<PAGE> 1
As filed with the Securities and Exchange Commission on April 27, 2000
Registration No. 333-76999*
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
POST-EFFECTIVE
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
7650 Edinborough Way, Suite 400
Minneapolis, MN 55435, (612) 838-6700
(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
7650 Edinborough Way, Suite 4007650 Edinborough Way, Suite 400
Minneapolis, MN 55435, (612) 838-6700
(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 3 TO THE
REGISTRANT'S FORM S-1 FILING, REGISTRATION NUMBER 333-29047, PURSUANT TO RULE
429.
<PAGE> 2
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 CAPITAL STOCK
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> 3
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 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 Minnesota, Iowa, Nebraska, North Dakota,
South Dakota, Illinois and Wisconsin physicians. These shares are offered and
issued to you as part of your purchase of insurance from 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 in
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, which is our principal asset, upon termination of your
insurance coverage with Midwest Medical for any reason. See "Description of
Capital Stock." As of December 31, 1999, the redemption value of Midwest Holding
was $63.18 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 May __, 2000.
<PAGE> 4
[inside front cover]
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 these 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> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary................................................................................... 2
The Offering......................................................................................... 3
Selected Financial Information....................................................................... 4
Business.............................................................................................. 6
Management........................................................................................... 12
Management's Discussion and Analysis of Financial Condition and Results
of Operations.................................................................................. 18
Description of Capital Stock......................................................................... 30
Legal Matters........................................................................................ 31
Experts.............................................................................................. 32
Available Information............................................................................... 32
Index to Financial Statements........................................................................ 33
APPENDIX - Allocation schedule....................................................................... A-1
</TABLE>
i
<PAGE> 6
PROSPECTUS SUMMARY
This summary, along with the information on the cover page, highlights what
we believe is the most important information about the offering. However, you
should read this entire prospectus for a complete understanding of our business
and the securities offered.
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: 7650 Edinborough Way, Suite 400, Minneapolis, Minnesota
55435; (612) 838-6700.
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 physician
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 the Class A 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> 7
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. These allocations have 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> 8
SELECTED FINANCIAL INFORMATION
The following selected financial data of Midwest Holding for the five years
ended December 31, 1999 are derived from the audited financial statements of
Midwest Holding. 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
OPERATIONS DATA 1995(2) 1996(2) 1997(1) 1998(1) 1999(1)
- ------------------------------------------------------------------------------------------------------------
(Amounts in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net premiums earned $ 29,798 $ 31,177 $ 32,916 $ 35,014 $ 46,583
Net investment and other income 14,258 15,558 19,276 21,404 21,006
-------- -------- -------- -------- --------
Total revenue 44,056 46,735 52,192 56,418 67,589
Loss and loss adjustment expenses 37,560 32,257 31,834 37,494 41,468
Policyholder dividends -- -- -- -- 10,175
Underwriting and other operating
expenses 6,482 5,539 6,595 10,287 13,394
-------- -------- -------- -------- --------
44,042 37,796 38,429 47,781 65,037
-------- -------- -------- -------- --------
Income before income taxes 14 8,939 13,763 8,637 2,552
Income taxes (benefit) (1,711) 1,458 4,463 2,689 816
-------- -------- -------- -------- --------
Net income $ 1,725 $ 7,481 $ 9,300 $ 5,948 $ 1,736
======== ======== ======== ======== ========
Net income per common share -
assuming dilution $ 13.74 $ 58.33 $ 70.23 $ 43.65 $ 12.53
Number of shares used in per share
calculation 125,536(3) 128,259 132,427 136,251 138,517
Net income/total revenue 3.9% 16.0% 17.8% 10.5% 2.6%
Return on average equity 1.7% 6.5% 7.4% 4.2% 1.1%
</TABLE>
4
<PAGE> 9
<TABLE>
<CAPTION>
DECEMBER 31
FINANCIAL CONDITION 1995(2) 1996(2) 1997(2) 1998(1) 1999(1)
- ---------------------------------------------------------------------------------------------------------------------
(Amounts in thousands, except per share data)
ASSETS
<S> <C> <C> <C> <C> <C>
Fixed maturities at fair value $182,817 $183,561 $171,975 $164,652 $153,950
Equity securities at fair value 28,311 38,001 49,759 86,553 104,898
Short-term investments 15,015 7,898 13,909 3,556 9,128
Other -- -- 10,000 10,000 10,000
-------- -------- -------- -------- --------
Total investments 226,143 229,460 245,643 264,761 277,976
Reinsurance recoverable on paid and
unpaid losses 25,112 22,174 19,117 16,499 19,285
Other assets 13,329 10,359 10,755 14,223 22,915
-------- -------- -------- -------- --------
Total assets $264,584 $261,993 $275,515 $295,483 $320,176
======== ======== ======== ======== ========
LIABILITIES
Unpaid losses and loss adjustment
expenses $120,264 $110,037 $107,806 $110,964 $119,141
Other liabilities 34,053 33,074 33,942 33,926 45,432
--------- -------- -------- -------- --------
154,317 143,111 141,748 144,890 164,573
REDEEMABLE STOCK
Class A and Class B Common Stock
at redemption value 6,975 7,604 7,477 8,147 7,803
OTHER SHAREHOLDERS' EQUITY 103,292 111,278 126,290 142,446 147,800
--------- -------- -------- -------- --------
Total liabilities, redeemable stock and
shareholders' equity $264,584 $261,993 $275,515 $295,483 $320,176
======== ======== ======== ======== ========
Midwest Medical Insurance Holding
Company:
Class A Common Shares issued
and outstanding 116,251(3) 118,209 121,322 125,682 123,509
Redemption value per share $ 60.00 $ 64.33 $ 61.63 $ 64.81 $ 63.18
Class A Common Shares
redeemed 12,424 10,272 10,306 9,005 15,024
Amount paid to terminating
policyholders upon redemption $ 829 $ 608 $ 648 $ 523 $ 954
</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 MLM. See Note 1 to the consolidated
financial statements included in this Prospectus.
5
<PAGE> 10
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, 1999 and revenues of less than $500,000 for the year
ended December 31, 1999.
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 second
installment payment was made in January, 2000 and the third will be made in
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 $1,600,000 at December 31, 1999 and had
revenues of approximately $1,700,000 for the year ended December 31, 1999.
Management Agreement. Midwest Medical, Solutions and MedPower pay
Midwest Holding for comprehensive management, administration, and underwriting
services, and for use of Midwest
6
<PAGE> 11
Holding's facilities, equipment and personnel. Midwest Holding receives a
management fee generally equal to the cost of providing such services, plus 10
percent. Midwest Holding employs all of the employees, and owns all of the
non-financial assets, used in the operation of these businesses. The agreement
must be reviewed and approved periodically by the Minnesota Department of
Commerce.
Services operates independently with its own management and administrative
staff, and therefore does not have a management agreement with Midwest Holding.
Insurance Policies. Midwest Medical primarily writes policies of medical
professional liability insurance to: (1) individual physicians, (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. 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's current reinsurance contract is in effect over the
three-year period of 1998 through 2000. The primary layer of coverage provides
$1,250,000 of coverage in excess of $750,000 of retention per insured. The
premium ceded for this coverage is based upon the losses paid under the contract
limited to a minimum of 1.27% and a maximum of 9.21% of the underlying Midwest
Medical subject premium. Midwest Medical has utilized this "swing-rated" treaty
mechanism since
7
<PAGE> 12
1992. These treaties do not include a commutation clause, but rather develop
over time as claims are handled. There are no claims outstanding from years
prior to 1992. All contracts for years prior to 1992 have been commuted. For
limits of liability greater than 2,000,000, Midwest Medical "cedes" all premium
and exposure to reinsurers and collects a ceding commission of 25%. The
reinsurers, their participation percentages, and their A.M. Best rating are
listed below.
- General Reinsurance Corporation, (80%), A++
- Hannover Reinsurance Company, (7%), A+
- Transatlantic Reinsurance Company, (6.5%), A+
- CNA Re, UK, (6.5%), A
Marketing and Distribution. Marketing of Midwest Medical policies in
Minnesota, Iowa, 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. 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
55% of total invested assets at December 31, 1999 compared to 62% at December
31, 1998. Equity securities comprised approximately 37% of total invested assets
at December 31, 1999 compared to 33% at December 31, 1998. The increase in the
proportion of equity securities was due to an increase in equity market values
and a decrease in market values of fixed income securities. The remainder of
Midwest Medical's investment portfolio, 8% and 5% at December 31, 1999 and 1998,
respectively, was invested in a real estate investment trust and short-term
instruments.
The following table sets forth the composition of the combined investment
portfolio of Midwest Medical at the dates indicated:
8
<PAGE> 13
<TABLE>
<CAPTION>
BOOK VALUE AT DECEMBER 31,
--------------------------
(IN THOUSANDS)
Investments 1997 1998 1999
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities at fair value
(cost: 1997 - $170,590,
1998 - $161,430, 1999 - $159,464) $171,975 $164,652 $153,950
Equity securities at fair value
(cost: 1997 - $20,595,
1998 - $41,907, 1999 - $46,216) 49,759 86,553 104,898
Short-term 13,909 3,556 9,128
Other 10,000 10,000 10,000
------- -------- --------
Total Investments $245,643 $264,761 $277,976
======== ======== ========
</TABLE>
The following schedule compares the average yield on investments during the last
three years.
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
1997 1998 1999
<S> <C> <C> <C>
Average yield 4.9% 4.3% 5.4%
</TABLE>
The fair value of fixed maturities at December 31, 1999, 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 3%
1 - 5 years 20
5 - 10 years 28
Over 10 years 49
---
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 1999. 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 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.
9
<PAGE> 14
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.
Dividends that exceed the greater of 10% of MMIC's prior year-end policyholder
surplus or Midwest Medical's prior year net income excluding realized capital
gains are considered extraordinary under Minnesota insurance statutes. Payment
of extraordinary dividends are subject to the approval of the Commissioner of
the Department of Commerce of the State of Minnesota. At December 31, 1999, the
maximum dividend that may be paid by Midwest Medical in 2000 without regulatory
approval is approximately $16,476,000. Midwest Medical paid cash dividends to
Midwest Holding of $2,050,000 and $2,000,000 in 1999 and 1998, respectively.
State statutes also require Midwest Holding 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 and various
forms of managed health care. 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, 1999, Midwest Holding employed 83 persons, of
whom nine were executives, 51 were supervisory employees or specialists, and 23
were clerical employees. As of December 31, 1999, Services employed 10 persons
of whom one was an executive, 8 were supervisory employees or specialists, and
one was a clerical employee. None of the employees is
10
<PAGE> 15
covered by a collective bargaining agreement and management believes that
relations with employees are good.
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, 1999
------------------
<S> <C>
Office furniture and equipment $726,517
Leasehold improvements at leased premises 156,043
Computer hardware 465,033
Computer system software 1,453,310
----------
Total $2,800,903
==========
</TABLE>
Midwest Holding and Midwest Medical own no real estate. Effective October 1,
1999, Midwest Holding moved to new offices in Edina, Minnesota of 26,069 square
feet. This space is leased for a term of 6 years, 2 months. Midwest Holding also
leases approximately 15,765 square feet of office space in Edina, Minnesota
under a 10-year lease that expires in 2001. This space was sublet for the
duration of that lease effective December 1, 1999. 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. Midwest Holding also leases 1,249 square feet of
office space in Omaha, Nebraska under a three year lease that expires November
30, 2000. Services operates out of a separate 4,000 square foot facility located
in Shoreview, Minnesota. This lease expires in 2000. Solutions and MedPower
operate out of a separate, leased, 3,149 square foot facility also located in
Edina, Minnesota. This lease expires in 2001. Aggregate annual rent expense was
$637,585 for 1999 and $501,032 for 1998.
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> 16
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, 1999, are as follows:
<TABLE>
<CAPTION>
CLASS A
COMMON
DIRECTOR PRINCIPAL SHARES
NAME AGE SINCE OCCUPATION OWNED
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Michael Abrams 38 1996 Exec V.P. Iowa Medical Society -
John R. Balfanz, M.D. 54 1995 Physician 16
Gail P. Bender, M.D. 52 1996 Physician 25
James R. Bishop, M.D. 58 1994 Physician -
David P. Bounk 53 1995 President and CEO -
Thomas C. Evans, M.D. 44 1999 Physician 30
Roger L. Frerichs, M.D. 60 1988 Surgeon 92
Richard Geier, Jr., M.D. 59 1995 Physician 28
Anthony C. Jaspers, M.D. 52 1996 Physician 54
Russel J. Kuzel, M.D. 47 1997 Physician 29
Wayne F. Leebaw, M.D. 56 1994 Physician 26
Mark O. Liaboe, M.D. 46 1999 Physician 7
Steven A. McCue, M.D. 58 1995 Physician 133
Harold W. Miller, M.D. 52 1996 Physician 29
Anton S. Nesse, M.D. 61 1989 Radiologist 56
Mark D. Odland, M.D. 47 1996 Physician 94
G. William Orr, M.D. 64 1996 Physician 57
Paul S. Sanders, M.D. 55 1984 CEO-MN Medical Assoc. -
Richard D. Schmidt, M.D.
Secretary 56 1990 Physician 158
Judith F. Shank, M.D. 57 1999 Physician 16
Andrew J. K. Smith, M.D.
Chairman of Board 57 1990 Neurological Surgeon -
G. David Spoelhof, M.D. 46 1989 Physician 51
Thomas D. Throckmorton, M.D. 54 1997 Physician 76
R. Bruce Trimble, M.D.
Vice Chair of Board 59 1993 Physician -
</TABLE>
On December 31, 1999 the directors of Midwest Holding, as a group, owned
977 shares, or less than one percent of the total shares outstanding. No
executive officer owned any shares.
12
<PAGE> 17
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; 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 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 common 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:
13
<PAGE> 18
- Andrew J.K. Smith, Chairman
- Michael Abrams.
- David P. Bounk
- Roger L. Frerichs, M.D.
- G. Richard Geier, M.D.
- Paul S. Sanders, M.D.
- Richard D. Schmidt, M.D.
- R. Bruce Trimble, M.D.
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, M.D.
- Andrew J.K. Smith, M.D.
- G. Richard Geier, M.D.
- John R. Balfanz, M.D.
- Thomas D. Throckmorton, 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.
- 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 four 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.
- James R. Bishop, M.D.
- Harold W. Miller, M.D.
- John R. Balfanz, M.D.
- Steven A. McCue, 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.
14
<PAGE> 19
The Chairman of Midwest Holding Board of Directors (currently Dr. Smith) is
paid an annual fee of $41,707. 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.
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 53 President and Chief 8/1/90 to date President and Chief
Executive Officer - Executive Officer-
Midwest Holding Midwest Holding
Niles A. Cole 38 Vice President-Finance, 1998 to date Vice President-Finance,
Treasurer and Chief Treasurer and Chief
Financial Officer Financial Officer
Jack L. Kleven 53 President - Midwest 1986 to date President - Midwest
Medical and Chief Medical and Chief
Operating Officer Operating Officer
Elizabeth S. Lincoln 46 Vice President-Law and 1990 to date Vice President-Law and
Health Policy Health Policy
Thomas H. Lee 56 Vice President - 7/99 to date Vice President - Information
Information Systems Information Systems
Gerald M. O'Connell 45 Vice President - 1998 to date Vice President -
Marketing Marketing
Michael G. Rutz 46 Vice President - 5/15/95 to date Vice President -
Underwriting Underwriting
Jerry A. Zeitlin 49 Vice President - Claims 7/99 to date Vice President - Claims
</TABLE>
15
<PAGE> 20
Mr. Bounk has over 31 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.
Mr. Cole has over 16 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 26 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 16 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. Lee has over 25 years experience in the insurance industry. Prior to
joining Midwest Holding in 1998 he owned an insurance related technology
consulting business. From 1971 to 1989 he was Senior Vice President
Administration of American Hardware Mutual Insurance Company. He has BA degrees
in mathematics and statistics.
Mr. Rutz has over 21 years experience in the insurance industry, including
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 23 years in the medical malpractice segment of the
insurance
16
<PAGE> 21
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.
Mr. Zeitlin has over 26 years of claims experience in the property-casualty
insurance industry. Prior to joining Midwest Holding in 1993 he was Liability
Supervisor for The St. Paul Companies from 1979 to 1993. He has a BS degree in
Liberal Arts.
Officers serve until their successors are appointed by the Board of
Directors, or until their prior resignation, removal or death.
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, and car
allowances.
<TABLE>
<CAPTION>
CASH COMPENSATION
NAME OF INDIVIDUAL CAPACITIES IN ------------------ ALL OTHER
OR NUMBER IN GROUP WHICH SERVED SALARY BONUS COMPENSATION(A)
- ------------------------------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C>
David P. Bounk President and Chief 1999 $213,981 $85,830 $34,348
Executive Officer - 1998 200,187 56,126 32,272
Midwest Holding 1997 187,088 51,024 20,963
Jack L. Kleven President - Midwest 1999 177,624 61,636 32,066
Medical and 1998 167,716 43,752 30,847
Chief Operating Officer 1997 145,840 39,796 17,193
Michael G. Rutz Vice President- 1999 125,000 36,694 31,377
Underwriting 1998 119,816 34,233 31,406
1997 114,110 32,604 14,113
Gerald M. O'Connell Vice President-Marketing 1999 117,196 34,749 29,864
1998 109,000 11,530 21,739
1997 95,077 2,423 17,850
Elizabeth S. Lincoln Vice President-Law 1999 113,332 33,080 26,826
and Health Policy 1998 108,015 30,861 29,242
1997 102,871 29,106 13,286
</TABLE>
Midwest Holding also maintains a Supplemental Executive Retirement Plan
("SERP") which provides an annual retirement benefit for an executive officer
who retires at age 62 with 10 years of service of 70% (55% for new officers
after 1997) of the officer's final average salary. Benefits are reduced for
years of service less than 10 and retirement prior to age 62. The annual benefit
payable under the SERP is reduced by 50% of the officer's primary Social
Security benefit and by the annual benefit (expressed in the form of an annuity)
of the officer's accrued benefits under 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;
Mr. Rutz--$147,100; Mr. O'Connell--$96,400 and Ms. Lincoln--$82,000. The
estimated annual retirement benefits were calculated assuming salary increases
of five percent per year, discounted four percent per year for future inflation
to express the estimated benefits in today's dollars.
17
<PAGE> 22
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 1999 consolidated financial statements and
notes thereto appearing under Item 8 in this prospectus, Midwest Holding and its
subsidiaries are referred to collectively as Midwest Holding unless the
reference pertains to a separate entity.
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 $277,976,000 and $264,761,000 at December 31, 1999 and 1998,
respectively, which represented 86.8% and 89.6% of total assets. The main
objectives of Midwest Holding's investment policy established by the Investment
Committee of the Board of Directors are the preservation of assets, maximizing
pre- tax total portfolio return, and assuring adequate liquidity to meet
operational requirements primarily the payment of insurance claims. Fixed
maturity investments and equity securities are classified as available for sale
and therefore are carried at fair value. The real estate investment trust and
short-term instruments are recorded at cost which approximates fair value.
During 1997, 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 capital position relative to the risks inherent in its
business operations.
Midwest Holding's cash flow from operations was $2,187,000 in 1999 versus
$(9,605,000) in 1998 and $4,002,000 in 1997. The 1999 cash flow from operations
was favorably impacted by premium adjustments received from reinsurers on
reinsurance contracts for prior years and greater premium received at the end of
1999 due to earlier billing of policies with January 2000 effective dates. The
1998 cash flow from operations was unfavorably impacted by premium adjustments
paid to reinsurers on reinsurance contracts for prior years and less premium
received at the end of 1998 due to later billing of policies with January 1999
effective dates. Also contributing to the unfavorable 1998 cash flow were
increases in underwriting and other operating expenses. 1998 underwriting
18
<PAGE> 23
expenses increased primarily from additional staff needed to manage insurance
business growth and added costs from the conversion to a new insurance company
operating system. 1998 other operating expenses increased primarily from
launching the operations of Solutions including the acquisition of MedPower. The
positive 1997 cash flow from operations was primarily the result of a decrease
in claim payments.
Premium rates in general have trended lower with rate decreases in regions
where claims have developed favorably offset partially by rate increases in
regions where claims have developed unfavorably. Increases in new premium
written, however, have helped to keep cash receipts from policyholder premiums
relatively level. Substantial amounts of premiums have also been returned to
policyholders in the form of retrospective premium credits. In 1999, a
policyholder dividend program replaced the previous retrospective premium
program. While the retrospective premium credits were paid to policyholders in
the first quarter of the year following approval by the Board of Directors, the
majority of the policyholder dividends will be paid in four equal installments
in February, May, August and November of the year following their declaration by
the Board of Directors. Loss and operating expense payments have generally been
met from policyholder premium receipts with any excess cash allocated to the
investment portfolio. Management regularly analyzes loss liabilities to project
the cash flow required in future years. Since the overall portfolio is highly
liquid, exact matching of bond maturities and loss liabilities is not a goal.
Bond maturities are primarily selected to maximize total return. 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 therefore will not need to borrow funds
from external sources. Midwest Holding does maintain a $5,000,000 secured line
of credit with its bank in the event of an urgent cash need. Midwest Holding had
no material capital expenditure commitments as of December 31, 1999.
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 1999,
1998 and 1997 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 the accompanying consolidated financial statements provide the details
of the increases and decreases in other shareholders' equity.
Periodically, 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 non-insurance business
operations including new business ventures. Dividends totaling $2,050,000 were
declared and paid in 1999. A dividend of $2,000,000 was declared and paid in
1998. No dividends were declared or paid by Midwest Medical to Midwest Holding
in 1997.
RESULTS OF OPERATIONS
Net premiums earned increased $11,569,000 in 1999 from 1998. New business
generated approximately $5,700,000 of additional earned premium. The remaining
increase was the result of
19
<PAGE> 24
the following significant factors:
1. Effective 1999, a policyholder dividend program replaced the previous
retrospective premium program. In 1998, retrospective premium credits
of $6,719,000 were recorded for Minnesota, North Dakota and Iowa
policyholders. The retrospective premium credits of $317,000 recorded
in 1999 represented actual payments made that were greater than what
had been previously estimated and accrued. The difference between
years resulted in a $6,402,000 increase in 1999 net premiums earned.
2. The estimated reinsurance premium applicable to the treaty years
1992-1994 and 1995-1997, which is based in part on reinsured claims
experience, was reduced $5,920,000 on a net basis in 1999. This
compares to a net reduction for those treaty years of $2,550,000 in
1998 resulting in a net increase in premium between years of
$3,370,000.
3. Due to the increase in premium volume and policyholders purchasing
higher limits, reinsurance costs on the current year were $2,115,000
greater in 1999 compared to 1998. This decreased 1999 net premiums
earned.
4. A 5% rate decrease in regions with favorable claims experience
resulted in a decrease of approximately $1,250,000 in 1999 net
premiums earned.
5. Accounts that did not renew in 1999 resulted in a decrease of
approximately $538,000 in 1999 net premiums earned.
Net premiums earned increased $2,098,000 in 1998 from 1997. Although
policyholder rates remained relatively level, new business generated
approximately $1,263,000 of additional earned premium. The remaining increase
was the result of the following significant factors:
1. The estimated reinsurance premium applicable to the treaty years
1992-1994 and 1995-1997, which is based in part on reinsured claims
experience, was reduced $2,550,000 on a net basis in 1998. This
compares to a net reduction for those treaty years of $2,950,000 in
1997 resulting in a net decrease in premium between years of
$400,000.
2. 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.
4. Retrospective premiums credits of $5,200,000 for Minnesota
policyholders and $280,000 for North Dakota policyholders were
recorded in 1998. The premium credits for 1997 were $5,000,000 for
Minnesota policyholders only. The difference between years resulted in
a $480,000 decrease in 1998 net premiums earned.
20
<PAGE> 25
Net investment income decreased $8,000 in 1999 from 1998 and $632,000 in
1998 from 1997. The decrease in 1999 was primarily driven by additional fees
paid to equity managers due to the appreciation in Midwest Holding's equity
securities. The decrease in 1998 was primarily due to the decrease in the fixed
maturity component of invested assets 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 in 1998 drove the decline in investment income.
Realized capital gains decreased $1,861,000 to $7,220,000 in 1999 and
increased $2,552,000 to $9,081,000 in 1998. During 1999, sales of equity
securities realized $10,312,000 of net capital gains while sales of bonds
realized $(3,092,000) of net capital losses. Approximately $(1,757,000) of the
net realized capital losses on bonds came from the repositioning of the bond
portfolio during the last two months of 1999. Midwest Holding's new fixed income
manager, who assumed management of the portfolio on November 2, 1999,
recommended repositioning the bond portfolio primarily to shorten its duration.
All other 1999 realized capital gains and losses resulted from the management of
the portfolio on a pre-tax total return basis within the parameters set by the
Investment Committee of the Board of Directors. During 1998, approximately
$1,175,000 of net capital gains were realized through the allocation of
$15,000,000 to international equities in January of 1998. The remaining
$7,906,000 of 1998 net realized capital gains resulted from the management of
the portfolio on a pre-tax total return basis. During 1997, the fixed income
portfolio was restructured to pursue the newly adopted pre-tax total return
objective resulting in net realized capital gains of $4,916,000. An additional
$1,613,000 of net capital gains were realized in 1997 in the normal course of
managing the investment portfolio. 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 of the Board
of Directors. This policy was revised in 1997 as previously discussed under the
Liquidity and Capital Resources section. The Investment Committee meets with
outside investment managers approximately four times per year.
21
<PAGE> 26
Other revenues increased $1,471,000 from $1,352,000 in 1998 to $2,823,000
in 1999. The increase was due to Services beginning active operations in January
of 1999. 1999 other revenues includes $1,661,000 of commission income received
by Services from insurance carriers. The commission income from Services was
partially offset by a decline in finance charges on premiums owed to Midwest
Medical.
Other revenues increased $208,000 from $1,144,000 in 1997 to $1,352,000 in
1998. The increase was primarily due to the acquisition of MedPower by Solutions
in January of 1998. MedPower's main source of revenues is electronic claims
processing fees received from healthcare providers.
Losses and loss adjustment expenses are the costs associated with the
settlement of insurance claims and are Midwest Holding's principal expense.
Incurred loss and loss adjustment expenses were $41,468,000 for 1999 compared to
$37,494,000 in 1998 and $31,834,000 in 1997. This resulted in an increase of
10.6% in 1999 and an increase of 17.8% in 1998. As shown in Note 6 of the
consolidated financial statements, the current year's provision for loss and
loss adjustment expense, which is based upon policyholder exposure, expected
frequency of losses, and severity of losses, increased by $4,015,000 in 1999 and
$1,741,000 in 1998. The increase in 1999 was primarily driven by additional
policyholder exposure from the increase in premium volume particularly from the
newer business lines such as large, healthcare systems and hospitals. Loss and
loss adjustment expenses also include adjustments of prior years' estimates.
These adjustments to the liability for loss and loss adjustment expense are
evaluated by management and supported by an outside actuarial review performed
at the conclusion of the year. As shown in Note 6 of the consolidated financial
statements, these evaluations resulted in a reduction in estimated liabilities
applicable to prior years of $4,474,000, $4,433,000 and $8,352,000, respectively
in 1999, 1998 and 1997. The less favorable development on prior years is the
primary reason for the greater incurred loss and loss adjustment expenses in
1998.
The following schedule summarizes the development of the liability for loss
and loss adjustment expense from 1989 through 1999. This schedule is presented
net of reinsurance which 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.
22
<PAGE> 27
DEVELOPMENT OF LIABILITY FOR LOSS AND LOSS ADJUSTMENT EXPENSE
(Thousands of Dollars)
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Liability for unpaid loss and
loss adjustment expense $ 89,630 $ 97,375 $100,167 $ 98,617 $105,589 $ 88,227
Cumulative amount of liability paid through:
1 year later 10,585 13,973 19,112 21,422 25,251 26,879
2 years later 21,890 28,643 32,798 37,498 42,685 46,925
3 years later 30,869 35,305 39,906 45,227 51,087 55,534
4 years later 35,015 37,624 42,752 46,226 53,594 57,129
5 years later 35,115 38,298 43,994 46,823 53,288 58,856
6 years later 35,187 39,505 44,370 46,810 54,709
7 years later 35,295 39,861 44,420 47,218
8 years later 35,295 39,862 44,634
9 years later 35,295 39,923
10 years later 35,297
Liability re-estimated as of:
1 year later 73,244 83,359 83,991 94,633 80,960 85,595
2 years later 62,056 64,876 74,883 69,490 75,364 76,365
3 years later 52,010 56,351 53,538 65,568 64,586 67,891
4 years later 44,582 42,075 52,833 56,426 57,851 65,794
5 years later 37,872 41,771 45,892 52,388 56,785 63,958
6 years later 37,617 39,519 43,760 53,014 55,358
7 years later 35,882 38,929 43,563 52,469
8 years later 35,882 38,929 43,633
9 years later 35,882 38,967
10 years later 35,884
Cumulative redundancy 53,746 58,408 56,534 46,148 50,231 24,269
<CAPTION>
1995 1996 1997 1998 1999
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Liability for unpaid loss and
loss adjustment expense $ 96,424 $ 90,342 $ 89,394 $ 94,467 $ 99,894
Cumulative amount of liability paid through:
1 year later 33,454 30,097 28,755 33,787
2 years later 53,132 44,562 48,437
3 years later 59,568 54,411
4 years later 63,915
5 years later
6 years later
7 years later
8 years later
9 years later
10 years later
Liability re-estimated as of:
1 year later 87,580 81,990 84,961 89,992
2 years later 79,665 76,542 78,679
3 years later 77,294 70,228
4 years later 73,979
5 years later
6 years later
7 years later
8 years later
9 years later
10 years later
Cumulative redundancy 22,445 20,114 10,715 4,475
</TABLE>
23
<PAGE> 28
Policyholder dividends of $10,175,000 were declared by the Board of
Directors of Midwest Medical in 1999 and will be paid to physician, clinic and
hospital policyholders in 2000. As described in Note 4 of the consolidated
financial statements, the policyholder dividend program was instituted in 1999
and replaced the previous retrospective premium program for physicians. The
primary reasons Midwest Medical switched to a policyholder dividend program were
to allow greater flexibility in determining amounts to be refunded to
policyholders and to more closely resemble programs of peer companies thus
making the financial statement impact similar. The latter reason helps to
eliminate confusion in the marketplace when comparing the financial performance
of Midwest Medical to its competitors.
Underwriting, acquisition and insurance expenses increased $499,000 from
$6,698,000 in 1998 to $7,197,000 in 1999. Approximately $706,000 of the increase
came from additional management fees for staff additions, maintenance of and
enhancements to the new operating system and moving Midwest Holding's main
office. An additional $311,000 of payments to medical societies for license and
endorsement agreements also contributed to the increase. A portion of these
payments are tied to premium volume thus causing the increase. These increases
were offset partially by additional ceding commissions earned by Midwest Medical
resulting from the increase in premiums ceded to the current year reinsurance
contract on higher limit policies.
Underwriting, acquisition and insurance expenses increased $1,189,000 from
$5,509,000 in 1997 to $6,698,000 in 1998. Approximately $469,000 of the increase
came from increases in variable expenses such as commissions and premiums taxes.
The remaining increase was largely due to additional management fees for staff
needed to expand Midwest Medical market share and added costs from the
conversion to a new insurance company operating system.
Other operating expenses increased $2,608,000 from $3,589,000 in 1998 to
$6,197,000 in 1999. Approximately $1,648,000 of the increase was from the
Services subsidiary that began active operations in January 1999. Services
primary expenses are commissions and salaries paid to its staff. The remaining
increase resulted largely from greater salary expenses incurred by Solutions,
added equipment and depreciation costs incurred by MedPower and new product
development costs incurred by Midwest Holding.
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. Salaries, benefits,
outside consulting, and equipment costs are the main operating expenses charged
to Solutions and MedPower by Midwest Holding in the form of management fees. The
remaining increase resulted primarily from greater salary and benefits costs of
operating the holding company Midwest Holding.
Income before income taxes decreased to $2,552,000 in 1999 compared to
$8,637,000 in 1998. The decrease resulted primarily from greater loss
liabilities estimated for the current year, 1999 policyholder dividends that
were greater than the 1998 retrospective premium credits and lower realized
capital gains due to the capital losses sustained on the repositioning of the
bond portfolio at the end of 1999.
24
<PAGE> 29
Income before income taxes decreased to $8,637,000 in 1998 compared to
$13,763,000 in 1997. The decrease resulted primarily from less favorable
development on loss liabilities estimated in prior years and added expenses from
operating two non-insurance companies newly formed at the beginning of 1998.
Income taxes decreased to $816,000 for 1999 compared to $2,689,000 for
1998. The effective tax rates for 1999 and 1998 were 32.0% and 31.1%,
respectively. The principal factor in the increase in the effective tax rate was
a lower recovery of prior year taxes recorded in 1999 compared to 1998.
Income taxes decreased to $2,689,000 for 1998 compared to $4,463,000 for
1997. The effective tax rates for 1998 and 1997 were 31.1% and 32.4%,
respectively. The principal factor in the decline in the effective tax rate was
a recovery of prior year taxes recorded in 1998.
Net income earned by Midwest Holding decreased to $1,736,000 for 1999
compared to $5,948,000 for 1998 due to the factors discussed above. Basic net
income per share decreased to $13.92 for 1999 from $48.36 per share for 1998.
Diluted net income per share decreased to $12.53 for 1999 from $43.65 per share
for 1998.
Also due to the factors discussed above, Midwest Holding recorded net
income of $5,948,000 for 1998 compared to $9,300,000 for 1997. Basic net income
per share decreased to $48.36 for 1998 from $77.79 per share for 1997. Diluted
net income per share decreased to $43.65 for 1998 from $70.23 per share for
1997.
YEAR 2000 ISSUE
No significant Year 2000 problems have been encountered with respect to
Midwest Holding's internal computer hardware and software, key business partners
and vendors and insurance policy exposure. Midwest Holding's Year 2000 Task
Force, however, continues to monitor the potential for insurance policy exposure
relative to Year 2000 issues.
A multi-departmental management team carefully studied and assessed the
exposure that might exist in the policies issued by Midwest Medical. The
majority of the exposure is related to medical equipment that contains computer
chips that could be affected by the Year 2000. This is primarily an exposure for
the products liability carrier which insures the medical equipment manufacturer.
All hospital policyholders were surveyed in 1999 and were found to be in
compliance with Midwest Medical guidelines on medical equipment. No coverage
change or exclusion was enacted for the medical malpractice professional
liability policy. A Year 2000 exclusion became effective January 1, 1999 on all
premises and general liability policies issued by Midwest Medical. This
exclusion will continue through the 2000 policy year. Midwest Medical
communicated its Year 2000 exposure preparedness to its reinsurers and they have
fully supported Midwest Holding's plan and actions to date.
Based on the due diligence performed above, the overall success of
businesses in dealing with
25
<PAGE> 30
Year 2000 issues, and no Year 2000 claims reported as of the date of this
report, Midwest Holding believes it has little, if any, exposure to Year 2000
claims. The potential does still exist, however, in a worst case scenario for
claims to be made by Midwest Medical policyholders for Year 2000 failures they
experience. In the event Year 2000 claims are made on policies written by
Midwest Medical, Midwest Holding believes these claims will be without merit and
will vigorously defend its position. Depending on whether such claims are deemed
to have merit and to the extent these claims are awarded compensation, such
claims could have a material adverse effect on Midwest Holding's business,
financial condition and results of operations.
Readers are reminded that forward-looking statements contained in this
description of Midwest Holding's treatment of the Year 2000 issue should be read
in conjunction with Midwest Holding's following disclosures under the heading
"Cautionary Note Regarding Forward-Looking Statements."
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements other than historical information contained in this 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:
1. the impact of changing market conditions on Midwest Holding's business
strategy;
2. the effects of increased competition on pricing, coverage terms,
retention of customers and ability to attract new customers;
3. greater severity or frequency of the types of losses that Midwest
Holding insure;
4. faster or more adverse loss development experience than that on which
Midwest Holding based its underwriting, reserving, and investment
practices;
5. developments in global financial markets which could adversely affect
the performance of Midwest Holding's investment portfolio;
6. litigation, regulatory or tax developments which could adversely
affect Midwest Holding's business;
7. risks associated with the introduction of new products and services;
8. dependence on key personnel;
26
<PAGE> 31
9. the impact of mergers and acquisitions; and
10. material claim payments awarded policyholders of Midwest
Holding for Year 2000 failures they experienced.
The facts set forth above should be considered in connection with 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 avail itself of the safe harbor from liability with respect to
forward-looking statements provided by Section 27A and Section 21E referred to
above.
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 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 Common 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
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 must also be 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
27
<PAGE> 32
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 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. 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, 1999, there were 123,509 of these shares outstanding
held by 3,481 physicians; 2,890 additional physicians have accrued the right to
receive 13,698 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 also 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
Minnesota Medical 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."
28
<PAGE> 33
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, 1999 and 1998, and for each of the
three years in the period ended December 31, 1999, 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.
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 auditing standards generally accepted in
the United States. 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, 7650 Edinborough Way, Suite 400, Minneapolis,
Minnesota 55435; (612) 838-6700.
29
<PAGE> 34
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page No.
<S> <C>
Consolidated Financial Statements
Report of Independent Auditors ......................................................................... F1
Consolidated Balance Sheets - December 31, 1999 and 1998................................................. F2
Consolidated Statements of Income - For the Years Ended December 31, 1999,
1998 and 1997.......................................................................................... F3
Consolidated Statements of Changes in Other Shareholders' Equity - For the Years
Ended December 31, 1999, 1998 and 1997............................................................... F4
Consolidated Statements of Cash Flows - For the Years Ended
December 31, 1999, 1998 and 1997..................................................................... F5
Notes to Consolidated Financial Statements............................................................... F6
FINANCIAL STATEMENT SCHEDULES
Schedule II - Condensed Financial Information of Registrant
(Parent Company)......................................................................................... F31
Balance Sheets - December 31, 1999 and 1998.............................................................. F31
Statements of Income - For the Years Ended December 31, 1999, 1998
and 1997............................................................................................. F32
Statements of Cash Flows - For the Years Ended December 31, 1999,
1998 and 1997........................................................................................ F33
Note to Condensed Financial Statements................................................................... F34
Schedule IV - Reinsurance - For the Years Ended December 31, 1999, 1998
and 1997................................................................................................. F35
Schedule VI - Supplemental Information Concerning Property/Casualty Insurance
Operations - December 31, 1999 and 1998 and for Each of the Three Years
in the Period Ended December 31, 1997.................................................................... F36
</TABLE>
30
<PAGE> 35
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Midwest Medical Insurance Holding Company
and Subsidiaries
We have audited the accompanying consolidated balance sheets of Midwest Medical
Insurance Holding Company and Subsidiaries as of December 31, 1999 and 1998, and
the related consolidated statements of income, changes in other shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1999. Our audits also included the financial statement schedules listed in
the index at Item 16(b). These financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Midwest Medical
Insurance Holding Company and Subsidiaries at December 31, 1999 and 1998, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedules, when considered in relation
to the basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February 1, 2000
F-1
<PAGE> 36
Midwest Medical Insurance Holding Company and Subsidiaries
Consolidated Balance Sheets
(In Thousands, Except for Share Amounts)
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-----------------------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities at fair value (cost: 1999--$159,464;
1998--$161,430) $153,950 $164,652
Equity securities at fair value (cost: 1999--$46,216; 1998--$41,907) 104,898 86,553
Short-term 9,128 3,556
Other 10,000 10,000
-----------------------------
277,976 264,761
Cash 1,821 647
Accrued investment income 2,317 1,739
Premiums receivable 7,143 2,023
Reinsurance recoverable on paid and unpaid losses 19,285 16,499
Amounts due from reinsurers 3,833 3,191
Other assets 7,801 6,623
-----------------------------
Total assets $320,176 $295,483
=============================
LIABILITIES, REDEEMABLE STOCK AND OTHER SHAREHOLDERS' EQUITY
Liabilities:
Unpaid losses and loss adjustment expenses $119,141 $110,964
Unearned premiums 12,797 8,173
Policyholder dividends 10,175 -
Retrospective premiums - 8,543
Deferred income taxes 12,201 10,966
Other liabilities 10,259 6,244
-----------------------------
Total liabilities 164,573 144,890
Redeemable stock:
Class A Common Stock--authorized 300,000 shares, issued and outstanding 123,509
shares in 1999 and 125,682 shares in 1998 7,802 8,146
Class B Common Stock--authorized, issued and outstanding 1 share 1 1
-----------------------------
7,803 8,147
Other shareholders' equity 147,800 142,446
-----------------------------
Total liabilities, redeemable stock and other shareholders' equity $320,176 $295,483
=============================
</TABLE>
See accompanying notes.
F-2
<PAGE> 37
Midwest Medical Insurance Holding Company and Subsidiaries
Consolidated Statements of Income
(In Thousands, Except for Per Share Amounts)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Net premiums earned $ 46,583 $ 35,014 $ 32,916
Net investment income 10,963 10,971 11,603
Realized capital gains 7,220 9,081 6,529
Other 2,823 1,352 1,144
------------------------------------------------------
67,589 56,418 52,192
Losses and expenses:
Losses and loss adjustment expenses 41,468 37,494 31,834
Policyholder dividends 10,175 - -
Underwriting, acquisition and insurance expenses 7,197 6,698 5,509
Other operating expenses 6,197 3,589 1,086
------------------------------------------------------
65,037 47,781 38,429
------------------------------------------------------
Income before income taxes 2,552 8,637 13,763
Income taxes 816 2,689 4,463
------------------------------------------------------
Net income $ 1,736 $ 5,948 $ 9,300
======================================================
Income per common share $ 13.92 $ 48.36 $ 77.79
======================================================
Income per common share--assuming dilution $ 12.53 $ 43.65 $ 70.23
======================================================
</TABLE>
See accompanying notes.
F-3
<PAGE> 38
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, 1996 $111,278 $12,789 $ 84,615 $13,874
Comprehensive income:
Net income 9,300 - 9,300 -
Other comprehensive income:
Unrealized gains on securities net of $5,491 in
taxes 10,199 - - 10,199
Reclassification adjustment for gains included in
net income net of $2,269 in taxes (4,215) - - (4,215)
--------------
Total comprehensive income 15,284
Net income of non-insurance entities includable in
Class A Common Stock redemption value (272) - (272) -
---------------------------------------------------------
Balance at December 31, 1997 126,290 12,789 93,643 19,858
Comprehensive income:
Net income 5,948 - 5,948 -
Other comprehensive income:
Unrealized gains on securities net of $9,111 in
taxes 16,921 - - 16,921
Reclassification adjustment for gains included in
net income net of $3,132 in taxes (5,817) - - (5,817)
--------------
Total comprehensive income 17,052
Dividend paid by Midwest Medical Insurance Company to
Midwest Medical Insurance Holding Company (2,000) - (2,000) -
Net loss of non-insurance entities includable in Class
A Common Stock redemption value 1,104 - 1,104 -
---------------------------------------------------------
Balance at December 31, 1998 142,446 12,789 98,695 30,962
Comprehensive income:
Net income 1,736 - 1,736 -
Other comprehensive income:
Unrealized gains on securities net of $3,708 in 8,600 - - 8,600
taxes
Reclassification adjustment for gains included in
net income net of $2,394 in taxes (4,646) - - (4,646)
--------------
Total comprehensive income 5,690
Dividend paid by Midwest Medical Insurance Company to
Midwest Medical Insurance Holding Company (2,050) - (2,050) -
Net loss of non-insurance entities includable in Class
A Common Stock redemption value 1,714 - 1,714 -
---------------------------------------------------------
Balance at December 31, 1999 $147,800 $12,789 $ 100,095 $34,916
=========================================================
</TABLE>
See accompanying notes.
<PAGE> 39
Midwest Medical Insurance Holding Company and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
--------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,736 $ 5,948 $ 9,300
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
(Increase) decrease in accrued investment income (578) 602 437
(Increase) decrease in premiums receivable (5,120) (1,489) 50
(Increase) decrease in reinsurance recoverable (2,786) 2,618 3,057
Increase in amounts due from reinsurers (642) (3,191) -
(Increase) decrease in other assets (1,178) (2,224) 1,468
Deferred tax provision (90) 1,354 1,494
Increase (decrease) in unpaid losses and loss adjustment expenses 8,177 3,158 (2,231)
Increase (decrease) in unearned premiums 4,624 2,101 (788)
Increase in policyholder dividends 10,175 - -
Decrease in retrospective premiums (8,543) (1,362) (933)
Decrease in amounts due reinsurers - (2,984) (4,290)
Increase (decrease) in other liabilities 4,015 (5,145) 3,287
Accretion of bond discount, net of premium amortization (636) (134) (573)
Realized capital gains (7,220) (9,081) (6,529)
Compensation expense for vested Class A common shares
253 224 253
--------------------------------------------
2,187 (9,605) 4,002
INVESTING ACTIVITIES
Purchases of fixed maturity investments and equity securities (171,139) (401,922) (311,947)
Sales of fixed maturity investments and equity securities 174,651 398,717 316,982
Calls and maturities of fixed maturity investments 2,000 1,250 -
Net sales (purchases) of short-term investments (5,572) 10,352 (6,011)
--------------------------------------------
(60) 8,397 (976)
FINANCING ACTIVITIES
Redemption of Class A Common Stock (953) (523) (648)
--------------------------------------------
Increase (decrease) in cash 1,174 (1,731) 2,378
Cash at beginning of year 647 2,378 -
============================================
Cash at end of year $ 1,821 $ 647 $ 2,378
============================================
</TABLE>
See accompanying notes.
F-5
<PAGE> 40
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.
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.
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 technology services and support.
Effective January 1, 1998, Solutions purchased the assets and
operations of MedPower Information Resources, Inc. (MedPower). MedPower
processes and electronically submits medical claims for a network of over 100
provider entities. MedPower also provides various information consulting and
network support services.
F-6
<PAGE> 41
Midwest Holding Insurance Services, Inc. (Services) was incorporated in
1995 and began active operations in January 1999 with the acquisition of a book
of business from Johnson-McCann Benefits, Inc. Services is an insurance agency
specializing in providing clients with group insurance products such as health,
dental, life, disability and workers' compensation.
Midwest Holding provides management and administrative services to
Midwest Medical, Solutions and MedPower for a fee generally equal to the cost of
services provided plus 10%. Services operates independently with its own
management and administrative staff and therefore does not have a management
agreement with Midwest Holding.
Midwest Medical 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.
Hereafter, Midwest Holding, Midwest Medical, Services, Solutions and
MedPower shall be collectively referred to as Midwest Holding unless the
reference pertains to a specific entity.
F-7
<PAGE> 42
BASIS OF PRESENTATION
The consolidated financial statements have been presented in conformity
with accounting principles generally accepted in the United States, which differ
in certain respects from statutory accounting practices followed by Midwest
Medical in reporting to the Department of Commerce of the State of Minnesota
(see Note 12).
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, as well as disclosure of contingent assets
and liabilities at the date of the financial statements. Actual results could
differ from those estimates.
INVESTMENTS
Midwest Holding manages its investment portfolio to achieve its
long-term investment objective of providing for the financial stability of
Midwest Holding through preservation of assets and maximization of total
portfolio return. Although management believes Midwest Holding 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 20% equity interests in non-traded real
estate investment trusts and are recorded at cost, which approximates fair
value.
Realized gains and losses on sales of investments are reported on a
pre-tax basis as a component of income and are determined on the specific
identification basis.
F-8
<PAGE> 43
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 AND POLICYHOLDER DIVIDENDS
Premiums received are recorded as earned ratably over the lives of the
policies to which they apply. A portion of premiums received is deferred to
recognize 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.
Prior to 1999, Midwest Medical had a retrospective premium program
whereby physicians may have received credits against future premiums based upon
the loss experience of Midwest Medical. Amounts returned under the program were
accrued when approved by the Board of Directors and reflected as a reduction in
net premiums earned. Beginning in 1999, the retrospective premium program was
replaced by a policyholder dividend program. Policyholder dividends are accrued
when approved by the Board of Directors and are recorded as a separate component
of losses and expenses in the consolidated statements of income.
REINSURANCE
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.
ACQUISITION COSTS
Acquisition costs are expensed when incurred. Due to the nature of its
operations, Midwest Medical does not pay significant amounts in commissions.
OTHER REVENUES
F-9
<PAGE> 44
Other revenues are primarily comprised of commission income from
insurance carriers for Services and electronic claims processing fees from
healthcare providers for MedPower. Generally, such revenues are earned as the
related services are provided or performed.
INCOME TAXES
Midwest Holding 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. Midwest Holding 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). Midwest Holding does not record any
amounts related to unissued Class A Common Shares. At the vesting date, the
issued shares are recorded at the then current redemption value (see Note 14).
Midwest Holding 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. Midwest Holding 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
F-10
<PAGE> 45
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. Midwest Holding
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-11
<PAGE> 46
Following is the detail of changes in redeemable stock for each of the
three years in the period ended December 31, 1999 (in thousands, except for
share and per share amounts):
<TABLE>
<CAPTIION>
MIDWEST MIDWEST ACCUMULATED
CLASS A COMMON STOCK CLASS B HOLDING HOLDING OTHER
--------------------- COMMON PAID-IN RETAINED COMPREHENSIVE
TOTAL SHARES AMOUNT STOCK CAPITAL EARNINGS INCOME
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $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 253 4,013 - - 253 - -
vesting
Other (15) - - - - (15) -
--------------------------------------------------------------------
Balance at December 31, 1997 (carried forward) 7,477 121,322 1 1 4,358 3,038 79
</TABLE>
F-12
<PAGE> 47
<TABLE>
<CAPTION>
CLASS B MIDWEST MIDWEST ACCUMULATED
CLASS A COMMON STOCK COMMON HOLDING HOLDING OTHER
--------------------- PAID-IN RETAINED COMPREHENSIVE
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 224 3,928 - - 224 - -
vesting
Dividend from Midwest Medical 2,000 - - - 2,000 - -
--------
Balance at December 31, 1998 (carried forward) 8,147 125,682 1 1 6,275 1,718 152
</TABLE>
F-13
<PAGE> 48
<TABLE>
<CAPTION>
CLASS B MIDWEST MIDWEST ACCUMULATED
CLASS A COMMON STOCK COMMON HOLDING HOLDING OTHER
-------------------- PAID-IN RETAINED COMPREHENSIVE
TOTAL SHARES AMOUNT STOCK CAPITAL EARNINGS INCOME
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 (brought forward) $8,147 125,682 $ 1 $ 1 $6,275 $1,718 $ 152
Comprehensive income:
Net loss of non-insurance entities includable in
Class A Common Stock redemption value (1,714) - - - - (1,714) -
Other comprehensive income:
Unrealized gains on securities net of $11 in taxes 20 - - - - - 20
--------
Total comprehensive income (1,694)
Redemption of shares due to policyholder terminations
by effective date:
January 1, 1999 to June 30, 1999; NRV of $64.81 (504) (7,784) - - (341) (163) -
July 1, 1999 to December 31, 1999; NRV of $60.10 (450) (7,240) (1) - (304) (145) -
Issuance of shares to vested policyholders 1 8,702 1 - - - -
Initial issuance of shares to policyholders upon 253 4,149 - - 253 - -
vesting
Dividend from Midwest Medical 2,050 - - - 2,050 - -
-----------------------------------------------------------------------
Balance at December 31, 1999 $7,803 123,509 $ 1 $ 1 $7,933 $ (304) $ 172
=======================================================================
</TABLE>
F-14
<PAGE> 49
3. INVESTMENTS
Components of net investment income are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities $ 9,836 $ 9,340 $10,901
Equity securities 866 820 523
Short-term investments 466 926 939
Other investments 1,015 907 94
------------------------------------------------------
12,183 11,993 12,457
Investment expenses (1,220) (1,022) (854)
------------------------------------------------------
$10,963 $10,971 $11,603
======================================================
</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, 1999
------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturities:
Midwest Medical:
United States Government $ 74,387 $ 25 $(2,717) $ 71,695
Public utilities 1,450 - (205) 1,245
Industrial and other 83,627 31 (2,648) 81,010
------------------------------------------------------------
Total $159,464 $ 56 $(5,570) $153,950
============================================================
Equity securities:
Midwest Holding:
Common stock:
Industrial, miscellaneous and other $ 282 $ 266 $ - $ 548
Midwest Medical
Common stock:
Banks, trusts and insurance 3,375 4,703 - 8,078
companies
Industrial, miscellaneous and other 42,559 55,504 (1,791) 96,272
------------------------------------------------------------
Total $ 46,216 $60,473 $(1,791) $104,898
============================================================
</TABLE>
F-15
<PAGE> 50
<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:
Common stock:
Industrial, miscellaneous and other $ 520 $ 234 $ - $ 754
Midwest Medical
Common stock:
Banks, trusts and insurance 3,749 3,873 - 7,622
companies
Industrial, miscellaneous and other 37,638 41,424 (885) 78,177
------------------------------------------------------------
Total $ 41,907 $ 45,531 $ (885) $ 86,553
============================================================
</TABLE>
The components of the unrealized appreciation on available for sale
securities as of December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
---------------------------------- ------------------------------------
MIDWEST HOLDING MIDWEST MEDICAL MIDWEST HOLDING MIDWEST MEDICAL
---------------------------------- ------------------------------------
<S> <C> <C> <C> <C>
Fixed maturities:
Gross unrealized gains $ - $ 56 $ - $ 3,385
Gross unrealized losses - (5,570) - (163)
Equity securities:
Gross unrealized gains 266 60,207 234 45,297
Gross unrealized losses - (1,791) - (885)
---------------------------------- ------------------------------------
266 52,902 234 47,634
Deferred income taxes (94) (17,986) (82) (16,672)
---------------------------------- ------------------------------------
$ 172 $ 34,916 $ 152 $ 30,962
================================== ====================================
</TABLE>
F-16
<PAGE> 51
The amortized cost and market value of fixed maturities at December 31,
1999, by contractual maturity, are shown below (in thousands). Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
AMORTIZED MARKET
COST VALUE
------------------------------------
<S> <C> <C>
Due in one year or less $ 4,822 $ 4,821
Due after one year through five years 31,224 30,596
Due after five years through ten years 45,090 43,274
Due after ten years 78,328 75,259
------------------------------------
$ 159,464 $ 153,950
====================================
</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 REALIZED REALIZED
FROM SALES GAINS LOSSES
-----------------------------------------------------
<S> <C> <C> <C>
Year ended December 31, 1999:
Fixed maturities $154,388 $ 608 $(3,700)
Equity securities 20,263 11,292 (980)
Year ended December 31, 1998:
Fixed maturities 382,048 3,600 (769)
Equity securities 16,669 6,536 (286)
Year ended December 31, 1997:
Fixed maturities 310,235 5,806 (884)
Equity securities 6,747 2,168 (561)
</TABLE>
F-17
<PAGE> 52
Net unrealized appreciation of fixed maturities increased (decreased) by
$(8,736,000), $1,837,000 and $(2,197,000) and net unrealized appreciation of
equity securities increased by $14,036,000, $15,360,000 and $11,417,000 for the
years ended December 31, 1999, 1998 and 1997, respectively.
4. POLICYHOLDER DIVIDENDS
In 1999, Midwest Medical instituted a policyholder dividend program which
replaced the previous retrospective premium credit program for physicians.
To implement the physician and clinic policyholder dividend program,
Midwest Medical issued participating policy endorsements to all active physician
and clinic accounts during 1999. To implement the hospital policyholder dividend
program, Midwest Medical will issue participating policy endorsements to all
active hospital accounts during 2000. Participating policies represented 91% of
total premiums in force and premium income at December 31, 1999.
In the third quarter of 1999, Midwest Medical's Board of Directors declared
a $10,100,000 dividend to be paid to physician and clinic policyholders in four
equal installments in February, May, August and November 2000. The dividend will
be awarded proportionately based on annual premiums for physician and clinic
policyholders that were insured by Midwest Medical in 1995 and remain insured
throughout 2000.
In the fourth quarter of 1999, Midwest Medical's Board of Directors
declared a $75,000 dividend to be paid to hospital policyholders for policies
that were written from 1995 through 1998 and that renew in 2000. The dividend
will be awarded based on the number of years insured with Midwest Medical and
will be paid within two months after the hospital policy renews in 2000.
Prior to 1999, retrospective premium credits were deducted from net
premiums earned. Under the new policyholder dividend program, dividends are
recorded as a component of losses and expenses. The following illustrates what
net premiums earned would have been had retrospective premium credits been
issued as policyholder dividends.
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------------------------
<S> <C> <C> <C>
Net premiums earned per consolidated statements of
income $46,583 $35,014 $32,916
Retrospective premium credits 317 6,719 6,371
------------------------------------------------------
Pro forma net premiums earned $46,900 $41,733 $39,287
======================================================
</TABLE>
F-18
<PAGE> 53
5. RETROSPECTIVE PREMIUMS
Effective January 1, 1999, Midwest Medical replaced its retrospective
premium program with a policyholder dividend arrangement as discussed in Note 4.
As of December 31, 1998, Midwest Medical had accrued retrospective premium
credits of $5,200,000, $280,000 and $3,063,000 related to Minnesota, North
Dakota and Iowa policyholders, respectively.
A provision of the agreement and plan of merger between IPMIT and Midwest
Medical required that any favorable development of certain pre-merger
liabilities of IPMIT be paid to the former IPMIT policyholders who remain active
Midwest Medical insureds as of the date of payment through a retrospective
premium credit. This agreement stipulated that any amounts due under this
provision be finalized using financial information as of December 31, 1998.
During 1999, final payments of $3,058,000 were made to former IPMIT
policyholders under the terms of the agreement. During 1998, retrospective
premium payments of $3,073,000 were made to former IPMIT policyholders. Actual
retrospective premium payments made to Minnesota and North Dakota policyholders
in 1999 and 1998 were $5,802,000 and $5,008,000, respectively.
A provision of the agreement and plan of merger between MLM and Midwest
Medical requires that any favorable development of certain pre-merger
liabilities of MLM be paid to the former MLM policyholders who remain active
Midwest Medical insureds as of the date of payment through a retrospective
premium credit. The agreement further stipulates that any amounts due under this
provision must be settled no later than June 5, 2001. As of December 31, 1999,
there has been no favorable development and, therefore, there is no accrual
related to this provision.
F-19
<PAGE> 54
6. 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>
1999 1998 1997
-------------------------------------------------
<S> <C> <C> <C>
Balance as of January 1, net of reinsurance
recoverables $ 94,467 $ 89,394 $ 90,342
Incurred related to:
Current year 45,942 41,927 40,186
Prior years (4,474) (4,433) (8,352)
-------------------------------------------------
Total incurred 41,468 37,494 31,834
Paid related to:
Current year 2,253 3,666 2,685
Prior years 33,788 28,755 30,097
-------------------------------------------------
Total paid 36,041 32,421 32,782
-------------------------------------------------
Balance as of December 31, net of reinsurance
recoverables 99,894 94,467 89,394
Reinsurance recoverables at December 31 19,247 16,497 18,412
-------------------------------------------------
Balance as of December 31, gross $ 119,141 $ 110,964 $ 107,806
=================================================
</TABLE>
Midwest Holding continually evaluates emerging trends in the development of
loss liabilities including the trends related to the pre-merger IPMIT and MLM
business. Based on this analysis, management periodically adjusts their
estimates of ultimate losses.
7. SEGMENT INFORMATION
Midwest Holding is organized into five legal entity business segments
consisting of Midwest Holding, Midwest Medical, Services, Solutions and
MedPower. The business and accounting policies of the reportable segments are
described in Note 1 to the Consolidated Financial Statements. Management
evaluates the performance of each business segment based primarily on profit or
loss from operations. With the exception of foreign stocks and bonds held as
investments by Midwest Medical, all business transactions are conducted in the
United States. The following financial information summarizes the results of
operations and total assets reported by the five business segments for the years
ended 1999, 1998 and 1997 (in thousands).
F-20
<PAGE> 55
<TABLE>
<CAPTION>
1999
---------------------------------------------------------------------------------------------------
MIDWEST MIDWEST SERVICES SOLUTIONS MEDPOWER ELIMINATIONS (1) CONSOLIDATED
HOLDING MEDICAL
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
External customers $ -- $ 47,181 $ 1,661 $ -- $ 410 $ -- $ 49,252
Intersegment 16,273 -- -- -- 13 (16,286) --
Net investment income (696) 10,780 21 17 13 828 10,963
Other (2) 185 7,041 -- -- -- 148 7,374
---------------------------------------------------------------------------------------------------
15,762 65,002 1,682 17 436 (15,310) 67,589
Total expenses 15,584 59,904 1,648 1,408 1,803 (15,310) 65,037
---------------------------------------------------------------------------------------------------
Income (loss) before income taxes 178 5,098 34 (1,391) (1,367) -- 2,552
Income taxes 91 1,648 15 (473) (465) -- 816
---------------------------------------------------------------------------------------------------
Net income (loss) $ 87 $ 3,450 $ 19 $ (918) $ (902) $ -- $ 1,736
===================================================================================================
Total assets $ 160,848 $ 311,367 $ 1,634 $ 1,539 $ 1,123 $(156,335) $ 320,176
===================================================================================================
</TABLE>
(1) Intersegment eliminations for revenues and expenses are primarily for
management, administrative and investment services provided by Midwest
Holding. Eliminations for assets consist primarily of investments in
wholly-owned subsidiaries, intersegment receivables for management fees and
reclassifications between assets and liabilities for taxes and reinsurance.
(2) Other revenues consist primarily of net realized capital gains.
F-21
<PAGE> 56
<TABLE>
<CAPTION>
1998
---------------------------------------------------------------------------------------------------
MIDWEST MIDWEST SERVICES SOLUTIONS MEDPOWER ELIMINATIONS (1) CONSOLIDATED
HOLDING MEDICAL
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
External customers $ -- $ 35,771 $ -- $ -- $ 387 $ -- $ 36,158
Intersegment 14,038 -- -- -- -- (14,038) --
Net investment income (429) 10,731 -- 3 2 664 10,971
Other (2) 139 8,944 -- -- -- 206 9,289
---------------------------------------------------------------------------------------------------
13,748 55,446 -- 3 389 (13,168) 56,418
Total expenses 13,481 45,126 -- 916 1,426 (13,168) 47,781
---------------------------------------------------------------------------------------------------
Income (loss) before income taxes 267 10,320 -- (913) (1,037) -- 8,637
Income taxes 104 3,268 -- (320) (363) -- 2,689
---------------------------------------------------------------------------------------------------
Net income (loss) $ 163 $ 7,052 $ -- $ (593) $ (674) $ -- $ 5,948
===================================================================================================
Total assets $ 154,727 $ 287,639 $ 3 $ 2,728 $ 1,693 $(151,307) $ 295,483
===================================================================================================
</TABLE>
(1) Intersegment eliminations for revenues and expenses are primarily for
management, administrative and investment services provided by Midwest
Holding.
Eliminations for assets consist primarily of investments in wholly-owned
subsidiaries, intersegment receivables for management fees and
reclassifications between assets and liabilities for taxes and reinsurance.
(2) Other revenues consist primarily of net realized capital gains.
F-22
<PAGE> 57
<TABLE>
<CAPTION>
1997
--------------------------------------------------------------------------------------------------------
MIDWEST MIDWEST SERVICES SOLUTIONS MEDPOWER ELIMINATIONS (1) CONSOLIDATED
HOLDING MEDICAL
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
External customers $ -- $ 33,795 $ -- $-- $-- $ -- $ 33,795
Intersegment 9,901 -- -- -- -- (9,901) --
Net investment income 19 11,160 -- -- -- 424 11,603
Other (2) 47 6,482 2 -- -- 263 6,794
-------------------------------------------------------------------------------------------------------
9,967 51,437 2 -- -- (9,214) 52,192
Total expenses 9,535 38,108 -- -- -- (9,214) 38,429
--------------------------------------------------------------------------------------------------------
Income before income taxes 432 13,329 2 -- -- -- 13,763
Income taxes 162 4,301 -- -- -- -- 4,463
--------------------------------------------------------------------------------------------------------
Net income $ 270 $ 9,028 $ 2 $-- $-- $ -- $ 9,300
========================================================================================================
Total assets $ 137,247 $ 261,780 $ 5 $-- $-- $ (123,517) $ 275,515
========================================================================================================
</TABLE>
(1) Intersegment eliminations for revenues and expenses are primarily for
management, administrative and investment services provided by Midwest
Holding. Eliminations for assets consist primarily of investments in
wholly-owned subsidiaries, intersegment receivables for management fees and
reclassifications between assets and liabilities for taxes and reinsurance.
(2) Other revenues consist primarily of net realized capital gains.
F-23
<PAGE> 58
8. INCOME TAXES
Components of income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------------------------
<S> <C> <C> <C>
Current provision $906 $1,335 $2,969
Deferred tax provision (90) 1,354 1,494
------------------------------------------------------
$816 $2,689 $4,463
======================================================
</TABLE>
Midwest Holding's income taxes differ from the federal statutory rate
applied to income before tax as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------------------
<S> <C> <C> <C>
Income before tax at the federal statutory rate
(34% - 1999, 35% - 1998 and 1997) $868 $3,023 $4,817
Tax-exempt income (net of proration adjustment) - - (775)
Dividends received deductions (net of proration adjustment)
(81) (99) (89)
State income taxes, net of federal tax benefit 86 37 198
Payment of prior year taxes - - 300
Recovery of prior year taxes (59) (267) -
Other 2 (5) 12
-------------------------------------------
$816 $2,689 $4,463
===========================================
</TABLE>
The deferred income tax provision includes the following differences
between financial and income tax reporting (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------------------------
<S> <C> <C> <C>
Discounting of post-1986 unpaid losses and loss adjustment
expenses $ 167 $ 842 $ 323
Liabilities not currently deductible (121) 596 636
Unearned premiums (256) (151) 57
Investment income not currently taxable 156 - -
Utilization of alternative minimum tax carryforwards - - 496
Other (36) 67 (18)
-----------------------------------------
$ (90) $ 1,354 $ 1,494
=========================================
</TABLE>
F-24
<PAGE> 59
Midwest Holding made income tax payments of $1,751,000, $3,041,000 and
$1,518,000 in 1999, 1998 and 1997, respectively.
The components of the net deferred income tax (liability) asset as of
December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------------------------------------
<S> <C> <C>
Deferred tax assets:
Unpaid losses and loss adjustment expenses $ 3,990 $ 4,154
Liabilities not currently deductible 1,200 1,079
Unearned premiums 884 628
Other 730 550
------------------------------------
6,804 6,411
Deferred tax liabilities:
Unrealized gains (18,077) (16,754)
Other (928) (623)
------------------------------------
(19,005) (17,377)
------------------------------------
$ (12,201) $ (10,966)
====================================
</TABLE>
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.
9. REINSURANCE
To reduce overall risk, including exposure to large losses, Midwest Holding
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, 1999.
Midwest Holding evaluates the financial condition of its reinsurers and monitors
concentration of credit risk arising from similar geographic regions, activities
or economic characteristics of the reinsurers to minimize its exposure to
significant losses from reinsurer insolvencies. Reinsurance recoverables on paid
and unpaid losses of $15,648,000 and $13,215,000 are associated with a single
reinsurer, General Reinsurance Corporation, at December 31, 1999 and 1998,
respectively. Midwest Holding also holds collateral under related reinsurance
agreements in the form of letters of credit totaling $2,612,000 that can be
drawn upon in the event the applicable reinsuring company is unable to pay its
obligation to Midwest Medical.
Midwest Medical is authorized to issue policies with limits not to
exceed $12,000,000
F-25
<PAGE> 60
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. Midwest Holding generally
retains the first $750,000 of each claim and reinsures the remainder through a
treaty under which premiums are subject to adjustment based on experience.
The effect of reinsurance on premiums written and earned for 1999, 1998 and
1997 is as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------- ----------------------------- -----------------------------
WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED
----------------------------- ----------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Direct $51,672 $47,048 $39,431 $37,329 $35,722 $36,511
Assumed 48 48 97 97 - -
Ceded (1,897) (513) (2,601) (2,412) (3,595) (3,595)
----------------------------- ----------------------------- -----------------------------
Net $49,823 $46,583 $36,927 $35,014 $32,127 $32,916
============================= ============================= =============================
</TABLE>
Loss and loss adjustment expenses incurred are net of applicable
reinsurance of $5,204,000, $2,240,000 and $2,455,000 for the years ended
December 31, 1999, 1998 and 1997, respectively.
In 1998, Midwest Holding commuted reinsurance treaties covering the period
January 1, 1991 through December 31, 1991. Net premiums recovered as a result of
these commutations of $789,000 have been included in net premiums earned in
1998. As a result of this and prior treaty commutations, Midwest Holding has no
reinsurance coverage for the exposure period October 1, 1986 through December
31, 1991. Due to the nature of Midwest Holding's policies, there is no risk of
incurring future losses related to this time period.
10. OTHER COMMITMENTS
In the normal course of claim settlement, 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, 1999
and 1998, respectively, non-assigned structured settlements guaranteed
$3,489,000 and $5,820,000 of payments under annuity contracts for which Midwest
Medical and its reinsurers paid $2,241,000 and $2,627,000. In the event that the
insurance company issuing the annuity was unable to meet its obligation under
the terms provided, Midwest Medical would be liable for the ultimate settlement.
11. BENEFIT PLANS
F-26
<PAGE> 61
Substantially all employees at Midwest Holding are covered by a
non-contributory defined contribution pension plan. Contributions to the plan
are based upon each covered employee's salary. Substantially all employees at
Midwest Holding are also covered by a 401(k) plan that provides a 50% match on
employee contributions subject to certain limitations. Total contributions
charged to expense for the years ended December 31, 1999, 1998 and 1997 were
$581,000, $521,000 and $393,000, respectively.
Midwest Holding 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, Midwest Holding invests
in specified assets which are designed to coordinate with the projected
obligation under the SERP. The net periodic pension cost for this plan was
$441,000, $404,000 and $363,000 for the years ended December 31, 1999, 1998 and
1997, respectively. The liability recognized in the consolidated balance sheets
at December 31, 1999 and 1998 related to this plan was $2,704,000 and
$2,439,000, respectively.
Midwest Holding also provides medical benefits to retirees through a
defined benefit post-retirement plan which covers substantially all employees.
The net periodic post-retirement benefit cost for the years ended December 31,
1999, 1998 and 1997 was $23,000, $41,000 and $27,000, respectively. As of
December 31, 1999, the net post-retirement benefit plan liability was $19,000.
As of December 31, 1998, the plan was fully funded.
12. RECONCILIATION WITH STATUTORY ACCOUNTING PRINCIPLES
The following is a reconciliation of net income and shareholders'
equity under accounting principles generally accepted in the United States (US
GAAP) with that reported for Midwest Medical on a statutory basis (in
thousands):
NET INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
-------------------------------------------------
<S> <C> <C> <C>
As reported under US GAAP $1,736 $5,948 $ 9,300
Loss (income) of non-insurance entities 1,714 1,104 (272)
-------------------------------------------------
On the basis of US GAAP, Midwest Medical only 3,450 7,052 9,028
Additions (deductions):
Deferred income taxes 37 1,390 1,525
-------------------------------------------------
On the basis of statutory accounting principles $3,487 $8,442 $ 10,553
=================================================
</TABLE>
F-27
<PAGE> 62
SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998 1997
-------------------------------------------------
<S> <C> <C> <C>
As reported under US GAAP $147,800 $142,446 $126,290
Additions (deductions):
Deferred income taxes 12,878 11,526 4,158
Unrealized (gain) loss on fixed maturities 5,514 (3,222) (1,385)
Non-admitted assets (1,000) - -
Prescribed market value differences (253) - -
Other (179) (34) (3)
-------------------------------------------------
On the basis of statutory accounting principles $164,760 $150,716 $129,060
=================================================
</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 accounting principles generally
accepted in the United States.
Under Minnesota insurance statutes, Midwest Medical is required to
maintain statutory surplus in excess of ten times its per risk reinsurance
retention limit. Since Midwest Medical limited its retention to $750,000 on any
single risk, the minimum statutory surplus level was $7,500,000 for 1999 and
1998.
Dividends that exceed the greater of 10% of Midwest Medical's prior
year-end policyholder surplus or Midwest Medical's prior year net income
excluding realized capital gains are considered extraordinary under Minnesota
insurance statutes. Payment of extraordinary dividends are subject to the
approval of the Commissioner of the Department of Commerce of the State of
Minnesota. At December 31, 1999, the maximum dividend that may be paid by
Midwest Medical in 2000 without regulatory approval is approximately
$16,476,000. Midwest Medical paid cash dividends to Midwest Holding of
$2,050,000 and $2,000,000 in 1999 and 1998, respectively.
F-28
<PAGE> 63
13. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except for share and per share amounts):
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------------------------
<S> <C> <C> <C>
Numerator for basic and dilutive earnings per share
available to common shareholders $1,736 $5,948 $9,300
=================================================
Denominator:
Denominator for basic earnings per share--weighted
average shares 124,725 123,004 119,554
Effect of dilutive securities:
Unvested shares 13,792 13,247 12,873
-------------------------------------------------
Denominator for dilutive earnings per share--
adjusted weighted-average shares and assumed
conversions 138,517 136,251 132,427
=================================================
Basic earnings per share $13.92 $48.36 $77.79
=================================================
Diluted earnings per share $12.53 $43.65 $70.23
=================================================
</TABLE>
F-29
<PAGE> 64
14. NET REDEMPTION VALUE
The net redemption value per share of the Class A common shares was as
follows:
<TABLE>
<CAPTION>
CLASS A NET REDEMPTION
MIDWEST HOLDING COMMON SHARES VALUE PER
NET EQUITY OUTSTANDING SHARE
----------------------------------------------------------------
(000s)
<S> <C> <C> <C>
December 31, 1995 $6,975 116,251* $60.00
===================== ======================
December 31, 1996 $7,604 118,209 $64.33
===================== ======================
December 31, 1997 $7,477 121,322 $61.63
===================== ======================
December 31, 1998 $8,147 125,682 $64.81
===================== ======================
December 31, 1999 $7,803 123,509 $63.18
===================== ======================
</TABLE>
* Includes pro forma shares related to merger.
F-30
<PAGE> 65
Midwest Medical Holding Company and Subsidiaries
(Parent Company)
Schedule II--Condensed Financial Information of Registrant
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
------------------------------------
(In Thousands)
<S> <C> <C>
ASSETS
Short-term investments $ 1,107 1,310
Cash 6 -
Investment in subsidiaries 150,734 145,032
Other 9,001 8,385
------------------------------------
Total assets $ 160,848 $ 154,727
====================================
LIABILITIES, REDEEMABLE STOCK AND
OTHER SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable $ 214 $ 43
Accrued expenses and other liabilities 5,031 4,091
------------------------------------
5,245 4,134
REDEEMABLE STOCK
Class A Common Stock 7,802 8,146
Class B Common Stock 1 1
------------------------------------
7,803 8,147
OTHER SHAREHOLDERS' EQUITY
Additional paid-in capital 12,789 12,789
Retained earnings, comprised of undistributed earnings
of subsidiaries 100,095 98,695
Unrealized appreciation on investments, net of income
taxes 34,916 30,962
------------------------------------
147,800 142,446
------------------------------------
Total liabilities, redeemable stock and
other shareholders' equity $ 160,848 $ 154,727
====================================
</TABLE>
See accompanying note.
F-31
<PAGE> 66
Midwest Medical Insurance Holding Company and Subsidiaries
(Parent Company)
Statements of Income
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
-------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
REVENUES
Management fee from subsidiaries $16,273 $14,038 $9,901
Net investment income (696) (429) 19
Realized capital gains 179 137 47
Other income 6 2 -
-------------------------------------------------
15,762 13,748 9,967
EXPENSES
Operating and administrative 15,584 13,481 9,535
-------------------------------------------------
Income before income taxes and other items 178 267 432
Income tax expense 91 104 162
-------------------------------------------------
Income before equity in undistributed income
of subsidiaries 87 163 270
Equity in undistributed income of subsidiaries 1,649 5,785 9,030
-------------------------------------------------
Net income $ 1,736 $ 5,948 $9,300
=================================================
</TABLE>
See accompanying note.
F-32
<PAGE> 67
Midwest Medical Insurance Holding Company and Subsidiaries
(Parent Company)
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
-------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Net cash (used in) provided by operating
activities $ 856 $ (366) $ (527)
INVESTING ACTIVITIES
Purchase of fixed maturities - (21,758) (38,979)
Sales of fixed maturities - 22,826 38,701
Calls and maturities of fixed maturities - 250 -
Sales of short-term investments, net 203 1,420 1,453
Capitalization of Services (1,500) - -
Capitalization of Solutions (650) (3,850) -
FINANCING ACTIVITIES
Redemption of Class A Common Stock (953) (522) (648)
Dividend from Midwest Medical 2,050 2,000 -
-------------------------------------------------
Increase in cash 6 - -
Cash at beginning of year - - -
-------------------------------------------------
Cash at end of year $ 6 $ - $ -
=================================================
</TABLE>
See accompanying note.
F-33
<PAGE> 68
Midwest Medical Insurance Holding Company and Subsidiaries
(Parent Company)
Note to Condensed Financial Statements
December 31, 1999
The accompanying condensed financial statements should be read in
conjunction with the consolidated financial statements and notes thereto of
Midwest Medical Insurance Holding Company and Subsidiaries.
See Note 2 to the consolidated financial statements of Midwest Medical
Insurance Holding Company and Subsidiaries for a description of the redeemable
stock.
Certain amounts in the prior year's financial statements have been
reclassified to conform to the current year presentation.
F-34
<PAGE> 69
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 OF
CEDED TO OTHER ASSUMED FROM NET AMOUNT ASSUMED
GROSS AMOUNT COMPANIES OTHER COMPANIES AMOUNT TO NET
- --------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999:
Insurance premiums:
Property/casualty insurance $47,048 $ 513 $48 $46,583 0.1%
Year ended December 31, 1998:
Insurance premiums:
Property/casualty insurance 37,329 2,412 97 35,014 0.3%
Year ended December 31, 1997:
Insurance premiums:
Property/casualty insurance 36,511 3,595 - 32,916 N/A
</TABLE>
NOTE TO SCHEDULE IV:
Ceded premiums for the years ended December 31, 1999, 1998 and 1997 are
net of reductions in ceded premiums related to swing rated reinsurance treaties
of $5,205,000, $2,550,000 and $2,950,000, respectively. Ceded premiums in 1999
are also net of proceeds from contingent commission on reinsurance covering the
period January 1, 1992 through December 31, 1994 of $715,000. Ceded premiums in
1998 are also net of proceeds from commutations of reinsurance covering the
period January 1, 1991 through December 31, 1991 of $789,000.
F-35
<PAGE> 70
Midwest Medical Insurance Holding Company and Subsidiaries
Schedule VI--Supplemental Information
Concerning Property/Casualty Insurance Operations
<TABLE>
<CAPTION>
DECEMBER 31 YEAR ENDED DECEMBER 31
------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E COL. F COL. G COL. H COL. I COL. J COL. K
- ------------------------------------------------------------------------------------------------------------------------------------
LOSSES AND LOSS
ADJUSTMENT EXPENSES
RESERVES FOR INCURRED RELATED TO AMORTIZATION PAID
DEFERRED UNPAID LOSSES DISCOUNT, ------------------- OF DEFERRED LOSSES
AFFILIATION POLICY AND LOSS IF ANY, NET (1) (2) POLICY AND LOSS
WITH ACQUISITION ADJUSTMENT DEDUCTED UNEARNED EARNED INVESTMENT CURRENT PRIOR ACQUISITION ADJUSTMENT PREMIUMS
REGISTRANT COSTS EXPENSES IN COLUMN C PREMIUMS PREMIUMS INCOME YEAR YEAR COSTS EXPENSES WRITTEN
- ------------------------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated
property/
casualty
entities
1999 N/A $119,141 N/A $12,797 $46,583 $10,886 $45,942 $(4,474) N/A $36,041 $51,672
1998 N/A 110,964 N/A 8,173 35,014 10,828 41,927 (4,433) N/A 32,421 39,431
1997 N/A 107,806 N/A 6,072 32,916 11,430 40,186 (8,352) N/A 32,782 35,722
</TABLE>
F-36
<PAGE> 71
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
Public Health 10 1.00
Radiology-Diagnostic-No Surg 10 1.00
</TABLE>
A-1
<PAGE> 72
<TABLE>
<S> <C> <C>
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
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
</TABLE>
A-2
<PAGE> 73
<TABLE>
<S> <C> <C>
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
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
</TABLE>
A-3
<PAGE> 74
<TABLE>
<S> <C> <C>
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> 75
ALLOCATION SCHEDULE - IOWA
<TABLE>
<CAPTION>
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
Otology-No Surg 10 1.00
</TABLE>
A-5
<PAGE> 76
<TABLE>
<S> <C> <C>
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
Opthalmology-Min Surg 20 1.52
Orthopedics-Minor Surgery-Asst Own 20 1.52
Otology-Min Surg 20 1.52
</TABLE>
A-6
<PAGE> 77
<TABLE>
<S> <C> <C>
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
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
</TABLE>
A-7
<PAGE> 78
<TABLE>
<S> <C> <C>
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> 79
ALLOCATION SCHEDULE - NEBRASKA
<TABLE>
<CAPTION>
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
</TABLE>
A-9
<PAGE> 80
<TABLE>
<S> <C> <C>
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
Orthopedics-Minor Surgery-Asst Own 20 1.67
Otology-Min Surg 20 1.67
</TABLE>
A-10
<PAGE> 81
<TABLE>
<S> <C> <C>
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
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
</TABLE>
A-11
<PAGE> 82
<TABLE>
<S> <C> <C>
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> 83
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.
II-1
<PAGE> 84
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
(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.
(7) 10B. Lease for office space between the registrant and Centennial
Lakes IV, L.L.C., Lexington Property Fund, L.P., dated July
30, 1999.
(7) 10C. Amended and Restated Management Agreement between the
registrant and Midwest Medical Insurance Company dated July 1,
1999.
(5) 10D. Agreement of Reinsurance between Midwest Medical Insurance
Company and General Reinsurance Corporation, dated January 1,
1998.
(2) 10E. 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.
(7) 10F. 1999 Officers Short-Term Incentive Plan of the registrant.
(4) 10G. Amended and Restated Supplemental Executive Retirement Plan of
the registrant.
(7) 10H. Amended and Restated Endorsement Agreement between Midwest
Medical Insurance Company and Iowa Medical Society, dated
January 1, 1999.
(4) 10I. Form of Termination Agreement with Executive Officers.
(5) 21. Subsidiaries of the registrant.
(6) 23A. Consent of Ernst & Young LLP
* (6) 24. Powers of Attorney.
II-2
<PAGE> 85
(7) 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,
SEC File No. 0-21230.
(6) Filed with original registration statement SEC file number 333-76999, on
April 26, 1999.
(7) Incorporated herein by reference to the Annual Report on Form 10-K filed by
registrant for the year ended December 31, 1999, SEC File No.
0-21230.
(*) 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, 1999 and 1998, Statements of
Income--For the Years Ended December 31, 1999 and 1998 and 1997; and,
Statements of Cash Flows--For the Years Ended December 31, 1999, 1998 and
1997. Included in "FINANCIAL STATEMENTS" Section of Prospectus filed
herewith.
IV. Reinsurance Summary for the Years Ended December 31, 1999,
1998 and 1997. Included in "FINANCIAL STATEMENTS" section of Prospectus
filed herewith.
VI. Supplemental Information Concerning Property/Casualty
Insurance Operations--December 31, 1999 and 1998, and for Each of the Three
Years in the Period Ended December 31, 1999. Included in "FINANCIAL
STATEMENTS" section of Prospectus filed herewith.
II-3
<PAGE> 86
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 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.
II-4
<PAGE> 87
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has
duly caused this Post-Effective 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 April 27, 2000.
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
Post-Effective Amendment Number 1 to the Registration Statement has been signed
by the following persons in the capacities indicated on April 27, 2000.
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
- -----------------------
Thomas C. Evans, 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.
S-1
<PAGE> 88
* Director
- ----------------------------
Wayne F. Leebaw, M.D.
* Director
- ----------------------------
Mark O. Liaboe, M.D.
* Director
- ----------------------------
Stephen A. McCue, M.D.
* Director
- ----------------------------
Harold W. Miller, M.D.
* Director
- ----------------------------
Anton S. Nesse, M.D.
* Director
- ----------------------------
Mark D. Odland, M.D.
* Director
- ----------------------------
G. William Orr, 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
- ----------------------------
Thomas 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.
S-2
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 1, 2000, in Post-Effective Amendment Number 1
to the Registration Statement (Form S-1) and related Prospectus of Midwest
Medical Insurance Holding Company and Subsidiaries dated April 27, 2000.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
April 27, 2000
<PAGE> 1
POWER OF ATTORNEY
I, Mark Liaboe, M.D., do hereby constitute and appoint David P. Bounk,
my attorney-in-fact, for the purposes of signing in my name and on my behalf as
Director of Midwest Medical Insurance Holding Company, a registration statement
on Form S-1 for the registration under the Securities Act of 1933, as amended,
of Class A common stock of the Company, par value of $.01 per share, and any and
all amendments to said registration statement, and to deliver on my behalf said
registration statement and any and all amendments thereto, as each thereof is so
signed, for filing with the Securities and Exchange Commission.
Dated: April 2, 2000 /s/ Mark Liaboe
---------------------------------
<PAGE> 2
POWER OF ATTORNEY
I, Thomas Evans, M.D., do hereby constitute and appoint David P. Bounk,
my attorney-in-fact, for the purposes of signing in my name and on my behalf as
Director of Midwest Medical Insurance Holding Company, a registration statement
on Form S-1 for the registration under the Securities Act of 1933, as amended,
of Class A common stock of the Company, par value of $.01 per share, and any and
all amendments to said registration statement, and to deliver on my behalf said
registration statement and any and all amendments thereto, as each thereof is so
signed, for filing with the Securities and Exchange Commission.
Dated: April 1, 2000 /s/ Thomas Evans
---------------------------------
