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Annual Report 2003
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Table of Contents
Letter from the Chairman
President's Report
Condensed Financial Highlights
Board of Directors
Senior Management
Headquarted in Minneapolis, Minn., the MMIC Group provides medical malpractice insurance, property and casualty insurance products and a range of technology, human resources and strategic health care consulting products and services to physicians, clinics, hospitals and health systems in the Upper Midwest.
Vision Statement
To become the most trusted business partner of health care providers.
Mission Statement
To provide high quality professional liability insurance and other services to enhance the strength and security of the health care community. | |
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Letter to Shareholders
In 1979, physicians had few choices for professional liability insurance. The commercial insurance companies were increasing premiums at a rapid rate and were suddenly pulling out of many states, leaving physicians to scramble for any coverage at any cost. That same year, the Minnesota Medical Association voted to establish the Minnesota Medical Insurance Exchange (now MMIC), a physician-owned insurer that would give Minnesota doctors a better choice when buying medical liability insurance. In 1978, a group of Nebraska physicians created Medical Liability Mutual Insurance Company of Nebraska. The Iowa Medical Society founded Iowa Physicians Medical Insurance Trust in 1984. By 1996, these three companies had merged to create the present Midwest Medical Insurance Company, the best choice for professional liability insurance for physicians, clinics and hospitals in the Upper Midwest.
Nationally, things today are a lot like they were twenty-plus years ago. Physicians face a crisis with rapidly escalating liability insurance premiums and with insurance companies leaving a number of states or quitting the malpractice business entirely.
Conning Research and Consulting Inc., a leading insurance consulting firm, stated in a 2003 report entitled Medical Malpractice - Anatomy of a Crisis that, "in as little as two years, the medical malpractice insurance industry as a whole may be technically insolvent; that is, their equity will be less than zero. ....In essence the insurance industry has lost its ability to forecast losses, the foundation of adequately and appropriately pricing risk. Insurance as a risk transfer mechanism cannot function in this environment. ....Financial conditions going forward are worrisome."
In the past three years, A.M. Best Inc., the most recognized independent insurance rating organization, has downgraded numerous medical malpractice insurers. Because the legal climate is less volatile in the Upper Midwest, our ability to forecast losses is more predictable. After two years of small losses MMIC has returned to profitability. This modest profit is reassuring. It further strengthens our financial position and demonstrates that we price our insurance appropriately. Our stability was never in question and A.M. Best reaffirmed our 'A' rating with a stable outlook. MMIC is one of only six physician-owned malpractice specialty insurers so rated.
A common characteristic of the six companies with 'A' ratings has been their continued adherence to the physician-owned philosophy, which was the cornerstone of their formation. While they may have entered other states, or perhaps, other lines of business, they remained physician-focused and, in all cases, single state or regional in scope.
After surveying clinic policyholders several years ago, MMIC entered into other business opportunities that again focused on you, our owners and policyholders. These ventures included MMIC Benefits, MMIC Technology Solutions and business relationships with Partners Healthcare Consulting Inc. and Langan and Flynn, LLC, a human resources firm. All of these groups have contributed to our mutual success through the development of more than 500 multiple relationships with MMIC insured clinics, hospitals and health systems representing more than 3,000 physicians.
In the wake of recent corporate scandals and the Sarbanes-Oxley Act of 2002, the MMIC board of directors has taken a fresh look at its governance and has made a few changes to improve its function as a board and to strengthen the board's education program.
We have also improved our internal audit program over the last two years. The board takes its role seriously and is justifiably proud of our management team, our company and our policyholders.
Our board membership remained stable except for the departure of Dr. Russell Kuzel, who relocated out of the area. Russ was a valuable member of the board and was chair of the Risk Management and Underwriting Committee.
Overall, 2003 was a very good year for the MMIC Group. We are still the best choice and are working hard to stay that way.
G. Richard Geier, M.D.
Chairman of the Board
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Presidents Report
As you read through this year's annual report, you will see why we think your company is Still the Best Choice for medical liability insurance coverage. We have listed some of the most compelling reasons below. We hope you will agree that MMIC's history of leadership and stability'especially during difficult times'proves it has the characteristics of a company with a long-term focus and is indeed the best choice for today's health care providers.
- MMIC became a Physician Insurers Association of America (PIAA) pioneer when it merged with two other one-state insurers forming a powerful regional medical liability carrier. Now MMIC is market leader in its five-core-state territory.
- MMIC's A.M. Best rating of 'A' has been affirmed every year since it was first attained in 1992.
- MMIC was one of the first PIAA companies to offer liability coverage to hospitals and now insures more hospitals than any other PIAA company.
- MMIC's ability to control loss expenses and underwriting expenses has consistently resulted in it having some of the lowest rates in the country.
- MMIC is recognized locally and
nationally for its diligent tort reform and patient safety efforts.
- MMIC was one of the first specialty medical liability insurance company to diversify its offerings to policyholders to include noninsurance products and services to help them meet the changing needs of health care.
- MMIC has the ability to attract extraordinary board members and remarkable employees who work together to carry out its visionary strategic direction.
Continued record of stability
MMIC returned to profitability in 2003,
after two years of modest losses. Factors contributing to its success were a combined ratio of 110.5 percent, lower average claim payments, level administrative expenses, renewal retention of 96 percent and realized capital gains from the bond and stock portfolios.
After several years of record growth, we planned 2003 as a year to grow modestly to ensure we were meeting our high quality service standards. Therefore, we set a new business premium goal of $5.1 million compared to more than $30 million in new business written in 2001 and 2002 combined. We exceeded our 2003 goal by writing $6.6 million in new business because attractive new opportunities were greater than anticipated and it was clear we had the financial and service capacity to accommodate a higher level. Our total written premium of $103 million is an MMIC milestone.
In 2003, even with significant price competition, our policyholders chose to stay with MMIC because of its stable history of quality coverage, exceptional customer service and responsible pricing. Such loyalty allowed MMIC to preserve its market leader position.
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Building for the future through a progressive strategic plan
Last year was the first year in MMIC's 2003-2005 strategic plan. The plan calls for continued profitability, growth and product diversification. It is a progressive plan designed to continue strengthening the company for the benefit of our policyholders. The strategic plan continues to be based on our core values and sound business principles.
The goal of the 2003-2005 plan is to attain an A.M. Best rating of 'A+.' While no physician-owned medical specialty insurance company currently has an 'A+' rating, we believe it is a challenging, but appropriate goal for MMIC.
The A.M. Best rating given to an insurance carrier is an indication of a company's financial strength and stability. A.M. Best ratings range from 'A++' to 'F.' Generally, a rating of 'A-'or higher is acceptable for a medical liability insurance carrier. Insurance agents and brokers, health care organizations and sponsoring trade associations have indicated that they usually will not request or recommend an insurance quotation from an insurance company with an A.M. Best rating lower than 'A-.'
MMIC received its first A.M Best rating of 'B' in 1988, and an 'A-' in 1990. Receiving its 'A' rating in 1992, only four years after its first rating, signified that A.M. Best recognized that MMIC understood the industry and had acquired financial strength and stability to underwrite medical liability insurance coverage. During the 1980s and 1990s, the average rating for medical liability insurance companies was an 'A-.' However, during the last five years, the average A.M. Best rating for insurance companies has plummeted to just above a 'B+.'
Our executive management team meets annually with A.M. Best to review MMIC's financial results and business plan. Best is encouraged by MMIC's implementation of the strategic plan and its diversification into noninsurance products and services. We will continue to present a strong case for an 'A+' consideration.
Strong claim performance
The average indemnity result in 2003 showed a small decline from 2002 and a significant improvement from our peak in 2000 and 2001. While we are encouraged by this recent two-year performance, these calendar-year average indemnity results are misleading, as they reflect claim payments on losses reported from up to eight years ago. A more accurate reflection of claim trends is depicted in report-year claim data where claim payments and reserves are matched to the year the claim was reported.
Our report-year claim data show an increasing severity trend; however, it is less than the national claim severity trend.
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Claim frequency held steady at 6 claims per 100 insured physicians and clinics; however, it was up from a historical low in 2000 and 2001.
MMIC rates remain affordable and responsible
In 2003, the MMIC board of directors approved base rate increases in 2004 for physicians in all states. The rate increases were modest compared with other medical malpractice insurers in our region that filed for base rate increases ranging from 15 percent to 75 percent.
Base rates are promulgated on two primary factors: claim severity - the projected future average size claim, and claim frequency - the number of reported claims (looking at the previous six-year claim trend).
MMIC determines base rates by looking at each state's individual claim experience. For the past nine years, MMIC's cumulative base rate increases have ranged from 17 percent in Minnesota to 66 percent in Iowa. In states that border our five-state territory, cumulative rate increases the last nine years have ranged from 26 percent to 226 percent.
MMIC rates rank with the lowest in the country and in our region for several reasons:
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The medical liability climate in the Midwest is less volatile, which contributes to more predictable claim trends and rates. In addition, our Claim Department efficiently and effectively manages claims.
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We continue to control underwriting costs by risk selection, adhering to underwriting guidelines and using an efficient and cost-effective policy processing system.
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Our Risk Management Department educational efforts through seminars, newsletters, telephone consultations, workshops and one-to-one meetings help lower claim frequency.
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We control company expenses. In 2003, our administrative expense of $988 per physician was one of the lowest among PIAA companies. We consistently rank in the top three among peer companies for low underwriting cost per physician. Over the past four years, some insurance company expenses have been reimbursed to the holding company from other MMIC Group members, further tempering rate increases.
Policyholder dividends
Historically, MMIC's dividend ratio compares very favorably to other medical specialty insurers. For over eight consecutive years, MMIC returned a total of $60 million of unanticipated profits to qualifying policyholders. Given that there were no unanticipated profits for the reported years 1999 and 2000, policyholders did not receive dividends the past two years. We will know if a dividend will be paid in 2005 after the actuaries review losses for 2001. It is our policy to not return dividends until there are unanticipated profits concurrent with a strong surplus position.
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Adding value through diversification
In 2003, the MMIC Group developed more than 420 new customer relationships. More than 40 percent of these new relationships came from existing customers who began to use additional product offerings.
MMIC Technology Solutions has experienced considerable growth in revenue and new clients. Many policyholders used MMIC Technology Solutions for their technology needs in 2003, largely because they trust the MMIC brand and its reputation for high quality products and services. Technology Solutions services included installing and training clients on the award-winning NextGen electronic medical record and practice management systems, network support, billing office services, security and Web development and hosting. With knowledge of the health care industry, Technology Solutions is in the unique position to better understand the business needs of physicians, clinics and hospitals.
MMIC Benefits produced its best operating gain since MMIC purchased it five years ago. Last year was also the end of MMIC's five-year contract with Pat and Gayle McCann and Tim Dunleavy. They exercised an option in the original agreement that allowed them to repurchase their books of business at the end of the first five-year period. MMIC will receive a minimum of $1.6 million in capital gains from the transaction. The MMIC Group will continue its excellent relationship with all parties and is endorsing the McCann's agency, Johnson McCann, for group employee
benefits business.
Both Partners Health Care Consulting Inc. and Langan and Flynn, LLC had their best year ever building new relationships with MMIC policyholders. They created innovative business solutions for many policyholders. MMIC earned income from both organizations in 2003.
MMIC takes leading advocacy role
Strengthening the company and helping physicians secure their future are reasons MMIC takes the lead on a variety of health care issues. In 2003, board members and members of the executive management team actively sought out and participated in the debate on health care issues at the national, regional and local levels. Our work with state medical societies, the American Medical Association, the PIAA, local joint underwriting associations and insurance federations gives us a broad-based knowledge of industry trends, physician concerns and legislative issues.
Medical malpractice reform was a passionate topic in 2003. MMIC's Law and Health Policy Department educated legislators and drafted bill language in support of reform in order to avoid the crises in our region that the rest of the country is experiencing. Reforms were introduced in several MMIC states, but received limited attention from legislators. However, a major effort to reform Minnesota's law on joint and several liability was successful.
At the federal level MMIC continued working with the PIAA and with the Health Coalition on Liability and Access (HCLA), as a member of its board. HCLA is a national advocacy coalition that believes legal reform is the best way to ensure that affordable health care is accessible to all Americans. The organization is supporting passage of the tort reform package based on California MICRA, which is a comprehensive tort reform package that includes $250,000 jury award cap on noneconomic damages and limits on attorney fees.
The HR 5 HEALTH (Help Efficient Accessible, Low-Cost, Timely Health Care) Act, which is based on MICRA, passed in the House but was defeated in the Senate.
HCLA continues to work for passage of needed reform to help stem the malpractice tide nationwide.
Customer service is a top priority
Many MMIC policyholders, agents and technology clients choose MMIC because of the quality customer service provided throughout the company.
We have high standards for issuing polices, quoting new accounts, responding to a first notice of a claim, answering routine and emergency risk management questions, addressing billing concerns and handling other service issues. For the convenience of policyholders, additional risk management, claim and underwriting resources were added to the MMIC Group Web site (www.mmicgroup.com) in 2003. | |
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To ensure we maintain our high level of service, policyholders and clients are periodically surveyed about a variety of issues and concerns. Last year, Technology Solutions surveyed its clients on customer expectations. Nearly 95 percent of the respondents reported Technology Solutions met or exceeded their expectations.
In 2003, our involvement with HIPAA regulations continued on the state and national level. We worked to help policyholders meet the April 14, 2003, deadline for implementing the requirements of the HIPAA Privacy rule. In February 2003, to stress our commitment to protect the confidentiality and security of patient health information sent to us, MMIC mailed HIPAA Business Associate Agreements to all its policyholders.
Technology Solutions is offering services to help policyholders meet the new HIPAA Security Rule 2005 deadline. All HIPAA updates are added to the HIPAA Resource Center on the MMIC Group Web site.
Insurance agents and brokers represent 55 percent of MMIC's premium volume, driven mostly by hospitals, health systems and large physician groups. Their relentless efforts to provide great service to current and prospective policyholders have been instrumental in MMIC reaching its growth, retention and profitability goals.
As we closed the book on 2003, we made the commitment to policyholders to remain the best choice for their medical liability insurance coverage and technology needs. We are confident the right strategies and resources are in place to ensure MMIC's future. | |
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| Midwest Medical Insurance Holding Company and Subsidiaries |
Condensed Consolidated Financial Information
(Unaudited, In Thousands) |
| Balance Sheets |
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December 31 |
| Assets |
2003 |
2002 |
| Invested assets |
$294,420 |
$255,702 |
| Other assets |
44,530 |
48,616 |
| Total assets |
$338,950 |
$304,318 |
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| Liabilities and shareholders' equity |
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| Liabilities: |
$166,411 |
$148,763 |
| Unpaid losses and loss adjustment expenses |
47,799 |
44,540 |
| Other Liabilities |
$214,210 |
$193,303 |
| Total liabilities |
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| Shareholders' equity |
124,740 |
111,015 |
| Total liabilities and shareholders' equity |
$338,950 |
$304,318 |
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| Statments of Income |
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Year Ended December 31 |
| Revenues: |
2003 |
2002 |
| Net premiums earned |
$77,854 |
$70,472 |
| Net investment income |
9,657 |
11,404 |
| Realized capital gains |
6,275 |
1,358 |
| Other |
7,325 |
3,782 |
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101,111 |
87,016 |
| Losses and expenses: |
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| Losses and loss adjustment expenses |
75,176 |
74,819 |
| Underwriting, acquisition and insurance expenses |
10,086 |
10,203 |
| Other operating expenses |
9,834
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8,114
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95,096 |
93,136 |
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| Income (loss) before income taxes |
6,015 |
(6,120) |
| Income tax expense (benefit) |
1,725 |
(2,564) |
| Net income (loss) |
$4,290 |
$ (3,556) |
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The foregoing unaudited condensed consolidated financial information has been derived from the audited consolidated financial statements. These statements are available upon request from the Finance Department or on our Web site: www.mmicgroup.com.
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Board of Directors
G. Richard Geier, M.D. (Chair)
General Surgery
Rochester, Minnesota
Chair, Executive, Nominating, Strategic Planning,
MMIC Technology Solutions and Benefits Committees
Michael D. Abrams
Executive Director Iowa
Medical Society
West Des Moines, Iowa
John R. Balfanz, M.D.
Pediatrics
St. Paul, Minnesota
Gail P. Bender, M.D.
Oncology
St. Louis Park, Minnesota
James R. Bishop, M.D.
Director of Medical Affairs
Edina, Minnesota
Chair, Board Organization Committee
David P. Bounk
President and Chief Executive Officer - MMIC Group
Minneapolis, Minnesota
Terence P. Cahill, M.D.
Family Practice
Blue Earth, Minnesota
Mary S. Carpenter, M.D.
Family Practice
Winner, South Dakota
Peter J. Daly, M.D.
Orthopedic
St. Paul, Minnesota
Anthony C. Jaspers, M.D.
Family Practice
Lake Crystal, Minnesota
Chair, Risk Management and Underwriting Committee
Jack L. Kleven
President and Chief Operating Officer - MMIC
Minneapolis, Minnesota
Russel J. Kuzel, M.D.
Family Practice
Fargo, North Dakota
Senior Management
David P. Bounk - The MMIC Group
President and Chief Executive Officer
Jack L. Kleven - MMIC
President and Chief Operating Officer
Niles A. Cole - The MMIC Group
Chief Financial Officer/Vice President of Finance
Thomas H. Lee - MMIC Technology Solutions
Vice President
Elizabeth S. Lincoln - The MMIC Group
Vice President of Law and Health Policy
Gerald M. O'Connell - The MMIC Group
Vice President of Sales and Marketing
Julie J. Stafford - MMIC
Vice President of Underwriting
Jerry A. Zeitlin - MMIC
Vice President of Claim
Stephanie A. Kroeger - The MMIC Group
Assistant Vice President of Human Resources
Thomas M. Youngblom - The MMIC Group
Senior Information Services Manager
Rosalind M. Miller - The MMIC Group
Communications Manager
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Wayne F. Leebaw, M.D.
(Vice Chair)
Endocrinology
Edina, Minnesota
Chair, Audit & Budget and Compensation Committees
Mark O. Liaboe, M.D.
Internal Medicine
Dubuque, Iowa
Patricia J. Lindholm, M.D.
Family Practice
Fergus Falls, Minnesota
Stephen A. McCue, M.D.
Obstetrics - Gynecology
Sunfish Lake, Minnesota
Roger H. Meyer, M.D.
Family Practice
Seward, Nebraska
Harold W. Miller, M.D.
Family Practice
Davenport, Iowa
Chair, Investment Committee
Mark D. Odland, M.D.
General Surgery
Minneapolis, Minnesota
Chair, Claim Committee
Robert K. Meiches, MD
CEO Minnesota Medical Association
Family Practice
Minneapolis, Minnesota
T. Michael Tedford, M.D
Otolaryngology
Minneapolis, Minnesota
Tom D. Throckmorton, M.D.
General Surgery
Spencer, Iowa
R. Bruce Trimble, M.D.
Rheumatologist
Mason City, Iowa
William L. Youmans, M.D.
Family Practice
St. Louis Park, Minnesota | |
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Corporate Office
7650 Edinborough Way, Suite 400
Minneapolis, MN 55435
Telephone: 800-328-5532
West Des Moines Office
1415 28th Street, Suite 125
West Des Moines, IA 50266
Telephone: 800-798-9870
Omaha Office
10330 Regency Parkway Dr., Suite 302
Omaha, NE 68114
Telephone: 888-397-3034
MMIC Technology Solutions
2800 Campus Drive, Suite 150
Plymouth, MN 55441
Telephone: 800-328-5532
Auditors
Ernst & Young LLP
Actuarial Consultant
Bickerstaff, Whatey, Ryan & Burkhalter, Consulting Actuaries
Corporate Counsel
Chares A. Geer | |
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