the third (3rd) floor of the Building may change from time to time as designated by Landlord. 7 8 B. Landlord further agrees that during Landlord's initial leasing of the then designated Option Space, if Landlord receives a bona fide expression of interest from a third party to lease said Option Space on terms that would be acceptable to Landlord, Landlord shall give written notice of such fact to Tenant ("LANDLORD'S NOTICE"). Provided Tenant is not then in default under this Lease Agreement beyond the passage of any applicable period of cure, grace or notice and there would remain as of the 34 B. Commencement Date (as defined below) at least (3) years in the initial Term or in the Extended Term of this Lease Agreement if the Term of this Lease Agreement has been extended in accordance with Article 35 below, Tenant shall then have a period of five (5) days following Landlord's Notice to elect to lease all of the Option Space from Landlord by giving written notice to Landlord, time being of the essence ("TENANT'S NOTICE"). If no such Tenant's Notice is timely given, Landlord shall be free to lease the Option Space to any third party or parties, subject, however, to the remaining provisions of this Article 34. If such Tenant's Notice is timely given, such Option Space shall be leased by Tenant from Landlord commencing (the "34 B. COMMENCEMENT DATE") no later than thirty (30) days following the date such Option Space is available for the construction of Tenant Improvements by Landlord, but in no event earlier than the commencement date for the Premises being leased by Tenant under Article 1 above, and continuing for a period co-terminous with the remainder of the initial Term or Extended Term of this Lease Agreement, as applicable and otherwise on terms and conditions identical to those set forth in this Lease Agreement, including the payment of Minimum Rental at the rate(s) in effect from time to time during the remainder of the initial Term or Extended Term of this Lease Agreement, as applicable; provided, however, the T.I. Allowance to be furnished by Landlord for such Option Space shall equal the product of (i) $0.2568 and (ii) the number of months remaining in the initial Term or Extended Term of this Lease Agreement, as applicable for which Minimum Rental will be payable by Tenant for such Option Space. C. Landlord further agrees that following the initial leasing of the then designated Option Space by Landlord to a third party tenant, if such Option Space again becomes Available For Lease (as defined below), Landlord shall give written notice of such fact to Tenant ("LANDLORD'S 34 C. Notice"). Provided Tenant is not then in default under this Lease Agreement beyond the passage of any applicable period of cure, grace or notice and there would remain as of the 34 C. Commencement Date (as defined below) at least three (3) years in the initial Term or in the Extended Term of this Lease Agreement if the Term of this Lease Agreement has been extended in accordance with Article 35 below, Tenant shall then have a period of five (5) days following Landlord's 34 C. Notice to elect to lease all of the Option Space from Landlord by giving written notice to Landlord, time being of the essence ("TENANT'S 34 C. NOTICE"). If no such Tenant's 34 C. Notice is timely given, Landlord shall be free to lease all of the Option Space to any third party or parties, subject, however, to the remaining provisions of this Article 34. If such Tenant's 34 C. Notice is timely given, such Option Space shall be leased by Tenant from Landlord commencing (the "34 C. COMMENCEMENT DATE") immediately following vacancy of such Option Space by the third party tenant occupying same and continuing for a period co-terminous with the remainder of the initial Term or Extended Term of this Lease Agreement, as applicable and otherwise on terms and conditions identical to those set forth in this Lease Agreement, including the payment of Minimum Rental at the rate(s) in effect from time to time during the remainder of the initial Term or Extended Term of this Lease Agreement, as applicable, provided, however, the Option Space shall be leased by Tenant in its then existing "as is" condition without any obligation on the part of Landlord to make any improvements or modifications thereto or pay any T.I. Allowance or other allowances therefor. As used herein, Option Space shall be "AVAILABLE FOR LEASE" if such Option Space is not subject to any existing lease (including provisions of said lease granting the tenant thereunder the right to renew the term thereof); provided, however, Landlord may make such Option Space "Available for Lease" as early as nine (9) months prior to the expiration of said existing lease. D. Notwithstanding anything in this Article 34 to the contrary, in the event Tenant shall lease any Option Space from Landlord in accordance with the provisions of either Article 34 B. or Article 34 C. above, Tenant shall have no further rights under this Article 34 to lease Option Space from Landlord and Article 34 A., Article 34 B. and Article 34 C. above shall become null and void and of no further force or effect. ARTICLE 35 - OPTION TO RENEW Tenant shall have the right to extend the Term of this Lease Agreement for one (1) period of five (5) years (the "EXTENDED TERM") subject to the following terms and conditions: (a) Subject to the right of Tenant to rescind the giving of the Renewal Notice (as hereinafter defined) in accordance with the provisions of subparagraph (d) below of this Article 35, Tenant shall give written notice of its election to extend the Term no later than ten (10) months prior to commencement of the Extended Term, time being of the essence (the "RENEWAL NOTICE"). If no such Renewal Notice is timely given, this Lease Agreement shall terminate at the end of the initial Term; (b) Tenant shall not be in default under this Lease Agreement beyond the passage of any applicable period of cure, grace or notice at the time of giving the Renewal Notice or at any time thereafter to and including the commencement of the Renewal Term; (C) The extension of the Term hereunder shall be on the same terms and conditions as are applicable to the initial Term; provided, however, this Article 35 shall not apply to the Extended Term, (ii) the Premises (including any Option Space leased pursuant to Article 34 above) shall be leased by Tenant in their current "as is" condition and (iii) the monthly Minimum Rental payable by Tenant to Landlord for the Premises for the Extended Term shall be the Market Rent as determined pursuant to subparagraph (d) of this Article 35; and (d) Within thirty (30) days following receipt of Tenant's Renewal Notice, Landlord will submit to Tenant Landlord's proposed Market Rent for the Extended Term ("LANDLORD'S PROPOSED MARKET RENT NOTICE"). If Tenant does not agree in writing with Landlord's proposed Market Rent, the parties shall negotiate in good faith for a period of thirty (30) days following Landlord's Proposed Market Rent Notice with a view to reaching agreement as to the Market Rent for the Extended Term. In connection therewith, each party shall submit to the other party such evidence as it then has to substantiate its proposed Market Rent. If the Market Rent is not resolved by the parties in writing within said thirty (30) day period, Tenant shall have the option, but not the obligation, to rescind the giving of the Renewal Notice by giving written notice to Landlord no later than ten (10) days following the expiration of said thirty (30) day period, time being of the essence (the "RESCISSION NOTICE"), in which case the Lease Agreement shall terminate as of the end of the initial Term. If no such Rescission Notice is timely given by Tenant, the Renewal Notice shall remain in full force and effect and the Minimum Rental payable during the Extended Term shall be the Market Rent proposed by Landlord in Landlord's Proposed Market Rent Notice. ARTICLE 36 - HAZARDOUS MATERIALS Tenant shall not cause or permit the release, discharge, or disposal nor the presence, use, transportation, generation, or storage of any Hazardous Materials (as hereafter defined) in, on, under, about, to, or from the Premises by either Tenant, Tenant's employees, agents, contractors, or invitees (collectively the "Tenant") other than the use of such materials in de minimum quantities reasonably necessitated by the Tenant's regular business activities. Tenant further agrees and covenants to Landlord, its agents, employees, affiliates and shareholders (collectively the "Landlord") the following: (a) To comply with all Environmental Laws in effect, or may come into effect, applicable to the Tenant or Tenant's use and occupancy of the Premises; (b) To immediately notify Landlord, in writing, of any existing, pending or threatened (i) investigation, inquiry, claim or action by any governmental authority in connection with any Environmental Laws; (ii) third party claims; (iii) regulatory actions; and/or (iv) contamination of the Premises; (c) Tenant shall, at Tenant's expense, investigate, monitor, remediate, and/or clean up any Hazardous Material or other environmental condition on, about, or under the Premises required as a result of Tenant's use or occupancy of the Premises; 8 9 (d) To keep the Premises free of any lien imposed pursuant to any Environmental Laws arising out of, or related to Tenant's failure to comply with any other provisions of this Article 36; and (e) To indemnify, defend, and save Landlord harmless from and against any and all claims (including personal injury, real, or personal property damage), actions, judgments, damages, penalties, fines, costs, liabilities, interest, or attorney's fees that arise, directly or indirectly, from Tenant's violation of any Environmental Laws or the presence of any Hazardous Materials on, under or about the Premises arising out of, or related to Tenant's failure to comply with any other provisions of this Article 36. The Tenant's obligations, responsibilities, and liabilities under this Article shall survive the expiration of this Lease Agreement. For purposes of this Article the following definitions apply: "Hazardous Materials" shall mean: (i) any "hazardous waste" and/or "hazardous substance" defined pursuant to any Environmental Laws; (ii) asbestos or any substance containing asbestos; (iii) polychlorinated biphenyls; (iv) lead; (v) radon; (vi) pesticides; (vii) petroleum or any other substance containing hydrocarbons; (viii) any substance which, when on the Premises, is prohibited by any Environmental Laws; and (ix) any other substance, materials, or waste which, (a) by any Environmental Laws required special handling or notification of any governmental authority in its collection, storage, treatment, or disposal or (b) is defined or classified as hazardous, dangerous or toxic pursuant to any legal requirement. "Environmental Laws" shall mean: any and all federal, state and local laws, statutes, codes, ordinances, regulations, rules or other requirements, relating to human health or safety or to the environment, including, but not limited to, those applicable to the storage, treatment, disposal, handling and release of any Hazardous Materials, all as amended or modified from time to time. ARTICLE 37 - GENERAL This Lease Agreement does not create the relationship of principal and agent or of partnership or of joint venture or of any association between Landlord and Tenant, the sole relationship between Landlord and Tenant being that of landlord and tenant. No waiver of any default of Tenant hereunder shall be implied from any omission by Landlord to take any action on account of such default if such default persists or is repeated, and no express waiver shall affect any default other than the default specified in the express waiver and that only for the time and to the extent therein stated. The covenants of Tenant to pay the Minimum Rental and the Additional Rental are each independent of any other covenant, condition, or provision contained in this Lease Agreement. The marginal or topical headings of the several Articles, paragraphs and clauses are for convenience only and do not define, limit or construe the contents of such Articles, paragraphs or clauses. All preliminary negotiations are merged into and incorporated in this Lease Agreement. This Lease Agreement can only be modified or amended by an agreement in writing signed by the parties hereto. All provisions hereof shall be binding upon the heirs, successors and assigns of each party hereto. If any term or provision of this Lease Agreement shall to any extent be held invalid or unenforceable, the remainder shall not be affected thereby, and each other term and provision of this Lease Agreement shall be valid and be enforced to the fullest extent permitted by law. If Tenant is a corporation, each individual executing this Lease Agreement on behalf of said corporation represents and warrants that he is duly authorized to execute and deliver this Lease Agreement on behalf of said corporation in accordance with a duly adopted resolution of the Board of Directors of said corporation or in accordance with the Bylaws of said corporation, and that this Lease Agreement is binding upon said corporation in accordance with its terms. No receipt or acceptance by Landlord from Tenant of less than the monthly rent herein stipulated shall be deemed to be other than a partial payment on account for any due and unpaid stipulated rent; no endorsement or statement of any check or any letter or other writing accompanying any check or payment of rent to Landlord shall be deemed an accord and satisfaction, and Landlord may accept and negotiate such check or payment without prejudice to Landlord's rights to (i) recover the remaining balance of such unpaid rent or (ii) pursue any other remedy provided in this Lease Agreement. Neither party shall record this Lease Agreement or any memorandum thereof, and any such recordation shall be a breach of this Lease Agreement void, and without effect. Time is of the essence with respect to the due performance of the terms, covenants and conditions herein contained. Submission of this instrument for examination does not constitute a reservation of or option for the Premises, and this Lease Agreement shall become effective only upon execution and delivery thereof by Landlord and Tenant. IN WITNESS WHEREOF, this Lease Agreement has been duly executed by the parties hereto as of the day and year indicated above.
TENANT: MIDWEST MEDICAL INSURANCE HOLDING COMPANY LANDLORD: CENTENNIAL LAKES IV, L.L.C., BY UNITED PROPERTIES LLC, ITS MANAGER By: [SIG] By: [SIG] ------------------------------------------ --------------------------------------------- Its: President/CEO Its: ------------------------------- --------------------------------------------- By: [SIG] By: [SIG] ----------------------------------------- --------------------------------------------- Its: Vice President, Finance/CFO Its: Vice President ----------------------------- ------------------------------------------- Date: July 23,1999 Date: July 30, 1999 Address for Notices, if other than the Premises: - ----------------------------------------------- - ----------------------------------------------- - -----------------------------------------------
SCHEDULE OF EXHIBITS Exhibit A-1......... Graphic or description of the Fourth Floor Premises Exhibit A-2......... Site Plan of Building Exhibit B........... Shell Building definition Exhibit C........... Operating Expense Exclusions Exhibit D........... Janitorial Specifications Exhibit E........... Current Rules and Regulations 9 EX-10.C 3 AMENDED AND RESTATED MGMT. AGREEMENT 1 EXHIBIT 10C AMENDED AND RESTATED MANAGEMENT AGREEMENT 1999 THIS AMENDED AND RESTATED MANAGEMENT AGREEMENT, made and entered into as of this first day of July, 1999 by and between Midwest Medical Insurance Company (the "Company"), a Minnesota stock insurance corporation, and Midwest Medical Insurance Holding Company (the "Manager"), a Minnesota corporation. WITNESSETH: WHEREAS, by Management Agreement dated November 30, 1988 and amended and restated as of January 1, 1996, at the request of the Company, the Manager has managed the business of the Company, provided certain other management services and provided facilities for the conduct of the Company's business; and WHEREAS, the parties desire to continue such relationship, amend certain provisions of the Management Agreement, and restate such agreement and its various amendments by this Amended and Restated Management Agreement ("Management Agreement"); NOW, therefore, in consideration of the mutual promises set forth below, the parties agree and contract as follows: 1. Appointment of Manager. The Company hereby confirms the appointment of the Manager to be the exclusive manager of the business of the Company, pursuant to the terms and conditions of this Management Agreement. 2. General Powers. The Manager agrees to perform or provide for the performance of the services hereinafter specified for the management of the Company in an efficient manner in strict accordance with the law, applicable requirements of governmental and non governmental regulatory and supervisory authorities, and generally accepted insurance, accounting, actuarial and business practices consistent with the financial well-being and general welfare of the Company and its insureds. The Manager agrees to procure and maintain any and all licenses that may be necessary in connection with performance of its duties under this Agreement, including, without limitation, insurance brokers' and salesmen's licenses. 3. Services. The Manager agrees to perform or provide for the performance of the following services, unless otherwise stated, at its expense, on behalf of the Company: (a) to provide general administration and management of the day-to-day insurance business of the Company including, without limitation, the production, underwriting and servicing of insurance and claims; (b) to solicit, receive and accept or reject applications for insurance to be issued by the Company and to investigate and pass upon the 2 AMENDED AND RESTATED MANAGEMENT AGREEMENT 1999 desirability of the risks involved in the applications for insurance; and in such connection to provide marketing and sales services, as reasonably necessary; (c) to provide advise and recommendations concerning the strategic directions and business plans of the Company and to bring to its attention for appropriate action opportunities for the pursuit of the business plan of the Company, as it is approved and modified from time to time; (d) to underwrite, classify, rate and issue policies and binders of insurance and reinsurance for the Company; (e) to establish and maintain for, and as the property of, the Company complete and accurate records of all insurance policies written by the Company; (f) to solicit, collect, receive, and account for all insurance premiums paid, and to deposit all of said insurance premiums in a bank or banks to the account of the Company as soon as practicable; to maintain said premium accounts in accordance with applicable law; (g) to invest or cause the investment of such funds in accordance with legal requirements and the advice or instructions of any investment advisor or advisors selected by the Company upon the recommendation of the Manager and to monitor and supervise the performance of any such investment advisor on behalf of the Company and its Board of Directors and Investment Committee. (h) to establish and maintain for, and as the property of, the Company all financial and business records required by law and by sound and accepted insurance and business practices; to prepare for the Company all reports required by governmental and non governmental regulatory and supervisory authorities, including insurance reports and income tax returns; (i) to procure such reinsurance, automatic or facultative, required by law and by sound and accepted insurance and business practices; to keep the necessary records for, and as the property of, the Company in connection with such reinsurance; (j) to provide and equip appropriate and adequate offices for the business of the Company; to furnish all equipment, stationery, forms, printing and supplies for the conduct of functions required to be performed under this Agreement by the Manager; (k) to provide and maintain an adequate claims service and facilities for the handling of all claims against the Company and for the payment thereof on behalf of the Company; to recover promptly for the Company all reinsurance due on claims paid; (l) to prepare mailings, advertisements, newsletters and other promotional material for the Company; 2 3 AMENDED AND RESTATED MANAGEMENT AGREEMENT 1999 (m) to make all required filings with the Commissioner of Commerce of the State of Minnesota and any other governmental agencies and authorities having jurisdiction over the Company including income taxing authorities; and (n) to do any and all other things reasonably necessary to carry out the foregoing. 4. Extraordinary Services. Manager agrees to provide such special, or extraordinary, services as may be requested by Company from time to time and which are outside the scope of the services described in paragraph 3., such as services in connection with the acquisition of other companies or businesses. At the time such extraordinary services are provided, the Company and Manager shall agree on the basis and amount of additional consideration or reimbursement, including any incentive compensation, as shall be payable with respect to any such extraordinary services. 5. Reimbursement and Fees. The Company shall make the following payments with respect to services rendered and expenses incurred by Manager: (a) It shall reimburse all third party expenses and reimbursements paid or incurred on its behalf without service fee including, without limitation, the following: (i) All board of director and board committee fees and expenses of the boards of both the Manager and the Company. (ii) Directors and Officers liability insurance of the Company. (iii) Legal, audit, consulting and other third party expenses incurred directly and specifically for the Company which shall not be considered to be part of Allocated Costs, as defined below. (b) Certain third party fees and charges which are direct obligations of the Company shall be paid by it in the first instance, including but not limited to items in paragraph 7. (c) It shall pay promptly upon receipt of invoice all costs, fees and additional consideration as is agreed upon between the parties under paragraph 4 with respect to Extraordinary Services. (d) It shall pay its share of operating, general and overhead expenses of Manager which are incurred by Manager to provide the services to the Company under paragraph 3 above, plus a 10% service charge thereon. Operating, general and overhead expenses of Manager shall be allocated between Manager, the Company and other corporate subsidiaries and affiliates of Manager in accordance with generally accepted cost accounting principles consistently applied ("Allocated Costs"), shall be agreed upon in 3 4 AMENDED AND RESTATED MANAGEMENT AGREEMENT 1999 advance of each year during the term of this Agreement and memorialized on a schedule which shall be herein. Payments shall be made on the first business day of each month based on Manager's estimate of amounts which will be payable to it hereunder with respect to such month on a cash basis modified to include accruals out of the ordinary and, with respect to December of each year, anticipated year end accruals. Such monthly payments shall include a true-up or adjustment factor to reflect actual results of the previous month and, annually, shall be trued-up and adjusted within 60 days after year's end to reflect actual accrued expenses and obligations incurred during the previous year. Upon termination of this Agreement, such payments shall be trued-up and adjusted within 60 days after the last day of the month in which such termination occurred to reflect actual accrued expenses and obligations hereunder through the date of termination. 6. Federal Income Taxes. Federal income taxes incurred by either the Manager or the Company shall be shared in accordance with the separate Tax Sharing Agreement between the parties dated December 16, 1998 and are excluded from this Management Agreement. 7. Direct Expenses. It is agreed that certain expenses, to be agreed upon from time to time, but to include the following, are direct expenses of the Company and shall be paid directly by the Company: (a) Agents commissions. (b) Premium taxes. (c) Guarantee fund assessments. (d) Insurance Department licenses and fees. (e) Donations approved by the Company's Board of Directors. (f) Costs of legislative monitoring. (g) Reinsurance commissions received by the Company from its reinsurers. (h) Company membership dues and insurance federation dues. (i) endorsement and licensing fees. 8. Responsibility. The Manager shall remain fully responsible for the proper performance of any functions which it delegates to agents or independent contractors as permitted elsewhere in this Agreement. The Manager assumes no responsibility hereunder other than to render the services called for, in good faith, and shall not be responsible for any actions of the Company, or its Board of Directors, in following or declining to follow the advise or recommendations of the Manager. 9. Non-interference. Upon any termination of this Management Agreement, Manager agrees to turn over to Company all of its property and records, and to cooperate with the transition of the Company to other management services, provided that it receive its reasonable costs incurred in providing such transitional services, plus ten percent (10%). In the event of any such termination, Company agrees not to solicit the employment or services of employees of Manager, without its prior written 4 5 AMENDED AND RESTATED MANAGEMENT AGREEMENT 1999 consent, nor retain such employment or services within one year of the effective date of the termination of this Management Agreement. 10. Term and Termination. (a) Upon execution, this Agreement shall be effective for an indefinite term and shall continue unless terminated by either party at the end of any calendar year by written notice to the other given at least 180 days prior to the effective date of termination. (b) Notwithstanding the provisions of Paragraph 8(a), either party may terminate this Agreement as hereinafter provided: (1) Effective immediately upon written notice to the other party in the event of fraud or dishonesty by the other party, provided that such notice shall be given as soon as practicable after discovery of such fraud or dishonesty. (2) Effective immediately upon written notice to the other party upon the final judicial determination of the insolvency or bankruptcy of the other party provided that such notice shall be given as soon as practicable after discovery of such fraud or dishonesty. (3) Upon at least one full month's notice effective the last day of any month because of the material breach by the other party of its obligations under this Agreement, provided that such notice shall be given as soon as practicable after discovery of such breach and that the other party fails to remedy such breach within the notice period provided. (4) Upon at least one full month's notice effective the last day of any month upon the merger of Company with another entity or upon the change in controlling ownership of Company by Manager. (c) Upon termination of this Agreement the Manager shall deliver to the Company or its successor in interest all property, records and information of every kind concerning the affairs of the Company in the possession, custody, or control of the Manager and the parties shall make all payments required in paragraphs 4 and 5. (d) After the effective date of termination of this Agreement for any reason, the Company shall bear the cost of both allocated and unallocated loss adjustment expense for all claims open at the date of termination or reported after the date of termination and the Manager shall not be responsible for any such expense after the date of termination. (e) In the event that either party gives such notice of termination, the Company shall have the right, during the period preceding the termination date, to make any and all arrangements necessary or desirable in its discretion to provide for personnel and facilities for 5 6 AMENDED AND RESTATED MANAGEMENT AGREEMENT 1999 the performance of the services performed under this Agreement by the Manager, and the Manager will cooperate with the Company toward the end that there will be an orderly transfer of management service functions in respect of the Company's business from the Manager to the Company or its designee. 11. Damages for Breach. No provision of this Agreement shall preclude either party from recovering damages, if any, sustained by reason of any conduct in breach of the terms hereof. 12. Regulatory Compliance. The Manager agrees and acknowledges that it shall cooperate in all respects with the relationship between the Company and the various governmental agencies having jurisdiction over it and its activities and agrees to make available to such agencies during normal business hours and upon reasonable request any and all records maintained by it for the Company under this Agreement. 13. Arbitration. (a) In the event any dispute or difference of opinion arises under or with respect to this Agreement, the controversy shall be submitted to arbitration. Each party shall select one arbitrator, and the two arbitrators so selected shall select a third arbitrator before the entry into arbitration. Each of the arbitrators shall be persons having no less than five (5) years' experience in executive position with casualty insurance companies transacting substantial business. (b) The arbitrators may use their discretion in conducting the arbitration proceedings and are relieved of all judicial formalities except that they shall allow the parties an opportunity to be heard after reasonable notice before reaching any decision. (c) Each party shall bear the expense of its own arbitrator and shall jointly and equally bear with the other the expense of the third arbitrator and of the arbitration. k Any such arbitration shall take place in the greater Minneapolis-St. Paul area at a mutually acceptable location. MIDWEST MEDICAL INSURANCE HOLDING COMPANY By /s/ Andrew J. K. Smith ---------------------------------- Andrew J. K. Smith, M.D., Chairman By /s/ David Bounk ---------------------------------- David Bounk, President and CEO 6 7 AMENDED AND RESTATED MANAGEMENT AGREEMENT 1999 MIDWEST MEDICAL INSURANCE COMPANY By /s/ Andrew J. K. Smith ---------------------------------- Andrew J. K. Smith, M.D., Chairman By /s/ David Bounk ---------------------------------- David Bounk, President and CEO 7 EX-10.F 4 1999 OFFICERS SHORT-TERM INCENTIVE PLAN 1 EXHIBIT 10F 1999 OFFICERS SHORT-TERM INCENTIVE PLAN 2 MIDWEST MEDICAL INSURANCE COMPANY 1999 SHORT TERM INCENTIVE PLACE DESIGN 1. PLAN PARTICIPANTS - President - Senior Vice President - Vice President 2. PERFORMANCE MEASURES AND WEIGHTINGS - Combined Ratio 50% - Retention 20% - Growth 20% - Budget 10% 3. PLAN TRIGGER - The Threshold for Combined Ratio must be attained for the plan to activate and awards to be made under any performance measure. 4. PARTICIPATION LEVELS - Tier I - President - Tier II - Senior Vice President - Tier III - Vice President 5. GOAL/TARGET AWARDS (% OF BASE SALARY) - Tier I 35% - Tier II 30% - Tier III 25% 6. AWARD CALCULATIONS - Each performance measure is set up with a series of "cliffs". - Performance between "cliffs" would result in an award based on the lower "cliff". - Performance below Threshold will result in no award being made. - Performance beyond Maximum will not increase the award. Award Summary * Threshold Goal Maximum Attained --------- ---- ------- -------- Tier I 15.75% 35.00% 50.75% 40.25 Tier II 13.50% 30.00% 43.50% 34.50 Tier III 11.25% 25.00% 36.25% 28.75 * Assumes all performance measures are Threshold, Goal, Maximum. "Budget" counted only on Goal and Maximum. 2 3 MMIC COMBINED RATIO ------------------- Goal based upon actual amounts in the 1999 Business Plan approved by Board November 11, 1998. Performance Award Goal Level Level ---- ----------- ----- Maximum 94.9 85% 150% 103.2 92.5 125 Goal/Target 111.6 100. 100 120.0 107.5 75 Threshold 128.3 115. 50 (Plan trigger - This threshold combined ratio must be attained to receive any award under the entire plan) COMBINED RATIO TARGET AWARD --------------------------- Tier I 17.50% of salary II 15.00 of salary III 12.50 of salary 1999 Actual 106.0% 100% 100% 3 4 MMIC COMBINED RATIO EXPLANATION (in thousands of $)
1999 COMBINED 1999 COMBINED BUDGET RATIO ACTUAL RATIO ------ ----- ------ ----- Direct Premium Earned 48,000 52,037 Reinsurance Ceded - Current Year (6,400) (7,817) Reinsurance Ceded - Prior Year 2,041 5,919 Unearned Premium Adjustment (700) (3,239) ------- ------- Net Earned Premium 42,941 46,900 Loss & ALAE Incurred 32,200 35,543 Losses & ALAE - Additional 2,138 ULAE Incurred 6,111 6,489 Underwriting Expense Incurred 7,473 7,697 ------- ------- Total Expenses 47,922 111.6 49,729 106.0 ------- ------- Net Underwriting Gain (Loss) (4,981) (2,828) ======= =======
4 5 RETENTION --------- Percentage of December 31, 1999 Physician Policies in force which are available for renewal and are retained at the January 1, 2000 renewal. January 1, 2000 retirements and those not offered a renewal policy for Underwriting reasons are not available for renewal. Performance Award Goal Level Level ---- ----------- ----- Maximum 99.75 105% 150% 97.38 102.5 125 Goal/Target 95.0 100. 100 92.63 97.5 75 Threshold 90.25 95. 50 RETENTION TARGET AWARD ---------------------- Tier I 7% of salary II 6 of salary III 5 of salary 1999 Actual 98.6% 102.5% 125% 5 6 GROWTH ------ 1999 New Business premium written for all lines of business, physician, hospital, SIR, etc. Excludes new adds to existing accounts. Performance Award Goal Level Level ---- ----------- ----- Maximum $5,600M 125% 150% 5,040M 112.5 125 Goal/Target 4,480M 100. 100 3,920M 87.5 75 Threshold 3,360M 75. 50 GROWTH TARGET AWARD ------------------- Tier I 7% of salary II 6 of salary III 5 of salary 1999 Actual $8,588M 125% 150% 6 7 BUDGET ------ Attain 1999 MMIHC budget as approved in the 1999 Business Plan. Performance Award Goal Level Level ---- ----------- ----- $11,851M 95-105% 100% (Performance outside of this range results in no award) BUDGET TARGET AWARD ------------------- Tier I 3.5% of salary II 3.0 of salary III 2.5 of salary 1999 Actual 12,279,000 104.2% 100% 7 EX-10.H 5 AMENDED AND RESTATED ENDORSEMENT AGREEMENT 1 EXHIBIT 10H. AMENDED AND RESTATED ENDORSEMENT AGREEMENT THIS AMENDED AND RESTATED ENDORSEMENT AGREEMENT (the "Agreement") is made and entered into with an effective date of January 1, 1999 (the "Effective Date"), by and between MIDWEST MEDICAL INSURANCE COMPANY, a Minnesota insurance corporation ("MMIC"), and IOWA MEDICAL SOCIETY, an Iowa nonprofit corporation ("IMS"). RECITALS: A. MMIC and IMS are parties to that certain Endorsement Agreement dated as of July 1, 1993, as amended by the Endorsement Agreement Amendment dated as of December 21, 1995 (the "Original Endorsement Agreement"), pursuant to which IMS has agreed to endorse the MMIC Program (as defined below). B. The parties now wish to continue the endorsement by IMS of the MMIC Program subject to the modification of certain terms and conditions of such endorsement as set forth herein. NOW, THEREFORE, in consideration of the foregoing recitals, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto do hereby agree as follows: 1. Effect on Original Endorsement Agreement. MMIC and IMS hereby acknowledge and agree that from and after the Effective Date, the Original Endorsement Agreement shall be amended and restated as set forth in this Agreement and that the endorsement by IMS of the MMIC Program shall be undertaken on the terms and subject to the conditions set forth herein. 2. Certain Definitions. As used herein, the terms set forth below shall have the following meanings: (a) "MMIC Program" shall mean the offer and sale by MMIC of professional liability insurance policies meeting the requirements of this Agreement providing coverage for physicians practicing in the State of Iowa. (b) "Endorse" or "Endorsement" shall mean the endorsement, recognition and support of the MMIC Program by IMS to its member physicians. (c) "Voting Trust Agreement" shall mean the Voting Trust Agreement dated July 1, 1993 between IMS and Minnesota Medical Association ("MMA") in which the voting trustees, as the sole record holders of the issued and outstanding Class B common stock of Midwest Medical Insurance Holding Company 2 ("MMIHC"), a Minnesota corporation, agree to vote the Class B common stock for, and elect as directors of MMIHC from time to time, those persons entitled to be proposed for election by IMS. (d) "IMS Licensed Marks" shall mean the following marks owned by IMS: the name "Iowa Medical Society", the acronym "IMS" and various symbols, devices, logos and designs embodying the same. (e) "MMIC Licensed Marks" shall mean the following marks owned by MMIC: the names "Midwest Medical Insurance Company" and "Midwest Medical Insurance", the acronym "MMIC" and various symbols, devices, logos and designs embodying the same. (f) "Merger Agreement" shall mean the Agreement and Plan of Merger dated as of September 1, 1992 by and among MMIC, MMIHC and Iowa Physicians Mutual Insurance Trust ("IPMIT"), pursuant to which IPMIT was merged with and into MMIC. 3. Endorsement. IMS will and does hereby endorse MMIC and the MMIC Program to its member physicians (including all former policyholders of IPMIT), and agrees to endorse and promote the MMIC Program exclusively. IMS will use its reasonable efforts to support the MMIC Program through its membership materials and at IMS sponsored membership meetings and, so long as not involving material direct expense to IMS, agrees during the term of this Agreement to: (a) Provide a well located site for an MMIC booth at the annual meeting of the House of Delegates of IMS and exclude all other professional liability insurance carriers from exhibiting at such meeting. (b) Refuse to accept any sponsorship from any other professional liability insurance carrier of any IMS events, such as lunches, receptions, etc., at the annual meeting of the House of Delegates and at all other membership meetings, seminars or conventions. (c) At the request of MMIC, co-sponsor with MMIC at least one risk management seminar each calendar year. (d) Invite MMIC to participate in any and all joint IMS/specialty society or component society meetings concerning professional liability issues. -2- 3 (e) Invite MMIC to participate in any and all IMS meetings or seminars dealing with professional liability issues or legislative issues concerning professional liability. (f) Invite MMIC to participate in any and all IMS/Association of Iowa Hospitals and Health Systems joint meetings involving professional liability legislation or issues. (g) List MMIC as the exclusive, endorsed and recommended provider of professional liability insurance coverage in all resource directories and other lists of endorsed providers of member services. (h) Provide MMIC on a quarterly basis with a list of names and addresses of physicians commencing practice in the State of Iowa. (i) Provide MMIC the opportunity to deliver reports at all IMS Executive Committee meetings and meetings of the Board of Trustees (which shall be replaced by a Board of Directors effective upon the opening of the IMS 1999 House of Delegates meeting). (j) Promptly notify MMIC of any issues related to MMIC relations with IMS members that may come to the attention of IMS. (k) Make available for purchase by MMIC full-page prime location advertising opportunities in IMS publications. 4. License. IMS hereby grants MMIC an exclusive license to use the IMS Licensed Marks and their associated goodwill, including the phrases "Endorsed by the IMS" and "Exclusively Endorsed and Recommended by the Iowa Medical Society", for the specific purpose of promoting, marketing, selling, advertising and distributing products under the MMIC Program (including display of the IMS Licensed Marks upon various printed and media materials used in connection therewith), all subject to the terms of this Agreement. IMS acknowledges and agrees that it may not grant to others a license or sublicense to use the IMS Licensed Marks in connection with the offer, sale or promotion of professional liability insurance coverages. MMIC acknowledges and agrees that it may not grant others a license or sublicense to use the IMS Licensed Marks for any purpose, except that materials prepared by MMIC for the permitted license purposes may be distributed by MMIC's agents and contractors. -3- 4 MMIC hereby grants IMS an exclusive license to use the MMIC Licensed Marks and their associated goodwill, including the phrase "Exclusively Endorsing MMIC Professional Liability Insurance", in Iowa for the specific purpose of performing its duties under this Agreement in connection with its membership services and upon various printed and media materials used in connection therewith, subject to the terms of this Agreement. IMS acknowledges and agrees that it may not grant others a license or sublicense to use the MMIC Licensed Marks, except that materials prepared by IMS for permitted license purposes may be distributed by IMS' agents and contractors. If this Agreement expires at the end of the Initial Term or any Renewal Term (as defined in Section 10 hereof), without being terminated for cause or any other reason permitted by this Agreement, MMIC and IMS, as licensees, provided they are and remain in full compliance with the other terms and provisions of this Agreement, may continue to use the respective licensed marks in the ordinary course of business for a period of six (6) months after such expiration date on a non-exclusive basis on materials on hand at the date of such expiration. Upon termination of such six (6) month period, or immediately if this Agreement is terminated for cause in accordance with Section 11 hereof, the parties will destroy and/or delete the licensed marks from their respective materials and cease all further use of the licensed marks. 5. Lawful Use. MMIC and IMS, each as licensee, represent and warrant to the other that: (a) All uses of the licensed marks will be lawful. (b) Each licensee will use diligent efforts to provide the other, as licensor, with copies or samples of each proposed use of such licensed marks, in advance of use, for reasonable comment. (c) Each licensee will, as appropriate, indicate in all public uses that the licensed marks are registered with the United States Patent and Trademark Office. (d) Each licensee agrees not to register, or attempt to register, the licensed marks of the other. 6. Solicitation and Sales Activity. All solicitation, offers, sales, marketing, servicing and other activity related to the MMIC Program shall be the sole responsibility of MMIC or such agents and brokers as MMIC may in its discretion appoint from time to time, and the parties hereto acknowledge and agree that IMS shall have no authority or obligation to undertake any such activities in connection with its Endorsement of the MMIC Program. MMIC shall be solely responsible for compensating agents and -4- 5 brokers selected by MMIC to market the MMIC Program to physicians practicing in the State of Iowa. All solicitation and promotional materials used by MMIC to market the MMIC Program in the State of Iowa shall designate MMIC (or its appointed agents) as the person to contact for further information concerning the MMIC Program. 7. Royalty Payments. In consideration for the grant to MMIC of a license to use the IMS Licensed Marks and for the IMS endorsement of the MMIC Program, MMIC agrees to pay IMS an annual royalty comprised of the following payments: (a) Fixed Royalty. MMIC shall make an annual payment of $97,000 to IMS during each year for which this Agreement remains in effect, with such payment to be made no later than the 28th day of February, commencing with the year 1999. (b) Variable Royalty. MMIC shall pay IMS a variable royalty based on the gross written premium collected by MMIC with respect to all physician business written in the State of Iowa during each year for which this Agreement remains in effect, with such royalty to be calculated as follows: (i) 1.75% (.0175) of the first $15,000,000 of gross written premium on all physician business written in the State of Iowa; plus (ii) 1.25% (.0125) of gross written premium on all physician business written in the State of Iowa in excess of $15,000,000; provided, however, (iii) that in no event shall the variable royalty be less than the sum of $200,000 on an annual basis. By way of illustration, if MMIC collected gross written premium of $18,000,000 for the year, the variable royalty would be $300,000 (.0175 x $15,000,000 + .0125 x $3,000,000 = $300,000), or if such gross written premium collected during the year were $10,000,000, the variable royalty would be established at the minimum figure of $200,000, as the formula would result in an amount of $175,000 (.0175 x $10,000,000 = $175,000). The variable royalty shall be paid to IMS in monthly installments due no later than the 15th day of each month based on the gross written premium collected by MMIC for the previous month. Each payment shall be accompanied by a report presenting in reasonable detail the amount of gross written premium collected by MMIC during the previous month -5- 6 (including, whenever possible, the names of the physicians covered by policies with respect to which such premiums were paid) and illustrating the calculation of the payment made to IMS. The term "gross written premium" shall be defined to mean the total amount of premiums written and collected by MMIC on all new and renewal policies of professional liability insurance during a particular calendar year covering physicians practicing in the State of Iowa, regardless of whether the policy is issued in the name of an individual physician, to a clinic or other practice group through which a physician practices or to a hospital, health system or other entity by which a physician is employed or through which a physician engages in the practice of medicine. The parties acknowledge and agree that IMS shall not be required to pay any royalty or other fee for its use of the MMIC Licensed Marks in accordance with the terms of this Agreement. 8. Certain Agreements of MMIC. On and after the Effective Date, MMIC agrees to the following arrangements: (a) MMIC will carry out each of the agreements made by it in Article 7 of the Merger Agreement, each of which is hereby made a condition of the Endorsement and its continuation. MMIC confirms that the agreement set forth at Section 7.5 of the Merger Agreement is, in fact, an obligation of MMIC. (b) In addition to the provisions of Section 7.9 of the Merger Agreement, MMIC will consult with IMS on additions to or deletions from the current defense counsel list for Iowa physicians, although MMIC retains all decisions with respect thereto in its unfettered discretion. (c) MMIC will faithfully carry out the lessee's obligations under the office building lease (the "Office Lease") assumed from IPMIT in connection with the Merger Agreement, the lessor under such lease being IMS. (d) MMIC acknowledges that the provisions of Article III of the Bylaws of MMIC and the Bylaws of MMIHC, dealing with Board and committee participation by IMS members and their representatives, may not be modified by the directors because of the provisions of Article XI thereof. -6- 7 (e) MMIC agrees to sponsor appropriate activities at meetings and events of IMS, all at the expense of MMIC, which are expected to be at or above the level provided at meetings and events of the MMA. (f) MMIC agrees to provide information and meet with officers of IMS with respect to various aspects of the MMIC Program, including its financial results, the Endorsement, marketing, coverage issues, litigation defense, competitiveness of premiums, MMIHC board compensation issues, grievances or complaints by either party or other appropriate topics, to the same extent and in the same manner as it provides similar information and meets with officers of the MMA with respect to the Minnesota program, and to do so on a continuing basis. (g) MMIC shall provide to IMS upon its request the names of IMS members who are insured under the MMIC Program and such other information as is provided to the MMA and may reasonably be requested by IMS. (h) MMIC agrees to purchase prime advertising space in the IMS Journal each year during the term of this Agreement at an agreed price of $3,000 to be paid no later than February 28 of each year. (i) MMIC agrees to permit representatives of IMS to have access to MMIC's books and records during normal business hours upon reasonable prior notice to verify the information relating to the calculation of the variable royalty payment pursuant to Section 7(b) of this Agreement. 9. Certain Agreements of IMS. On and after the Effective Date, IMS agrees that it will faithfully carry out its obligations under the Office Lease. 10. Term of Agreement. Unless earlier terminated in accordance with the provisions of Section 11 hereof, this Agreement shall continue in effect until December 31, 2003 (the "Initial Term"), and shall thereafter automatically renew for successive terms of one year each (a "Renewal Term") unless either party shall notify the other party in writing at least ninety (90) days prior to the end of the Initial Term or any Renewal Term of its election to terminate this Agreement as of the end of the Initial Term or a Renewal Term, as the case may be; provided, however, that the parties agree to explore in good faith the extension of this Agreement during the ninety (90) days preceding the last ninety (90) days of the Initial Term or any Renewal Term prior to giving any such notice of termination. -7- 8 11. Termination for Cause. This Agreement may be terminated sooner than stated in Section 10 hereof upon thirty (30) days written notice: (a) by either party in the event that: (i) the other party breaches or otherwise fails to perform its obligations under this Agreement or the Merger Agreement in any material respect; or (ii) the other party abandons this Agreement, commits any fraudulent act in connection with this Agreement, is the subject of any insolvency proceeding or commits any act of gross or willful misconduct; (b) by IMS in the event of the suspension, cancellation or non-renewal of the certificate of authority of MMIC to write professional liability insurance in either the State of Minnesota or the State of Iowa; (c) by IMS in the event it reasonably determines that the professional liability coverages, premium charges or other material aspects of the MMIC Program (including, without limitation, the failure of the financial condition of MMIC: (i) to meet standards for licensure in Iowa; (ii) to permit an opinion of MMIC's independent auditor to be issued without material qualification; or (iii) to achieve the rating of A.M. Best of "B+" or higher) cease to be competitive with other professional liability insurance which is otherwise available to IMS member physicians in the State of Iowa; (d) by IMS in the event of the termination of the Voting Trust, or the material breach of the Voting Trust by MMA or the voting trustees named thereunder; (e) by IMS in the event of the breach of the Office Lease by MMIC; (f) by MMIC in the event of the breach of the Office Lease by IMS; (g) by either party in the event of: (i) any affirmative act of insolvency by the other party, or upon the appointment of any receiver or trustee to take possession of the property and/or business of such other party; (ii) upon the wind-up, sale or -8- 9 sequestration of any party by any governmental authority; (iii) upon the redemption of the Class B common stock in MMIHC now owned by MMA; and (iv) upon any other material change in the ownership or control of MMIHC or MMIC which is determined by the board of directors of MMIC to be inconsistent with the continued endorsement of its products by IMS; provided, however, if the acts or circumstances which entitle a party to terminate this Agreement can be cured by the defaulting party within seventy-five (75) days of the date of written notice, the defaulting party provides prompt written notice of its election to cure such default and thereafter proceeds to diligently and in good faith to cure such default, this Agreement shall not be terminated if such a default is cured within such seventy-five (75) day period. 12. No Assignments. The undertakings of the parties under this Agreement are personal to such parties, and neither party may assign its rights, duties or obligations under this Agreement without the written consent of the other party, which consent shall not unreasonably be withheld. This Agreement shall be binding upon and inure to the benefit of the successors and permitted assigns of the parties hereto. 13. No Joint Venture or Agency. Nothing contained in this Agreement shall be construed to constitute the arrangement between the parties as a joint venture, partnership, agency relationship or other arrangement under which either party shall be liable to third parties for any act or omission of the other, and neither party shall have the power to bind or obligate the other. 14. Governing Law. This Agreement and its interpretation, validity and performance shall be governed by the laws of the State of Iowa, without regard to principles of conflicts of law. 15. Mutual Indemnification. Each party agrees to indemnify, defend and hold harmless the other from and against all claims, suits and liabilities for which the indemnified party is sought to be held liable, which arise out of acts or omissions which the indemnified party did not participate in. The indemnity obligations herein provided for shall survive termination of this Agreement. 16. Notices. Any notices, demands, consents or other communications hereunder shall be in writing and, unless otherwise specifically provided, shall be deemed effective when delivered personally or sent by facsimile transmittal with first class mail with postage prepaid to follow or certified mail with first class postage prepaid, addressed as follows: -9- 10 (a) If addressed to IMS: Iowa Medical Society 1001 Grand Avenue West Des Moines, IA 50265-3599 Fax: 515-283-8420 (b) If addressed to MMIC: Midwest Medical Insurance Company 6600 France Avenue, Suite 245 Minneapolis, MN 55435 Fax: 612-922-7323 or to either party at such other address as such party may specify to the other party in a notice in compliance with this paragraph. 17. Arbitration. Any dispute, claim or controversy of any kind between the parties arising out of this Agreement or involving the interpretation or application of any provisions of this Agreement shall be submitted to arbitration in Des Moines, Iowa, in accordance with commercial arbitration rules of the American Arbitration Association and by either party appropriately commencing the arbitration process under such rules. The parties shall attempt in good faith to agree on a single arbitrator within thirty (30) days of commencement of the arbitration process; but if the parties are unable to agree upon a single arbitrator, either party may request the appointment of an arbitrator by the American Arbitration Association, the appointment of which shall bind both parties. Arbitration decisions shall be final and binding on both parties unless the arbitration is fraudulent or so grossly erroneous as to necessarily imply bad faith. General costs of arbitration (arbitrator's fees, location costs, etc.) are to be shared by both parties equally, provided that the arbitrator may choose to award general costs of arbitration against the losing party if the arbitrator determines that the final position urged by the losing party was not reasonable. Each party shall be required to submit its proposed resolution of each issue of such dispute, claim or controversy to the arbitrator and such arbitrator shall be required to render a decision adopting in full one or the other of such proposed resolutions on a per issue basis, and no compromises or alternative resolutions shall be allowed or considered by the arbitrator without the mutual consent of the parties. 18. Invalidity. In case one or more of the provisions hereof are determined to be invalid, illegal or unenforceable in any respect, the validity of the remaining provisions will in no way be affected, prejudiced or disturbed thereby. -10- 11 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first hereinabove set forth. IOWA MEDICAL SOCIETY By:/s/ Sterling Laaveg, M.D. -------------------------------- Name:Sterling Laaveg, M.D. Its: Chairman of the Board By:/s/ Michael D. Abrams -------------------------------- Name:Michael D. Abrams Its: Executive Vice President MIDWEST MEDICAL INSURANCE COMPANY By:/s/ Andrew J. K. Smith, M.D. -------------------------------- Name:Andrew J. K. Smith, M.D. Its: Chairman of the Board By:/s/ David P. Bounk -------------------------------- Name: David P. Bounk Its: Chief Executive Officer -11- EX-21 6 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 Midwest Medical Insurance Holding Company and Subsidiaries (Parent Company) Exhibit 21--Subsidiaries of the Registrant
PERCENT STATE OF ENTITY DESCRIPTION OWNED FEIN INCORPORATION - ---------------------------------------------------------------------------------------------------------------------------- Midwest Medical Insurance Holding Company Registrant n/a 41-1625287 Minnesota Midwest Medical Insurance Company Tier 1 Subsidiary 100% 41-1625288 Minnesota MMIHC Insurance Services, Inc. Tier 1 Subsidiary 100% 41-1819825 Minnesota Midwest Medical Solutions, Inc. Tier 1 Subsidiary 100% 41-1896304 Minnesota MedPower Information Resources, Inc. Tier 2 Subsidiary 100% 41-1895576 Minnesota
EX-24 7 POWER OF ATTORNEY 1 [MMIHC Letterhead] EXHIBIT 24 POWER OF ATTORNEY I, __________________________________, do hereby constitute and appoint David P. Bounk and Niles A. Cole, or either of them, my attorneys in fact for the purposes of signing in my name and on my behalf as a Director of Midwest Medical Insurance Holding Company, the filing of the annual 10K Form which provides additional information as required by the SEC. Dated: January_____, 2000 ____________________________________________ 2 [MMIHC Letterhead] POWER OF ATTORNEY I, ________________________________, do hereby constitute and appoint David P. Bounk, my attorney in fact for the purposes of signing in my name and on my behalf as Director of Midwest Medical Insurance Holding Company, a registration statement on Form S-1 for the registration under the Securities Act of 1933, as amended, of Class A common stock of the Company, par value of $.01 per share, and any and all amendments to said registration statement, and to deliver on my behalf said registration statement and any and all amendments thereto, as each thereof is so signed, for filing with the Securities and Exchange Commission. Dated: April _____, 2000 ________________________________________________ EX-27 8 FINANCIAL DATA SCHEDULE
7 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 153,950 0 0 104,898 0 0 277,976 1,821 19,285 0 320,176 119,141 12,797 0 10,175 0 0 0 7,803 147,800 320,176 46,583 10,963 7,220 2,823 41,468 0 7,197 2,552 816 1,736 0 0 0 1,736 13.92 12.53 94,467 45,942 (4,474) 2,253 33,788 99,894 4,474
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