10-K 1 c60988e10-k.txt FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Fee Required) For the fiscal year ended December 31, 2000 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (No Fee Required) For the transition period from to --------------- ---------------- Commission file number 0-21230 ------- Midwest Medical Insurance Holding Company -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Minnesota 41-1625287 ---------------------------------------------------------------------------- ----------------------------------------- (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 7650 Edinborough Way, Suite 400 Minneapolis, Minnesota 55435-5978 ---------------------------------------------------------------------------- ----------------------------------------- (Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (952) 838-6700 ------------- Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act:

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value (based on December 31, 2000 Net Redemption Value per share) of the voting stock held by non-affiliates of the registrant as of March 16, 2001 was $-0-. The number of shares outstanding of the issuer's classes of common stock, as of March 16, 2001: Class A Common Stock, $.01 par value -- 0 shares Class B Common Stock, $1,000 par value -- 1 share Class C Common Stock, no par value -- 7,961 shares DOCUMENTS INCORPORATED BY REFERENCE None. 1 2 PART I ITEM 1. BUSINESS BACKGROUND Midwest Medical Insurance Holding Company is a holding company organized under the laws of the State of Minnesota. Midwest Medical Insurance Company, Midwest Medical Solutions, Inc., which includes its wholly-owned subsidiary, MedPower Information Resources, Inc., and MMIHC Insurance Services, Inc. are wholly-owned subsidiaries of Midwest Holding. Midwest Holding and its subsidiaries are referred to collectively as the Company unless the reference pertains to a specific entity. The Company's principal business operation is Midwest Medical. Midwest Medical's primary business is selling and issuing policies of medical professional liability insurance to: (1) individual physicians, (2) partnerships or professional corporations composed of physicians, (3) clinics, (4) hospitals and (5) health plans. Midwest Medical originally was organized in 1980 under the auspices of the Minnesota Medical Association to provide professional liability (malpractice) insurance to Minnesota physicians who were members of the Minnesota Medical Association. The business was reorganized on November 30, 1988 into a stock insurance company, Midwest Medical, wholly owned by a holding company, Midwest Holding, which could pursue other business opportunities. Another purpose of the reorganization was to give physicians a limited equity interest in their malpractice insurer while preserving Midwest Medical's capital and surplus. As of July 1, 1993, the Iowa physician-owned malpractice insurer, Iowa Physicians Mutual Insurance Trust, was merged with and into Midwest Medical. As of June 5, 1996, the Nebraska physician-owned malpractice insurer, Medical Liability Mutual Insurance Company of Nebraska, was merged with and into Midwest Medical. Midwest Medical now provides malpractice insurance to physicians and physician groups in Minnesota, Iowa, North Dakota, South Dakota, Nebraska, Illinois and Wisconsin on a claims-made basis. Midwest Medical has had the sponsorship of the Minnesota Medical Association since inception and also has the sponsorship of the Iowa Medical Society and the North Dakota Medical Association. Professional liability, general liability and umbrella excess liability insurance is also available to hospitals and other healthcare facilities throughout Midwest Medical's territory. During 1997, Midwest Holding formed 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 developed include practice enhancement, strategic consulting, and technology services and support. Effective January 1, 1998, Solutions purchased the assets of MedPower Information Services, Inc. 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. 2 3 ITEM 1. BUSINESS (CONTINUED) Services was incorporated in 1995 and began active operations in January 1999 with the acquisition of a book of business from Johnson-McCann Benefits, Inc. Services is an insurance agency specializing in providing Upper Midwest clients with group insurance products such as health, dental, life, disability and workers' compensation. Midwest Holding provides management and administrative services to Midwest Medical, Solutions and MedPower for a fee equal to the cost of services provided. Services operates independently with its own management and administrative staff and therefore does not have a management agreement with Midwest Holding. ELIGIBLE PHYSICIANS An individual physician must meet the following criteria in order to be eligible to obtain insurance coverage from Midwest Medical: 1. An applicant must be licensed to practice medicine, surgery or osteopathy in Minnesota, Iowa, North Dakota, South Dakota, Nebraska, Illinois or Wisconsin; 2. An applicant must conduct a majority of his or her practice in Minnesota, Iowa, North Dakota, South Dakota, Nebraska, Illinois or Wisconsin. ELIGIBLE GROUPS Midwest Medical also provides professional liability insurance to entities, including partnerships, professional corporations and other associations through which qualifying physicians practice medicine, surgery or osteopathy. A group must meet the following criteria in order to be eligible to be insured by Midwest Medical: 1. The entity must have its principal place of business in Minnesota, Iowa, North Dakota, South Dakota, Nebraska, Illinois or Wisconsin; and 2. The group must demonstrate that a majority of the individual physicians practicing medicine, surgery or osteopathy on a full-time basis through such clinic are, or intend to be, insured by Midwest Medical. ELIGIBLE HOSPITALS AND OTHER HEALTHCARE FACILITIES Midwest Medical also provides professional liability, general liability and umbrella excess liability to hospitals and other healthcare facilities. 3 4 ITEM 1. BUSINESS (CONTINUED) A business must meet the following criteria in order to be eligible to be insured by Midwest Medical: 1. The entity must have its principal place of business in Minnesota, Iowa, North Dakota, South Dakota, Nebraska, Illinois or Wisconsin; and 2. The facility must be a licensed hospital or other healthcare facility. POLICY FORMS 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 relating to occurrences which took place during the period in which the policyholder had coverage with Midwest Medical. For purposes of policy coverage, a claim includes any lawsuit, allegation of liability or other notice of patient dissatisfaction with services performed that is communicated to Midwest Medical as required by the policy. The policy also covers prior acts (i.e., claims first made during the policy period with respect to occurrences which took place prior to the date the insured initially secured coverage from Midwest Medical) for physicians previously insured under a claims-made policy with another professional liability insurer. Prior acts coverage is not available from Midwest Medical for physicians who have not been continuously insured prior to obtaining coverage from Midwest Medical. Midwest Medical also offers reporting endorsements ("tails") which provide coverage of subsequent claims (i.e., claims first made subsequent to the date the insured terminates basic insurance coverage with Midwest Medical, but with respect to occurrences which took place while the insurance coverage was in effect prior to such termination date) made against its former insureds who have voluntarily terminated insurance coverage with Midwest Medical. In the event of death, permanent disability or retirement at age 55 or older after five years of continuous coverage with Midwest Medical, the reporting endorsement is provided at no additional premium. Midwest Medical offers basic limits of coverage from $1,000,000 for each claim, subject to $3,000,000 annual aggregate, up to $12,000,000 for each claim, subject to $14,000,000 annual aggregate. Excess coverage above the basic limits is available from Midwest Medical's reinsurers on a facultative basis. MARKETING AND DISTRIBUTION Marketing of Midwest Medical policies is handled principally by Midwest Medical through salaried marketing representatives. Midwest Medical has also made marketing arrangements with a select group of agents to assist Midwest Medical in the production of large accounts and in the production of new coverages as they are developed. Midwest Medical approves all policies (and their terms) sold by agents prior to their becoming effective, and no commissions are earned by agents until such approval has been granted. 4 5 ITEM 1. BUSINESS (CONTINUED) Distribution of policies is handled through a processing system which Midwest Medical updated in 1998. Since most policies have a common expiration date, it is essential that Midwest Medical's policy processing operations be highly efficient. Midwest Medical consistently has been able to provide policy processing on a timely basis. REINSURANCE Midwest Medical purchases reinsurance in order to reduce its liability on individual risks. A reinsurance transaction takes place when an insurance company transfers or "cedes" to another insurer a portion of its exposure on insurance it writes. The reinsurer assumes the exposure in return for a portion of the premium. The reinsurer's liability is limited to losses it assumes that are in excess of the portion retained by Midwest Medical. However, in the event the reinsurer is unable or otherwise fails to pay, Midwest Medical remains primarily liable for the loss. Historically, entering into reinsurance agreements permitted Midwest Medical to issue policies having greater liability limits than otherwise would have been allowed under Minnesota insurance law, which prohibits an insurer from retaining a risk on any one claim that is greater than 10% of its surplus. As Midwest Medical's surplus has grown, Midwest Medical now utilizes reinsurance primarily to limit its risk on any single claim. Such limits of risk assumed by Midwest Medical for physician coverage have increased from $150,000 in the first year of operations to $1,000,000 currently. The reinsurer will pay losses in excess of the amount of risk retained by Midwest Medical, not to exceed the limits of liability of the policies issued by Midwest Medical. Midwest Medical's reinsurance contract in effect for the three-year period of 1998 through 2000 provided a primary layer of coverage of $1,250,000 in excess of $750,000 of retention per insured. The premium ceded for this coverage was 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 utilized this "swing-rated" treaty mechanism from 1992 through 2000. 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 the reinsurers and collects a ceding commission of 25%. The reinsurers, their participation percentages and their A.M. Best rating are listed below. - General Reinsurance Corporation, (80%), A++ - Hannover Reinsurance Company, (7%), A+ - Transatlantic Reinsurance Company, (6.5%), A+ - CNA Re, UK, (6.5%), A 5 6 ITEM 1. BUSINESS (CONTINUED) Midwest Medical entered into a new three-year reinsurance agreement effective January 1, 2001. The retention on the primary layer of coverage under the new reinsurance agreement was increased to $1,000,000 per insured. The premium ceded for this coverage is based on a "flat" rate of 8.75% of net written premium and includes a profit-sharing provision. The reinsurers on the new agreement, their participation percentages and their A.M. Best rating are listed below: - Hannover Reinsurance Company, (35%), A+ - Transatlantic Reinsurance Company, (35%), A+ - CNA Re, UK, (15%), A - Gerling Global Reinsurance Corporation of America, (15%), A 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 through the preservation of assets and the maximizing of 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 manage the portfolio on a discretionary basis consistent with the policies set by Midwest Medical. In addition, the Investment Committee utilizes the services of a separate outside consultant who calculates performance measures and provides an independent opinion on the overall results being obtained by the investment managers. 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 56% of total invested assets at December 31, 2000 compared to 55% at December 31, 1999. Midwest Medical's investment policy also permits the inclusion of equity securities. Equity securities comprised approximately 33% of total invested assets at December 31, 2000 compared to 37% at December 31, 1999. The decrease in the proportion of equity securities was due to sales of equity securities to provide capital for other corporate purposes and a decrease in equity market values. The remainder of Midwest Medical's investment portfolio, 11% and 8% at December 31, 2000 and 1999, respectively, was invested in real estate investment trusts and short-term investments. RATING A.M. Best & Company, Inc., publisher of Best's Insurance Reports, Property-Casualty, 1999 Edition, has assigned Midwest Medical an "A," or excellent, rating in 2000. This is the highest rating currently assigned to any company that specializes in medical malpractice insurance. Best's ratings are based on an analysis of the financial condition and operation of an insurance 6 7 ITEM 1. BUSINESS (CONTINUED) company as compared with the industry in general. Midwest Medical 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 it. A positive rating relates to the ability of an insurer to meet its insurance obligations and does not directly relate to the value of the insurer's securities. GOVERNMENT REGULATION Midwest Medical is subject to governmental regulation in the states in which it conducts its business (Minnesota, Iowa, North Dakota, South Dakota, Nebraska, Illinois and Wisconsin). Such regulation is conducted by state agencies having broad administrative power dealing with all aspects of Midwest Medical's business, including policy terms, rates, dividends and retrospective premium credits to policyholders, and dividends to the parent corporation, Midwest Holding. Without prior approval from the Minnesota Commissioner of Commerce, annual dividends to Midwest Holding cannot exceed 10% of policyholder surplus of Midwest Medical or the prior year's net income from operations of Midwest Medical, excluding realized capital gains, whichever is greater. Midwest Medical is also subject to statutes that require it to file periodic information with state regulatory authorities and is subject to periodic financial and business conduct examinations. Midwest Holding is also subject to statutes governing insurance holding company systems in Minnesota, which relate primarily to the acquisition or control of insurance companies directly or through a holding company. COMPETITION Midwest Medical's major competitor in all states in which it conducts its business is The St. Paul Companies. The St. Paul Companies is a major national property-casualty insurance company, one of the largest writers of medical professional liability insurance in the United States, and is many times larger than Midwest Medical. In addition to The St. Paul Companies, several other national companies have become active competitors in the last several years, including Medical Protective Insurance Company, CNA Insurance Company, Zurich Insurance Company and Fireman's Fund Insurance Company. At this time, they have achieved limited market penetration, but represent an increasing competitive pressure for the future. In addition, several other physician-owned specialty carriers have entered the market, but have yet to be a significant factor in Midwest Medical's market area. Midwest Medical is the only carrier endorsed by local medical societies in Minnesota, Iowa and North Dakota and owned by its physician-insureds, which management believes gives Midwest Medical a competitive advantage in marketing to physicians. 7 8 ITEM 1. BUSINESS (CONTINUED) EMPLOYEES As of December 31, 2000, Midwest Holding employed 95 persons, of whom 9 were executives, 64 were supervisory employees or specialists and 22 were clerical employees. As of December 31, 2000, Services employed 11 persons, of whom 1 was an executive, 8 were supervisory employees or specialists and 2 were clerical employees. No employees of Midwest Holding and Services are covered by a collective bargaining agreement and management believes that relations with employees are good. ITEM 2. PROPERTIES The Company owns the following fixed assets, all of which are used in the conduct of its business:

Midwest Holding owns no real estate. Prior to October 1, 1999, Midwest Holding leased approximately 15,765 square feet of office space in Edina, Minnesota under a 10-year lease that expires in 2001. Effective October 1, 1999, Midwest Holding moved to new offices in Edina, Minnesota, with total square feet of 26,069. Midwest Holding sublet the former office space effective December 1, 1999 for the duration of that lease. The new leased space has a term of 6 years, 2 months. 4,060 square feet of office space is leased in West Des Moines, Iowa under an exercised option that extended the term an additional five years after the original 10-year lease term expired in 2000. An additional 2,014 square feet of office space is leased in Omaha, Nebraska under a three-year lease that expires January 31, 2002. MedPower operates out of a separate 3,149 square foot facility also located in Edina, Minnesota. This lease is set to expire in 2001. Services operates out of a separate 4,000 square foot facility located in Shoreview, Minnesota. This lease was extended until 2001. Annual rent expense was $895,431 in 2000 and $637,585 in 1999. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any pending or threatened legal proceedings which could have a material adverse effect on its operations. 8 9 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) A special meeting of the Class A shareholders of Midwest Holding was held on Thursday, June 29, 2000. (b) The special meeting of June 29, 2000 considered the adoption of a new Article 4.c to the Articles of Incorporation of Midwest Holding. Under the new Article 4.c, the Board of Directors is authorized to establish one or more additional series and classes of common or preferred stock, setting forth the designation of each such series or class, and fixing the relative rights and preferences of each such series or class. Class A shareholders of Midwest Holding approved the adoption of Article 4.c by the following vote: Yes 1,747 No 12 Abstain 15 ---------- Total 1,774 ==========

9 10 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS (a) There is no market for Midwest Holding's Class A, Class B or Class C Common Stock. Class A shares are no longer issued and the class has been canceled. Class C shares are issued only to insured individual physicians or individual physicians jointly with the legal entities in which they practice. The shares are restricted and cannot be sold to any person other than Midwest Holding and are subject to mandatory redemption at the time that the physician terminates their insurance coverage with Midwest Medical for any reason. (b) As of March 16, 2001, there were 0 shares of Class A Common Stock outstanding, 1 share of Class B Common Stock held by the Minnesota Medical Association and 7,961 shares of Class C Common Stock outstanding held by 7,961 physicians. (c) Midwest Holding has never paid a shareholder dividend nor does it intend to within the foreseeable future. Without prior approval from the Minnesota Commissioner of Commerce, annual dividends to Midwest Holding from Midwest Medical cannot exceed 10% of policyholder surplus of Midwest Medical or the prior year's net income from operations of Midwest Medical, excluding realized capital gains, whichever is greater. ITEM 6. SELECTED FINANCIAL DATA Following is the selected financial data of the Company for the five years ended December 31, 2000. This data should be read in conjunction with the audited consolidated financial statements and notes thereto appearing under Item 8 of this Form 10-K.

10 11 ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)

11 12 ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)

--------------------------------------- (1) Amounts derived from audited consolidated financial statements of Midwest Holding included in Item 8 of this Form 10-K. (2) Amounts derived from audited consolidated financial statements of Midwest Holding. (3) Pursuant to a tender offer completed in 2000, all outstanding Class A Common Shares of Midwest Holding were exchanged and redeemed as of December 31, 2000. See Notes 2 and 11 to the audited consolidated financial statements included in Item 8 of this Form 10-K. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MANNER OF PRESENTATION The financial statements of Midwest Holding and its subsidiaries are presented on a consolidated basis. In future references in this analysis, which should be read together with the 2000 audited consolidated financial statements and notes thereto appearing under Item 8 of this Form 10-K, Midwest Holding and its subsidiaries are referred to collectively as the Company unless the reference pertains to a specific entity. LIQUIDITY AND CAPITAL RESOURCES The majority of the Company's assets are invested in investment-grade bonds, common stocks, real estate investment trusts and short-term investments. These investments totaled $263,436,000 and $277,976,000 at December 31, 2000 and 1999, respectively, which represented 87.3% and 86.8% of total assets. The main objectives of the Company's investment policy established by the 12 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Investment Committee of the Board of Directors are the preservation of assets, maximizing pre-tax total portfolio return and assuring adequate liquidity to meet operational requirements, primarily the payment of insurance claims. Fixed maturity investments and equity securities are classified as available for sale and therefore are carried at fair value. The real estate investment trusts are recorded at appraised value and short-term investments are recorded at cost which approximates fair value. The Company's cash flow from operations was $1,544,000 in 2000 versus $2,187,000 in 1999 and $(9,605,000) in 1998. The 2000 cash flow from operations was favorably impacted by premium adjustments received from reinsurers on reinsurance contracts for prior years and federal tax refunds, including interest received from the Internal Revenue Service for the 1992 to 1996 tax years. These positive cash flows were partially offset by the payment of policyholder dividends. 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. Underwriting expenses in 1998 increased primarily from additional staff needed to manage insurance business growth and added costs from the conversion to a new insurance company operating system. Other operating expenses increased in 1998 primarily from launching the operations of Solutions, including the acquisition of MedPower. Premium rates in general have trended lower with rate decreases in regions where claim frequency has dropped, offset partially by rate increases in regions where claim severity has risen. Increases in new premium written, however, have helped to keep cash receipts from policyholder premium relatively level. Substantial amounts of premium have been returned to policyholders through policyholder dividends or retrospective premium credits. In 1999, a policyholder dividend program replaced the retrospective premium credit program. While retrospective premium credits were paid to policyholders in the first quarter of the year following approval by the Board of Directors, the majority of 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. As discussed under the reinsurance section of Item 1 of this Form 10-K, a new three-year reinsurance agreement became effective January 1, 2001. Under this new agreement, Midwest Medical increased its retention from $750,000 to $1,000,000 per insured for the primary layer of coverage. Several factors entered into the decision to increase the retention. One significant factor was the reinsurance cost for the layer of coverage from $750,000 to $1,000,000 had increased dramatically in the marketplace. Another significant factor was management's belief that Midwest Medical could reasonably assume the added loss exposure due to its strong capital position and historical analysis that indicated the additional reinsurance cost for that layer 13 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) of coverage exceeded the anticipated additional losses on that layer. Although the premiums ceded on the new reinsurance agreement should be roughly the same as the prior reinsurance agreement, the added loss exposure from the increase in Midwest Medical's retention could potentially lead to greater losses incurred. Another change in the new reinsurance agreement is the use of a "flat" ceded premium rate. A flat rate contract lessens the volatility of reinsurance premium payments compared to the previous swing-rated contract based upon losses paid. This allows Midwest Medical to estimate future ceded premium payments with greater certainty. 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 investment 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. The Company believes that its cash and investments combined with internally generated funds will be sufficient to meet its present and reasonably foreseeable operating and capital requirements. Therefore, the Company does not expect to borrow funds from external sources. The Company does maintain a $5,000,000 secured line of credit with its bank in the event of an urgent cash need. The Company had no material capital expenditure commitments as of December 31, 2000. During 2000, Midwest Holding completed a tender offer resulting in the exchange and redemption of all outstanding Class A Common Stock. Under the terms of the tender offer, Class A shareholders received $66 for each Class A share owned, plus one Class C share. Prior to the tender offer, Class A Common Stock issued by Midwest Holding to Midwest Medical policyholders were required to be redeemed when a physician ceased to be insured by Midwest Medical for any reason. The redemption value per Class A share was calculated by dividing the net book value of Midwest Holding, excluding the net book value of Midwest Medical from the calculation, by the number of Midwest Holding Class A Common Shares outstanding. More details about the tender offer, Class A and Class C Common Stock and the actual Class A share redemptions during the years 2000, 1999 and 1998 are found in Note 2 to the audited consolidated financial statements. The increases and decreases in shareholders' equity are described in the consolidated statements of changes in shareholders' equity found in the accompanying audited consolidated financial statements. Approximately $9,541,000 was paid to Class A shareholders pursuant to the tender offer. An $8,500,000 loan from Midwest Medical to Midwest Holding largely funded these payments. Midwest Medical primarily used proceeds from sales of domestic equity securities to provide the loan. The loan is a non-interest-bearing note that will be retired in 2001 by Midwest Holding through dividends received from Midwest Medical. 14 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Periodically, the Board of Directors of Midwest Medical declares dividends payable to Midwest Holding to provide capital for non-insurance business operations, including new business ventures. Prior to the stock restructure in 2000, dividends from Midwest Medical were also used to support the redemption value of Midwest Holding's Class A Common Stock. Midwest Medical declared and paid dividends to Midwest Holding of $3,000,000, $2,050,000 and $2,000,000 in 2000, 1999 and 1998, respectively. RESULTS OF OPERATIONS Net premiums earned decreased $5,239,000 in 2000 from 1999. The decrease 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, increased $634,000 on a net basis in 2000. This compares to a net reduction for those treaty years of $5,920,000 in 1999, resulting in a net decrease in premium between years of $6,554,000. 2. New 2000 business increased earned premium by approximately $2,600,000. 3. Due primarily to the new reinsurance program for fraud and abuse provided at no additional cost to Midwest Medical policyholders, current year reinsurance costs were $968,000 greater in 2000 compared to 1999. This decreased 2000 net premiums earned. 4. Accounts that did not renew in 2000 resulted in a decrease of approximately $317,000 in 2000 net premiums earned. Net premiums earned increased $11,569,000 in 1999 from 1998. New business generated approximately $5,700,000 of additional earned premium. The remaining increase was the result of the following significant factors: 1. Effective in 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. 15 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 3. Due to the increase in premium volume and policyholders purchasing higher limits, reinsurance costs on the current year were $2,115,000 greater in 1999 compared to 1998. This decreased 1999 net premiums earned. 4. A 5% rate decrease in regions with favorable claims experience resulted in a decrease of approximately $1,250,000 in 1999 net premiums earned. 5. Accounts that did not renew in 1999 resulted in a decrease of approximately $538,000 in 1999 net premiums earned. Net investment income increased $1,305,000 in 2000 from 1999 and decreased $8,000 in 1999 from 1998. Increasing yields on bonds and short-term investments from the upward movement in interest rates during 1999 and 2000 primarily caused the increase in net investment income in 2000. Also contributing to the increase were proceeds from the sales of equity securities used to pay Class A shareholders for stock restructure redemptions. The proceeds earned interest while held in short-term investments until stock restructure payments were made. The decrease in 1999 was largely driven by additional fees paid to equity managers due to the appreciation in the Company's equity securities. Realized capital gains increased $3,282,000 to $10,502,000 in 2000 and decreased $1,861,000 to $7,220,000 in 1999. During 2000, sales of equity securities realized $12,245,000 of net capital gains while sales of bonds realized $(1,743,000) of net capital losses. Approximately $7,000,000 of the net realized capital gains on equity securities resulted from the sale of appreciated technology common stocks in the first quarter, as holdings in the technology sector were trimmed in order to maintain appropriate portfolio diversification. Sales of equity securities in the latter part of 2000 to provide for stock restructure redemption payments to Class A shareholders resulted in another $3,000,000 of net realized capital gains. All other 2000 realized capital gains and losses resulted from the management of the portfolio on a pre-tax total return basis. During 1999, sales of equity securities realized $10,312,000 of net capital gains while sales of bonds realized $(3,092,000) of net capital losses. Approximately $(1,757,000) of the net realized capital losses on bonds came from the repositioning of the bond portfolio during the last two months of 1999. The Company's new fixed income manager, who assumed management of the portfolio on November 2, 1999, recommended repositioning the bond portfolio primarily to shorten its duration. All other 1999 realized capital gains and losses resulted from the management of the portfolio on a pre-tax total return basis. The Company employs three outside professional advisors to manage the portfolio: one to manage investment-grade fixed income securities, one to manage large-cap domestic equities and one to manage international equities. The managers operate within the Company's adopted investment policy, as approved by the Investment Committee of the Board of Directors. The Investment Committee meets with outside investment managers approximately four times per year. 16 17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Other revenues increased $1,509,000 from $2,823,000 in 1999 to $4,332,000 in 2000. Interest on federal tax refunds of $1,716,000 recorded by Midwest Medical in 2000 primarily caused the increase. Revenues from the new information technology consulting division of Solutions also contributed to the increase. Decreases in operating revenues from MedPower and income from Midwest Holding's officer life insurance policies partially offset the above increases. 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. Losses and loss adjustment expenses are the costs associated with the settlement of insurance claims and are the Company's principal expense. Incurred loss and loss adjustment expenses were $39,587,000 in 2000 compared to $41,468,000 in 1999 and $37,494,000 in 1998. This resulted in a decrease of 4.5% in 2000 versus an increase of 10.6% in 1999. As shown in Note 5 to the audited 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 $1,521,000 in 2000 and $4,015,000 in 1999. The increases in both 2000 and 1999 were primarily driven by additional policyholder exposure from the increase in premium volume particularly from 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 5 of the audited consolidated financial statements, these evaluations resulted in a reduction in estimated liabilities applicable to prior years of $7,876,000 and $4,474,000 in 2000 and 1999, respectively. The more favorable development on prior years is the primary reason for the decrease in incurred loss and loss adjustment expenses in 2000, while less favorable development on prior years is the primary reason for the increase in incurred loss and loss adjustment expenses in 1999. The following schedule summarizes the development of the liability for loss and loss adjustment expense from 1990 through 2000. This schedule is presented net of reinsurance which the Company believes best explains the development as it affects operating results. Midwest Medical has a conservative loss reserving policy that when coupled with a decline in medical malpractice insurance claim frequency since the early 1990s has resulted in redundancies in the liability for loss and loss adjustment expenses greater than expected. The table indicates that the redundancy in loss liabilities, which develop as actual results become known, has significantly decreased since 1990. Loss and loss adjustment expense liabilities have not been discounted in the Company's financial statements. 17 18 Development of Liability for Loss and Loss Adjustment Expense (Thousands of Dollars)

18 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Policyholder dividends of $8,108,000 were declared by the Board of Directors of Midwest Medical in 2000 and will be paid to physician, clinic and hospital policyholders in 2001. Policyholder dividends of $10,175,000 were declared by the Board of Directors of Midwest Medical in 1999 and were paid to physician, clinic and hospital policyholders in 2000. As described in Note 4 of the audited consolidated financial statements, the policyholder dividend program was instituted in 1999 and replaced the previous retrospective premium credit 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 $373,000 from $7,197,000 in 1999 to $7,570,000 in 2000. Less ceding commissions earned by Midwest Medical due to a decline in the premiums ceded to the treaty reinsurance contract for the current year drove approximately $216,000 of the increase. Greater commissions paid in 2000 due to enhanced agent incentives contributed an additional $215,000. These increases were partially offset by lower premium taxes. Lower written premium volume in 2000 and the $10,175,000 of policyholder dividends paid during the year, which is deductible for premium tax purposes, caused the decline in premium taxes. 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 and enhancement costs related to the new operating system and expenses related to moving the Company's main office. An additional $311,000 of payments to medical societies for license and endorsement agreements also contributed to the increase. Since a portion of these payments are tied to premium volume, the increase in premium caused an increase in payments to the medical societies. These increases were offset partially by additional ceding commissions earned by Midwest Medical, resulting from the increase in premiums ceded to the treaty reinsurance contract for the 1999 year compared to the 1998 year. Other operating expenses increased $1,415,000 from $6,197,000 in 1999 to $7,612,000 in 2000. The stock restructure of Midwest Holding drove most of the increase, as an additional $1,057,000 of compensation expense was recognized in 2000 for the vesting of all previously unvested Class A shares. Legal and accounting fees related to the restructure contributed another $201,000. The remaining increase resulted primarily from greater salary and benefit expenses incurred by Midwest Holding, Services and Solutions. These increases were partially offset by lower operating costs incurred by MedPower in 2000 due to aggressive cost reduction efforts. 19 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Other operating expenses increased $2,608,000 from $3,589,000 in 1998 to $6,197,000 in 1999. Approximately $1,648,000 of the increase was from the Services subsidiary that began active operations in January 1999, as described in Item 1 of this Form 10-K. Services' primary expenses are commissions and salaries paid to its staff. The remaining increase resulted largely from greater salary expenses incurred by Solutions, added equipment and depreciation costs incurred by MedPower and new product development costs incurred by Midwest Holding. Income before income taxes increased to $5,569,000 in 2000 compared to $2,552,000 in 1999. Greater realized capital gains from sales of domestic equity securities to maintain appropriate portfolio diversification and to fund the stock restructure primarily drove the increase. Interest on federal tax refunds, favorable development on prior years' loss liabilities and lower policyholder dividends also contributed to the increase. 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 1999, policyholder dividends that were greater in 1999 than the retrospective premium credits in 1998 and lower realized capital gains due to the capital losses sustained on the repositioning of the bond portfolio at the end of 1999. Income taxes decreased to $283,000 for 2000 compared to $816,000 for 1999. The effective tax rates for 2000 and 1999 were 5.1% and 32.0%, respectively. The principal factor in the decrease in the effective tax rate was a greater recovery of prior year taxes recorded in 2000 compared to 1999. The greater tax recovery in 2000 was primarily due to federal tax refunds received by Midwest Medical from the Internal Revenue Service for the 1992 to 1996 tax years. 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. Net income earned by the Company increased $3,550,000 to $5,286,000 in 2000 and decreased $4,212,000 to $1,736,000 in 1999 due to the factors discussed above. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS Statements other than historical information contained in this Form 10-K are considered to be "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as amended. 20 21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) All forward-looking statements address matters that involve risks and uncertainties. Accordingly, in addition to the factors discussed in this Form 10-K, there are or will be other important factors that could cause actual results to differ materially from those indicated in such statements. These factors include, but are not limited to: 1. the impact of changing market conditions on the Company's business strategy; 2. the effects of increased competition on pricing, coverage terms, retention of customers and ability to attract new customers; 3. greater severity or frequency of the types of losses that the Company insures; 4. faster or more adverse loss development experience than that on which the Company based its underwriting, reserving and investment practices; 5. developments in global financial markets which could adversely affect the performance of the Company's investment portfolio; 6. litigation, regulatory or tax developments which could adversely affect the Company's business; 7. risks associated with the introduction of new products and services; 8. dependence on key personnel; and 9. the impact of mergers and acquisitions. The facts set forth above should be considered in connection with any forward-looking statement contained in this Form 10-K. The important factors that could affect such forward-looking statements are subject to change, and the Company does not intend to update any forward-looking statement or the foregoing list of important factors. By this cautionary note, the Company intends to avail itself of the safe harbor from liability with respect to forward-looking statements provided by Section 27A and Section 21E referred to above. 21 22 ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the risk of loss that may occur when fluctuations in interest and foreign currency exchange rates and equity and commodity prices change the value of a financial instrument. Both derivative and nonderivative financial instruments have market risk. The Company is primarily exposed to interest rate risk on its investment in fixed maturities, equity price risk on its investment in equity securities and foreign currency exchange rate risk on its investment in international equity securities. As disclosed in Items 1 and 7 of this Form 10-K, the Company's fixed maturity and equity investments are classified as available for sale and are managed to preserve assets, maximize pre-tax total return and assure adequate liquidity to meet the funding needs of the Company. Professional outside investment firms manage the Company's investment portfolios according to the above objectives and within parameters set by the Company's investment policy, as approved by the Investment Committee of the Board of Directors. Under the current investment policy, the only derivative instrument the Company may use is covered call options. A call option gives the purchaser a right to buy a stock at a specified price within a specified time. The Company's domestic equity investment manager may write call options on equity securities the Company owns (a "covered" call option) to manage exposure to equity price risk and enhance investment returns. No covered call options were written or outstanding in 2000. Two covered call options were written in 1999 and none were outstanding as of December 31, 1999. Based on the effective duration of the fixed maturity investment portfolio, an abrupt 100 basis point increase in interest rates along the entire interest rate yield curve would adversely affect the fair value of fixed maturity investments by approximately $6,500,000 at December 31, 2000 and $7,900,000 at December 31, 1999. Based primarily on past annual performance relative to the Standard & Poors 500 Market Index (S&P 500), an abrupt 10% decrease in the S&P 500 would adversely affect the fair value of equity securities by approximately $10,400,000 at December 31, 2000 and $12,400,000 at December 31, 1999. A hypothetical 10% weakening of all foreign currencies relative to the U.S. dollar would adversely affect the fair value of the Company's investment in international equity securities by approximately $2,000,000 at December 31, 2000 and $1,900,000 at December 31, 1999. The Company believes that there would be no material effect on its net income and cash flows in any of the above scenarios. This effect on net income and cash flows does not consider the possible effects a change in economic activity could have in such an environment. Investors, customers, regulators and legislators could respond to these fluctuations in ways the Company cannot foresee. Because the Company cannot be certain what specific actions would be taken and their effects, the above sensitivity analyses assume no significant changes in the Company's financial structure. 22 23 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The audited consolidated financial statements of Midwest Medical Insurance Holding Company and Subsidiaries are presented on the following pages 24 through 58 of this Annual Report on Form 10-K. 23 24 Midwest Medical Insurance Holding Company and Subsidiaries Consolidated Financial Statements Years ended December 31, 2000, 1999 and 1998 CONTENTS Report of Independent Auditors.............................................25 Consolidated Financial Statements Consolidated Balance Sheets................................................26 Consolidated Statements of Income..........................................27 Consolidated Statements of Changes in Shareholders' Equity.................28 Consolidated Statements of Cash Flows......................................29 Notes to Consolidated Financial Statements.................................30

24 25 Report of Independent Auditors Board of Directors Midwest Medical Insurance Holding Company and Subsidiaries We have audited the accompanying consolidated balance sheets of Midwest Medical Insurance Holding Company and Subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2000. Our audits also included the financial statement schedules listed in the index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Midwest Medical Insurance Holding Company and Subsidiaries at December 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, 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 2, 2001 25 26 Midwest Medical Insurance Holding Company and Subsidiaries Consolidated Balance Sheets (In Thousands, Except for Share Amounts)

See accompanying notes. 26 27 Midwest Medical Insurance Holding Company and Subsidiaries Consolidated Statements of Income (In Thousands)

See accompanying notes. 27 28 Midwest Medical Insurance Holding Company and Subsidiaries Consolidated Statements of Changes in Shareholders' Equity (In Thousands)

See accompanying notes. 28 29 Midwest Medical Insurance Holding Company and Subsidiaries Consolidated Statements of Cash Flows (In Thousands)

See accompanying notes. 29 30 Midwest Medical Insurance Holding Company and Subsidiaries Notes to Consolidated Financial Statements December 31, 2000 1. ACCOUNTING POLICIES ORGANIZATION AND OPERATIONS The Minnesota Medical Insurance 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. was the Insurance Exchange's attorney-in-fact and was responsible for management of the Insurance Exchange. On November 30, 1988, the Insurance Exchange was reorganized into a stock insurance company, Midwest Medical Insurance Company, under the statutes of the State of Minnesota. Concurrently, Medical Management merged with the Midwest Medical Insurance Holding Company, which then acquired all outstanding shares of the reorganized stock company. Effective July 1, 1993, Midwest Medical merged with Iowa Physicians Mutual Insurance Trust, a physician-owned professional liability insurance company providing insurance coverage to Iowa physicians. As provided for in the agreement and plan of merger, Iowa Physicians 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, a physician-owned professional liability insurance company providing insurance coverage to Nebraska physicians. As provided for in the agreement and plan of merger, Medical Liability Mutual was merged into Midwest Medical. The merger was accounted for as a pooling-of-interests. 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 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 of MedPower Information Services, Inc. Solutions then contributed those assets to its newly formed, wholly-owned subsidiary, Medpower Information Resources, Inc. MedPower processes and electronically submits medical claims for a network of over 100 provider entities. 30 31 Midwest Medical Insurance Holding Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. ACCOUNTING POLICIES (CONTINUED) 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. 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. 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. 31 32 Midwest Medical Insurance Holding Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. ACCOUNTING POLICIES (CONTINUED) PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of 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 the Company unless the reference pertains to a specific entity. BASIS OF PRESENTATION The consolidated financial statements have been presented in conformity with accounting principles generally accepted in the United States, which differ in certain respects from statutory accounting practices followed by Midwest Medical in reporting to the Department of Commerce of the State of Minnesota (see Note 10). USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. INVESTMENTS The Company manages its investment portfolio to achieve its long-term investment objective of providing for the financial stability of the Company through preservation of assets and maximization of total portfolio return. Although management believes the 32 33 Midwest Medical Insurance Holding Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. ACCOUNTING POLICIES (CONTINUED) Company has the ability to hold its fixed maturity investment portfolio to maturity, these investments are classified as "available for sale," as management may take advantage of opportunities to increase total return through sales of selected securities in response to changing market conditions. Consistent with management's classification of its investment in debt and equity securities as available for sale, such investments are carried at fair value, with unrealized holding gains and losses reflected as a component of other comprehensive income, net of applicable deferred taxes. Fair values are based on quoted market prices, where available. For fixed maturity investments not actively traded, fair values are estimated using values obtained from independent pricing services. Short-term investments are principally money market funds backed by U.S. government securities and are recorded at cost, which approximates fair value. Other investments are less than 20% equity interests in non-traded real estate investment trusts and are recorded at appraised value. Realized gains and losses on sales of investments are reported on a pre-tax basis as a component of income and are determined on the specific identification basis. LOSSES AND LOSS ADJUSTMENT EXPENSES The liability for unpaid losses and loss adjustment expenses represents an estimate of the ultimate cost of all such amounts which are unpaid at the balance sheet dates. The liability is based on both case-by-case estimates and statistical analysis and projections using the historical loss experience of 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. 33 34 Midwest Medical Insurance Holding Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. ACCOUNTING POLICIES (CONTINUED) PREMIUMS AND POLICYHOLDER DIVIDENDS Premiums received are recorded as earned ratably over the lives of the policies to which they apply. A portion of premiums received is deferred to recognize 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. Reinsurance contracts are principally 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. Reserve liabilities are reported gross of reinsurance credits. ACQUISITION COSTS Acquisition costs are expensed when incurred. As most of its premium is written without the use of intermediaries, Midwest Medical does not pay significant amounts in commissions. 34 35 Midwest Medical Insurance Holding Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. ACCOUNTING POLICIES (CONTINUED) OTHER REVENUES Other revenues include commission income from insurance carriers for Services, technology consulting fees from healthcare providers for Solutions and electronic claims processing fees from healthcare providers for MedPower. Generally, such revenues are earned as the related services are provided or performed. INCOME TAXES The Company files a consolidated tax return with its subsidiaries. Income tax expense is allocated to the subsidiaries based upon separate company taxable income under a tax-sharing agreement. The Company uses the asset and liability method of accounting for income taxes. Deferred income tax assets or liabilities are recognized for the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. RECLASSIFICATIONS Certain amounts in the prior years' financial statements have been reclassified to conform with the current year presentation. 2. CAPITAL STRUCTURE Effective November 30, 1988, Midwest Medical policyholders earned 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 were not issued until the end of five years of continuous coverage under a Midwest Medical policy (the vesting date). At the vesting date, the issued shares were recorded at the then current redemption value (see Note 11). 35 36 Midwest Medical Insurance Holding Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. CAPITAL STRUCTURE (CONTINUED) Midwest Holding accounted 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 continued to earn shares for each month they remained insured with Midwest Medical according to the stock allocation formula. Midwest Holding accounted 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. In accordance with the Articles of Incorporation and By-laws of Midwest Holding, only active policyholders of Midwest Medical owned shares of Class A Common Stock of Midwest Holding. At each meeting of the shareholders, every Class A shareholder having the right to vote was 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 were required to redeem their shares with Midwest Holding upon termination as policyholders of Midwest Medical. The net redemption value (NRV) of the shares was equal to the net book value of Midwest Holding, excluding the amount of net book value that was 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 was the redemption value determined at the most recent semi-annual valuation. The Board of Directors of Midwest Holding approved a tender offer for the exchange and redemption of substantially all Class A shares owned by Class A shareholders of record on April 30, 2000. Pursuant to the offer, Class A shareholders who tendered their shares received $66 for each Class A share owned, plus one Class C share. The tender offer was conducted during the summer of 2000 and was closed effective July 31, 2000. Remaining shares outstanding after closing of the tender offer were subsequently acquired pursuant to individual offers under identical terms. All outstanding Class A Common Shares of Midwest Holding were exchanged and redeemed as of December 31, 2000. During 2000, payments of $9,541,000 were made to Class A shareholders for stock redemptions related to these offers. 36 37 Midwest Medical Insurance Holding Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. CAPITAL STRUCTURE (CONTINUED) Like the Class A shares, Class C shares are not publicly or privately traded. The Class C shares provide all shareholders with the same voting rights as the Class A shares. Class C shareholders, however, do not accrue additional shares and the Class C shares have no redemption value. Issuance of Class C shares will not be subject to any vesting requirements. In the event of a liquidation, sale or similar transaction, Class C shareholders would participate in the proceeds according to a distribution formula developed by the Board of Directors. This formula takes into account the underwriting risk classification and years of coverage of each shareholder. As this is the same distribution formula that was previously applicable to Class A shares, Class C shareholders will retain the same percentage ownership after the exchange as they had before the exchange. Class C shares are returned to Midwest Holding upon termination of the shareholder's insurance coverage with Midwest Medical. Midwest Holding has issued one share of Class B voting stock that carries with it the right to elect the Board of Directors of Midwest Holding. The Minnesota Medical Association and the Iowa Medical Society currently exercise the voting rights. A majority of the Class C shareholders may at any time, by a two-thirds vote, elect to redeem the Class B share at cost. 37 38 Midwest Medical Insurance Holding Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. CAPITAL STRUCTURE (CONTINUED) Following is the detail of changes in redeemable stock for each of the three years in the period ended December 31, 2000 (in thousands, except for share and per share amounts):

38 39 Midwest Medical Insurance Holding Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. CAPITAL STRUCTURE (CONTINUED)

39 40 Midwest Medical Insurance Holding Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. CAPITAL STRUCTURE (CONTINUED)

40 41 Midwest Medical Insurance Holding Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. INVESTMENTS Components of net investment income are summarized as follows (in thousands):

The cost (amortized cost for fixed maturities) and fair value of available for sale investments are as follows (in thousands):

41 42 Midwest Medical Insurance Holding Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. INVESTMENTS (CONTINUED)

42 43 Midwest Medical Insurance Holding Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. INVESTMENTS (CONTINUED) The components of the unrealized appreciation on available for sale securities as of December 31 are as follows (in thousands):

The amortized cost and market value of fixed maturities at December 31, 2000, 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.

43 44 Midwest Medical Insurance Holding Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. INVESTMENTS (CONTINUED) Proceeds from sales of available for sale investments and the related gross realized gains and losses are as follows (in thousands):

Net unrealized appreciation of fixed maturities increased (decreased) by $3,198,000, $(8,736,000) and $1,837,000 and net unrealized appreciation of equity securities (decreased) increased by $(22,003,000), $14,036,000 and $15,360,000 for the years ended December 31, 2000, 1999 and 1998, respectively. Net unrealized appreciation of other long-term investments increased by $915,000 for the year ended December 31, 2000 as a result of an initial, independent appraisal of the non-traded real estate investment trusts. 4. POLICYHOLDER DIVIDENDS AND RETROSPECTIVE PREMIUMS In 1999, Midwest Medical instituted a policyholder dividend program that replaced the previous retrospective premium credit program for physicians. To implement the program, Midwest Medical issued participating policy endorsements to all active physician, clinic and hospital accounts during 1999 and 2000. Participating policies represented 96% and 91% of total premiums in force and premium income at December 31, 2000 and December 31, 1999, respectively. 44 45 Midwest Medical Insurance Holding Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 4. POLICYHOLDER DIVIDENDS AND RETROSPECTIVE PREMIUMS (CONTINUED) In the third quarter of 2000, Midwest Medical's Board of Directors declared an $8,000,000 dividend to be paid to physician and clinic policyholders in four equal installments in February, May, August and November 2001. The dividend will be awarded proportionately based on annual premiums for physician and clinic policyholders that were insured by Midwest Medical in 1996 and remain insured throughout 2001. In the fourth quarter of 2000, Midwest Medical's Board of Directors declared an $108,000 dividend to be paid to hospital policyholders for policies that were written from 1995 through 1999 and that renew in 2001. 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 2001. In the third quarter of 1999, Midwest Medical's Board of Directors declared a $10,100,000 dividend that was paid to physician and clinic policyholders in four equal installments in February, May, August and November 2000. The dividend was 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 that was paid to hospital policyholders for policies that were written from 1995 through 1998 and that renewed in 2000. The dividend was awarded based on the number of years insured with Midwest Medical and was paid within two months after the hospital policy renewed 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.

45 46 Midwest Medical Insurance Holding Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 4. POLICYHOLDER DIVIDENDS AND RETROSPECTIVE PREMIUMS (CONTINUED) Retrospective premium payments of $5,802,000 and $5,008,000 were made to Minnesota and North Dakota policyholders in 1999 and 1998, respectively. A provision of the agreement and plan of merger between Iowa Physicians and Midwest Medical required that any favorable development of certain pre-merger liabilities of Iowa Physicians be paid to the former Iowa Physicians 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 Iowa Physicians policyholders under the terms of the agreement. During 1998, retrospective premium payments of $3,073,000 were made to former Iowa Physicians policyholders. A provision of the agreement and plan of merger between Medical Liability Mutual and Midwest Medical requires that any favorable development of certain pre-merger liabilities of Medical Liability Mutual be paid to the former Medical Liability Mutual 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, 2000, there has been no favorable development and, therefore, no accrual or payments have been made related to this provision. 46 47 Midwest Medical Insurance Holding Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 5. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES The reconciliation of the liability for unpaid losses and loss adjustment expenses is as follows (in thousands):

Midwest Medical continually evaluates emerging trends in the development of loss liabilities, including the trends related to the pre-merger Iowa Physicians and Medical Liability Mutual business. Based on this analysis, management periodically adjusts their estimates of ultimate losses. 47 48 Midwest Medical Insurance Holding Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 6. SEGMENT INFORMATION The Company 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 2000, 1999 and 1998 (in thousands). 48 49 Midwest Medical Insurance Holding Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 6. SEGMENT INFORMATION (CONTINUED)

(1) Intersegment eliminations for revenues and expenses are primarily for management, administrative and investment services provided by Midwest Holding. Eliminations for assets consist primarily of investments in wholly-owned subsidiaries, intersegment receivables for management fees and reclassifications between assets and liabilities for taxes. (2) Other revenues consist primarily of net realized capital gains and interest received on federal income tax refunds. 49 50 Midwest Medical Insurance Holding Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 6. SEGMENT INFORMATION (CONTINUED)

(1) Intersegment eliminations for revenues and expenses are primarily for management, administrative and investment services provided by Midwest Holding. Eliminations for assets consist primarily of investments in wholly-owned subsidiaries, intersegment receivables for management fees and reclassifications between assets and liabilities for taxes and reinsurance. (2) Other revenues consist primarily of net realized capital gains. 50 51 Midwest Medical Insurance Holding Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 6. SEGMENT INFORMATION (CONTINUED)

(1) Intersegment eliminations for revenues and expenses are primarily for management, administrative and investment services provided by Midwest Holding. Eliminations for assets consist primarily of investments in wholly-owned subsidiaries, intersegment receivables for management fees and reclassifications between assets and liabilities for taxes and reinsurance. (2) Other revenues consist primarily of net realized capital gains. 51 52 Midwest Medical Insurance Holding Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 7. INCOME TAXES Components of income taxes are as follows (in thousands):

The Company's income taxes differ from the federal statutory rate applied to income before tax as follows (in thousands):

The deferred income tax provision includes the following differences between financial and income tax reporting (in thousands):

52 53 Midwest Medical Insurance Holding Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 7. INCOME TAXES (CONTINUED) The Company made income tax payments of $2,298,000, $1,751,000 and $3,041,000 in 2000, 1999 and 1998, respectively. The components of the net deferred income tax (liability) asset as of December 31 are as follows (in thousands):

53 54 Midwest Medical Insurance Holding Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 8. REINSURANCE To reduce overall risk, including exposure to large losses, Midwest Medical 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, 2000. Midwest Medical 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 $15,117,000 and $15,648,000 are associated with a single reinsurer, General Reinsurance Corporation, at December 31, 2000 and 1999, respectively. Midwest Medical also holds collateral under related reinsurance agreements in the form of letters of credit totaling $2,267,000 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 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 Medical 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 2000, 1999 and 1998 is as follows (in thousands):

54 55 Midwest Medical Insurance Holding Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 8. REINSURANCE (CONTINUED) Loss and loss adjustment expenses incurred are net of applicable reinsurance of $5,315,000, $5,204,000 and $2,240,000 for the years ended December 31, 2000, 1999 and 1998, respectively. In 1998, Midwest Medical 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 Medical has no reinsurance coverage for the exposure period October 1, 1986 through December 31, 1991. Due to the nature of Midwest Medical's policies, there is no risk of incurring future losses related to this time period. 9. BENEFIT PLANS Substantially all employees of 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, 2000, 1999 and 1998 were $583,000, $581,000 and $521,000, respectively. Midwest Holding provides an unfunded Supplemental Executive Retirement Plan (SERP) which is a non-qualified, defined benefit retirement plan covering certain Midwest Holding 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 $574,000, $441,000 and $404,000 for the years ended December 31, 2000, 1999 and 1998, respectively. The liability recognized in the consolidated balance sheets at December 31, 2000 and 1999 related to this plan was $3,101,000 and $2,704,000, respectively. 55 56 Midwest Medical Insurance Holding Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 9. BENEFIT PLANS (CONTINUED) 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, 2000, 1999 and 1998 was $36,000, $23,000 and $41,000, respectively. As of December 31, 2000 and 1999, the net post-retirement benefit plan liability was $51,000 and $19,000, respectively. 10. RECONCILIATION WITH STATUTORY ACCOUNTING PRINCIPLES Accounting principles generally accepted in the United States differ in certain respects from the accounting practices prescribed or permitted by insurance regulatory authorities (statutory basis). The following is a reconciliation of net income and shareholders' equity under US GAAP with that reported for Midwest Medical on a statutory basis (in thousands): Net Income

56 57 Midwest Medical Insurance Holding Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 10. RECONCILIATION WITH STATUTORY ACCOUNTING PRINCIPLES (CONTINUED) Shareholders' Equity

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 2000, 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 is subject to the approval of the Commissioner of the Department of Commerce of the State of Minnesota. At December 31, 2000, the maximum dividend that may be paid by Midwest Medical in 2001 without regulatory approval is approximately $14,039,000. Cash dividends paid to Midwest Holding by Midwest Medical in 2000, 1999 and 1998 were $3,000,000, $2,050,000 and $2,000,000, respectively. 57 58 Midwest Medical Insurance Holding Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 10. RECONCILIATION WITH STATUTORY ACCOUNTING PRINCIPLES (CONTINUED) The National Association of Insurance Commissioners (NAIC) revised the Accounting Practices and Procedures Manual in a process referred to as Codification. The revised manual will be effective January 1, 2001. Midwest Medical's domiciliary state of Minnesota has adopted the provisions of the revised manual. The revised manual has changed, to some extent, prescribed statutory accounting practices and will result in changes to the accounting practices that Midwest Medical uses to prepare its statutory-basis financial statements. Management believes that although the implementation of Codification will have a negative impact on Midwest Medical's statutory-basis capital and surplus primarily from the recording of a net deferred tax liability, Midwest Medical will remain in compliance with all regulatory and contractual obligations. 11. NET REDEMPTION VALUE The net redemption value per share of the Class A Common Shares was as follows:

Due to the stock restructure discussed in Note 2, all outstanding Class A Common Shares of Midwest Holding were exchanged and redeemed as of December 31, 2000. Under the terms of the stock restructure, Class A shareholders received $66.00 for each Class A share owned, plus one Class C share. 58 59 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 59 60 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS The names and ages of the directors of Midwest Holding, the year each first became a director and the number of Class C Common Shares owned by each as of December 31, 2000 are as follows:

60 61 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED) The Bylaws of Midwest Holding provide that Midwest Holding's Board of Directors shall include the following: (1) up to 20 physicians divided into three classes and elected for staggered three-year terms; (2) for as long as the Class B Common Share is outstanding, the Chief Executive Officer of the Minnesota Medical Association and the Executive Vice President of the Iowa Medical Society, both of whom shall be ex-officio directors; (3) the President of Midwest Holding as an ex-officio director; and (4) such additional ex-officio 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 physician directors. All physician 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. 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 any state medical society. There are currently no outside directors of Midwest Holding so the Boards of Midwest Holding and Midwest Medical are identical with the exception of Jack L. Kleven, COO and President of Midwest Medical, who is a member of Midwest Medical's Board of Directors as the result of Midwest Medical's Bylaws. Pursuant to the merger with Iowa Physician's, the Bylaws of Midwest Holding were amended to provide for 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 insureds compared to the total number of Midwest Medical insureds, subject to a minimum of two Iowa directors, one of whom shall be the Executive Vice President of the Iowa Medical Society, for as long as the Class B Common Share is outstanding. The Minnesota Medical Association has placed the Class B Voting Share in a voting trust which requires the trustee to vote the share for the election of the Iowa directors nominated by the Iowa Medical Society. Directors serve until their successors are elected and qualified, or until their prior resignation, removal, death or disqualification. As of December 31, 2000, the directors of Midwest Holding, as a group, owned 19 Class C Common Shares or less than 1.0 percent of the total Class C Common Shares outstanding as of that date. No executive officer owned any Class C Common Shares as of that date. All of the directors have been principally engaged in the practice of medicine for more than five years except for Dr. Paul S. Sanders, who has been the President of the Minnesota Medical Association since 1990, Michael D. Abrams, who has been the Executive Vice President of the Iowa Medical Society since 1996, David P. Bounk, who has been the President and CEO of Midwest Holding since 1990, and Jack L. Kleven, who has been the COO and President of 61 62 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED) Midwest Medical since 1999. Prior to 1990, Dr. Sanders was principally engaged in the practice of medicine. Prior to 1996, Mr. Abrams was Director, Government Relations of the Indiana Medical Association for nine years. The Chairman of the Board of Directors (currently Dr. Smith) is paid an annual fee of $53,097. All members of the Board of Directors currently are paid $1,250 for each meeting of the Board of Directors they attend. In addition, members of the Executive Committee currently are paid $1,250 for each meeting of the Executive Committee they attend, and committee chairmen are paid $1,000 for each meeting of the standing committee they chair. Other members of standing committees currently are paid between $500 and $800, 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:

62 63 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED) Mr. Bounk has over 30 years' experience in the insurance industry and joined Midwest Holding and Midwest Medical as President and Chief Executive Officer in August 1990. From July 1982 through July 1990, he was Executive Vice President and Chief Operating Officer of Missouri Medical Insurance Company, a corporation providing malpractice insurance to physicians in Missouri. Mr. Bounk has an M.B.A. 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, subject to a maximum of 12 additional months, and then only until he commences new employment or self-employment. The agreement also prohibits Mr. Bounk from competing with Midwest Holding for one year following his termination of employment. Effective January 1, 1997, 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 17 years' experience in the insurance industry, including 6 years as Vice President and Controller of Washington State Physician's Insurance Association. He has been in his current position since March 1998. He has B.S. degrees in accounting and finance. Mr. Kleven has over 26 years' experience in medical malpractice claims adjusting and management. He joined the Insurance Exchange in 1983, and was Vice President, Claims since March 1986. He was promoted to Chief Operating Officer on January 1, 1998. He was promoted to President of Midwest Medical effective September 1, 1999. Prior to joining the Insurance Exchange, he was a liability manager at The St. Paul Companies for six years. He has a B.S. degree in business. Mr. Lee has over 26 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 B.A. degrees in mathematics and statistics. Ms. Lincoln has over 17 years' experience in medical professional liability risk management. She joined the Insurance Exchange in 1982, and was Vice President, Risk Management since January 1990. She transferred to Vice President - Law and Health Policy effective January 1, 1998. She has a law degree. 63 64 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED) Ms. McBride has over 13 years' experience in the insurance industry. Prior to joining Midwest Holding in 1994, she served as a trial attorney specializing in insurance defense. She has a B.A. degree in nursing and a law degree. Mr. O'Connell has over 24 years in the medical malpractice segment of the insurance industry. From 1977 to 1995, he was with St. Paul Fire and Marine Insurance Company, holding various marketing and underwriting management positions. He joined Midwest Holding in October 1996. He has a B.S. in agriculture business management with an emphasis in insurance. Mr. Rutz has over 22 years' experience in the insurance industry, including 12 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 B.S. degree in resource management. Mr. Zeitlin has over 27 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 B.S. degree in liberal arts. Officers serve until their successors are appointed by the Board of Directors, or until their prior resignation, removal or death. Beneficial Ownership Reporting Section 16 of the Securities Exchange Act of 1934 requires officers and directors of reporting companies to file reports disclosing ownership of, and transactions in, securities of the Company. During 2000, required Forms 3 were not filed for the new directors and officers. This failure was cured by filings of Forms 5 made after the end of the year. 64 65 ITEM 11. EXECUTIVE COMPENSATION 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.

(a) Includes employer contributions to qualified retirement plans and car allowances Midwest Holding also maintains a Supplemental Executive Retirement Plan 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 plan 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 65 66 ITEM 11. EXECUTIVE COMPENSATION (CONTINUED) Summary Compensation Table are as follows: Mr. Bounk--$239,839; Mr. Kleven--$146,811; Mr. Rutz--$138,981; Mr. O'Connell--$101,990 and Mr. Cole--$90,040. The estimated annual retirement benefits were calculated assuming salary increases of 5% per year, discounted 4% per year for future inflation to express the estimated benefits in today's dollars. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The response to this item is contained in Item 10. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. 66 67 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) The following consolidated financial statements of Midwest Medical Insurance Holding Company for the year ended December 31, 2000 are included in this annual report (Form 10-K) in Item 8: Report of Independent Auditors Consolidated Balance Sheets as of December 31, 2000 and 1999 Consolidated Statements of Income for the years ended December 31, 2000, 1999 and 1998 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2000, 1999 and 1998 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 Notes to Consolidated Financial Statements (a)(2) The following consolidated financial statement schedules of Midwest Medical Insurance Holding Company required by Item 14(d) are included in a separate section of this report: II Condensed Financial Information of Registrant IV Reinsurance VI Supplemental Information Concerning Property/Casualty Insurance Operations All other schedules to the consolidated financial statements required by Article 7 of Regulation S-X are not required under the related instructions or are inapplicable and therefore have been omitted. (a)(3) Listing of Exhibits The Exhibits required to be a part of this report are listed in the Index to Exhibits which follows the Financial Statement Schedules. (b) Reports on Form 8-K No reports on Form 8-K were filed during the fourth quarter of 2000. 67 68 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Midwest Medical Insurance Holding Company ------------------------------------------------------- (Registrant) By: /s/ David P. Bounk March 16, 2001 --------------------------------------- -------------- David P. Bounk Date President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ David P. Bounk Principal Executive Officer March 16, 2001 ------------------------------------------- David P. Bounk /s/ Niles Cole Principal Financial Officer and March 16, 2001 ------------------------------------------- Niles Cole Principal Accounting Officer * Director, Chairman of the Board March 16, 2001 ------------------------------------------- Andrew J. K. Smith, M.D. * Director March 16, 2001 ------------------------------------------- Michael D. Abrams * Director March 16, 2001 ------------------------------------------- John R. Balfanz, M.D. * Director March 16, 2001 ------------------------------------------- Gail P. Bender, M.D.

68 69 * Director March 16, 2001 ------------------------------------------- James R. Bishop, M.D. * Director March 16, 2001 ------------------------------------------- Terence P. Cahill, M.D. * Director March 16, 2001 ------------------------------------------- Thomas C. Evans, M.D. * Director March 16, 2001 ------------------------------------------- G. Richard Geier, Jr., M.D. * Director March 16, 2001 ------------------------------------------- Anthony C. Jaspers, M.D. * Director March 16, 2001 ------------------------------------------- Russel J. Kuzel, M.D. * Director March 16, 2001 ------------------------------------------- Wayne F. Leebaw, M.D. * Director March 16, 2001 ------------------------------------------- Mark O. Liaboe, M.D. * Director March 16, 2001 ------------------------------------------- Patricia J. Lindholm, M.D. * Director March 16, 2001 ------------------------------------------- Steven A. McCue, M.D. * Director March 16, 2001 ------------------------------------------- Roger H. Meyer, M.D. * Director March 16, 2001 ------------------------------------------- Harold W. Miller, M.D.

69 70 * Director March 16, 2001 ------------------------------------------- Anton S. Nesse, M.D. * Director March 16, 2001 ------------------------------------------- Mark D. Odland, M.D. * Director March 16, 2001 ------------------------------------------- Paul S. Sanders, M.D. * Director, Secretary March 16, 2001 ------------------------------------------- Richard D. Schmidt, M.D. * Director March 16, 2001 ------------------------------------------- Tom D. Throckmorton, M.D. * Director, Vice Chairman March 16, 2001 ------------------------------------------- R. Bruce Trimble, M.D. * By: /s/ David P Bounk March 16, 2001 ----------------------------------- David P. Bounk pursuant to power of attorney

* David P. Bounk, on his own behalf and pursuant to Powers of Attorney, dated prior to the date hereof, attested by the officers and directors listed above and filed with the Securities and Exchange Commission, by signing his name hereto does hereby sign and execute this Report of Midwest Medical Insurance Holding Company on behalf of each of the officers and directors named above, in the capacities in which the name of each appears above. The above persons signing as directors constitute a majority of the directors. 70 71 Midwest Medical Insurance Holding Company and Subsidiaries (Parent Company) Schedule II--Condensed Financial Information of Registrant Balance Sheets

See accompanying note. 71 72 Midwest Medical Insurance Holding Company and Subsidiaries (Parent Company) Schedule II--Condensed Financial Information of Registrant (continued) Statements of Income

See accompanying note. 72 73 Midwest Medical Insurance Holding Company and Subsidiaries (Parent Company) Schedule II--Condensed Financial Information of Registrant (continued) Statements of Cash Flows

See accompanying note. 73 74 Midwest Medical Insurance Holding Company and Subsidiaries (Parent Company) Schedule II--Condensed Financial Information of Registrant (continued) Note to Condensed Financial Statements December 31, 2000 The accompanying condensed financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto of Midwest Medical Insurance Holding Company and Subsidiaries. See Note 2 to the audited consolidated financial statements of Midwest Medical Insurance Holding Company and Subsidiaries for a description of the stock restructure completed in 2000. The $8,500,000 received from Midwest Medical through a non-interest-bearing note was used to redeem Class A shares under the stock restructure during 2000. The note will be retired in 2001. Certain amounts in the prior year's financial statements have been reclassified to conform to the current year presentation. 74 75 Midwest Medical Insurance Holding Company and Subsidiaries Schedule IV--Reinsurance

NOTE TO SCHEDULE IV: Ceded premiums for the years ended December 31, 2000, 1999 and 1998 are net of (additions) reductions in ceded premiums related to swing-rated reinsurance treaties of $(1,300,000), $5,205,000 and $2,550,000, respectively. Ceded premiums in 2000 and 1999 are also net of proceeds from contingent commission on reinsurance covering the period January 1, 1992 through December 31, 1994 of $666,000 and $715,000, respectively. 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. 75 76 Midwest Medical Insurance Holding Company and Subsidiaries Schedule VI--Supplemental Information Concerning Property/Casualty Insurance Operations

76 77 ANNUAL REPORT ON FORM 10-K ITEM 14(a)(3) AND 14(c) EXHIBITS Midwest Medical Insurance Holding Company Index to Exhibits

77 78 Index to Exhibits (continued)

--------------------------------- (1) Filed with the Company's Registration Statement on Form S-4, as amended, SEC File No. 33-55062 and incorporated herein by reference. (2) Filed with the Company's Registration Statement Form S-1 SEC File No. 33-70182 and incorporated herein by reference. (3) Filed with 1998 Annual Report on Form 10-K and incorporated herein by reference. (4) Filed with 1999 Annual Report on Form 10-K and incorporated herein by reference. (5) Filed with Schedule TO SEC File No. 005-58917 filed on April 26, 2000, as amended, and incorporated herein by reference. (6) Filed with this Annual Report on Form 10-K. 78

MIDWEST MEDICAL INSURANCE HOLDING CO 10-K