<PAGE>
As filed with the Securities and Exchange Commission on July 27, 1999
Registration No. 333-76999*
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
AMENDMENT NUMBER 1 TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
MIDWEST MEDICAL INSURANCE HOLDING COMPANY
(Exact name of registrant as specified in its Charter)
State or other jurisdiction of incorporation or organization: Minnesota
Primary Standard Industrial Classification Code Number: 6749
IRS Employer Identification Number: 41-1625287
6600 France Avenue South, Suite 245
Minneapolis, MN 55435, (612) 922-5445
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
David P. Bounk, President
Midwest Medical Insurance Holding Company
6600 France Avenue South, Suite 245
Minneapolis, MN 55435, (612) 922-5445
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
COPIES TO:
Ross C. Formell, Esq.
Best & Flanagan LLP
4000 U.S. Bank Place
601 Second Avenue South
Minneapolis, MN 55402
---------
Approximate date of commencement of proposed sale of the securities to the
public: As soon as possible after the effective date of this registration
statement. If the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. X
---
---------
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- -----------------------------------------------------------------------------------------------
Title of Each Proposed Proposed
Class of Maximum Maximum
Securities Amount Offering Aggregate Amount of
to be to be Price Offering Registration
Registered Registered Per Unit Price Fee
- ---------- ---------- -------- -------------- ------------
<S> <C> <C> <C> <C>
Class A Common Stock 20,000 shares $1,080(1) $21,600,000(1) $6,372.00
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee,
based upon book value of securities of the registrant to be issued as of
December 31, 1998.
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
* THIS FILING ALSO CONSTITUTES POST-EFFECTIVE AMENDMENT NUMBER 2 TO THE
REGISTRANT'S FORM S-1 FILING, REGISTRATION NUMBER 333-29047, PURSUANT TO
RULE 429.
<PAGE>
CROSS REFERENCE SHEET
Pursuant to Rule 501(b) of Regulation S-K
<TABLE>
<CAPTION>
Form S-1 Item Number and Caption Location in the Prospectus
- -------------------------------- --------------------------
<S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus Inside Front Cover Page;
Outside Back Cover Page
3. Summary Information, Risk Factors, and
Ratio of Earnings to Fixed Charges PROSPECTUS SUMMARY
4. Use of Proceeds Not Applicable
5. Determination of Offering Price THE OFFERING
6. Dilution Not Applicable
7. Selling Security Holders Not Applicable
8. Plan of Distribution THE OFFERING
9. Description of Securities to be Registered DESCRIPTION OF CAPITALSTOCK
10. Interests of Named Experts and Counsel Not Applicable
11. Information with Respect to the Registrant SELECTED FINANCIAL
INFORMATION; MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND
RESULTS OF OPERATIONS;
BUSINESS; MANAGEMENT;
DESCRIPTION OF CAPITAL STOCK;
FINANCIAL STATEMENTS
12. Disclosure of Commission Position on
Indemnification for Securities
Act Liabilities Not Applicable
</TABLE>
<PAGE>
PROSPECTUS
MIDWEST MEDICAL INSURANCE HOLDING COMPANY
35,000 shares of Class A Common Stock
Shares of Class A Common Stock, are being offered by Midwest Medical
Insurance Holding Company ("Midwest Holding") only to purchasers of insurance
from Midwest Holding's wholly-owned subsidiary, Midwest Medical Insurance
Company. Midwest Medical is a physician-controlled medical malpractice
insurance company which provides professional liability insurance to physicians
in Minnesota, Iowa, Nebraska, Wisconsin, Illinois, North Dakota and South
Dakota. These shares are offered and issued to you as part of your purchase of
insurance form Midwest Medical. You are not required to pay anything for these
shares in addition to your insurance premiums. You will earn these shares each
day you are insured by Midwest Medical. Policyholders in Nebraska receive fewer
shares than policyholders of other states due to the lower premiums charged by
Midwest Medical in Nebraska. New purchasers of insurance will not actually
receive these shares until they have been continuously insured by Midwest
Medical for at least five years. See "The Offering."
You may not transfer, sell or assign these shares to anyone else. These
shares must be redeemed by Midwest Holding at net book value, excluding the
value of Midwest Medical (Midwest Holding's principal asset), upon your
termination of your insurance coverage with Midwest Medical for any reason. See
"Description of Capital Stock." As of December 31, 1998, the redemption value
of Midwest Holding was $64.81 per share.
--------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------------
The date of this Prospectus is July 26, 1999.
<PAGE>
No one is authorized to give you any information about this offering, or to
make any representations about this offering to you, other than those contained
in this prospectus. If someone does, you cannot rely upon that information or
representation. The delivery of this prospectus and distribution of the shares
does not imply that there has been no change in Midwest Holding's affairs since
the date of this prospectus, or that the information is correct as of any later
date. This Prospectus is not an offer to sell, or a solicitation of an offer to
buy, any securities other than these shares.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Selected Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . 5
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Management's Discussion and Analysis of Financial Condition and Results
of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Description of Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Legal Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Available Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Index to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . 32
APPENDIX - Allocation schedule . . . . . . . . . . . . . . . . . . . . . . . . . A-1
</TABLE>
i
<PAGE>
PROSPECTUS SUMMARY
The entire following summary is qualified by the more detailed information
and the consolidated financial statements and notes appearing elsewhere in this
prospectus. This should be read along with the information on the cover page.
THE COMPANIES
Midwest Medical is in the business of providing professional liability
insurance to physicians. It also provides such insurance, as well as general
and umbrella excess liability insurance, to clinics, hospitals and healthcare
systems. It is a wholly-owned subsidiary of Midwest Holding. The address and
telephone number of the principal executive offices of Midwest Holding and
Midwest Medical are: 6600 France Avenue South, Suite 245, Minneapolis,
Minnesota 55435; (612) 922-5445.
THE SHARES
You will not receive a certificate for these shares. These shares may be
owned by individual physicians or by individual physicians jointly with the
legal entities in which they practice. In the latter case, only the physicians
can vote the shares. See "Description Of Capital Stock."
You are entitled to only one vote, regardless of the number of the shares
you hold. The Minnesota Medical Association holds the single class B common
share of Midwest Holding presently outstanding. This gives it the exclusive
right to vote for the election of directors. The holders of these shares, at
any time, may vote to cause Midwest Holding to redeem the class B common share
for $1,000. If they do this, they will obtain the right to elect directors.
2
<PAGE>
THE OFFERING
These shares are being offered only to purchasers of insurance from
Midwest Medical, who will earn shares each day they are insured by Midwest
Medical. Purchasers of insurance are not required to pay anything for the
shares in addition to their insurance premiums. The shares will be allocated
semi-annually, according to the allocation schedule, which is set forth in the
appendix to this Prospectus. The shares allocated to new purchasers of
insurance are not issued until the end of five years of continuous coverage by
Midwest Medical. Termination of coverage before the completion of five years of
coverage will result in a forfeiture of accrued but unissued shares. Persons
who were purchasers of insurance from the Iowa Physician's Mutual Insurance
Trust or Medical Liability Mutual Insurance Company of Nebraska at the time of
the merger between those entities and Midwest Medical, were not subject to the
five-year vesting requirement. Those persons were issued shares upon completion
of those transactions and shares they accrue currently are deemed issued when
they are allocated.
The allocation schedule contained in the Appendix lists the number of
shares accrued by each physician for each year of insurance coverage based upon
his or her insurance risk class. The risk class each physician is assigned is
based on his or her medical specialty and is the same risk class to which the
physician has been assigned by Midwest Medical for purposes of writing the
professional liability insurance for the physician. Annual insurance premiums
are based on these risk classes. The number of shares shown in the table
therefore reflect, indirectly, the relative premiums paid to Midwest Medical by
each policyholder. This has changed since Midwest Medical began its business.
Midwest Holding reserves the right to change the allocation schedule in the
future.
The shares allocated to Nebraska physicians are reduced because policy
limits, and therefore premiums, are lower in Nebraska. The amount of this
reduction is determined by Midwest Medical's regular external actuaries to
adjust for the difference between the policy limit of policies issued in
Nebraska as compared to the base policy limit issued by Midwest Medical in all
other states in which it does business. Currently, a Nebraska policyholder of
Midwest Medical would be allocated the right to receive 58.1% of the shares of
Midwest Holding otherwise indicated by the allocation schedule. This is based
upon current information and policy limits, and the factor used may be
recalculated from time-to-time.
No certificates for these shares are issued. Although the shares have
been registered under the Securities Act of 1933 and state securities laws, they
are nontransferable, and there is no market in which they may be sold. Upon
termination of a physician's insurance policy with Midwest Medical for any
reason, the shares must be redeemed by Midwest Holding. See "Description Of
Capital Stock."
No independent brokers, dealers, or underwriters have been engaged to
represent Midwest Holding in this offering and no commissions will be paid to
any person. These shares will be offered and sold solely by officers of
Midwest Holding.
3
<PAGE>
SELECTED FINANCIAL INFORMATION
The following selected financial data of Midwest Holding for the five years
ended December 31, 1998 are derived from the audited financial statements of
Midwest Holding. The financial data for the three-month period, ended March 31,
1999 and 1998 are derived from unaudited statements. The unaudited statements
include all adjustments, consisting of normal recurring accruals, which Midwest
Holding considers necessary for a fair representation of the financial position
and the results of operations for these periods. This data should be read in
conjunction with the consolidated financial statements and notes thereto
appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 THREE MONTHS ENDED MARCH 31
OPERATIONS DATA 1994(2) 1995(2) 1996(1) 1997(1) 1998(1) 1998 1999
- ----------------------------------------------------------------------------------------------------------- ---- ----
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Net premiums earned $ 26,246 $ 29,798 $ 31,177 $ 32,916 $ 35,014 $ 10,291 $ 10,512
Net investment and other income 11,509 14,258 15,558 19,276 21,404 6,437 10,049
----------------------------------------------------------------------------------------
Total revenue 37,755 44,056 46,735 52,192 56,418 16,728 20,561
Loss and loss adjustment expenses 11,334 37,560 32,257 31,834 37,494 9,285 9,485
Underwriting and other operating expenses 5,509 6,482 5,539 6,595 10,287 2,978 4,044
----------------------------------------------------------------------------------------
16,843 44,042 37,796 38,429 47,781 12,263 13,529
----------------------------------------------------------------------------------------
Income before income taxes 20,912 14 8,939 13,763 8,637 4,465 7,032
Income taxes (benefit) 6,417 (1,711) 1,458 4,463 2,689 1,563 2,463
----------------------------------------------------------------------------------------
Net income $ 14,495 $ 1,725 $ 7,481 $ 9,300 $ 5,948 2,902 4,569
----------------------------------------------------------------------------------------
Net income per common share -- assuming
dilution $ 114.84 $ 13.74 $ 58.33 $ 70.23 $ 43.65 $ 21.68 $ 32.45
Number of shares used in per share
calculation 126,222 125,536(3) 128,259 132,427 136,251 133,881 140,802
Net income/total revenue 38.4% 3.9% 16.0% 17.8% 10.5% 17.3% 22.2%
Return on average equity 15.8% 1.7% 6.5% 7.4% 4.2% 2.4% 3.5%
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31 MARCH 31
FINANCIAL CONDITION 1994(2) 1995(2) 1996(2) 1997(1) 1998(1) 1999
----------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Fixed maturities at fair value $174,203 $182,817 $183,561 $ 171,975 $164,652 $156,862
Equity securities at fair value 19,782 28,311 38,001 49,759 86,553 86,718
Short-term investments 9,755 15,015 7,898 13,909 3,556 8,703
Other - - - 10,000 10,000 10,000
--------------------------------------------------------------------------------------
Total investments 203,740 226,143 229,460 245,643 264,761 262,283
Reinsurance recoverable 23,637 25,112 22,174 19,117 16,499 19,786
Other assets 19,100 13,329 10,359 10,755 14,223 41,607
--------------------------------------------------------------------------------------
Total assets $246,477 $264,584 $261,993 $ 275,515 $295,483 323,676
--------------------------------------------------------------------------------------
LIABILITIES
Unpaid losses and loss adjustment expenses
$110,967 $120,264 $110,037 $ 107,806 $110,964 111,612
Other liabilities 38,358 34,053 33,074 33,942 33,926 59,594
--------------------------------------------------------------------------------------
149,325 154,317 143,111 141,748 144,890 171,206
REDEEMABLE STOCK
Class A and Class B Common Stock at
redemption value 7,712 6,975 7,604 7,477 8,147 7,630
OTHER SHAREHOLDERS' EQUITY
89,440 103,292 111,278 126,290 142,446 144,840
--------------------------------------------------------------------------------------
Total liabilities, redeemable stock and
shareholders' equity $246,477 $264,584 $261,993 $ 275,515 $295,483 323,676
Midwest Medical Insurance Holding Company:
Class A Common shares issued and
outstanding 116,855(3) 116,251(3) 118,209 121,322 125,682 127,873
Redemption value per share $ 66.00 $ 60.00 $ 64.33 $ 61.63 $ 64.81 $ 64.81
Class A Common shares redeemed
12,640 12,424 10,272 10,306 9,005 1,031
Amount paid to terminating
policyholders upon redemption $ 840 $ 829 $ 608 $ 648 $ 523 $ 66
</TABLE>
- ---------------------------------------
(1) Amounts derived from audited consolidated financial statements of Midwest
Holding included in this prospectus.
(2) Amounts derived from audited consolidated financial statements of Midwest
Holding.
(3) Includes pro forma shares computed to give retroactive effect to the merger
of Midwest Holding/Midwest Medical with Medical Liability Mutual Insurance
Company of Nebraska. See Note 1 to the consolidated financial statements
included in this prospectus.
5
<PAGE>
BUSINESS
BACKGROUND. Midwest Medical was originally organized in 1980 under the
direction of the Minnesota Medical Association to provide professional liability
insurance to Minnesota physicians who were its members. At that time, claims
and awards in medical malpractice cases had been increasing dramatically, and
physicians were faced with substantial premium increases and a declining number
of insurers offering medical malpractice coverage. The business was reorganized
in 1988 into a stock insurance company, Midwest Medical, wholly owned by a
holding company, Midwest Holding, which could pursue other business
opportunities. The reorganization also was effected to give physicians a
limited equity interest in their malpractice insurer, which would give them
input into the operations of the insurer and an opportunity to share in any
profits, while preserving the capital and surplus of Midwest Medical. On July
1, 1993, the Iowa physician-owned malpractice insurer, Iowa Physician's Mutual
Insurance Trust, was merged into Midwest Medical, and on June 5, 1996, the
Nebraska physician-owned malpractice insurer, Medical Liability Mutual Insurance
Company of Nebraska, was merged into Midwest Medical.
Midwest Medical now provides professional liability insurance to physicians
and clinics in Minnesota, Iowa, Nebraska, Wisconsin, Illinois, North Dakota and
South Dakota. Professional liability, general liability and umbrella excess
liability insurance is also available to hospitals, and healthcare systems
through Midwest Medical. Midwest Medical has had the sponsorship of the
Minnesota Medical Association since inception and also has the sponsorship of
the Iowa and North Dakota medical associations.
During 1997, Midwest Holding formed Midwest Medical Solutions, Inc. as a
business development company to strengthen and promote the independence and
interdependencies of physicians, clinics and hospitals served by Midwest
Medical. Solutions is currently considering several business development
opportunities. These include practice enhancement, strategic consulting, and
electronic processing and integration services and support. Solutions purchased
the assets of MedPower Information Services, Inc. effective January 1, 1998.
Solutions then contributed those assets to its newly formed, wholly-owned
subsidiary, MedPower Information Resources, Inc. 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. Together, Solutions and MedPower had assets of less than
$3,000,000 at December 31, 1998 and revenues of less than $400,000 for the year
ended December 31, 1998.
MMIHC INSURANCE SERVICES, INC. WAS INCORPORATED IN 1995 AND BEGAN ACTIVE
OPERATIONS IN JANUARY 1999 WITH THE ACQUISITION OF A BOOK OF BUSINESS FROM
JOHNSON-MCCANN BENEFITS, INC. Midwest Holding provided $1,500,000 of capital to
Services to fund the first of three installment payments on this purchase as
well as to provide additional funds for future agency acquisitions. The
remaining two installment payments will be made in 2000 and 2001. Services is
an insurance agency specializing in providing clients with group insurance
products such as health, dental, life, and disability. Commission income from
insurance carriers is the principal source of revenue. Services had assets of
approximately $1,512,000 at March 31, 1999 and had revenues of approximately
$349,000 for the three months ended March 31, 1999.
MANAGEMENT AGREEMENT. Midwest Medical pays Midwest Holding for
comprehensive management, administration, and underwriting services, and for use
of Midwest Holding's facilities, equipment and personnel. Midwest Holding
receives a management fee generally equal to the cost of providing such
services, plus 10
6
<PAGE>
percent. Midwest Holding employs all of the employees, and
owns all of the non-financial assets, used in the operation of the businesses of
the Midwest Medical and Midwest Holding. The agreement must be reviewed and
approved periodically by the Minnesota Department of Commerce.
INSURANCE POLICIES. Midwest Medical primarily writes policies of medical
professional liability insurance to: (1) individual physicians, and (2) clinics
formed as partnerships or professional corporations comprised of physicians"",
and (3) hospitals and healthcare systems. In addition, Midwest Medical writes
business liability insurance providing coverage for claims against a medical
business entity resulting from acts by its employees, and office premises
liability insurance providing coverage for claims arising out of the ownership,
maintenance or use of office space.
In addition to meeting Midwest Medical's underwriting standards, insured
physicians must be licensed to practice in Minnesota, Iowa, Nebraska, Wisconsin,
Illinois, North Dakota or South Dakota, and conduct a majority of their practice
in such states. All insured clinics must have their principal place of business
in one of Midwest Medical's states and all full-time physicians practicing with
insured clinics must be insured by Midwest Medical.
Midwest Medical offers a "claims-made" medical malpractice liability
insurance policy. Under a claims-made policy, coverage is provided for claims
asserted and reported to Midwest Medical while the policy is in effect
concerning occurrences which took place after a certain date set forth in the
policy. Finally, Midwest Medical also offers extended reporting endorsements,
which are commonly called "tails", which provide coverage of claims first made
after the insured physician or clinic terminates basic insurance coverage with
Midwest Medical, but concerning occurrences which took place while the insurance
coverage was in effect.
Midwest Medical offers basic limits of coverage from $1,000,000 for each
claim, with a $3,000,000 annual aggregate limit, up to $12,000,000 for each
claim, with a $14,000,000 annual aggregate limit. Excess coverage above the
basic limits is available from Midwest Medical's reinsurers.
REINSURANCE. Midwest Medical purchases reinsurance in order to reduce its
liability on individual risks and to protect against catastrophic losses. A
reinsurance transaction takes place when an insurance company transfers, or
"cedes", to another insurance company a portion of its risk 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.
However, if the reinsurer fails to pay, Midwest Medical remains primarily
liable for the loss. Midwest currently uses reinsurance to limit its risk on
any single claim to $750,000.
Midwest Medical currently has a single reinsurance treaty with liability
distributed among General Reinsurance Corporation of Stamford, Connecticut
(80%), Hanover Reinsurance Company of Hanover, Germany (7%), Transatlantic
Reinsurance Corp. (6.5%), and CNA Re, UK (6.5%). General Reinsurance Corporation
is the largest reinsurer of medical professional liability in the United States
and one of the largest in the world and has received the highest rating of A++
by A.M. Best & Company, Inc. Hanover Reinsurance Company is rated A+;
Transatlantic Re is rated A++; and CNA Re, UK is rated A by A.M. Best & Company,
Inc. Coverage under the treaty was initially issued on January 1, 1998, and is
continuous until canceled by any party. Midwest Medical currently cedes about
$4,400,000 of premium per year under the reinsurance treaty.
7
<PAGE>
MARKETING AND DISTRIBUTION. Marketing of Midwest Medical policies in
Minnesota, South Dakota, North Dakota, Nebraska, Illinois and Wisconsin
primarily is handled directly by Midwest Medical through salaried marketing
representatives. Midwest Medical also has marketing arrangements with a select
group of large national brokers to assist Midwest Medical in the production of
large accounts and in the production of new coverages as they are developed.
These brokers will sell Midwest Medical's products in all states in which
Midwest Medical is licensed to do business. IMS Services Company, a
wholly-owned subsidiary of the Iowa Medical Society, is the exclusive agent for
marketing Midwest Medical policies to physicians and clinics in Iowa. Midwest
Medical does not believe that the loss of this exclusive agent would have a
material adverse effect on its business because other agents are available and
Midwest Medical has the in-house capacity to market directly. Midwest Medical
hospital insurance policies are marketed directly by Midwest Medical and through
independent agents and brokers. Midwest Medical approves all policies sold by
agents prior to their becoming effective, and no commissions are earned by
agents until approval has been granted.
INVESTMENTS. Midwest Medical's investment portfolio is under the
direction of the Board of Directors acting through the Investment Committee. The
Investment Committee establishes Midwest Medical's investment policy which, in
summary, is to assist in maintaining Midwest Medical's financial stability by
preserving assets and maximizing pre-tax investment income. Adequate liquidity
is maintained to assure that Midwest Medical has the ability to meet its
insurance operational requirements, in particular the payment of claims. Midwest
Medical employs outside investment managers who have discretion to manage the
portfolio consistent with the policies set by Midwest Medical. In addition, the
Investment Committee utilizes the services of a consultant who calculates
performance measures and provides an independent opinion on the overall results
being obtained by the investment managers.
Midwest Medical'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
62% of total invested assets at December 31, 1998 compared to 70% at December
31, 1997. Equity securities comprised approximately 33% of total invested
assets at December 31, 1998 compared to 20% at December 31, 1997. The increase
in the proportion of equity securities was due to an increase in equity market
values and a reallocation of $15,000,000 from fixed income investments to
international equities in January 1998. The objectives of this reallocation were
to further diversify the portfolio and maximize pre-tax total return. The
remainder of Midwest Medical's investment portfolio, 5% and 10% at December 31,
1998 and 1997, respectively, was invested in a real estate investment trust and
short-term instruments.
8
<PAGE>
The following table sets forth the composition of the combined investment
portfolio of Midwest Medical at the dates indicated:
<TABLE>
<CAPTION>
BOOK VALUE AT DECEMBER 31,
--------------------------
(IN THOUSANDS)
INVESTMENTS
1996 1997 1998
<S> <C> <C> <C>
Fixed maturities at fair value
(cost: 1996 - $179,979,
1997 - $170,590, 1998 - $161,430) $183,561 $171,975 $164,652
Equity securities at fair value
(cost: 1996 - $20,237,
1997 - $20,595, 1998 - $41,906,) $ 38,001 49,759 86,554
Short-term 7,898 13,909 3,556
Other 10,000 10,000
------ ------
Total Investments $229,460 $245,643 $264,761
-------- --------------------------
-------- --------------------------
</TABLE>
The following schedule compares the average yield on investments during the
last three years.
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
-------------------------------------------
1996 1997 1998
---------------------- ----
<S> <C> <C> <C>
Average yield 5.4% 4.9% 4.3%
</TABLE>
The fair value of fixed maturities at December 31, 1998, by contractual
maturity, is shown below as a percentage of the total fixed maturities
portfolio:
<TABLE>
<CAPTION>
PERCENTAGE OF FIXED
MATURITY MATURITY PORTFOLIO AT FAIR VALUE
-------- --------------------------------
<S> <C>
0 - 1 year 4%
1 - 5 years 25
5 - 10 years 17
Over 10 years 54
--
100%
----
----
</TABLE>
RATING. A. M. Best & Company, Inc. ("Best's"), publisher of BEST'S
INSURANCE REPORTS, PROPERTY-CASUALTY, has assigned Midwest Medical an A, or
excellent, rating in 1998. Best's ratings range from A++ to F, and are based on
an analysis of the financial condition and operation of an insurance company
compared with the industry in general. Midwest Holding 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
9
<PAGE>
with a positive rating. A positive rating indicates the ability of an insurer
to meet its insurance obligations and does not directly indicate the value of
the insurer's securities.
GOVERNMENT REGULATION. Governmental regulation applies to Midwest Medical
in the states in which it conducts business - Minnesota, Iowa, Nebraska,
Illinois, Wisconsin, North Dakota and South Dakota. Regulation is conducted by
state agencies which have broad administrative power dealing with all aspects of
Midwest Medical's business, including policy terms, rates, dividends and
retroactive premium adjustments to purchasers of insurance, and dividends to
Midwest Holding.
Without prior approval from the Minnesota Commissioner of Commerce, annual
dividends from Midwest Medical to Midwest Holding cannot exceed 10 percent of
unassigned surplus of Midwest Medical, or the prior year's net income from
operations of Midwest Medical, whichever is greater. State statutes also
require Midwest to file periodic information with state regulatory authorities,
and these authorities conduct a financial and business conduct examination
every three years. Statutes governing insurance holding company systems in
Minnesota apply to Midwest Holding. These statutes concern primarily the
acquisition of control of insurance companies.
COMPETITION. Midwest Medical's major competitor is the St. Paul Companies.
The St. Paul Companies is a major national property-casualty insurance company.
It is the largest writer of medical professional liability insurance in the
United States, and it is many times larger than Midwest Medical. In addition to
the St. Paul Companies, several other national companies have become active 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. At this time these additional
competitors 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 Midwest Medical's area. Finally, in the mid-1990's,
several large self-insured hospitals in Minneapolis and Des Moines purchased
Midwest Medical 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 health care providers, Midwest Medical expanded
its underwriting capacity by partnering with its reinsurers to provide the types
of coverages needed by larger health organizations. Midwest Medical is the only
carrier in Minnesota, Iowa and North Dakota markets endorsed by local medical
societies and owned by its insured physicians-, which management believes gives
Midwest Medical 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
health care 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, various forms
of managed health care, various forms of alliances between providers, proposals
for enterprise liability, and many others. Management is developing new
programs and products which it believes will allow it to remain competitive as
such change occurs, although no assurance can be given that these programs and
products will succeed.
EMPLOYEES. On December 31, 1998, Midwest Holding employed 82 persons, of
whom six were executives, 52 were supervisory employees or specialists, and 24
were clerical employees. None of the employees is covered by a collective
bargaining agreement and management believes that relations with employees are
good.
10
<PAGE>
PROPERTIES. Midwest Holding owns the following fixed assets, all of which
are used in the conduct of its business:
<TABLE>
<CAPTION>
Net Book Value
December 31, 1998
-----------------
<S> <C>
Office furniture and equipment $ 250,291
Leasehold improvements at leased premises,
6600 France Ave. S., Minneapolis, MN 37,819
Computer hardware 728,593
Computer system software 1,911,712
----------
Total $2,928,415
----------
----------
</TABLE>
The Company owns no real estate. Midwest Holding leases approximately 15,765
square feet of office space in Edina, Minnesota under a 10-year lease that
expires in 2001. Midwest Holding has the option to renew the lease for an
additional five years after the original term. Solutions and MedPower operated
out of a separate, leased, 3,149 square foot facility also located in Edina,
Minnesota. This lease expires in 2001. Midwest Holding also leases 4,060
square feet of office space in West Des Moines, Iowa under a 10-year lease that
expires in 2000, with an option for Midwest Holding to extend the term for an
additional five years. Finally, Midwest Holding leases 1,249 square feet of
office space in Omaha, Nebraska under a three year lease that expires November
30, 2000. Aggregate annual rent expense was $501,032 for 1998 and $427,646 for
1997.
LITIGATION. Midwest Medical believes that its reserves are adequate to
cover possible liability from claims and lawsuits on policies which arise in the
normal course of its insurance business. Midwest Medical is not a party to any
other pending or threatened legal proceeding which it believes could have a
material adverse effect on its operations.
11
<PAGE>
MANAGEMENT
DIRECTORS
The names and ages of the directors of Midwest Holding and Midwest Medical,
the year each first became a director, and the number of shares owned by each as
of December 31, 1998, are as follows:
<TABLE>
<CAPTION>
CLASS A
COMMON
DIRECTOR PRINCIPAL SHARES
NAME AGE SINCE OCCUPATION OWNED
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Michael Abrams 37 1996 Exec V.P. Iowa Medical Society -
John R. Balfanz, M.D. 53 1995 Physician 15
Gail P. Bender 51 1996 Physician 23
James R. Bishop, M.D. 57 1994 Physician -
David P. Bounk 52 1995 President and CEO -
Roger L. Frerichs, M.D. 59 1988 Surgeon 88
Richard Geier, Jr., M.D. 58 1995 Physician 24
Anthony C. Jaspers, M.D. 51 1996 Physician 52
Russel J. Kuzel, M.D. 46 1997 Physician 27
Wayne F. Leebaw, M.D. 55 1994 Physician 25
Steven A. McCue, M.D. 57 1995 Physician 126
William J. McMillan, Jr. M.D. 51 1997 Physician 70
Harold W. Miller, M.D. 51 1996 Physician 27
Anton S. Nesse, M.D. 60 1989 Radiologist 54
Mark D. Odlund, M.D. 46 1996 Physician 88
G. William Orr, M.D. 63 1996 Physician 56
Norman Rinderknecht, M.D. 64 1993 Physician 97
Paul S. Sanders, M.D. 54 1984 CEO-MN Medical Assoc. -
Richard D. Schmidt, M.D.
Secretary 55 1990 Physician 152
Judith F. Shank, M.D. 56 1999 Physician 15
Andrew J. K. Smith, M.D.
Chairman of Board 56 1990 Neurological Surgeon 199
G. David Spoelhof, M.D. 45 1989 Physician 48
Tom D. Throckmorton, M.D. 53 1997 Physician 72
R. Bruce Trimble, M.D
Vice Chair of Board 58 1993 Physician
</TABLE>
On December 31, 1998 the directors of Midwest Holding, as a group, owned
1,283 shares, or one percent of the total shares outstanding. No executive
officer owned any shares.
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 Minnesota Medical Association since 1990;
Michael Abrams, who has been the Executive Director of the Iowa Medical Society
since 1996;
12
<PAGE>
and David P. Bounk, who has been President and CEO of Midwest Holding since
1991. Prior to 1996, Mr. Abrams was Director, Governmental Relations of the
Indiana Medical Association for nine years.
The Bylaws of Midwest Holding require its Board of Directors to 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 Minnesota Medical Association
and the Executive Vice President of the non-voting Iowa Medical Society, both of
whom are non-voting directors; (3) the President of Midwest Holding as a
non-voting director; and (4) such additional non-voting and advisory members as
the Board of Directors may determine. At least two-thirds of the voting members
of the Board of Directors must be members of a state medical association and
insured by Midwest Medical. The Minnesota Medical Association, which has the
exclusive right to elect directors, has agreed to elect the directors nominated
by a committee of the Board of Directors. Directors serve until their
successors are elected and qualified or until their prior resignation, removal,
death or disqualification.
The Bylaws of Midwest Holding also require the election of directors who
are members of the Iowa Medical Society in a number, when compared to the total
number of directors, which is proportionate to the number of Iowa purchasers of
insurance compared to the total number of Midwest Medical purchasers of
insurance, with a minimum of two Iowa directors, one of whom shall be the
Executive Vice President of the Iowa Medical Society, for as long as the Class B
Common Share is outstanding. The Minnesota Medical Association 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 Iowa Medical
Society.
The Board of Directors of Midwest Holding has the following standing
committees:
- Executive;
- Audit and Budget;
- Nomination;
- Compensation.
The activities and current membership of each of these committees are
described below:
The Executive Committee has the full power to act for the Board between its
meetings. The members of the Executive Committee include the Chairman, Vice
Chairman and Secretary of the Board of Midwest Holding, the President, and other
individuals appointed by the Board of Directors. The persons currently on the
Executive Committee are as follows:
- Andrew J.K. Smith, Chairman
- David P. Bounk
- Roger L. Frerichs, M.D.
- Richard Geier, M.D.
- Paul S. Sanders, M.D.
- Richard D. Schmidt, M.D.
- R. Bruce Trimble, M.D.
- Michael Abrams.
13
<PAGE>
The Audit and Budget Committee reviews and approves the annual audit of the
books and records and annual budget of Midwest Holding. The members of the
Audit and Budget Committee are:
- R. Bruce Trimble.
- Andrew J.K. Smith, M.D.
- Richard Geier, M.D.
- John Balfanz, M.D.
- Norman Rinderknecht, M.D.
The Nominating Committee submits to the Board of Directors all nominees for
election to the Board. The Chairman of the Board is a member of the Nominating
Committee together with the Vice-Chairman of the Board, the Chairman of the
Board of the Minnesota Medical Association or his or her designate, the Chief
Executive Officer of the Minnesota Medical Association, and two members
appointed by the Board. The members of the Nominating Committee are:
- Andrew J.K. Smith, M.D.
- Paul S. Sanders, M.D.
- Michael Abrams
- R. Bruce Trimble, M.D.
- Anthony Jaspers, M.D.
- Stephan A. McCue, M.D.
- Paul Matson, M.D.
The Compensation Committee reviews and establishes the compensation and
benefits of all executives of Midwest Holding. The Committee consists of the
Chairman of the Board, the Vice Chairman of the Board, and three additional
members appointed by the Board. The current members of the Compensation
Committee are:
- Andrew J.K. Smith, M.D.
- R. Bruce Trimble, M.D.
- and James Bishop, M.D.
- Harold W.. Miller, M.D.
- John R. Balfanz, M.D..
The Bylaws of Midwest Medical provide that the directors of Midwest Holding
shall also serve as the directors of Midwest Medical, with the exception of any
outside directors of Midwest Holding. Outside directors are persons who are not
policyholders of Midwest Medical or members of the Minnesota Medical
Association. There are currently no outside directors of Midwest Holding so the
Boards of Midwest Holding and Midwest Medical are identical.
The Chairman of Midwest Holding Board of Directors (currently Dr. Smith) is
paid an annual fee of $38,520. All members of the Board of Directors are paid
$750 for each meeting of the Board of Directors they attend. In addition,
members of the Executive Committee 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 are paid between $300 and $500, depending upon distance traveled, for
each committee meeting they attend.
14
<PAGE>
EXECUTIVE OFFICERS
The names, ages and positions of the executive officers of Midwest Holding
and Midwest Medical are as follows:
<TABLE>
<CAPTION>
PERIOD OF
POSITION SERVICE AS PRINCIPAL
NAME AGE WITH COMPANY AN OFFICER OCCUPATION
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
David P. Bounk 52 President and Chief 8/1/90 to date President and Chief
Executive Officer Executive Officer
Niles A. Cole 37 Vice President-Finance 1998 to date Vice President-Finance
and Treasurer and Treasurer
Jack L. Kleven 52 Senior Vice President 1986 to date Senior Vice President
and Chief Operating and Chief Operating
Officer Officer
Elizabeth S. Lincoln 45 Vice President-Law and 1990 to date Vice President-Law and
Health Policy Health Policy
Gerald M. O'Connell 44 Vice President - 1998 to date Vice President -
Marketing Marketing
Michael G. Rutz 45 Vice President- 5/15/95 to date Vice President-
Underwriting Underwriting
</TABLE>
Mr. Bounk has over 30 years experience in the insurance industry and joined
Midwest Holding and Midwest Medical 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.
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 Midwest Holding 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 Midwest Holding without cause, Mr. Bounk is entitled to receive
his base salary for six months thereafter, plus one additional month for each
year of service, up 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 Midwest Holding for one year following his termination
of employment.
Effective January 1, 1997, the Midwest Holding 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.
15
<PAGE>
Mr. Cole has over 15 years experience in the insurance industry. He joined
Midwest Holding in December 1996 and he has been in his current position since
March 1998. He was Vice President of Physicians Insurance Exchange in Seattle,
Washington for seven years prior to joining Midwest Holding. He has BS degrees
in accounting and finance.
Mr. Kleven has over 25 years experience in medical malpractice claims
adjusting and management. He joined Midwest Holding in 1983, and was Vice
President, Claims since March 1986. He was promoted to Chief Operating Officer
on January 1, 1998. Prior to joining Midwest Holding, he was a liability manager
at The St. Paul Companies for six years. He has a BS degree in business.
Ms. Lincoln has over 15 years experience in medical professional liability
risk management. She joined Midwest Holding 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. Rutz has over 20 years experience in the insurance industry, including
10 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 Midwest Holding in May 1995 as Vice
President-Underwriting. He has a BS degree in resource management.
Mr. O'Connell has over 22 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 Midwest Holding in October 1996. He has a BS in agriculture
business management with an emphasis in insurance.
Officers serve until their successors are appointed by the Board of
Directors, or until their prior resignation, removal or death.
16
<PAGE>
SUMMARY COMPENSATION TABLE
The following table summarizes compensation paid by Midwest Holding to its five
most highly compensated executive officers for services rendered in all
capacities during the last three years. The "All Other Compensation" Column
includes employer contributions to qualified retirement plans and the term and
cash surrender value of supplemental life insurance premiums.
<TABLE>
<CAPTION>
CASH COMPENSATION
NAME OF INDIVIDUAL CAPACITIES IN ----------------- ALL OTHER
OR NUMBER IN GROUP WHICH SERVED YEAR SALARY BONUS COMPENSATION
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
David P. Bounk President and Chief 1998 $200,187 $85,830 $32,272
Executive Officer 1997 187,088 56,126 20,963
1996 170,080 51,024 17,687
Jack L. Kleven Senior Vice President and 1998 167,716 61,636 30,847
Chief Operating Officer 1997 145,840 43,752 17,193
1996 132,420 39,796 17,384
Elizabeth S. Lincoln Vice President-Law 1998 108,015 33,080 29,242
and Health Policy 1997 102,871 30,861 13,286
1996 97,020 29,106 14,319
Gerald M. O'Connell Vice President-Marketing 1998 109,000 34,749 21,739
1997 95,077 11,530 17,850
1996 24,900 2,423 4,608
Michael G. Rutz Vice President- 1998 119,816 36,694 31,406
Underwriting 1997 114,110 34,233 14,113
1996 108,680 32,604 14,980
</TABLE>
Midwest Holding also maintains a Supplemental Executive Retirement Plan
which provides an annual retirement benefit of 70% of the officer's final
average salary for an executive officer who retires at age 62 with 10 years of
service. Benefits are reduced for years of service less than 10 and retirement
prior to age 62. The benefit is also reduced by 50% of the officer's primary
Social Security benefit and by the annual value (expressed in the form of an
annuity) of the officer's accrued benefits under Midwest Holding'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; Ms. Lincoln--$82,000; Mr. Rutz--$147,100 and
Mr. O'Connell--$96,400. These 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.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
MANNER OF PRESENTATION. The financial statements of Midwest Holding and
its Subsidiaries are presented on a consolidated basis. In future references in
this analysis, which should be read together with the 1998 consolidated
financial statements and notes thereto appearing elsewhere in this prospectus,
references to Midwest Holding should be considered to include its subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
The majority of Midwest Holding's assets are invested in investment-grade
bonds, stocks, a real estate investment trust and short-term instruments. These
investments totaled $264,761,000 and $246,746,000 at December 31, 1998 and 1997,
respectively, which represented 89.6% and 89.5% of total assets. The primary
objectives of Midwest Holding's investment policy established by the Investment
Committee 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 carried at fair value. The
real estate investment trust and short-term instruments are recorded at cost,
which approximates fair value.
During 1997, Midwest Holding 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, Midwest Holding 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
Midwest Holding's strong financial position relative to the risk inherent in the
amount of premium written.
Midwest Holding's cash flow from operations decreased in 1998 versus 1997
and 1996. The 1998 cash flow from operations of $(9,605,000) was unfavorably
impacted by premium adjustments paid to reinsurers on reinsurance contracts for
prior years, less premium received in advance at the end of the year due to
later billing of policies with January effective dates, and an increase in
underwriting and other operating expenses. 1998 underwriting expenses increased
primarily from additional staff needed to manage Midwest Holding's 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 cash flow from
1997 operations of $4,002,000 was primarily the result of a decrease in claim
payments, whereas the negative cash flow from 1996 operations of $(2,072,000)
was primarily driven by an increase in claim payments.
Premium rates in general have remained stable with slight rate increases in
regions where Midwest Holding has experienced unfavorable claim trends.
Consequently, cash receipts from policyholder premiums have been relatively
level. Midwest Medical, however, has returned substantial amounts of premiums to
policyholders in recent years in the form of retrospective premium credits. The
retrospective premium credits have been paid to policyholders in the first
quarter of each year. Loss and operating expense payments have generally been
met from policyholder premium receipts with any excess cash allocated to the
investment portfolio. Midwest Holding regularly analyzes loss liabilities to
project the cash flow required in future years. Since the overall portfolio is
18
<PAGE>
highly liquid, exact matching of bond maturities and liabilities is not a goal.
Bond maturities are primarily selected to maximize total return. Midwest Holding
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 will not need to borrow funds from
external sources. Midwest Holding had no material capital expenditure
commitments as of December 31, 1998.
Midwest Holding's bylaws require that Midwest Holding class A common stock
issued to Midwest Medical policyholders be redeemed when a physician ceases to
be insured by Midwest Medical for any reason. The redemption value per share is
calculated by dividing the net book value of Midwest Holding, excluding the net
book value of Midwest Medical (other shareholders' equity) from the calculation,
by the number of Midwest Holding Class A Common shares outstanding. More details
about the redeemable stock and the actual redemptions during the years 1998,
1997 and 1996 are found in Note 2 to the consolidated financial statements. This
limited redemption value preserves the capital of Midwest Medical which is
separately disclosed as other shareholders' equity in the consolidated financial
statements. The consolidated statements of changes in other shareholders' equity
found in Midwest Holding's consolidated financial statements provide the details
of additions to, and reductions in, other shareholders' equity.
From time to time the Board of Directors of Midwest Medical declares
dividends payable to Midwest Holding to maintain the redemption value of Midwest
Holding's class A common stock and to provide capital for new ventures entered
into by Solutions. A $2,000,000 dividend was declared in September of 1998 and
paid in November of 1998 for those reasons mentioned above. No dividends were
declared or paid by Midwest Medical to Midwest Holding in 1997. In July 1996, a
dividend of $327,000 was paid to Midwest Holding as required by a provision of
the Midwest Medical/Minnesota Liability Mutual Insurance Company of Nebraska
merger agreement. As required by the merger agreement, the amount was
sufficient to maintain the per share redemption value of Midwest Holding's class
A common stock at the same per share value immediately after the merger as
immediately before the merger. A $260,000 dividend was declared in November of
1995 and paid in February of 1996 primarily to maintain the redemption value of
Midwest Holding's class A common stock.
RESULTS OF OPERATIONS
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. Midwest Holding 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.
19
<PAGE>
4. Retrospective premium 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 premiums earned increased $1,749,000 in 1997 from 1996. Although
policyholder rates remained relatively level for 1996 and 1997, an increase in
the number of policyholders in 1997 resulted in additional earned premium of
$500,000. 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 $2,950,000 in 1997 versus an increase of $925,000 in 1996. This
resulted in a net INCREASE in premium between years of $3,875,000.
2. Midwest Holding recorded an increase of $1,171,000 in the Iowa
Development Experience Liability account in 1997. A similar increase of
$2,901,000 was recorded in 1996. While these increased liabilities both reduce
premium, the difference in the amounts between years caused an INCREASE in net
premiums earned from 1996 to 1997 of $1,730,000.
3. In 1996, $2,194,000 was received from the commutation of a reinsurance
treaty covering the years 1989 and 1990. This increased 1996 premiums. Since
there was no counterpart in 1997, premiums DECREASED $2,194,000 from 1996 to
1997.
4. A number of other prior year reinsurance premium adjustments recorded
in 1996 increased 1996 premiums by $2,143,000. With no counterpart in 1997, the
difference between years DECREASED 1997 premiums by $2,143,000.
NET INVESTMENT INCOME decreased $590,000 from 1997 to 1998 and $552,000
from 1996 to 1997. Although total invested assets has increased over the same
time period, the fixed maturity component of invested assets has decreased due
to Midwest Holding'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 Midwest Holding's investment
income, the decrease in fixed maturity investments decreased investment income.
Yields on fixed maturity investments also declined over the same time period
further contributing to the decrease in investment income.
REALIZED CAPITAL GAINS increased $2,465,000 to $8,949,000 in 1998 and
increased $4,713,000 to $6,484,000 in 1997. 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
$7,774,000 of 1998 net realized capital gains resulted from the management of
the portfolio on a pre-tax total return basis within the parameters set by the
Investment Committee. 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 $1,568,000 of net capital
gains were realized in 1997 in the normal course of managing the investment
portfolio. Midwest Holding 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 Midwest Holding's adopted investment policy as
approved by the Investment Committee. 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
20
<PAGE>
per year.
LOSSES AND LOSS ADJUSTMENT EXPENSES are the costs associated with the
settlement of insurance claims and are Midwest Holding's principal expense.
Incurred loss and loss adjustment expenses were $37,494,000 for 1998 compared
to $31,834,000 in 1997 and $32,257,000 in 1996. This results in an increase
of 17.8% between 1998 and 1997 versus a slight decrease of 1.3% between 1997
and 1996. As shown in Note 5 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, was fairly stable for the years 1998, 1997 and 1996. Loss 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 5 of the
consolidated financial statements, these evaluations resulted in a reduction
in estimated liabilities applicable to prior years of $4,433,000, $8,352,000
and $8,844,000, respectively in 1998, 1997 and 1996. 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 1988 through 1998. This schedule is presented
net of reinsurance which Midwest Holding believes best explains the development
as it affects operating results. Midwest Holding has a conservative loss
reserving policy which, when coupled with a moderation of malpractice insurance
losses beginning approximately in 1986 for Midwest Holding 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
Midwest Holding's financial statements.
21
<PAGE>
<TABLE>
<CAPTION>
Development of Liability for Loss and Loss Adjustment Expense
(THOUSANDS OF DOLLARS)
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Liability for unpaid loss and
loss adjustment expense $74,577 $89,630 $97,375 $100,167 $98,617 $105,589 $88,227 $96,424 $90,342 $89,394 $94,467
Cumulative amount of
liability paid through:
1 year later 12,067 10,585 13,973 19,112 21,422 25,251 26,879 33,454 30,097 28,755
2 years later 19,043 21,890 28,643 32,798 37,498 42,685 46,925 53,132 44,562
3 years later 24,143 30,869 35,305 39,906 45,227 51,087 55,534 59,568
4 years later 26,241 35,015 37,624 42,752 46,226 53,594 57,129
5 years later 27,561 35,115 38,298 43,994 46,823 53,288
6 years later 27,695 35,187 39,505 44,370 46,810
7 years later 27,695 35,295 39,861 44,420
8 years later 27,695 35,295 39,862
9 years later 27,695 35,295
10 years later 27,695
Liability re-estimated as of:
1 year later 65,928 73,244 83,359 83,991 94,633 80,960 85,595 87,580 81,990 84,961
2 years later 51,379 62,056 64,876 74,883 69,490 75,364 76,365 79,665 76,542
3 years later 43,516 52,010 56,351 53,538 65,568 64,586 67,891 77,294
4 years later 35,753 44,582 42,075 52,833 56,426 57,851 65,794
5 years later 31,052 37,872 41,771 45,892 52,388 56,785
6 years later 29,052 37,617 39,519 43,760 53,014
7 years later 29,002 35,882 38,929 43,563
8 years later 28,724 35,882 38,929
9 years later 28,724 35,882
10 years later 28,724
Cumulative redundancy 45,853 53,748 58,446 56,604 45,603 48,804 22,433 19,130 13,800 4,433
</TABLE>
22
<PAGE>
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 premium taxes
that resulted from the greater premium volume. The remaining increase was
largely due to additional staff needed to manage growth and added costs from the
conversion to a new insurance operating system.
Underwriting, acquisition and insurance expenses increased $828,000 from
1996 to 1997. Approximately $425,000 of the increase was due to payments to
state medical societies, for the first time in 1997, under license and
endorsement agreements. The remaining increase reflected the increase in overall
cost of operating Midwest Holding in 1997 with employee salaries and benefits
being the largest component.
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. Both Solutions and
MedPower began active operations as of the beginning of 1998. The remaining
increase resulted primarily from added costs of operating company.
Other operating expenses increased $228,000 from $858,000 in 1996 to
$1,086,000 in 1997. Approximately $131,000 of the increase was from researching
and forming Solutions. The remaining increase resulted primarily from additional
stock issuance expenses.
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 before income taxes increased to $13,763,000 in 1997 from $8,939,000
in 1996 primarily from the reversal of loss liabilities established in prior
years and additional net realized capital gains from the repositioning of the
investment portfolio.
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 taxes recorded in 1998.
Income taxes increased to $4,463,000 for 1997 compared to $1,458,000 for
1996. The effective tax rates for 1997 and 1996 were 32.4% and 16.3%,
respectively. The increase in the effective tax rate for 1997 was primarily due
to a reduction in tax-exempt investment income due to the 1997 repositioning of
the investment portfolio that eliminated tax-exempt municipal bonds. A 1997
payment of prior year taxes and tax-exempt life insurance proceeds received in
1996 also contributed to the increase in the effective tax rate in 1997.
NET INCOME realized by Midwest Holding was $5,948,000 for 1998 compared to
23
<PAGE>
$9,300,000 for 1997 because of the factors discussed above. 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.
Also due to the factors discussed above, Midwest Holding realized net
income of $9,300,000 for 1997 compared to net income of $7,481,000 for 1996.
Basic net income per share increased to $77.79 for 1997 from $64.45 per share
for 1996. Diluted net income per share increased to $70.23 for 1997 from $58.33
per share for 1996.
INTERIM PERIODS
The following is management's discussion and analysis of financial
conditions and results of operations for the three months ended March 31, 1999
and should be read in conjunction with the selected financial information.
CAPITAL RESOURCES AND LIQUIDITY
The majority of Midwest Holding's assets, 81%, continue to be invested in
investment-grade bonds, equities and short-term instruments. Under Statement of
Financial Accounting Standards (SFAS) No. 115 "Accounting for Certain
Investments in Debt and Equity Securities", Midwest Holding's investments in
debt and equity securities are classified as available for sale and therefore
carried at fair value with unrealized gains and losses, net of applicable taxes,
reflected as a separate component of equity. Other investments are equity
interests in non-traded real estate investment trusts and are recorded at cost
which approximates fair value.
The retrospective premium liability of $8,543,000 at December 31, 1998
consisted of two items. One represented amounts due to policyholders under a
retrospective premium rating plan. This liability consisted of $5,480,000 due to
Minnesota and North Dakota policyholders. The second component represented
amounts due to Iowa policyholders under terms of the Midwest Medical /Iowa
Physicians Mutual Insurance Trust July 1, 1993 merger agreement. The merger
agreement provided that if financial results for years prior to 1993 are more
favorable than expected, the favorable development must be returned to former
Iowa Physicians policyholders who were insured by Iowa Physicians on December
31, 1992 and who renew their coverage with Midwest Medical. This second
liability totaled $3,063,000. Both the retrospective and merger premium
liabilities were paid to policyholders in the first quarter of 1999.
Cash flow from operations was negative during the first three months of
both 1999 and 1998, $(3,823,000) and $(9,297,000) respectively. The primary
reason for the negative cash flows was the payment, in the first quarter of both
years, of the retrospective premium credit and the premium credit under the
terms of the merger agreement. These payments totaled $8,889,000 in 1999 and
$8,100,000 in 1998. The merger premium credit of $3,063,000 paid to Iowa
policyholders during the first quarter of 1999 was the final payment under the
terms of the merger agreement. The negative cash flow was lower in the first
three months of 1999 compared to the same period in 1998 primarily due to
greater premium receipts. Fewer policyholders paid
24
<PAGE>
premiums in advance of 1/1/99 policy renewals due to later policy billings.
Consequently, more policy premiums were paid after January 1 rather than prior
to that date compared to the same period the previous year.
Total equity consisting of redeemable stock and other shareholders' equity,
increased by $1,877,000 during the first three months of 1999. Equity increases
were from net income of $4,569,000 and Class A stock issuances of $56,000. These
increases were offset by net unrealized depreciation in the fair value of
investments, net of deferred taxes, of $(2,682,000) and class A stock
redemptions of $(66,000).
RESULTS OF OPERATIONS
Net premiums earned increased $221,000 over the same period of 1998
primarily as a result of writing approximately $3,500,000 of new business. The
new business was generated primarily from sales of policies to large, healthcare
systems. The increase from new business was offset by a 5% decrease in 1999
premium rate levels for policyholders in Minnesota, North Dakota, and South
Dakota. Also negatively impacting first quarter 1999 premiums were greater
retrospective premium credits paid during the first quarter to Minnesota and
North Dakota policyholders than what had been estimated and accrued at December
31, 1998. The additional retrospective premium credit payments recognized in
the first quarter of 1999 totaled approximately $346,000. Finally, the first
quarter of 1998 contained a favorable premium adjustment of approximately
$789,000 for the commutation of a 1991 reinsurance contract. The first quarter
of 1999 did not contain a similar type of premium adjustment.
Net capital gains of $6,309,000 were realized during the first three months
of 1999. Most of these capital gains resulted from the sale of common stock to
fund the payment of retrospective and merger premium credits during the first
quarter. Midwest Holding's investment portfolio is managed by professional,
outside investment advisors on a total return basis under guidelines set by the
Investment Committee of Midwest Holding's Board of Directors. Midwest Holding's
investment managers may take advantage of opportunities to increase total return
through sales of selected securities in response to changing market conditions.
Consequently, management has no estimate for future levels of realized capital
gains or losses.
Other revenues consist primarily of finance charges on Midwest Medical's
premium billings, commission income from Services, and claim processing fees
from MedPower. The increase for the first three months of 1999 over the same
period of 1998 is primarily due to Services beginning active operations in
January 1999.
Losses and loss adjustment expenses increased $200,000 for the first three
months of 1999 versus 1998. The increase in 1999 was primarily driven by the
increase in premium volume as interim period losses are estimated based on a
ratio of net premiums earned. The estimated loss ratio was developed while
determining 1999 premium rates. At year-end, an outside actuarial analysis of
losses is completed. Although the effects of interim claim frequency and
severity statistics are not analyzed, management did not observe any discernable
loss trends during the first
25
<PAGE>
three months of 1999 that would materially alter loss expectations.
Underwriting, acquisition and insurance expenses increased $275,000 for the
first three months of 1999 compared to the same period in 1998. The majority of
the increase is due to staff additions to handle Midwest Medical's business
growth and the continuing implementation of a new insurance company operating
system.
Other operating expenses increased $791,000 for the first three months of
1999 compared to the same period in 1998. The increase can be attributed
primarily to Services beginning active operations in January 1999 and additional
salary, benefits, and outside consulting expenses incurred by Solutions from
intensifying its business development efforts.
As a result of the factors discussed above, Midwest Holding realized net
income of $4,569,000 for the three months ended March 31, 1999 compared to net
income of $2,902,000 for the same period of 1998. Basic net income per share
increased to $36.03 from $24.01 for the three months ended March 31, 1999 and
1998, respectively. Diluted net income per share increased to $32.45 for the
three months ended March 31, 1999 from the $21.68 per share reported a year ago.
YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of Midwest
Holding's computer programs that have time sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculation causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send
billings, or engage in similar normal business activities.
A Year 2000 Task Force was formed in early 1998 consisting of members of
senior and departmental management to evaluate and monitor the Year 2000 issue,
identify the causes and consequences to Midwest Holding, and develop courses of
action including contingency plans as deemed necessary. The Year 2000 Task Force
assessment includes the following key areas: internal computer hardware and
software, significant business partners and vendors and insurance policy
exposure.
An evaluation of the Year 2000 readiness of all significant internal
computer hardware and software applications and devices was completed in the
latter part of 1998. The evaluation identified three pieces of network hardware
and one subsidiary operating system that were not Year 2000 compliant. The three
pieces of network hardware did not impact time sensitive operations and
therefore did not pose any significant Year 2000 risk to Midwest Holding. The
operating system used by the MedPower subsidiary is in the process of being
converted to a new, Year 2000 compliant platform. The new operating system is
expected to be fully operational by June 1999 with a total conversion cost
estimated at $250,000. The conversion was approximately 60% completed and had
expenditures of approximately $150,000 as of the date of this
26
<PAGE>
prospectus. As a result of the above evaluation, management believes that the
Year 2000 issue has been adequately addressed with respect to internal use
hardware and software.
A Year 2000 compliance inquiry was prepared and mailed in early October of
1998 to all of Midwest Holding's key business partners and service vendors.
Responses are being evaluated and follow-up will be performed during 1999 as
appropriate. No assurances, however, can be given that the systems of other
companies on which Midwest Holding's operations rely will become Year 2000
compliant in a timely manner, or that the failure by a third party to become
Year 2000 compliant would not have a material adverse effect on Midwest Holding.
A multi-departmental team consisting of claims, risk management and
underwriting management studied and carefully assessed the exposure that might
exist in the policies issued by Midwest Medical. The majority of the exposure is
related to medical equipment that contains computer chips and may be affected by
the Year 2000 bug. This is primarily an exposure for the products liability
carrier. All hospital purchasers of insurance have been surveyed to monitor
their compliance to Midwest Medical guidelines on medical equipment. All current
hospital purchasers of insurance are in compliance. At this point, no coverage
change or exclusion has been 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 Midwest Medical. This
exclusion will continue through the 2000 policy year. Midwest Medical has
communicated its Year 2000 exposure preparedness to its reinsurers and they
fully support the plan as developed. While Midwest Medical feels confident in
the completeness of its due diligence on Year 2000 exposure, it is not yet
possible to determine whether Year 2000 claims will be made against these
policies or if such claims will be held to have merit and what potential
financial impact may result.
Although Midwest Holding expects to complete its Year 2000 remediation in
1999, there are risks if its efforts are delayed or fail. A delay or failure in
remedying a Year 2000 issue, caused by internal computer hardware or software
errors or failures, or by key business partners and service vendors who fail to
become Year 2000 compliant could, in a worst case, interrupt Midwest Holding's
business. Depending upon the extent and duration of the business interruption
resulting from non-compliance issues, such interruption could have a material
adverse effect on Midwest Holding's business, financial condition, and results
of operations. Although Midwest Holding believes the likelihood is remote based
on the due diligence performed as described previously, the potential does exist
in a worst case scenario for claims to be made by Midwest Medical policyholders
for Year 2000 failures they experience. Depending on whether such claims are
deemed to have merit and to the extent and amount these claims are awarded
compensation, such claims could have a material adverse effect on Midwest
Holding's business, financial condition, and results of operations.
The Year 2000 Task Force has developed contingency plans for Midwest
Holding with the exception of the MedPower subsidiary which is in the process of
developing a separate contingency plan. MedPower's contingency plan is expected
to be completed in the third quarter of 1999. If Midwest Holding encounters Year
2000 problems with respect to internal computer hardware and software, core
functions can be processed manually until the problems are remedied.
27
<PAGE>
If unanticipated Year 2000 problems occur with key service vendors, essential
services can be handled manually or through other vendors until the problems are
resolved. The Year 2000 Task Force will be evaluating the need to test backup
manual systems and identify alternative key service vendors. In the event Year
2000 claims are made on policies written by Midwest Medical, Midwest Holding
believes these claims will be without merit and will vigorously defend its
position. Although Midwest Holding believes its contingency plans will be
adequate, no assurances can be given that such plans will address all risks that
may actually arise.
The anticipated completion dates for Year 2000 compliance and Midwest
Holding's contingency plans and the cost estimates for the completion of Year
2000 modifications are based on management's best estimates utilizing current
data regarding available resources, coordination with third parties and other
relevant factors and information about systems conversion. No assurances,
however, can be given that these estimates will be achieved and actual results
may differ from those anticipated.
Readers are reminded that forward-looking statements contained in this
description of Midwest Holding's treatment of the Year 2000 issue should be read
in conjunction with Midwest Holding's following disclosures under the heading
"Cautionary Note Regarding Forward-Looking Statements."
Cautionary Note Regarding Forward-Looking Statements
Statements other than historical information contained in this prospectus
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
prospectus, 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:
- - the impact of changing market conditions on Midwest Holding's business
strategy;
- - the effects of increased competition on pricing, coverage terms, retention
of customers and ability to attract new customers;
- - greater severity or frequency of the types of losses that Midwest Holding
insure;
- - faster or more adverse loss development experience than that on which
Midwest Holding based its underwriting, reserving, and investment
practices;
- - developments in global financial markets which could adversely affect the
performance of Midwest Holding's investment portfolio;
- - litigation, regulatory or tax developments which could adversely affect
Midwest Holding's
28
<PAGE>
business;
- - risks associated with the introduction of new products and services;
- - dependence on key personnel;
- - the impact of mergers and acquisitions; and
- - failure of Midwest Holding or significant third parties to achieve Year
2000 compliance or material expense incurred in connection with such
compliance.
The facts set forth above should be considered in reviewing any
forward-looking statement contained in this prospectus. The important factors
that could affect such forward-looking statements are subject to change, and
Midwest Holding does not intend to update any forward-looking statement or the
forgoing list of important factors. By this cautionary note, Midwest Holding
intends to rely upon the safe harbor from liability with respect to
forward-looking statements provided by Section 27A and Section 21E referred to
above.
Market risk is the risk of loss that may occur when fluctuations in
interest and currency exchange rates and equity and commodity prices change the
value of a financial instrument. Both derivative and nonderivative financial
instruments have market risk. Midwest Holding is primarily exposed to interest
rate risk on its investment in fixed maturities and equity price risk on its
investment in equity securities.
As disclosed previously, Midwest Holding'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 Midwest Holding. Under the current investment policy,
management does not use derivative instruments to manage exposure to either
interest rate risk or equity price risk. Professional outside investment
managers adjust portfolio characteristics, such as sector and average life,
based on their outlook of market conditions within the parameters set by Midwest
Holding's investment policy as approved by the Investment Committee of the Board
of Directors.
Based on the effective duration of the fixed maturity investment portfolio
as of December 31, 1998, an abrupt 1% increase in interest rates along the
entire interest rate yield curve would adversely affect the fair value of fixed
maturity investments by approximately $8,500,000. Based primarily on past annual
performance relative to the Standard & Poors 500 Market Index, an abrupt ten
percent decrease in the S&P 500 would adversely affect the fair value of equity
securities by approximately $10,000,000 at December 31, 1998. Midwest Holding
believes that there would be no material effect on its net income and cash flows
in either scenario. 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 Midwest Holding cannot foresee. Because Midwest
Holding cannot be certain what specific actions would be taken and their
effects, the above sensitivity analyses
29
<PAGE>
assume no significant changes in Midwest Holding's financial structure.
DESCRIPTION OF CAPITAL STOCK
DESCRIPTION OF CLASS A COMMON SHARES. Class A Common shares, $.01 par
value, which may be owned by individual physicians or by individual physicians
jointly with the legal entities in which they practice. In the latter case the
shares can be voted only by the physicians, although they have the right to
grant proxies. No certificates are issued. Each individual holder of shares
has only one vote, regardless of the number of shares that he or she owns.
Holders of shares have the right to vote on all corporate matters except for the
election of members of the Board of Directors of Midwest Holding. This right
has been granted to the Minnesota Medical Association, the holder of the sole
authorized and outstanding Class B Voting Share. The Minnesota Medical
Association has agreed to elect the directors nominated by a committee of the
Board of Directors. See "Description of Class B Voting Share."
As long as the class B share remains outstanding, the holders of these
class A shares may, at any time, cause Midwest Holding to redeem the Class B
Common Share at par value ($1,000), and thereby gain the right to elect
directors. This requires the vote of two-thirds of the class A shareholders who
vote on the question who also are a majority of the class A shareholders.
These shares are restricted shares that cannot be sold to any person other
than Midwest Holding. Midwest Holding must redeem these shares when a physician
insured by Midwest Medical terminates his or her insurance coverage for any
reason. The redemption price will be the net book value of Midwest Holding,
excluding the net book value of Midwest Medical, which is Midwest Holding's
primary asset. By excluding the value of Midwest Medical from the calculation
of the redemption price, Midwest Medical's capital and surplus will be
preserved. The redemption amount thus reflects primarily Midwest Holding's net
income from operations, which is primarily management fees paid by Midwest
Medical, earnings on investments, and any dividends paid by Midwest Medical to
Midwest Holding. Other terms and conditions of the redemption will be
established by the board of directors of Midwest Holding.
Holders of these shares will share in any remaining assets upon liquidation
of Midwest Holding proportionately on the basis of the number of shares held by
each shareholder. All of the assets of Midwest Holding will be included,
including Midwest Medical if Midwest Medical remains a subsidiary of Midwest
Holding at the time of liquidation. In the event of any merger, sale of all or
substantially all of the assets, or other extraordinary event, any consideration
payable to holders of these shares will reflect their full value and will not
be limited to the redemption amount.
These shares do not entitle shareholders to preemptive rights or cumulative
voting, and no assignment or other transfer is permitted. Shareholders are
permitted to enter into voting
30
<PAGE>
agreements and appoint proxies to vote the shares, and are permitted to assign
their rights to the proceeds from any redemption of the shares.
There is no market for these shares, and it is not anticipated that there
ever will be a public or private market in which these shares are traded.
Therefore, all holders of these shares must expect to retain them until they
cease to be insured by Midwest Medical. Midwest Holding has never paid a
dividend, nor does it intend to within the foreseeable future. If it ever does,
shareholders, will have the right to receive that dividend.
Purchasers of insurance from Midwest Medical accrue and are issued
additional shares pursuant to the Allocation schedule (reduced for Nebraska
purchasers of insurance, see "The Offering") for each day they remain insured
with Midwest Medical after the completion of those transactions. New purchasers
of insurance of Midwest Medical are not issued shares until they have been
insured by Midwest Medical for five years, and all rights will be forfeited if
insurance coverage is not continuous for five years. This limitation does not
apply to Nebraska physicians who were insured by Medical Liability Mutual
Insurance Company of Nebraska when it was merged with Midwest Medical. The
Allocation schedule has been modified since 1988 and Midwest Holding reserves
the right to modify it in the future.
As of December 31, 1998, there were 125,682 of these shares outstanding
held by 3,496 physicians; 2,557 additional physicians have accrued the right to
receive 13,770 additional shares upon completion of the five-year vesting
period.
DESCRIPTION OF CLASS B COMMON SHARE. The holder of the one class B share
authorized by Midwest Holding's Articles of Incorporation is the Minnesota
Medical Association. The class B share has no rights or preferences other than
the right to elect the members of the Board of Directors of Midwest Holding.
This right gives the Minnesota Medical Association the effective right to elect
the Board of Directors of Midwest Medical, since the Bylaws of both corporations
provide that each member of the Board of Directors of Midwest Medical will be a
member of the Board of Directors of Midwest Holding, and the MinnesotaMedical
Association and Midwest Holding have entered into an agreement to exercise their
respective voting rights to elect the same persons to the Board of Directors of
Midwest Holding and Midwest Medical. A nominating committee of Midwest Holding
nominates persons to be elected as members of the Board of Directors, and the
Midwest Medical Association has agreed to elect these persons to the Board of
Directors.
The class B share is currently held in a voting trust which requires the
trustee to vote the share for the election of at least two Iowa directors
nominated by the Iowa Medical Society. See, "MANAGEMENT - Directors."
31
<PAGE>
LEGAL MATTERS
The validity of the shares of Midwest Holding to be issued in this
offering, and other legal matters are being passed upon for Midwest Holding by
Best & Flanagan LLP, Minneapolis, Minnesota.
EXPERTS
The consolidated financial statements and schedules of Midwest Medical
Insurance Holding Company at December 31, 1998 and 1997, and for each of the
three years in the period ended December 31, 1998, appearing in this prospectus
and registration statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report appearing elsewhere in this prospectus
and in the registration statement, and are included in reliance upon that report
given upon the authority of that firm as experts in accounting and auditing.
32
<PAGE>
AVAILABLE INFORMATION
Midwest Holding is subject to the information reporting requirements of the
Securities Exchange Act of 1934, and files Form 10-K, Form 10-Q and other
reports and information with the Securities and Exchange Commission. Reports
and other information filed by Midwest Holding can be inspected and copied at
the Public Reference Room maintained by the Commission at 450 Fifth Street N.W.,
Washington, D.C. 20549, and at the following Regional Offices: 26 Federal
Plaza, New York, New York 10278; and 219 South Dearborn Street, Chicago,
Illinois 60604. The public may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains
an Internet site that contains reports, proxy and information statements and
other information regarding issuers that file electronically with the SEC at
http://www.sec.gov.
Midwest Holding provides its shareholders with an annual report containing
consolidated Midwest Holding and subsidiaries year-end financial statements
presented in accordance with generally accepted accounting principles. Midwest
Medical's separate net income and shareholders' equity are presented on both a
GAAP and statutory accounting basis in the notes to the consolidated financial
statements. Midwest Medical is subject to the insurance company filing
requirements of the Minnesota Department of Commerce and files the National
Association of Insurance Commissioners annual statement each year with the
Department of Commerce, which includes financial statements presented in
accordance with statutory requirements, together with an independent auditor's
report on those financial statements. Insurance holding company regulations
apply to Midwest Holding and it files Form B with the Minnesota Department of
Commerce annually. Form B contains current information about management, the
Board of Directors, and significant operating agreements, as well as a financial
report. Copies of any of these reports, or any of the documents referred to in
this prospectus, can be obtained by requesting them from David P. Bounk,
President and Chief Executive Officer, Midwest Medical Insurance Holding
Company, 6600 France Avenue South, Suite 245, Minneapolis, Minnesota 55435;
(612) 922-5445.
33
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page No.
FINANCIAL STATEMENTS
<S> <C>
Consolidated Financial Statements (Unaudited)
Balance Sheet - March 31, 1999. . . . . . . . . . . . . . . . . . . . . . . . . F1
Statements of Incomes - Three Months Ended March 31, 1999 and 1998. . . . . . . F2
Statements of Cash Flows - Three Months Ended March 31, 1999 and 1998 . . . . . F3
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . F4
Consolidated Financial Statements
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . F6
Consolidated Balance Sheets - December 31, 1998 and 1997. . . . . . . . . . . . F7
Consolidated Statements of Income - For the Years Ended December 31, 1998,
1997 and 1996. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F8
Consolidated Statements of Changes in Other Shareholders' Equity - For the
Years Ended December 31, 1998, 1997 and 1996. . . . . . . . . . . . . . . . . F9
Consolidated Statements of Cash Flows - For the Years Ended
December 31, 1998, 1997 and 1996. . . . . . . . . . . . . . . . . . . . . . .F10
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . .F11
FINANCIAL STATEMENT SCHEDULES
[Report of Independent Auditors. . . . . . . . . . . . . . . . . . . . . . . . . .F34
Schedule II - Condensed Financial Information of Registrant
(Parent Company). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .F35
Balance Sheets - December 31, 1998 and 1997 . . . . . . . . . . . . . . . . . .F35
Statements of Income - For the Years Ended December 31, 1998, 1997
and 1996. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .F36
Statements of Cash Flows - For the Years Ended December 31, 1998,
1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .F37
Note to Condensed Financial Statements. . . . . . . . . . . . . . . . . . . . .F38
Schedule IV - Reinsurance - For the Years Ended December 31, 1998, 1997
and 1996. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F38
Schedule VI - Supplemental Information Concerning Property/Casualty Insurance
Operations - December 31, 1998 and 1997 and for Each of the Three Years
in the Period Ended December 31, 1996 . . . . . . . . . . . . . . . . . F39
</TABLE>
34
<PAGE>
MIDWEST MEDICAL INSURANCE HOLDING COMPANY and SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31 December 31
1999 1998
----------- -----------
(Unaudited) (Note A)
<S> <C> <C>
ASSETS
Fixed maturity investments at fair value
(amortized cost: 1999 $156,947;
1998 $161,430) $ 156,862 $ 164,652
Equity securities at fair value (cost:
1999 $42,890; 1998 $41,907) 86,718 86,553
Short-term investments 8,703 3,556
Other investments 10,000 10,000
-------- --------
262,283 264,761
Cash 1,454 647
Accrued investment income 1,740 1,739
Reinsurance recoverable 16,805 16,499
Uncollected premiums - Note C 31,159 2,023
Amounts due from reinsurers 2,981 3,191
Other assets 7,254 6,623
-------- --------
$ 323,676 $ 295,483
--------- ---------
--------- ---------
LIABILITIES, REDEEMABLE STOCK AND OTHER
SHAREHOLDERS' EQUITY
LIABILITIES
Unpaid losses and loss adjustment expenses $ 111,612 $ 110,964
Unearned premiums - Note C 43,986 8,173
Retrospective premiums - 8,543
Deferred income taxes 9,521 10,966
Other liabilities 6,087 6,244
-------- --------
171,206 144,890
REDEEMABLE STOCK
Class A Common Stock; authorized 300,000 shares,
shares issued and outstanding 127,873 and
125,682 in 1999 and 1998, respectively 7,629 8,146
Class B Common Stock; authorized, issued and
outstanding 1 share 1 1
-------- --------
7,630 8,147
OTHER SHAREHOLDERS' EQUITY
Paid-in capital 12,789 12,789
Retained earnings 103,771 98,695
Accumulated other comprehensive income:
Net unrealized appreciation of investments 28,280 30,962
-------- --------
144,840 142,446
-------- --------
$ 323,676 $ 295,483
--------- ---------
--------- ---------
</TABLE>
See notes to condensed consolidated financial statements
F-1
<PAGE>
MIDWEST MEDICAL INSURANCE HOLDING COMPANY and SUBSIDIARIES
Condensed Consolidated Statements of Income
(Dollars in thousands, except per share dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
1999 1998
-------- --------
<S> <C> <C>
Revenues:
Net premiums earned $ 10,512 $ 10,291
Net investment income 2,873 2,980
Net realized capital gains 6,309 3,064
Other 867 393
-------- --------
20,561 16,728
Losses and expenses:
Losses and loss adjustment expenses 9,485 9,285
Underwriting, acquisition and
insurance expenses 2,517 2,242
Other operating expenses 1,527 736
-------- --------
13,529 12,263
-------- --------
Income before income taxes 7,032 4,465
Incomes taxes - Note B 2,463 1,563
-------- --------
Net income $ 4,569 $ 2,902
-------- --------
-------- --------
Income per common share $ 36.03 $ 24.01
-------- --------
-------- --------
Income per common share -
assuming dilution $ 32.45 $ 21.68
-------- --------
-------- --------
</TABLE>
See notes to condensed consolidated financial statements.
F-2
<PAGE>
MIDWEST MEDICAL INSURANCE HOLDING COMPANY and SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
1999 1998
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 4,569 $ 2,902
Adjustments to reconcile net income to net cash
used in operating activities:
Increase in uncollected premiums (29,136) (26,164)
Increase in unearned premiums 35,813 31,474
Decrease in retrospective premiums (8,543) (8,073)
Decrease in other liabilities (157) (6,103)
Net realized capital gains (6,309) (3,064)
Other changes (60) (269)
---------- ----------
(3,823) (9,297)
INVESTING ACTIVITIES
Purchases of fixed maturity investments and equity
securities (59,619) (176,645)
Sales of fixed maturity investments and equity
securities 69,461 177,972
Net (purchases) sales of short-term investments (6,646) 2,903
Capitalization of MMIHC Insurance Services, Inc. 1,500 -
Capitalization of Midwest Medical Solutions, Inc. - 1,850
---------- ----------
4,696 6,080
FINANCING ACTIVITIES
Redemption of Class A Common Stock (66) (132)
---------- ----------
INCREASE (DECREASE) IN CASH 807 (3,349)
Cash at beginning of period 647 2,378
---------- ----------
CASH AT MARCH 31 $ 1,454 $ (971)
---------- ----------
---------- ----------
</TABLE>
See notes to condensed consolidated financial statements.
F-3
<PAGE>
MIDWEST MEDICAL INSURANCE HOLDING COMPANY and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 31, 1999
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial
statements of Midwest Medical Insurance Holding Company and its subsidiaries
(the "Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and notes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for any
interim period are not necessarily indicative of the results that may be
expected for the full year. These interim financial statements should be read in
conjunction with the 1998 consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K as filed with the
Securities and Exchange Commission.
The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
Certain amounts applicable to prior periods have been reclassified to
conform to the classifications followed in the current year. All intercompany
amounts have been eliminated.
NOTE B - INCOME TAXES
The Company calculates its income tax provision for interim periods by
estimating its annual effective tax rate and applying this rate to the income of
the interim period. The estimated annual effective tax rate used for the three
months ended March 31, 1999 and 1998 was approximately 35%.
NOTE C - UNEARNED PREMIUMS and UNCOLLECTED PREMIUMS
The majority of the Company's insurance policies expire at December 31 and
renew on January 1 of each year. As a result, the majority of the unearned
premium amount at March 31, 1999 represents nine months of unearned premium for
every active policy renewed or newly written with an expiration date of December
31, 1999. At December 31, 1998, most active 1998 policies expired and therefore
had no unearned premium.
F-4
<PAGE>
NOTE C - UNEARNED PREMIUMS and UNCOLLECTED PREMIUMS (continued)
Of the total unearned premium balance of $8,173,000 at December 31, 1998,
$6,520,000 is reserved to recognize the Company's obligation to provide
reporting endorsement coverage without additional premium upon the death,
disability or retirement of policyholders. That same amount is also included in
the unearned premium balance at March 31, 1999 and represents the actuarially
determined present value of future benefits to be provided less the present
value of future revenues to be received.
The increase of $29,136,285 in uncollected premiums from December 31, 1998
to March 31, 1999 is primarily due to the renewal of most active policies on
January 1. The full year's premium is recorded as written and collectible at
January 1. Premiums may be paid annually or quarterly and the majority of each
year's premium is collected during the year. The uncollected balance remaining
at the end of the year primarily relates to the few policies underwritten by the
Company that have other than December 31 expiration dates.
NOTE D - COMPREHENSIVE INCOME
The components of the Company's comprehensive income are net income and
changes in unrealized appreciation of investments. Total comprehensive income
for the three-month periods ended March 31, 1999 and 1998 was $1,887,000 and
$6,955,000, respectively.
NOTE E - EARNINGS PER SHARE DATA
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except for share and per share amounts):
<TABLE>
<CAPTION>
Three Months Ended
March 31
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
Numerator for basic and dilutive earnings per share
available to common shareholders
$4,569 $2,902
------------ ------------
------------ ------------
Denominator:
Denominator for basic earnings per share--weighted average
shares 126,811 120,853
Effect of dilutive securities:
Unvested shares 13,991 13,028
------------ ------------
Denominator for dilutive earnings per share--adjusted
weighted-average shares and assumed conversions
140,802 133,881
------------ ------------
------------ ------------
Basic earnings per share $36.03 $24.01
------------ ------------
------------ ------------
Diluted earnings per share $32.45 $21.68
------------ ------------
------------ ------------
</TABLE>
F-5
<PAGE>
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, 1998 and 1997, 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, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, 1998 and 1997, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February 1, 1999
F-6
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Consolidated Balance Sheets
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
--------------------------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities at fair value (cost: 1998--$161,430;
1997--$170,590) $164,652 $171,975
Equity securities at fair value (cost: 1998--$41,907;
1997--$21,576) 86,553 50,862
Short-term 3,556 13,909
Other 10,000 10,000
--------------------------------
264,761 246,746
Cash 647 2,378
Accrued investment income 1,739 2,341
Reinsurance recoverable 16,499 19,117
Amounts due from reinsurers 3,191 -
Other assets 8,646 4,933
--------------------------------
Total assets $295,483 $275,515
--------------------------------
--------------------------------
LIABILITIES, REDEEMABLE STOCK AND OTHER
SHAREHOLDERS' EQUITY
Liabilities:
Unpaid losses and loss adjustment expenses $110,964 $107,806
Unearned premiums 8,173 6,072
Retrospective premiums 8,543 9,905
Deferred income taxes 10,966 3,592
Amounts due reinsurers - 2,984
Other liabilities 6,244 11,389
--------------------------------
Total liabilities 144,890 141,748
Redeemable stock:
Class A Common Stock--authorized 300,000 shares,
issued and outstanding 125,682 shares in 1998 and
121,322 shares in 1997 8,146 7,476
Class B Common Stock--authorized, issued
and outstanding 1 share 1 1
--------------------------------
8,147 7,477
Other shareholders' equity 142,446 126,290
--------------------------------
Total liabilities, redeemable stock and other
shareholders' equity $295,483 $275,515
--------------------------------
--------------------------------
</TABLE>
SEE ACCOMPANYING NOTES
F-7
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Consolidated Statements of Income
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
------------------------------------------------
<S> <C> <C> <C>
Revenues:
Net premiums earned $35,014 $32,916 $31,177
Net investment income 10,919 11,509 12,061
Realized capital gains 8,949 6,484 1,771
Other 1,536 1,283 1,726
------------------------------------------------
56,418 52,192 46,735
Losses and expenses:
Losses and loss adjustment expenses 37,494 31,834 32,257
Underwriting, acquisition and insurance expenses 6,698 5,509 4,681
Other operating expenses 3,589 1,086 858
------------------------------------------------
47,781 38,429 37,796
------------------------------------------------
Income before income taxes 8,637 13,763 8,939
Income taxes 2,689 4,463 1,458
------------------------------------------------
Net income $5,948 $9,300 $7,481
------------------------------------------------
------------------------------------------------
Income per common share $48.36 $77.79 $64.45
------------------------------------------------
------------------------------------------------
Income per common share--assuming dilution $43.65 $70.23 $58.33
------------------------------------------------
------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-8
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Consolidated Statements of Changes in Other Shareholders' Equity
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
PAID-IN RETAINED COMPREHENSIVE
TOTAL CAPITAL EARNINGS INCOME
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 $ 103,292 $ 12,789 $ 78,204 $ 12,299
Comprehensive income:
Net income 7,481 - 7,481 -
Other comprehensive income:
Unrealized gains on securities net of $1,468 in taxes 2,726 - - 2,726
Reclassification adjustment for gains included in net
income net of $620 in taxes (1,151) - - (1,151)
-------------
Total comprehensive income 9,056
Net income of non-insurance entities includable in Class A
Common Stock redemption value (1,070) - (1,070) -
-------------------------------------------------------------
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
-------------------------------------------------------------
-------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-9
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Consolidated Statements of Cash Flows
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
---------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 5,948 $ 9,300 $ 7,481
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Decrease in accrued investment income 602 437 97
Decrease in reinsurance recoverable 2,618 3,057 2,938
Increase in amounts due from reinsurers (3,191) - -
(Increase) decrease in other assets (3,713) 1,518 1,015
Deferred tax provision 1,354 1,494 298
Increase (decrease) in unpaid losses and loss adjustment expenses
3,158 (2,231) (10,227)
Increase (decrease) in unearned premiums 2,101 (788) (173)
Decrease in retrospective premiums (1,362) (933) (26)
Decrease in amounts due reinsurers (2,984) (4,290) (544)
(Decrease) increase in other liabilities (5,145) 3,287 (236)
Accretion of bond discount, net of premium amortization (266) (618) (1,080)
Realized capital gains (8,949) (6,484) (1,771)
Compensation expense for vested Class A common shares 224 253 156
---------------------------------------------
(9,605) 4,002 (2,072)
INVESTING ACTIVITIES
Purchases of fixed maturity investments and equity securities (401,922) (311,947) (75,684)
Sales of fixed maturity investments and equity securities 398,717 316,982 54,293
Calls and maturities of fixed maturity investments 1,250 - 16,250
Net sales (purchases) of short-term investments 6,502 (6,011) 7,117
Capitalization of Midwest Medical Solutions, Inc. 3,850 - -
---------------------------------------------
8,397 (976) 1,976
FINANCING ACTIVITIES
Redemption of Class A Common Stock (523) (648) (608)
---------------------------------------------
(Decrease) increase in cash (1,731) 2,378 (704)
Cash at beginning of year 2,378 - 704
---------------------------------------------
Cash at end of year $ 647 $ 2,378 $ -
---------------------------------------------
---------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-10
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1998
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 (Midwest Medical), under the statutes
of the State of Minnesota. Concurrently, MMMI merged with the Midwest Medical
Insurance Holding Company (Midwest Holding) which then acquired all outstanding
shares of the reorganized stock company.
Effective July 1, 1993, Midwest Medical 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 Midwest Medical. The merger
was accounted for as a pooling-of-interests.
During 1995, Midwest Holding formed Midwest Holding Insurance Services, Inc.
(Services) to provide agency services for the distribution of complementary
insurance products and services to physicians, clinics and hospitals.
Effective June 5, 1996, Midwest Medical 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 Midwest
Medical. The merger was accounted for as a pooling-of-interests and,
accordingly, the consolidated financial statements include the combined
financial position and results of operations of Midwest Holding and MLM for all
periods presented.
During 1997, Midwest Holding 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 Midwest Medical
serves. Business development opportunities being pursued include practice
enhancement, strategic consulting, and electronic processing and integration
services and support.
F-11
<PAGE>
1. ACCOUNTING POLICIES (CONTINUED)
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.
Midwest Holding provides management and administrative services to Midwest
Medical for a fee generally equal to the cost of services provided plus ten
percent. The insurance company 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 Midwest Medical are on a "claims made" basis and
provide coverage for the policyholder for claims first made against the
policyholder and reported to Midwest Medical during the policy period for claims
which occurred on or after the retroactive date stated in the policy.
Midwest Medical 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 Midwest Medical. 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 Midwest
Medical 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.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Midwest Holding
and its wholly-owned subsidiaries, Midwest Medical, Services, and Solutions,
which includes Solution's wholly-owned subsidiary, MedPower. All transactions
between Midwest Holding and its subsidiaries have been eliminated in
consolidation with the exception of the distribution of capital to Midwest
Holding by Midwest Medical in the form of dividends.
F-12
<PAGE>
1. ACCOUNTING POLICIES (CONTINUED)
Hereafter, Midwest Holding, Midwest Medical, 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
generally accepted accounting principles, which differ in certain respects from
statutory accounting practices followed by Midwest Medical in reporting to the
Department of Commerce of the State of Minnesota (see Note 10).
COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement 130, REPORTING
COMPREHENSIVE INCOME. Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net income or shareholders'
equity. Statement 130 requires unrealized gains or losses on the Company's
available-for-sale securities, which prior to adoption were reported separately
in shareholders' equity, to be included in other comprehensive income. Prior
year financial statements have been reclassified to conform to the requirements
of Statement 130.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles 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.
F-13
<PAGE>
1. ACCOUNTING POLICIES (CONTINUED)
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.
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 twenty percent equity interests in non-traded
real estate investment trusts and are recorded at cost.
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.
F-14
<PAGE>
1. ACCOUNTING POLICIES (CONTINUED)
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
Midwest Medical, 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. Midwest Medical
believes that the estimate of the liability for losses and loss adjustment
expenses is reasonable.
PREMIUMS
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
Midwest Medical'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.
Midwest Medical has a retro premium program whereby physicians may receive
credits against future premiums based upon loss experience of Midwest Medical.
Amounts to be returned under the program are accrued when approved by the Board
of Directors and reflected as a reduction in net premiums earned.
REINSURANCE
Midwest Medical 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 Midwest Medical 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.
F-15
<PAGE>
1. ACCOUNTING POLICIES (CONTINUED)
ACQUISITION COSTS
Acquisition costs are expensed when incurred. Due to the nature of its
operations, Midwest Medical does not pay significant amounts in commissions.
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, Midwest Medical 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 Midwest
Medical 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 12).
F-16
<PAGE>
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 Midwest Medical 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.
Midwest Medical 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 Midwest Medical. 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 Midwest Holding,
only active policyholders of Midwest Medical may own shares of Class A Common
Stock of Midwest Holding. 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 Midwest Holding
upon termination as policyholders of Midwest Medical. The net redemption value
(NRV) of the shares is equal to the net book value of Midwest Holding, excluding
the amount of net book value that is attributable to Midwest Medical, divided by
the number of outstanding Class A Common Shares of Midwest Holding 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.
Midwest Holding has issued one share of Class B voting stock which carries with
it the right to elect the Board of Directors of Midwest Holding. 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.
F-17
<PAGE>
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, 1998 (in thousands, except for share and
per share amounts):
<TABLE>
<CAPTION>
CLASS B
CLASS A COMMON STOCK COMMON
----------------------------
TOTAL SHARES AMOUNT STOCK
------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 $ 6,975 116,251 $ 1 $ 1
Comprehensive income:
Net income of non-insurance entities includable in Class A
Common Stock redemption value 1,070 - - -
Other comprehensive income:
Unrealized gains on securities net of $6 in taxes 11 - - -
--------------
Total comprehensive income 1,081
Redemption of shares due to policyholder terminations by effective date:
January 1, 1996 to June 30, 1996; NRV of $60.00 (377) (6,277) (1) -
July 1, 1996 to December 31, 1996; NRV of $57.84 (231) (3,995) - -
Issuance of shares to vested policyholders - 9,540 1 -
Initial issuance of shares to policyholders upon vesting 156 2,690 - -
------------------------------------------------------
Balance at December 31, 1996 (CARRIED FORWARD) 7,604 118,209 1 1
<CAPTION>
ACCUMULATED
MIDWEST MIDWEST OTHER
HOLDING HOLDING COMPREHENSIVE
PAID-IN RETAINED
CAPITAL EARNINGS INCOME
----------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1995 $ 4,752 $ 2,164 $ 57
Comprehensive income:
Net income of non-insurance entities includable in Class A
Common Stock redemption value - 1,070 -
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, 1996 to June 30, 1996; NRV of $60.00 (259) (117) -
July 1, 1996 to December 31, 1996; NRV of $57.84 (159) (72) -
Issuance of shares to vested policyholders - (1) -
Initial issuance of shares to policyholders upon vesting 156 - -
----------------------------------------------
Balance at December 31, 1996 (CARRIED FORWARD) 4,490 3,044 68
</TABLE>
F-18
<PAGE>
2. REDEEMABLE STOCK (CONTINUED)
<TABLE>
<CAPTION>
ACCUMULATED
CLASS B MIDWEST MIDWEST OTHER
CLASS A COMMON STOCK COMMON HOLDING HOLDING COMPREHENSIVE
-------------------- PAID-IN RETAINED
TOTAL SHARES AMOUNT STOCK CAPITAL EARNINGS INCOME
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 (BROUGHT FORWARD) $7,604 118,209 $1 $1 $4,490 $3,044 $ 68
Comprehensive income:
Net income of non-insurance entities includable
in Class A Common Stock redemption value 272 - - - - 272 -
Other comprehensive income:
Unrealized gains on securities net of $6
in taxes 11 - - - - - 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) (113) -
July 1, 1997 to December 31, 1997; NRV of $62.12 (370) (5,943) (1) - (220) (149) -
Issuance of shares to vested policyholders - 9,406 1 - - (1) -
Initial issuance of shares to policyholders upon
vesting 253 4,013 - - 253 - -
Other (15) - - - - (15) -
------------------------------------------------------------------------
Balance at December 31, 1997 (CARRIED FORWARD) 7,477 121,322 1 1 4,358 3,038 79
</TABLE>
F-19
<PAGE>
2. REDEEMABLE STOCK (CONTINUED)
<TABLE>
<CAPTION>
CLASS B ACCUMULATED
CLASS A COMMON STOCK COMMON MIDWEST MIDWEST OTHER
HOLDING HOLDING COMPREHENSIVE
-------------------- PAID-IN RETAINED
TOTAL SHARES AMOUNT STOCK CAPITAL EARNINGS INCOME
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 (BROUGHT FORWARD) $ 7,477 121,322 $ 1 $ 1 $ 4,358 $3,038 $ 79
Comprehensive income:
Net loss of non-insurance entities includable in Class A
Common Stock redemption value (1,104) - - - - (1,104) -
Other comprehensive income:
Unrealized gains on securities net of $39 in taxes 73 - - - - - 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) (104) -
July 1, 1998 to December 31, 1998; NRV of $54.70 (272) (4,935) (1) - (160) (111) -
Issuance of shares to vested policyholders - 9,437 1 - - (1) -
Initial issuance of shares to policyholders upon vesting 224 3,928 - - 224 - -
Dividend from Midwest Medical 2,000 - - - 2,000 - -
---------------------------------------------------------------------
Balance at December 31, 1998 $ 8,147 125,682 $ 1 $ 1 $ 6,275 $1,718 $152
---------------------------------------------------------------------
---------------------------------------------------------------------
</TABLE>
F-20
<PAGE>
3. INVESTMENTS
Components of net investment income are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
Fixed maturities $ 9,340 $ 10,901 $ 11,561
Equity securities 820 523 380
Short-term investments 926 939 904
Other investments 855 - -
----------------------------------------
11,941 12,363 12,845
Investment expenses (1,022) (854) (784)
----------------------------------------
$ 10,919 $ 11,509 $ 12,061
----------------------------------------
----------------------------------------
</TABLE>
The cost (amortized cost for fixed maturities) and fair value of available for
sale investments are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturities:
Midwest Medical:
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:
Midwest Holding $ 520 $ 234 $ - $ 754
Midwest Medical 41,387 45,297 (885) 85,799
---------------------------------------------------
Total $ 41,907 $ 45,531 $ (885) $ 86,553
---------------------------------------------------
---------------------------------------------------
</TABLE>
F-21
<PAGE>
3. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturities:
Midwest Holding:
United States Government $ 1,255 $ - $ - $ 1,255
Industrial and other 53 - - 53
Midwest Medical:
United States Government 97,234 801 (36) 97,999
State and other political
subdivisions 32,991 383 - 33,374
Industrial and other 39,057 257 (20) 39,294
----------------------------------------------------
Total $170,590 $ 1,441 $ (56) $171,975
----------------------------------------------------
----------------------------------------------------
Equity securities:
Midwest Holding $ 981 $ 122 $ - $ 1,103
Midwest Medical 20,595 29,164 - 49,759
----------------------------------------------------
Total $ 21,576 $ 29,286 $ - $ 50,862
----------------------------------------------------
----------------------------------------------------
</TABLE>
The components of the unrealized appreciation on available for sale securities
as of December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------
MIDWEST MIDWEST MIDWEST MIDWEST
HOLDING MEDICAL HOLDING MEDICAL
---------------------- ----------------------
<S> <C> <C> <C> <C>
Fixed maturities:
Gross unrealized gains $ - $ 3,385 $ - $ 1,441
Gross unrealized losses - (163) - (56)
Equity securities:
Gross unrealized gains 234 45,297 122 29,164
Gross unrealized losses - (885) - -
---------------------- ----------------------
234 47,634 122 30,549
Deferred income taxes (82) (16,672) (43) (10,691)
---------------------- ----------------------
$ 152 $ 30,962 $ 79 $19,858
---------------------- ----------------------
---------------------- ----------------------
</TABLE>
F-22
<PAGE>
3. INVESTMENTS (CONTINUED)
The amortized cost and market value of fixed maturities at December 31, 1998, 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.
<TABLE>
<CAPTION>
AMORTIZED MARKET
COST VALUE
--------------------------
<S> <C> <C>
Due in one year or less $ 6,192 $ 6,221
Due after one year through five years 40,322 40,982
Due after five years through ten years 27,671 28,309
Due after ten years 87,245 89,140
--------------------------
$161,430 $164,652
--------------------------
--------------------------
</TABLE>
Proceeds from sales of available for sale investments and the related gross
realized gains and losses are as follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
PROCEEDS FROM REALIZED REALIZED
SALES GAINS LOSSES
--------------------------------------
<S> <C> <C> <C>
Year ended December 31, 1998:
Fixed maturities $382,048 $3,600 $(769)
Equity securities 16,669 6,404 (286)
Year ended December 31, 1997:
Fixed maturities 310,235 5,806 (884)
Equity securities 6,747 2,109 (547)
Year ended December 31, 1996:
Fixed maturities 46,735 803 (214)
Equity securities 7,558 1,347 (165)
</TABLE>
Net unrealized appreciation of fixed maturities increased (decreased) by
$1,837,000, $(2,197,000) and $(4,691,000) and net unrealized appreciation of
equity securities increased by $15,360,000, $11,417,000 and $7,140,000 for the
years ended December 31, 1998, 1997 and 1996, respectively.
F-23
<PAGE>
4. RETROSPECTIVE PREMIUMS
The components of retrospective premiums at December 31 are as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
-----------------------
<S> <C> <C>
Retrospective premium credits declared:
Minnesota policyholders $5,200 $5,000
North Dakota policyholders 280 -
Iowa policyholders active at date of merger
and renewing in 1999 and 1998 3,063 3,100
Favorable development on pre-merger IPMIT
liabilities not yet approved for credit - 1,805
-----------------------
$8,543 $9,905
-----------------------
-----------------------
</TABLE>
A provision of the agreement and plan of merger between IPMIT and the Company
requires that any favorable development of certain pre-merger liabilities of
IPMIT be paid to the former IPMIT policyholders who remain active Midwest
Medical purchasers of insurance as of the date of payment through a
retrospective premium credit. The agreement further stipulates that any amounts
due under this provision must be finalized using financial information available
as of December 31, 1998. Final amounts due under this provision will be paid to
physician purchasers of insurance in early 1999. Actual payments of $3,073,000
and $2,501,000 were made to former IPMIT policyholders in 1998 and 1997,
respectively. Actual retrospective premium payments made to Minnesota
policyholders' accounts in 1998 and 1997 were $5,008,000 and $4,803,000,
respectively.
A provision of the agreement and plan of merger between MLM and the Company
requires that any favorable development of certain pre-merger liabilities of MLM
be paid to the former MLM policyholders who remain active Midwest Medical
purchasers of insurance 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, 1998,
there has been no favorable development and therefore there is no accrual
related to this provision.
F-24
<PAGE>
5. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
The reconciliation of the liability for unpaid losses and loss adjustment
expenses is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------
<S> <C> <C> <C>
Balance as of January 1, net of reinsurance
recoverables $ 89,394 $ 90,342 $ 96,424
Incurred related to:
Current year 41,927 40,186 41,101
Prior years (4,433) (8,352) (8,844)
------------------------------------------
Total incurred 37,494 31,834 32,257
Paid related to:
Current year 3,666 2,685 4,885
Prior years 28,755 30,097 33,454
------------------------------------------
Total paid 32,421 32,782 38,339
------------------------------------------
Balance as of December 31, net of reinsurance
recoverables 94,467 89,394 90,342
Reinsurance recoverables at December 31 16,497 18,412 19,695
------------------------------------------
Balance as of December 31, gross $ 110,964 $ 107,806 $ 110,037
------------------------------------------
------------------------------------------
</TABLE>
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. See Note 4 regarding retrospective premium credits
paid and accrued.
F-25
<PAGE>
6. INCOME TAXES
Components of income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------------
<S> <C> <C> <C>
Current provision $1,335 $2,969 $1,160
Deferred tax provision 1,354 1,494 298
---------------------------------
$2,689 $4,463 $1,458
---------------------------------
---------------------------------
</TABLE>
The Company's income taxes differ from the federal statutory rate applied to
income before tax as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------------
<S> <C> <C> <C>
Income before tax at the federal statutory rate
of 35% $3,023 $4,817 $3,129
Tax-exempt income (net of proration adjustment) - (775) (1,374)
Dividends received deductions (net of proration adjustment) (99) (89) (78)
State income taxes, net of federal tax benefit 37 198 50
Payment of prior year taxes - 300 -
Recovery of prior year taxes (267) - -
Proceeds on life insurance - - (368)
Other (5) 12 99
---------------------------------
$2,689 $4,463 $1,458
---------------------------------
---------------------------------
</TABLE>
F-26
<PAGE>
6. INCOME TAXES (CONTINUED)
The deferred income tax provision includes the following differences between
financial and income tax reporting (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------
<S> <C> <C> <C>
Discounting of post-1986 unpaid losses and loss
adjustment expenses $ 842 $ 323 $ 1,190
Liabilities not currently deductible 596 636 (274)
Unearned premiums (151) 57 6
Utilization of alternative minimum tax carryforwards
- 496 -
Alternative minimum tax carryforwards - - (496)
Other 67 (18) (128)
--------------------------------------
$ 1,354 $ 1,494 $ 298
--------------------------------------
--------------------------------------
</TABLE>
The Company made income tax payments of $3,041,000, $1,518,000 and $3,260,000 in
1998, 1997 and 1996, respectively.
The components of the net deferred income tax (liability) asset as of December
31 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------------------------
<S> <C> <C>
Deferred tax assets:
Unpaid losses and loss adjustment expenses $ 4,154 $ 4,996
Liabilities not currently deductible 1,079 1,675
Unearned premiums 628 477
Other 550 552
--------------------------
6,411 7,700
Deferred tax liabilities:
Unrealized gains (16,754) (10,734)
Other (623) (558)
--------------------------
(17,377) (11,292)
--------------------------
$(10,966) $ (3,592)
--------------------------
--------------------------
</TABLE>
F-27
<PAGE>
6. INCOME TAXES (CONTINUED)
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.
7. REINSURANCE
To reduce overall risk, including exposure to large losses, the Company
participates in various reinsurance programs. Midwest Medical 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, 1998.
Reinsurance recoverables on paid and unpaid losses of $16,277,000 and
$16,141,000 are associated with a single reinsurer, General Reinsurance
Corporation, at December 31, 1998 and 1997, respectively.
Midwest Medical 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 Midwest Medical. 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.
Total ceded reinsurance premiums, before the effects of treaty commutations, for
the years ended December 31, 1998, 1997 and 1996 were $3,104,000, $3,329,000 and
$6,416,000, respectively. Loss and loss adjustment expenses incurred are net of
applicable reinsurance of $2,240,000, $2,455,000 and $2,459,000 for the years
ended December 31, 1998, 1997 and 1996, respectively.
In 1998, the Company commuted reinsurance treaties covering the period January
1, 1991 through December 31, 1991. Net premiums recovered as a result of these
commutations of $789,000 have been included in net premiums earned in 1998.
In 1996, the Company commuted reinsurance treaties covering the period January
1, 1989 through December 31, 1990. Net premiums recovered as a result of these
commutations of $2,194,000 have been included in net premiums earned in 1996.
F-28
<PAGE>
8. OTHER COMMITMENTS
In the normal course of claim settlement, Midwest Medical 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
Midwest Medical from any future contractual liability to the claimant. Midwest
Medical and its reinsurers could only become liable for ultimate settlement of
those claims which have not been assigned. At December 31, 1998 and 1997,
respectively, non-assigned structured settlements guaranteed $5,820,000 and
$12,299,000 of payments under annuity contracts for which Midwest Medical and
its reinsurers paid $2,627,000 and $4,726,000. In the event that the insurance
company issuing the annuity was unable to meet its obligation under the terms
provided, Midwest Medical would be liable for the ultimate settlement.
9. BENEFIT PLANS
The Company has a non-contributory defined contribution pension plan covering
substantially all employees. Contributions to the plan are based upon each
covered employee's salary. The Company also sponsors a 401(k) plan covering
substantially all employees and provides a fifty percent match on employee
contributions subject to certain limitations. Total contributions charged to
expense for the years ended December 31, 1998, 1997 and 1996 were $521,000,
$393,000 and $371,000, respectively.
The Company 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 $404,000, $363,000 and
$323,000 for the years ended December 31, 1998, 1997 and 1996, respectively. The
liability recognized in the consolidated balance sheets at December 31, 1998 and
1997 related to this plan was $2,439,000 and $2,192,000, respectively.
F-29
<PAGE>
9. BENEFIT PLANS (CONTINUED)
The Company also provides medical benefits to retirees through a defined benefit
post-retirement plan which covers substantially all employees. The net periodic
post-retirement benefit cost for the years ended December 31, 1998, 1997 and
1996 was $41,000, $27,000 and $30,000, respectively. As of December 31, 1998 the
plan was fully funded. As of December 31, 1997, the net post-retirement benefit
plan liability was $4,000.
10. RECONCILIATION WITH STATUTORY ACCOUNTING PRINCIPLES
The following is a reconciliation of net income and shareholders' equity under
generally accepted accounting principles with that reported for Midwest Medical
on a statutory basis (in thousands):
Net Income
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
---------------------------------------
<S> <C> <C> <C>
As reported under generally accepted
accounting principles $ 5,948 $ 9,300 $ 7,481
(Income) loss of non-insurance entities 1,104 (272) (1,070)
---------------------------------------
On the basis of generally accepted accounting
principles, Midwest Medical only 7,052 9,028 6,411
Additions (deductions):
Deferred income taxes 1,390 1,525 445
Other - - 123
---------------------------------------
On the basis of statutory accounting
principles $ 8,442 $ 10,553 $ 6,979
---------------------------------------
---------------------------------------
</TABLE>
F-30
<PAGE>
10. RECONCILIATION WITH STATUTORY ACCOUNTING PRINCIPLES (CONTINUED)
Shareholders' Equity
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997 1996
-------------------------------------------
<S> <C> <C> <C>
As reported under generally accepted
accounting principles $ 142,446 $ 126,290 $ 111,278
Additions (deductions):
Deferred income taxes 11,526 4,158 (590)
Unrealized (gain) loss on fixed maturities
(3,222) (1,385) (3,580)
Other (34) (3) (41)
--------------------------------------------
On the basis of statutory accounting principles $ 150,716 $ 129,060 $ 107,067
-------------------------------------------
-------------------------------------------
</TABLE>
The equity of Midwest Holding, exclusive of the carrying value of its investment
in Midwest Medical, 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 Midwest Medical only under generally accepted accounting
principles.
Under Minnesota insurance statutes, Midwest Medical is required to maintain
statutory surplus in excess of ten times its per occurrence reinsurance
retention limit. The minimum level is $7,500,000 for 1998 and 1997.
F-31
<PAGE>
11. 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):
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------------------
<S> <C> <C> <C>
Numerator for basic and dilutive earnings per share
available to common shareholders
$ 5,948 $ 9,300 $ 7,481
---------------------------------------
---------------------------------------
Denominator:
Denominator for basic earnings per share--weighted
average shares 123,004 119,554 116,071
Effect of dilutive securities:
Unvested shares 13,247 12,873 12,188
---------------------------------------
Denominator for dilutive earnings per
share--adjusted weighted-average shares and assumed
conversions 136,251 132,427 128,259
---------------------------------------
---------------------------------------
Basic earnings per share $ 48.36 $ 77.79 $ 64.45
---------------------------------------
---------------------------------------
Diluted earnings per share $ 43.65 $ 70.23 $ 58.33
---------------------------------------
---------------------------------------
</TABLE>
F-32
<PAGE>
12. NET REDEMPTION VALUE
The net redemption value per share of the Class A common shares was as follows:
<TABLE>
<CAPTION>
MIDWEST CLASS A NET REDEMPTION
HOLDING COMMON SHARES VALUE PER
NET EQUITY OUTSTANDING SHARE
-------------------------------------------------------------
(000S)
<S> <C> <C> <C>
December 31, 1994 $7,712 116,855* $66.00
------------- -------------
------------- -------------
December 31, 1995 $6,975 116,251* $60.00
------------- -------------
------------- -------------
December 31, 1996 $7,604 118,209 $64.33
------------- -------------
------------- -------------
December 31, 1997 $7,477 121,322 $61.63
------------- -------------
------------- -------------
December 31, 1998 $8,147 125,682 $64.81
------------- -------------
------------- -------------
</TABLE>
* Includes pro forma shares related to merger.
F-33
<PAGE>
Report of Independent Auditors
Board of Directors
Midwest Medical Insurance Holding Company
and Subsidiaries
We have audited the consolidated financial statements of Midwest Medical
Insurance Holding Company and Subsidiaries as of December 31, 1998 and 1997, and
for each of the three years in the period ended December 31, 1998, and have
issued our report thereon dated February 1, 1999 (included elsewhere in this
Registration Statement). Our audits also included the financial statement
schedules listed in Item 16(b) of this Registration Statement. These schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion based on our audits.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
Minneapolis, Minnesota
February 1, 1999
F-34
<PAGE>
MIDWEST MEDICAL INSURANCE HOLDING COMPANY AND SUBSIDIARIES
(PARENT COMPANY)
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
------------------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Fixed maturities $ - $ 1,308
Short-term investments 1,310 2,730
Investment in subsidiaries 145,032 126,290
Accrued investment income - 40
Other 8,385 6,881
------------------------
Total assets $154,727 $137,249
------------------------
------------------------
LIABILITIES, REDEEMABLE STOCK AND
OTHER SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable $ 43 $ 111
Accrued expenses and other liabilities 4,091 3,371
------------------------
4,134 3,482
REDEEMABLE STOCK
Class A Common Stock 8,146 7,476
Class B Common Stock 1 1
------------------------
8,147 7,477
OTHER SHAREHOLDERS' EQUITY
Additional paid-in capital 12,789 12,789
Retained earnings, comprised of undistributed earnings
of subsidiaries 98,695 93,643
Unrealized appreciation on investments, net of income
taxes 30,962 19,858
------------------------
142,446 126,290
Total liabilities, redeemable stock and
other shareholders' equity $154,727 $137,249
------------------------
------------------------
</TABLE>
SEE ACCOMPANYING NOTE.
F-35
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
(Parent Company)
Schedule II--Condensed Financial Information of Registrant (continued)
Statements of Income
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
---------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES
Management fee from subsidiaries $14,038 $9,901 $8,706
Investment income 489 64 726
Other income 7 2 4
---------------------------------------
14,534 9,967 9,436
EXPENSES
Operating and administrative 14,267 9,535 8,357
---------------------------------------
Income before income taxes and other items 267 432 1,079
Income tax expense 104 162 9
---------------------------------------
Income before equity in undistributed income
of subsidiaries 163 270 1,070
Equity in undistributed income of subsidiaries 5,785 9,030 6,411
---------------------------------------
Net income $5,948 $9,300 $7,481
---------------------------------------
---------------------------------------
</TABLE>
SEE ACCOMPANYING NOTE.
F-36
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
(Parent Company)
Schedule II--Condensed Financial Information of Registrant (continued)
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
-------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net cash (used in) provided by operating
activities $ (366) $ (527) $ (877)
INVESTING ACTIVITIES
Purchase of fixed maturities (21,758) (38,979) (20,469)
Sales of fixed maturities 22,826 38,701 20,289
Calls and maturities of fixed maturities 250 - -
Sales of short-term investments, net 1,420 1,453 1,338
Capitalization of Solutions (3,850) - -
FINANCING ACTIVITIES
Redemption of Class A Common Stock (522) (648) (608)
Dividend from Midwest Medical 2,000 - 327
-------------------------------------------
Increase in cash - - -
Cash at beginning of year - - -
-------------------------------------------
Cash at end of year $ - $ - $ -
-------------------------------------------
-------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTE.
F-37
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
(Parent Company)
Schedule II--Condensed Financial Information of Registrant (continued)
Note to Condensed Financial Statements
December 31, 1998
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.
F-38
<PAGE>
MIDWEST MEDICAL INSURANCE HOLDING COMPANY AND SUBSIDIARIES
SCHEDULE IV--REINSURANCE
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998:
Insurance premiums:
Property/casualty insurance $37,518 $2,601 $97 $35,014 0.3%
Year ended December 31, 1997:
Insurance premiums:
Property/casualty insurance 36,511 3,595 - 32,916 N/A
Year ended December 31, 1996:
Insurance premiums:
Property/casualty insurance 34,006 2,829 - 31,177 N/A
</TABLE>
NOTE TO SCHEDULE IV:
Ceded premiums for the years ended December 31, 1998, 1997 and 1996 are net of
reductions (additions) in ceded premiums related to swing rated reinsurance
treaties of $2,550,000, $(3,688,000), and $748,000 respectively. Ceded premiums
in 1996 are also net of proceeds from commutations of reinsurance covering the
period January 1, 1989 through December 31, 1990 of $2,194,000. 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.
F-39
<PAGE>
Midwest Medical Insurance Holding Company and Subsidiaries
Schedule VI--Supplemental Information Concerning Property/Casualty Insurance
Operations
<TABLE>
<CAPTION>
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
- ------------------------------------------------------------------------------
Consolidated
property/casualty
entities
<S> <C> <C> <C> <C>
1998 N/A $110,964 N/A $8,173
1997 N/A 107,806 N/A 6,072
1996 N/A 110,037 N/A 6,860
<CAPTION>
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
- ---------------------------------------------------------------------------------------
(IN THOUSANDS)
<C> <C> <C> <C> <C> <C> <C>
$35,014 $10,919 $41,927 $(4,433) N/A $32,421 $39,431
32,916 11,509 40,186 (8,352) N/A 32,782 35,722
31,177 12,061 41,101 (8,844) N/A 38,339 31,167
</TABLE>
F-41
<PAGE>
ALLOCATION SCHEDULE - ALL STATES EXCEPT IOWA AND NEBRASKA
<TABLE>
<CAPTION>
Practice Shares per Year
DESCRIPTION Rate (Rate
- ------------ Relativity)
-----------
<S> <C> <C>
Administrative Medicine-No Surg-NOC 7 0.70
Forensic/Legal Medicine 7 0.70
Ltd Gen Practice-No Surg-NOC 7 0.70
Occupational Medicine 7 0.70
Pathology-No Surg 7 0.70
Physiatry-Phys Med/Rehab 7 0.70
Psychiatry-Incl Child-No ECT-No Surg 7 0.70
Psychoanalysis 7 0.70
Psychosomatic Medicine 7 0.70
Aerospace Medicine 10 1.00
Allergy 10 1.00
Colon & Rectal-No Surg-NOC 10 1.00
Dermatology-No Surg 10 1.00
Family Practice or General Practice-No Surg 10 1.00
General Preventive Medicine-No Surg 10 1.00
Geriatrics-No Surg 10 1.00
Gynecology-No Surg 10 1.00
Hand-No Surg-NOC 10 1.00
Head & Neck-No Surg-NOC 10 1.00
Hypnosis 10 1.00
Laryngology-No Surg 10 1.00
Neoplastic Disease-No Surg 10 1.00
Nuclear Medicine 10 1.00
Nutrition 10 1.00
OB/GYN-No Surg-NOC 10 1.00
Obstetrics-No Surg-NOC 10 1.00
Opthalmology-No Surg 10 1.00
Orthopedics-No Surg-NOC 10 1.00
Otology-No Surg 10 1.00
Otorhinolaryngology-No Surg 10 1.00
Pediatrics-No Surg 10 1.00
Pharmacology-Clinical 10 1.00
Physician-No Surg-NOC 10 1.00
Plastic-No Surg-NOC 10 1.00
A-1
<PAGE>
Public Health 10 1.00
Radiology-Diagnostic-No Surg 10 1.00
Rhinology-No Surg 10 1.00
Thoracic-No Surg-NOC 10 1.00
Urology-No Surg-NOC 10 1.00
Vascular-No Surg-NOC 10 1.00
Cardiovascular Diseases-No Surg 15 1.2
Diabetes-No Surg 15 1.2
Endocrinology-No Surg 15 1.2
Gastroenterolgy-No Surg 15 1.2
Hematology-No Surg 15 1.2
Infectious Disease-No Surg 15 1.2
Internal Medicine-No Surg 15 1.2
Nephrology-No Surg 15 1.2
Oncology-No Surg-NOC 15 1.2
Opthalmology-Min Surg 15 1.2
Pulmonary Disease-No Surg 15 1.2
Rhuematology-No Surg 15 1.2
Allergy-Minor Surg-Asst Own Pts 20 1.5
Anesthesiology 20 1.5
Cardiovascular Diseases-Min Surg 20 1.5
Colon & Rectal-Minor Surgery-Asst Own 20 1.5
Dermatology-Min Surg 20 1.5
Diabetes-Min Surg 20 1.5
Endocrinology-Min Surg 20 1.5
Family Practice or General Practice-Min Surg 20 1.5
Gastroenterolgy-Min Surg 20 1.5
Geriatrics-Min Surg 20 1.5
Gynecology-Min Surg 20 1.5
Hand-Minor Surgery-Asst Own Pts 20 1.5
Head & Neck-Minor Surgery-Asst Own 20 1.5
Hematology-Min Surg 20 1.5
Infectious Disease-Min Surg 20 1.5
Intensive Care Medicine 20 1.5
Internal Medicine-Min Surg 20 1.5
Laryngology-Min Surg 20 1.5
Neoplastic Disease-Min Surg 20 1.5
Nephrology-Min Surg 20 1.5
Neurology-Incl Child-Min Surg 20 1.5
Neurology-Incl Child-No Surg 20 1.5
A-2
<PAGE>
Nuclear Medicine-Minor Surgery-No Rad 20 1.5
Occupational Medicine-Minor Surgery-Asst 20 1.5
Orthopedics-Minor Surgery-Asst Own 20 1.5
Otology-Min Surg 20 1.5
Otorhinolaryngology-Min Surg 20 1.5
Pathology-Min Surg 20 1.5
Pediatrics-Min Surg 20 1.5
Physician-Min Surg-NOC 20 1.5
Plastic-Minor Surgery-Asst Own Pts 20 1.5
Psychiatry-Incl ECT-No Maj 20 1.5
Pulmonary Disease-Minor Surgery 20 1.5
Radiology-Diagnostic-Min Surg 20 1.5
Rhinology-Min Surg 20 1.5
Rhuematology-Minor Surgery-Asst Own 20 1.5
S-Ophthalmology 20 1.5
Sports Medicine-Min Surg 20 1.5
Broncho-Esophagology 30 2.10
Cardivasc Dis-Incl Cath-No Maj 30 2.10
Dermatology-Incl Rad Therapy 30 2.10
Emergency Medicine-No Maj Surg 30 2.10
Lasers-Used in Therapy 30 2.10
Neonatology 30 2.10
Neurology-Incl ECT-No Maj Surg 30 2.10
Neurology-Maj Risk Proc-No Maj Surg 30 2.10
Nuclear Med-Incl Rad Ther-No Maj 30 2.10
Pediatrics-Maj Risk Proc-No Surg 30 2.10
Physician-No Maj-Acupunture 30 2.10
Physician-No Maj-Angiography 30 2.10
Physician-No Maj-Arteriography 30 2.10
Physician-No Maj-Catheterization 30 2.10
Physician-No Maj-Colonoscopy 30 2.10
Physician-No Maj-Discograms 30 2.10
Physician-No Maj-ERCP 30 2.10
Physician-No Maj-Laparoscopy 30 2.10
Physician-No Maj-Lasers-Used in therapy 30 2.10
Physician-No Maj-Lymphangiography 30 2.10
Physician-No Maj-Myleography 30 2.10
Physician-No Maj-Needle Biopsy 30 2.10
Physician-No Maj-Phlebography 30 2.10
Physician-No Maj-Pneumatic/Mech Esoph Dilation 30 2.10
A-3
<PAGE>
Physician-No Maj-Pneumoencephalography 30 2.10
Physician-No Maj-Radiation Therapy 30 2.10
Physician-No Maj-Radiopaque Dye 30 2.10
Physicians-Maj Risk Proc-No Surg 30 2.10
S-Colon & Rectal 30 2.10
S-Endocrinology 30 2.10
S-Family Practice-Ob-No C-Sections 30 2.10
S-Gastroenterology 30 2.10
S-Geriatrics 30 2.10
S-Neoplastic 30 2.10
S-Nephrology 30 2.10
S-Urological 30 2.10
Emergency Medicine-Incl Maj Surg 40 2.60
S-Abdominal 40 2.60
S-Family Practice-OB-C-Sections 40 2.60
S-Otorhinolaryngology 40 2.60
S-Plastic-Otorhinolaryngology 40 2.60
S-Rhinology 40 2.60
S-General 43 3.20
Foot and Ankle Surgery 50 4.0
Oral Maxillofacial Surgery 50 4.0
S-Dermatologic 50 4.0
S-Gynecology 50 4.0
S-Laryngology 50 4.0
S-Neonatology 50 4.0
S-Otology 50 4.0
S-Plastic-NOC 50 4.0
Fetal & Maternal Medicines 60 5.50
S-Cardiac 60 5.50
S-Cardiovascular Disease 60 5.50
S-Hand 60 5.50
S-Head & Neck 60 5.50
S-OB/GYN 60 5.50
S-Obstetrics 60 5.50
S-Orthopedic-Excl Spine 60 5.50
S-Orthopedic-Incl Spine 60 5.50
S-Thoracic 60 5.50
S-Vascular 60 5.50
S-Traumatic 70 6.50
S-Neurology-Incl Child 80 9.00
</TABLE>
A-4
<PAGE>
<TABLE>
<CAPTION>
ALLOCATION SCHEDULE - IOWA
Practice Shares per Year
DESCRIPTION Rate Class (Rate
- ------------ Relativity)
---------------
<S> <C> <C>
Administrative Medicine-No Surg-NOC 7 0.83
Ltd Gen Practice-No Surg-NOC 7 0.83
Psychiatry-Incl Child-No ECT-No Surg 7 0.83
Psychoanalysis 7 0.83
Psychosomatic Medicine 7 0.83
Aerospace Medicine 10 1.00
Allergy 10 1.00
Cardiovascular Diseases-No Surg 10 1.00
Colon & Rectal-No Surg-NOC 10 1.00
Dermatology-No Surg 10 1.00
Diabetes-No Surg 10 1.00
Endocrinology-No Surg 10 1.00
Family Practice or General Practice-No Surg 10 1.00
Forensic/Legal Medicine 10 1.00
Gastroenterolgy-No Surg 10 1.00
General Preventive Medicine-No Surg 10 1.00
Geriatrics-No Surg 10 1.00
Gynecology-No Surg 10 1.00
Hand-No Surg-NOC 10 1.00
Head & Neck-No Surg-NOC 10 1.00
Hematology-No Surg 10 1.00
Hypnosis 10 1.00
Infectious Disease-No Surg 10 1.00
Internal Medicine-No Surg 10 1.00
Laryngology-No Surg 10 1.00
Neoplastic Disease-No Surg 10 1.00
Nephrology-No Surg 10 1.00
Neurology-Incl Child-No Surg 10 1.00
Nuclear Medicine 10 1.00
Nutrition 10 1.00
OB/GYN-No Surg-NOC 10 1.00
Obstetrics-No Surg-NOC 10 1.00
Occupational Medicine 10 1.00
Opthalmology-No Surg 10 1.00
Orthopedics-No Surg-NOC 10 1.00
A-5
<PAGE>
Otology-No Surg 10 1.00
Otorhinolaryngology-No Surg 10 1.00
Pathology-No Surg 10 1.00
Pediatrics-No Surg 10 1.00
Pharmacology-Clinical 10 1.00
Physiatry-Phys Med/Rehab 10 1.00
Physician-No Surg-NOC 10 1.00
Plastic-No Surg-NOC 10 1.00
Public Health 10 1.00
Radiology-Diagnostic-No Surg 10 1.00
Rhuematology-No Surg 10 1.00
Rhinology-No Surg 10 1.00
Thoracic-No Surg-NOC 10 1.00
Urology-No Surg-NOC 10 1.00
Vascular-No Surg-NOC 10 1.00
Oncology-No Surg-NOC 15 1.20
Pulmonary Disease-No Surg 15 1.20
Allergy-Minor Surg-Asst Own Pts 20 1.52
Anesthesiology 20 1.52
Cardiovascular Diseases-Min Surg 20 1.52
Colon & Rectal-Minor Surgery-Asst Own 20 1.52
Dermatology-Min Surg 20 1.52
Diabetes-Min Surg 20 1.52
Endocrinology-Min Surg 20 1.52
Family Practice or General Practice-Min Surg 20 1.52
Gastroenterolgy-Min Surg 20 1.52
Geriatrics-Min Surg 20 1.52
Gynecology-Min Surg 20 1.52
Hand-Minor Surgery-Asst Own Pts 20 1.52
Head & Neck-Minor Surgery-Asst Own 20 1.52
Hematology-Min Surg 20 1.52
Infectious Disease-Min Surg 20 1.52
Intensive Care Medicine 20 1.52
Internal Medicine-Min Surg 20 1.52
Laryngology-Min Surg 20 1.52
Neoplastic Disease-Min Surg 20 1.52
Nephrology-Min Surg 20 1.52
Neurology-Incl Child-Min Surg 20 1.52
Nuclear Medicine-Minor Surgery-No Rad 20 1.52
Occupational Medicine-Minor Surgery-Asst 20 1.52
A-6
<PAGE>
Opthalmology-Min Surg 20 1.52
Orthopedics-Minor Surgery-Asst Own 20 1.52
Otology-Min Surg 20 1.52
Otorhinolaryngology-Min Surg 20 1.52
Pathology-Min Surg 20 1.52
Pediatrics-Min Surg 20 1.52
Physician-Min Surg-NOC 20 1.52
Plastic-Minor Surgery-Asst Own Pts 20 1.52
Psychiatry-Incl ECT-No Maj 20 1.52
Pulmonary Disease-Minor Surgery 20 1.52
Radiology-Diagnostic-Min Surg 20 1.52
Rhinology-Min Surg 20 1.52
Rhuematology-Minor Surgery-Asst Own 20 1.52
S-Ophthalmology 20 1.52
Sports Medicine-Min Surg 20 1.52
S-Family Practice-Ob-No C-Sections 25 2.00
S-Urological 25 2.00
Broncho-Esophagology 30 2.31
Cardivasc Dis-Incl Cath-No Maj 30 2.31
Dermatology-Incl Rad Therapy 30 2.31
Emergency Medicine-No Maj Surg 30 2.31
Lasers-Used in Therapy 30 2.31
Neonatology 30 2.31
Neurology-Incl ECT-No Maj Surg 30 2.31
Neurology-Maj Risk Proc-No Maj Surg 30 2.31
Nuclear Med-Incl Rad Ther-No Maj 30 2.31
Pediatrics-Maj Risk Proc-No Surg 30 2.31
Physician-No Maj-Acupunture 30 2.31
Physician-No Maj-Angiography 30 2.31
Physician-No Maj-Arteriography 30 2.31
Physician-No Maj-Catheterization 30 2.31
Physician-No Maj-Colonoscopy 30 2.31
Physician-No Maj-Discograms 30 2.31
Physician-No Maj-ERCP 30 2.31
Physician-No Maj-Laparoscopy 30 2.31
Physician-No Maj-Lasers-Used in therapy 30 2.31
Physician-No Maj-Lymphangiography 30 2.31
Physician-No Maj-Myleography 30 2.31
Physician-No Maj-Needle Biopsy 30 2.31
Physician-No Maj-Phlebography 30 2.31
A-7
<PAGE>
Physician-No Maj-Pneumatic/Mech Esoph Dilation 30 2.31
Physician-No Maj-Pneumoencephalography 30 2.31
Physician-No Maj-Radiation Therapy 30 2.31
Physician-No Maj-Radiopaque Dye 30 2.31
Physicians-Maj Risk Proc-No Surg 30 2.31
S-Endocrinology 30 2.31
S-Gastroenterology 30 2.31
S-Geriatrics 30 2.31
S-Neoplastic 30 2.31
S-Nephrology 30 2.31
Emergency Medicine-Incl Maj Surg 40 2.96
S-Family Practice-OB-C-Sections 40 2.96
S-Otorhinolaryngology 40 2.96
S-Rhinology 40 2.96
S-Dermatologic 43 3.00
S-General 46 3.62
Foot and Ankle Surgery 50 4.41
Oral Maxillofacial Surgery 50 4.41
S-Abdominal 50 4.41
S-Colon & Rectal 50 4.41
S-Laryngology 50 4.41
S-Neonatology 50 4.41
S-Otology 50 4.41
S-Plastic-Otorhinolaryngology 50 4.41
S-Cardiac 60 4.93
S-Gynecology 60 4.93
S-Hand 60 4.93
S-Head & Neck 60 4.93
S-Obstetrics 60 4.93
S-Orthopedic-Excl Spine 60 4.93
S-Plastic-NOC 60 4.93
S-Orthopedic-Incl Spine 70 5.98
S-Thoracic 70 5.98
S-Vascular 70 5.98
Fetal & Maternal Medicines 80 7.37
S-Cardiovascular Disease 80 7.37
S-OB/GYN 80 7.37
S-Traumatic 80 7.37
S-Neurology-Incl Child 100 9.21
</TABLE>
A-8
<PAGE>
<TABLE>
<CAPTION>
ALLOCATION SCHEDULE - NEBRASKA
Practice Shares per Year
DESCRIPTION Rate (Rate
- ----------- Relativity)
<S> <C> <C>
Administrative Medicine-No Surg-NOC 7 0.70
Ltd Gen Practice-No Surg-NOC 7 0.70
Psychiatry-Incl Child-No ECT-No Surg 10 1.00
Psychoanalysis 10 1.00
Psychosomatic Medicine 10 1.00
Aerospace Medicine 10 1.00
Allergy 10 1.00
Cardiovascular Diseases-No Surg 10 1.00
Colon & Rectal-No Surg-NOC 10 1.00
Dermatology-No Surg 10 1.00
Diabetes-No Surg 10 1.00
Endocrinology-No Surg 10 1.00
Family Practice or General Practice-No Surg 10 1.00
Forensic/Legal Medicine 10 1.00
Gastroenterolgy-No Surg 10 1.00
General Preventive Medicine-No Surg 10 1.00
Geriatrics-No Surg 10 1.00
Gynecology-No Surg 10 1.00
Hand-No Surg-NOC 10 1.00
Head & Neck-No Surg-NOC 10 1.00
Hematology-No Surg 10 1.00
Hypnosis 10 1.00
Infectious Disease-No Surg 10 1.00
Internal Medicine-No Surg 10 1.00
Laryngology-No Surg 10 1.00
Neoplastic Disease-No Surg 10 1.00
Nephrology-No Surg 10 1.00
Neurology-Incl Child-No Surg 10 1.00
Nuclear Medicine 10 1.00
Nutrition 10 1.00
OB/GYN-No Surg-NOC 10 1.00
Obstetrics-No Surg-NOC 10 1.00
Occupational Medicine 10 1.00
Opthalmology-No Surg 10 1.00
Orthopedics-No Surg-NOC 10 1.00
A-9
<PAGE>
Otology-No Surg 10 1.00
Otorhinolaryngology-No Surg 10 1.00
Pathology-No Surg 10 1.00
Pediatrics-No Surg 10 1.00
Pharmacology-Clinical 10 1.00
Physiatry-Phys Med/Rehab 10 1.00
Physician-No Surg-NOC 10 1.00
Plastic-No Surg-NOC 10 1.00
Public Health 10 1.00
Radiology-Diagnostic-No Surg 10 1.00
Rhuematology-No Surg 10 1.00
Rhinology-No Surg 10 1.00
Thoracic-No Surg-NOC 10 1.00
Urology-No Surg-NOC 10 1.00
Vascular-No Surg-NOC 10 1.00
Pulmonary Disease-No Surg 10 1.00
Oncology-No Surg-NOC 15 1.20
Allergy-Minor Surg-Asst Own Pts 20 1.67
Cardiovascular Diseases-Min Surg 20 1.67
Colon & Rectal-Minor Surgery-Asst Own 20 1.67
Dermatology-Min Surg 20 1.67
Diabetes-Min Surg 20 1.67
Endocrinology-Min Surg 20 1.67
Family Practice or General Practice-Min Surg 20 1.67
Gastroenterolgy-Min Surg 20 1.67
Geriatrics-Min Surg 20 1.67
Gynecology-Min Surg 20 1.67
Hand-Minor Surgery-Asst Own Pts 20 1.67
Head & Neck-Minor Surgery-Asst Own 20 1.67
Hematology-Min Surg 20 1.67
Infectious Disease-Min Surg 20 1.67
Intensive Care Medicine 20 1.67
Internal Medicine-Min Surg 20 1.67
Laryngology-Min Surg 20 1.67
Neoplastic Disease-Min Surg 20 1.67
Nephrology-Min Surg 20 1.67
Neurology-Incl Child-Min Surg 20 1.67
Nuclear Medicine-Minor Surgery-No Rad 20 1.67
Occupational Medicine-Minor Surgery-Asst 20 1.67
Opthalmology-Min Surg 20 1.67
A-10
<PAGE>
Orthopedics-Minor Surgery-Asst Own 20 1.67
Otology-Min Surg 20 1.67
Otorhinolaryngology-Min Surg 20 1.67
Pathology-Min Surg 20 1.67
Pediatrics-Min Surg 20 1.67
Physician-Min Surg-NOC 20 1.67
Plastic-Minor Surgery-Asst Own Pts 20 1.67
Psychiatry-Incl ECT-No Maj 20 1.67
Pulmonary Disease-Minor Surgery 20 1.67
Radiology-Diagnostic-Min Surg 20 1.67
Rhinology-Min Surg 20 1.67
Rhuematology-Minor Surgery-Asst Own 20 1.67
Sports Medicine-Min Surg 20 1.67
Anesthesiology 30 2.18
S-Ophthalmology 30 2.18
S-Family Practice-Ob-No C-Sections 30 2.18
S-Urological 30 2.18
Broncho-Esophagology 30 2.18
Cardivasc Dis-Incl Cath-No Maj 30 2.18
Dermatology-Incl Rad Therapy 30 2.18
Lasers-Used in Therapy 30 2.18
Neonatology 30 2.18
Neurology-Incl ECT-No Maj Surg 30 2.18
Neurology-Maj Risk Proc-No Maj Surg 30 2.18
Nuclear Med-Incl Rad Ther-No Maj 30 2.18
Pediatrics-Maj Risk Proc-No Surg 30 2.18
Physician-No Maj-Acupunture 30 2.18
Physician-No Maj-Angiography 30 2.18
Physician-No Maj-Arteriography 30 2.18
Physician-No Maj-Catheterization 30 2.18
Physician-No Maj-Colonoscopy 30 2.18
Physician-No Maj-Discograms 30 2.18
Physician-No Maj-ERCP 30 2.18
Physician-No Maj-Laparoscopy 30 2.18
Physician-No Maj-Lasers-Used in therapy 30 2.18
Physician-No Maj-Lymphangiography 30 2.18
Physician-No Maj-Myleography 30 2.18
Physician-No Maj-Needle Biopsy 30 2.18
Physician-No Maj-Phlebography 30 2.18
Physician-No Maj-Pneumatic/Mech Esoph Dilation 30 2.18
A-11
<PAGE>
Physician-No Maj-Pneumoencephalography 30 2.18
Physician-No Maj-Radiation Therapy 30 2.18
Physician-No Maj-Radiopaque Dye 30 2.18
Physicians-Maj Risk Proc-No Surg 30 2.18
S-Endocrinology 30 2.18
S-Gastroenterology 30 2.18
S-Geriatrics 30 2.18
S-Neoplastic 30 2.18
S-Nephrology 30 2.18
S-Colon & Rectal 30 2.18
Emergency Medicine-No Maj Surg 40 2.71
S-Family Practice-OB-C-Sections 40 2.71
S-Otorhinolaryngology 40 2.71
S-Rhinology 40 2.71
S-Laryngology 40 2.71
S-Otology 40 2.71
Oral Maxillofacial Surgery 50 4.00
Emergency Medicine-Incl Maj Surg 60 4.26
S-Dermatologic 60 4.26
S-General 60 4.26
S-Abdominal 60 4.26
S-Neonatology 60 4.26
S-Plastic-Otorhinolaryngology 60 4.26
S-Gynecology 60 4.26
S-Hand 60 4.26
S-Head & Neck 60 4.26
S-Plastic-NOC 60 4.26
Foot and Ankle Surgery 70 5.50
S-Cardiac 70 5.50
S-Orthopedic-Excl Spine 70 5.50
S-Orthopedic-Incl Spine 70 5.50
S-Thoracic 70 5.50
S-Vascular 70 5.50
S-Cardiovascular Disease 70 5.50
S-Traumatic 70 5.50
S-Obstetrics 80 6.52
Fetal & Maternal Medicines 80 6.52
S-OB/GYN 80 6.52
S-Neurology-Incl Child 90 7.86
</TABLE>
A-12
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following are the estimated expenses to be paid by the Midwest Holding
in connection with the distribution of the securities being registered. All
such expenses are estimated, except for the SEC registration fee:
<TABLE>
<S> <C>
SEC registration fee . . . . . . . . . . . . . . . . . . . . . . . . . . .$6,372.00
Accounting fees and expenses . . . . . . . . . . . . . . . . . . . . . . . 10,000.00
Legal fees and expenses. . . . . . . . . . . . . . . . . . . . . . . . . . .10,000.00
Printing and engraving expenses. . . . . . . . . . . . . . . . . . . . . . .10,000.00
Blue Sky fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . 5,000.00
Miscellaneous expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 628.00
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $42,000.00
-----------
-----------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article X of the Bylaws of the registrant provides that each director,
committee member, officer, and employee shall be indemnified for expenses and
liabilities in the manner, under the circumstances, and to the extent permitted
by Minnesota Statutes, Section 302A.521, as amended from time to time.
Indemnification is also extended to certain consultants, agents, directors,
officers and employees of subsidiaries of the registrant.
Minnesota Statutes, Section 302A.521, generally requires a corporation to
indemnity its directors, officers, and employees against judgments, penalties,
fines, and expenses, including attorney's fees, incurred in connection with
their official capacities, provided that such person (i) has not been
indemnified by another with respect to the same matter, (ii) acted in good
faith, (iii) received no improper personal benefit, (iv) had no reasonable cause
to believe that his conduct was unlawful, and (v) reasonably believed that his
conduct was in the best interests of the corporation.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The registrant has made no sales of unregistered securities in the last
three years.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
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(3) 3A. Restated Articles of Incorporation of the registrant
(Form S-4, Exhibit 3C).
(3) 3B. Bylaws of the registrant, as amended (Form S-4, Exhibit 3D).
(6) 5. Opinion and Consent of Best & Flanagan LLP
(1) 9. Voting Trust Agreement between the Minnesota Medical
Association and the Iowa Medical Society.
(1) 10A. Governance Agreement between the registrant and the Minnesota
Medical Association, holder of the registrant's Class B Common
Share, dated November 30, 1998.
(1) 10B. Lease for office space between the registrant and Lexington
Property Fund, L.P., dated November 1, 1997.
10C. Management Agreement between the registrant and Midwest
Medical Insurance Company dated November 30, 1998, as amended
January 1, 1990, January 1, 1991 and January 1, 1996.
(Incorporated herein by reference to the Annual Report on Form
10-K, SEC file number 0-21230, filed by registrant for the
year ended December 31, 1996.)
(1) 10D. Agency Agreement with Vaaler Insurance, Inc. pursuant to which
Vaaler acted as agent of Midwest Medical in North Dakota,
dated April 21, 1989.
(5) 10E. Agreement of Reinsurance between Midwest Medical Insurance
Company and General Reinsurance Corporation, dated January 1,
1998.
(2) 10F. Letter Employment Agreement between the registrant and
David P. Bounk, President and Chief Executive Officer of the
registrant and Midwest Medical Insurance Company, dated
January 1, 1993.
(5) 10G. 1998 Officers Short-Term Incentive Plan of the registrant.
(4) 10H. Amended and Restated Supplemental Executive Retirement Plan of
the registrant.
10I. Agency Agreement with IMS Services, Inc. pursuant to which IMS
acts as agent of Midwest Medical in Iowa, dated July 1, 1993.
(Incorporated herein by reference to the Report on Form 10-K
filed by the registrant for the fiscal year ended December 31,
1993, file number 0-21230.)
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(4) 10J. Form of Termination Agreement with Executive Officers.
(5) 21. Subsidiaries of the registrant.
* 23A. Consent of Ernst & Young LLP
(6) 24. Powers of Attorney.
(5) 27. Financial Data Schedule.
(1) Incorporated herein by reference to the registration statement on Form S-4,
file number 33-55062, filed by registrant on November 25, 1993,
as amended.
(2) Incorporated herein by reference to the registration statement on Form S-1,
SEC file number 33-70182, filed by registrant on October 12, 1993,
as amended.
(3) Incorporated herein by reference to the registration statement on Form S-4,
SEC file number 333-00134, filed by registrant on January 10, 1996,
as amended.
(4) Incorporated herein by reference to the registration statement on Form S-1,
SEC file number 333-29047, filed by registrant on June 11, 1997,
as amended.
(5) Incorporated herein by reference to the Annual report on Form 10-K filed by
registrant for the year ended December 31, 1998.
(6) Filed with original registration statement SEC file number 333-76999, on
April 26, 1999.
(*) Filed herewith.
(b) Financial Statement Schedules.
The following financial statement schedules of the Midwest Holding
required by Regulation S-X and Form S-1 are filed as part of this
Registration Statement:
II. Condensed Financial Information of Registrant (Parent
Company)--Balance Sheets--December 31, 1998 and 1997, Statements of
Income--For the Years Ended December 31, 1998 and 1997 and 1996; and,
Statements of Cash Flows--For the Years Ended December 31, 1998, 1997 and
1996. Included in "FINANCIAL STATEMENTS" Section of Prospectus filed
herewith.
IV. Reinsurance Summary for the Years Ended December 31, 1998,
1997 and 1996. Included in "FINANCIAL STATEMENTS" section of Prospectus
filed herewith.
VI. Supplemental Information Concerning Property/Casualty
Insurance
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Operations--December 31, 1998 and 1997, and for Each of the Three
Years in the Period Ended December 31, 1998. Included in "FINANCIAL
STATEMENTS" section of Prospectus filed herewith.
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective
amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the
information set forth in the registration statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in
the registration statement or any material change to
such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold
at the termination of the offering.
(4) If the registrant is a foreign private issuer, to file a
post-effective amendment to the registrant statement to include any
financial statements required by 3-19 of Regulation S-X at the start
of any delayed offering or throughout a continuous offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses
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incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
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SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has
duly caused this Amendment Number 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized in the City of
Minneapolis, State of Minnesota, on July 26, 1999.
MIDWEST MEDICAL INSURANCE HOLDING COMPANY
By: /s/ David P. Bounk
----------------------------------------
David P. Bounk, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Amendment Number 1 to the Registration Statement has been signed by the
following persons in the capacities indicated on July 26, 1999.
SIGNATURE CAPACITY
- ---------- -----------
/s/ David P. Bounk Principal Executive Officer and Director
- --------------------------------
David P. Bounk
/s/ Niles A. Cole
- -------------------------------- Principal Financial Officer and
Niles A. Cole Principal Accounting Officer
* Director, Chairman of the Board
- --------------------------------
Andrew J.K. Smith, M.D.
* Director
- --------------------------------
Michael Abrams
* Director
- --------------------------------
John R. Balfanz, M.D.
* Director
- --------------------------------
Gail P. Bender, M.D.
* Director
- --------------------------------
James R. Bishop, M.D.
* Director
- --------------------------------
Roger L. Frerichs, M.D.
* Director
- --------------------------------
G. Richard Geier, M.D.
* Director
- --------------------------------
Anthony C. Jaspers, M.D.
* Director
- --------------------------------
Russel J. Kuzel, M.D.
* Director
- --------------------------------
Wayne F. Leebaw, M.D.
* Director
- --------------------------------
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Stephen A. McCue, M.D.
Director
- --------------------------------
William J. McMillan, Jr., M.D.
* Director
- --------------------------------
Harold W. Miller, M.D.
* Director
- --------------------------------
Anton S. Nesse, M.D.
* Director
- --------------------------------
Mark D. Odlund, M.D.
* Director
- --------------------------------
G. William Orr, M.D.
* Director
- --------------------------------
Norman Rinderknecht, M.D.
* Director
- --------------------------------
Paul S. Sanders, M.D.
* Director
- --------------------------------
Richard D. Schmidt, M.D.
* Director
- --------------------------------
Judith F. Shank, M.D.
* Director
- --------------------------------
G. David Spoelhof, M.D.
* Director
- --------------------------------
Tom D. Throckmorton, M.D.
* Director
- --------------------------------
Bruce R. Trimble, M.D.
*By: /s/ David P. Bounk
-----------------------------------
David P. Bounk pursuant to
power of attorney
The above persons signing as directors constitute all of the directors of the
registrant.
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page
--------- -------
<S> <C>
23. Consent of Ernst & Young LLP
</TABLE>
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Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated February 1, 1999, in Amendment Number 1 to the
Registration Statement (Form S-1) and related Prospectus of Midwest Medical
Insurance Holding Company and Subsidiaries dated July 26, 1999.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
July 26, 1999
