MIDWEST MEDICAL INSURANCE HOLDING CO - 10-K Annual Report

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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, 1998

[ ] 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
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Commission file number 0-21230
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Midwest Medical Insurance Holding Company
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)

Minnesota 41-1625287
- ---------------------------------------- ----------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

6600 France Avenue So., Suite 245
Minneapolis, Minnesota 55435-1891
- ---------------------------------------- ----------------------------------
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (612) 922-5445
--------------

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act:

Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------

Class A Common Stock $.01 par value N/A

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 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, 1998 Net Redemption Value per
share) of the voting stock held by non-affiliates of the registrant as of March
30, 1999 was $8,062,838.

The number of shares outstanding of the issuer's classes of common stock, as of
March 30, 1999:

Class A Common Stock $.01 par Value - 125,682 shares
Class B Common Stock $1,000 par value - 1 share

DOCUMENTS INCORPORATED BY REFERENCE

None.

1

PART I
ITEM 1. BUSINESS

BACKGROUND

Midwest Medical Insurance Holding Company (MMIHC) is an insurance holding
company organized under the laws of the State of Minnesota. Midwest Medical
Insurance Company (MMIC) is a wholly-owned subsidiary of MMIHC and is MMIHC's
primary operating asset.

MMIC's primary business is selling and issuing policies of medical professional
liability insurance to: (1) individual physicians, (2) partnerships or
professional corporations comprised of physicians, (3) clinics, (4) hospitals,
and (5) health plans. In addition, MMIC writes business liability insurance
providing coverage for claims against a medical business entity resulting from
acts by the employees who work for the entity, and office premises liability
insurance providing coverage for claims arising out of the ownership,
maintenance or use of office premises of the insured.

MMIC originally was organized in 1980 under the auspices of the Minnesota
Medical Association (the "MMA") to provide professional liability (malpractice)
insurance to Minnesota physicians who are members of the MMA. The business was
reorganized on November 30, 1988 into a stock insurance company (MMIC), wholly
owned by a holding company (MMIHC), which could pursue other business
opportunities. MMIHC has not engaged in such activities to any material
extent. The reorganization also was effected to give physicians a limited equity
interest in their malpractice insurer while preserving MMIC's capital and
surplus. As of July 1, 1993, the Iowa physician-owned malpractice insurer, Iowa
Physicians Mutual Insurance Trust (IPMIT), was merged with and into MMIC. As of
June 5, 1996, the Nebraska physician-owned malpractice insurer, Medical
Liability Mutual Insurance Company of Nebraska (MLM) was merged with and into
MMIC. MMIC now provides malpractice insurance to physicians and physician groups
in Minnesota, Iowa, North Dakota, South Dakota, Nebraska, Illinois and Wisconsin
on a claims-made basis. MMIC has had the sponsorship of the MMA since inception
and also has the sponsorship of the Iowa Medical Society (IMS) and North Dakota
Medical Association. Professional liability, general liability, and umbrella
excess liability insurance is also available to hospitals, nursing homes and
extended care facilities throughout MMIC's territory.

MMIC has no employees. Instead, MMIHC provides all management and administrative
services to MMIC for a fee based upon the cost of providing services. For
insurance operational expenses, a ten percent administrative surcharge is added.

During 1997, MMIHC formed Midwest Medical Solutions, Inc. (Solutions) as a
business development company to strengthen and promote the independence and
interdependencies of physicians, clinics and hospitals that MMIC serves.
Business development opportunities being considered include practice
enhancement, strategic consulting, and electronic processing and

2

ITEM 1. BUSINESS (CONTINUED)

integration services and support. Solutions purchased the assets of MedPower
Information Services, Inc. effective January 1, 1998. Solutions then contributed
those assets to its newly formed, wholly-owned subsidiary, MedPower Information
Resources, Inc. (MedPower). MedPower processes and electronically submits
medical claims for over 100 healthcare providers in the Upper Midwest. MedPower
also provides various information consulting and network support services.
Together, Solutions and MedPower had assets of less than $3,000,000 at
December 31, 1998 and revenues of less than $400,000 for the year ended December
31, 1998.

Hereafter, MMIHC, MMIC, Solutions and MedPower shall be collectively referred to
as the Company unless the reference pertains to a specific entity. Further, due
to the nature of the relationship between MMIHC and MMIC, the insurance
operations of MMIC will be discussed as though they are the operations of the
registrant.

ELIGIBLE PHYSICIANS

An individual physician must meet the following criteria in order to be eligible
to obtain insurance coverage from MMIC:

1. An applicant must be licensed to practice medicine, surgery or
osteopathy in Minnesota, Iowa, Nebraska, North Dakota, South Dakota,
Illinois, or Wisconsin;

2. An applicant must conduct a majority of his or her practice in
Minnesota, Iowa, Nebraska, North Dakota, South Dakota, Illinois or
Wisconsin.

ELIGIBLE GROUPS

MMIC also provides professional liability insurance to entities including
partnerships, professional corporations and other associations through which
qualifying physicians practice medicine, surgery or osteopathy.

A group must meet the following criteria in order to be eligible to be insured
by MMIC:

1. The entity must have its principal place of business in Minnesota,
Iowa, Nebraska, North Dakota, South Dakota, Illinois or Wisconsin;
and

2. The group must demonstrate that a majority of the individual
physicians practicing medicine, surgery or osteopathy on a full-time
basis through such clinic are, or intend to be, insured by MMIC.

3

ITEM 1. BUSINESS (CONTINUED)

ELIGIBLE HOSPITALS, NURSING HOMES AND OTHER EXTENDED CARE FACILITIES

MMIC also provides professional liability, general liability and umbrella excess
liability to hospitals, nursing homes and other extended care facilities which
provide medical services to patients on more than an outpatient basis.

A business must meet the following criteria in order to be eligible to be
insured by MMIC:

1. The entity must have its principal place of business in Minnesota,
Iowa, Nebraska, North Dakota, South Dakota, Illinois or Wisconsin; and

2. The facility must be a licensed hospital, nursing home, hospice or
other extended care facility.

POLICY FORMS

MMIC offers a "claims-made" medical malpractice liability insurance policy.
Under a claims-made policy, coverage is provided for claims asserted and
reported to MMIC while the policy is in effect relating to occurrences which
took place during the period in which the policyholder had coverage with MMIC.
For purposes of policy coverage, a claim includes any lawsuit, allegation of
liability or other notice of patient dissatisfaction with services performed
that is communicated to MMIC as required by the policy. The policy also covers
prior acts (i.e., claims first made during the policy period with respect to
occurrences which took place prior to the date the insured initially secured
coverage from MMIC) for physicians previously insured under a claims-made policy
with another professional liability insurer. Prior acts coverage is not
available from MMIC for physicians who have not been continuously insured prior
to obtaining coverage from MMIC.

MMIC also offers reporting endorsements ("tails") which provide coverage of
subsequent claims (i.e., claims first made subsequent to the date the insured
terminates basic insurance coverage with MMIC, but with respect to occurrences
which took place while the insurance coverage was in effect prior to such
termination date) made against its former insureds who have voluntarily
terminated insurance coverage with MMIC. In the event of death, permanent
disability, or retirement at age 55 or older after five years of continuous
coverage with MMIC, the reporting endorsement is provided at no additional
premium.

MMIC offers basic limits of coverage from $1,000,000 for each claim, subject to
$3,000,000 annual aggregate, up to $12,000,000 for each claim, subject to
$14,000,000 annual aggregate. Excess coverage above the basic limits is
available from MMIC's reinsurers on a facultative basis.

4

ITEM 1. BUSINESS (CONTINUED)

The basic office premises liability limits offered are $100,000 for each
occurrence for bodily injury and $100,000 for each occurrence for property
damage. Limits up to $1,000,000 for each occurrence are also available.

The basic liability limits for coverage of employees and assistants cannot
exceed the limits purchased by the insured physician or clinic.

MARKETING AND DISTRIBUTION

Marketing of MMIC policies in Minnesota, North Dakota, South Dakota, Nebraska,
Illinois and Wisconsin is handled principally by MMIC through salaried marketing
representatives. MMIC has also made marketing arrangements with a select group
of large national brokers to assist MMIC in the production of large accounts and
in the production of new coverages as they are developed. These brokers will
work in all states. MMIC has appointed an exclusive independent agent in Iowa in
order to enhance marketing efforts there. MMIC approves all policies (and their
terms) sold by agents prior to their becoming effective, and no commissions are
earned by agents until such approval has been granted.

Distribution of policies is handled through a processing system which MMIC has
utilized for several years. Since most policies have a common expiration date,
it is essential that MMIC's policy processing operations be highly efficient.
MMIC consistently has been able to provide policy processing on a timely basis.
In 1998 the Company completed an implementation of an entirely new operating
system which has expanded its capacity and efficiency.

REINSURANCE

MMIC purchases reinsurance in order to reduce its liability on individual risks.
A reinsurance transaction takes place when an insurance company transfers or
"cedes" to another insurer a portion of its exposure on insurance it writes. The
reinsurer assumes the exposure in return for a portion of the premium. The
reinsurer's liability is limited to losses it assumes that are in excess of the
portion retained by MMIC. However, in the event the reinsurer is unable or
otherwise fails to pay, MMIC remains primarily liable for the loss.

Historically, entering into reinsurance agreements permitted MMIC to issue
policies having greater liability limits than otherwise would have been allowed
under Minnesota insurance law, which prohibits an insurer from retaining a risk
on any one claim that is greater than 10 percent of its surplus. As MMIC's
surplus has grown, MMIC now utilizes reinsurance primarily to limit its risk on
any single claim. Such limits of risk assumed by MMIC for physician coverage
have increased from $150,000 in the first year of operations to $750,000
currently. The single claim limit of risk assumed is $750,000 for hospital
coverage. The reinsurer will pay losses in excess of the amount of risk retained
by MMIC, not to exceed the limits of liability of the policies issued by MMIC.

5

ITEM 1. BUSINESS (CONTINUED)

MMIC currently operates under an excess-of-loss reinsurance treaty with General
Reinsurance Corporation of Stamford, Connecticut (80%), Hanover Reinsurance
Company of Hanover, Germany (7%), Transatlantic Reinsurance Corp. (6.5%), and
CNA Re, UK (6.5%), whereby the reinsurers insure against losses in excess of the
loss limit retained by MMIC. General Reinsurance Corporation is the largest
reinsurer of medical professional liability in the United States and one of the
largest in the world and has received the highest rating of A++ by A.M. Best &
Company, Inc. Hanover Reinsurance Company is rated A+; Transatlantic Re is rated
A++; and CNA Re, UK is rated A by A.M. Best & Company, Inc. Coverage under the
treaty was initially issued on January 1, 1998, and is continuous until canceled
by either party. MMIC commuted the reinsurance treaties covering the period from
October 1, 1986 through December 31, 1991. As a result, there is no longer any
reinsurance coverage for those report years. As of December 31, 1998, there is
one open case with $10,000 in loss reserves pertaining to those report years.
Previous reinsurance treaties, which remain in effect for incidents prior to
October 1, 1986, were with various domestic and foreign reinsurers, all of whom
have maintained their obligations to MMIC and appear to be financially sound.
MMIC currently cedes about $4,700,000 of premium per year under the reinsurance
treaty.

INVESTMENTS

MMIC's investment portfolio is under the direction of the Board of Directors
acting through the Investment Committee. The Investment Committee establishes
MMIC's investment policy which, in summary, is to assist in maintaining MMIC's
financial stability through the preservation of assets and the maximizing of
pre-tax investment income. In 1997, the Committee changed the investment
guidelines to maximize pre-tax income and to extend the duration of the fixed
income investments. Adequate liquidity is maintained to assure that MMIC has the
ability to meet its insurance operational requirements, in particular the
payment of claims. MMIC employs outside investment managers who manage the
portfolio on a discretionary basis consistent with the policies set by MMIC. In
addition, the Investment Committee utilizes the services of a separate outside
consultant who calculates performance measures and provides an independent
opinion on the overall results being obtained by the investment managers.

MMIC's investment portfolio consists primarily of investment grade fixed income
instruments, including United States Government, governmental agency, and
corporate bonds. Fixed income investments comprised approximately 62% of total
invested assets at December 31, 1998 compared to 70% at December 31, 1997.
MMIC's investment policy also permits the inclusion of equity securities. Equity
securities comprised approximately 33% of total invested assets at December 31,
1998 compared to 20% at December 31, 1997. The increase in the proportion of
equity securities was due to an increase in equity market values and a
reallocation of $15,000,000 from fixed income investments to international
equities in January 1998. The objectives of this reallocation were to further
diversify the portfolio and maximize pre-tax total return. The remainder of
MMIC's investment portfolio, 5% and 10% at December 31, 1998 and 1997,
respectively, was invested in a real estate investment trust and short-term
instruments.

6

ITEM 1. BUSINESS (CONTINUED)

RATING

A.M. Best & Company, Inc. ("Best's"), publisher of BEST'S INSURANCE REPORTS,
PROPERTY-CASUALTY, 1997 Edition, has assigned MMIC an "A", or excellent, rating
in 1998. This is the highest rating given to any company that specializes in
medical malpractice insurance. Best's ratings are based on an analysis of the
financial condition and operation of an insurance company as compared with the
industry in general. MMIHC believes that a favorable rating has a positive
effect since customers and their advisors often review Best's ratings when
selecting an insurer and are more apt to purchase insurance from a company with
a positive rating because of the greater security and stability associated with
a positive rating. A positive rating relates to the ability of an insurer to
meet its insurance obligations and does not directly relate to the value of the
insurer's securities.

GOVERNMENT REGULATION

MMIC is subject to governmental regulation in the states in which it conducts
its business (Minnesota, Iowa, North Dakota, South Dakota, Nebraska, Illinois,
and Wisconsin). Such regulation is conducted by state agencies having broad
administrative power dealing with all aspects of MMIC's business, including
policy terms, rates, dividends and retrospective premium credits to
policyholders, and dividends to the parent corporation, MMIHC.

Without prior approval from the Minnesota Commissioner of Commerce, annual
dividends to MMIHC cannot exceed 10 percent of unassigned surplus of MMIC or the
prior year's net income from operations of MMIC, whichever is greater. MMIC is
also subject to statutes that require it to file periodic information with state
regulatory authorities and is subject to periodic financial and business conduct
examinations. MMIHC is also subject to statutes governing insurance holding
company systems in Minnesota, which relate primarily to the acquisition of
control of insurance companies directly or through a holding company.

COMPETITION

MMIC's major competitor in all states in which it conducts its business is
The St. Paul Companies. The St. Paul Companies is a major national
property-casualty insurance company, the largest writer of medical professional
liability insurance in the United States, and is many times larger than MMIC. In
addition to The St. Paul Companies, several other national companies have become
active competitors in the last several years, including Medical Protective
Insurance Company, CNA Insurance Company, Zurich Insurance Company, Fireman's
Fund Insurance Company, and American Continental Insurance Company (commonly
referred to as MMI). At this time they have achieved limited market penetration,
but represent an increasing competitive pressure for the future. In addition
several other physician-owned specialty carriers have entered the market, but
have yet to be a significant factor in MMIC's area. Finally, in the mid-nineties
several large self-insured hospitals in Minneapolis and Des Moines purchased

7

ITEM 1. BUSINESS (CONTINUED)

MMIC insured clinics, and other physician practices were purchased by large,
self-insured clinics such as the Mayo Clinic. In response to the consolidation
occurring among healthcare providers, MMIC expanded its underwriting capability
by partnering with its reinsurers to provide the types of coverages needed by
larger healthcare organizations. MMIC is also the only carrier endorsed by local
medical societies in Minnesota, Iowa and North Dakota and owned by its
physician-insureds, which management believes gives MMIC a competitive advantage
in marketing to physicians.

The market for medical professional liability insurance is changing, especially
with the dramatic changes proposed and occurring in the broader health care
industry. Various changes in the market for medical professional liability
insurance are possible as a result of developments such as practice
consolidation and integration, physician-hospital organizations, various forms
of managed health care, various forms of alliances between providers, proposals
for enterprise liability, and many others. Management of MMIC believes it is
developing new programs and products which will allow it to remain an industry
leader as such change occurs, although no assurance can be given to that effect.

EMPLOYEES

As of December 31, 1998, MMIHC employed 82 persons, of whom 6 were executives,
52 were supervisory employees or specialists, and 24 were clerical employees.
None of the employees of MMIHC is covered by a collective bargaining agreement
and management believes that relations with employees are good.

8

ITEM 2. PROPERTIES

MMIHC owns the following fixed assets, all of which are used in the conduct of
its business:

NET BOOK VALUE
DECEMBER 31,
1998
--------------

Office furniture and equipment $ 250,291
Leasehold improvements at leased premises,
6600 France Avenue South, Minneapolis, MN 37,819
Computer hardware 728,593
Computer system software 1,911,712
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Total $2,928,415
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----------

The Company owns no real estate. MMIHC leases approximately 15,765 square
feet of office space in Edina, Minnesota under a 10-year lease that expires
in 2001, subject to the option for MMIHC to renew the lease for an additional
five years after the original term. 4,060 square feet of office space is
leased in West Des Moines, Iowa under a 10-year lease that expires in 2000,
with an option for MMIHC to extend the term for an additional five years
after the original term. An additional 1,249 square feet of office space is
leased in Omaha, Nebraska under a three year lease that expires November 30,
2000. Solutions and MedPower operate out of a separate 3,149 square foot
facility also located in Edina, Minnesota. This lease is set to expire in
2001. Annual rent expense was $501,032 for 1998 and $427,646 for 1997.

ITEM 3. LEGAL PROCEEDINGS

The Company is not a party to any pending or threatened legal proceedings which
could have a material adverse effect on its operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of security holders.

9

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS

(a) There is no market for the Company's Class A or Class B Common Stock. Class
A shares are issued only to insured individual physicians or individual
physicians jointly with the legal entities in which they practice. The
shares are restricted and cannot be sold to any person other than MMIHC and
are subject to mandatory redemption at the time that the physician
terminates his or her insurance coverage for any reason.

(b) As of March 30, 1999, there were 125,682 shares of Class A Common Stock
outstanding held by 3,496 physicians and 1 share of Class B Common Stock
held by the Minnesota Medical Association.

(c) MMIHC has never paid a shareholder dividend nor does it intend to within
the foreseeable future. Without prior approval from the Minnesota
Commissioner of Commerce, annual dividends to MMIHC from MMIC cannot exceed
10% of unassigned surplus of MMIC or the prior year's net income from
operations of MMIC, whichever is greater.

ITEM 6. SELECTED FINANCIAL DATA

Following is the selected financial data of MMIHC for the five years ended
December 31, 1998. This data should be read in conjunction with the consolidated
financial statements and notes thereto appearing under Item 8 of this Form 10-K.

YEAR ENDED DECEMBER 31
OPERATIONS DATA 1998(1) 1997(1) 1996(1) 1995(2) 1994(2)
- -------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

Net premiums earned $ 35,014 $ 32,916 $ 31,177 $ 29,798 $ 26,246
Net investment and other income 21,404 19,276 15,558 14,258 11,509
-----------------------------------------------------
Total revenue 56,418 52,192 46,735 44,056 37,755

Loss and loss adjustment expenses 37,494 31,834 32,257 37,560 11,334
Underwriting and other operating expenses 10,287 6,595 5,539 6,482 5,509
-----------------------------------------------------
47,781 38,429 37,796 44,042 16,843
-----------------------------------------------------
Income before income taxes 8,637 13,763 8,939 14 20,912
Income taxes (benefit) 2,689 4,463 1,458 (1,711) 6,417
-----------------------------------------------------
Net income $ 5,948 $ 9,300 $ 7,481 $ 1,725 $ 14,495
-----------------------------------------------------
-----------------------------------------------------

10

ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)

YEAR ENDED DECEMBER 31
1998(1) 1997(1) 1996(1) 1995(2) 1994(2)
-----------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

Net income per common share - assuming dilution $43.65 $70.23 $58.33 $13.74 $114.84

Number of shares used in per share calculation 136,251 132,427 128,259 125,536(3) 126,222(3)

Net income/total revenue 10.5% 17.8% 16.0% 3.9% 38.4%

Return on average equity 4.2% 7.4% 6.5% 1.7% 15.8%

DECEMBER 31
FINANCIAL CONDITION 1998(1) 1997(1) 1996(2) 1995(2) 1994(2)
- ------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

ASSETS
Fixed maturities at fair value $164,652 $171,975 $183,561 $182,817 $174,203
Equity securities at fair
value 86,553 49,759 38,001 28,311 19,782
Short-term investments 3,556 13,909 7,898 15,015 9,755
Other 10,000 10,000 -- -- --
----------------------------------------------------
Total investments 264,761 245,643 229,460 226,143 203,740

Reinsurance recoverable 16,499 19,117 22,174 25,112 23,637
Other assets 14,223 10,755 10,359 13,329 19,100
----------------------------------------------------
Total assets $295,483 $275,515 $261,993 $264,584 $246,477
----------------------------------------------------
----------------------------------------------------
LIABILITIES
Unpaid losses and loss
adjustment expenses $110,964 $107,806 $110,037 $120,264 $110,967
Other liabilities 33,926 33,942 33,074 34,053 38,358
----------------------------------------------------
144,890 141,748 143,111 154,317 149,325
REDEEMABLE STOCK
Class A and Class B Common
Stock at redemption value 8,147 7,477 7,604 6,975 7,712

OTHER SHAREHOLDERS' EQUITY 142,446 126,290 111,278 103,292 89,440
----------------------------------------------------
Total liabilities, redeemable
stock and shareholders'
equity $295,483 $275,515 $261,993 $264,584 $246,477
----------------------------------------------------
----------------------------------------------------

11

ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)

DECEMBER 31
1998(1) 1997(1) 1996(1) 1995(2) 1994(2)
-------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

Midwest Medical Insurance Holding
Company:
Class A Common Shares issued and
outstanding 125,682 121,322 118,209 116,251(3) 116,855(3)
Redemption value per share $64.81 $61.63 $64.33 $60.00 $66.00

Class A Common Shares redeemed
9,005 10,306 10,272 12,424 12,640
Amount paid to terminating
policyholders upon redemption $ 523 $ 648 $ 608 $ 829 $ 840

_______________________________________

(1) Amounts derived from audited consolidated financial statements of MMIHC
included in Item 8 of this Form 10-K.

(2) Amounts derived from audited consolidated financial statements of MMIHC.

(3) Includes pro forma shares computed to give retroactive effect to the merger
of MMIHC/MMIC with MLM. See Note 1 to the consolidated financial statements
included in Item 8 of this Form 10-K.

12

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

MANNER OF PRESENTATION

The financial statements of MMIHC and its subsidiaries are presented on a
consolidated basis. In future references in this analysis, which should be read
together with the 1998 consolidated financial statements and notes thereto
appearing under Item 8 in this Form 10-K, MMIHC and its subsidiaries are
referred to collectively as the "Company."

LIQUIDITY AND CAPITAL RESOURCES

The majority of the Company's assets are invested in investment-grade bonds,
stocks, a real estate investment trust and short-term instruments. These
investments totaled $264,761,000 and $246,746,000 at December 31, 1998 and 1997,
respectively, which represented 89.6% and 89.5% of total assets. The primary
objectives of the Company's investment policy established by the Board's
Investment Committee are the preservation of assets, maximizing pre-tax total
portfolio return, and assuring adequate liquidity to meet operational
requirements primarily the payment of insurance claims. Fixed maturity
investments and equity securities are classified as available for sale and
carried at fair value. The real estate investment trust and short-term
instruments are recorded at cost which approximates fair value.

During 1997, the Company adopted a revised Investment Policy resulting in a
portfolio restructuring designed to increase the pre-tax total return from
investments. The benchmark total return goal set for the fixed portfolio manager
was increased. This resulted in a turnover of most of the fixed income portfolio
which included selling all municipal bonds. To further diversify the portfolio
and maximize total return, the Company invested $10 million in a private
placement real estate investment trust in September of 1997 and invested $15
million in international equities in January of 1998. These changes reflect the
Company's strong financial position relative to the risk inherent in the amount
of premium written.

The Company's cash flow from operations decreased in 1998 versus 1997 and 1996.
The 1998 cash flow from operations of $(9,605,000) was unfavorably impacted by
premium adjustments paid to reinsurers on reinsurance contracts for prior years,
less premium received in advance at the end of the year due to later billing of
policies with January effective dates, and an increase in underwriting and other
operating expenses. 1998 underwriting expenses increased primarily from
additional staff needed to manage Company growth and added costs from the
conversion to a new insurance company operating system. 1998 other operating
expenses increased primarily from launching the operations of Solutions
including the acquisition of MedPower. The positive cash flow from 1997
operations of $4,002,000 was primarily the result of a decrease in claim
payments, whereas the negative cash flow from 1996 operations of $(2,072,000)
was primarily driven by an increase in claim payments.

13

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Premium rates in general have remained stable with slight rate increases in
regions where the Company has experienced unfavorable claim trends.
Consequently, cash receipts from policyholder premiums have been relatively
level. MMIC, however, has returned substantial amounts of premiums to
policyholders in recent years in the form of retrospective premium credits. The
retrospective premium credits have been paid to policyholders in the first
quarter of each year. Loss and operating expense payments have generally been
met from policyholder premium receipts with any excess cash allocated to the
investment portfolio. The Company regularly analyzes loss liabilities to project
the cash flow required in future years. Since the overall portfolio is highly
liquid, exact matching of bond maturities and liabilities is not a goal. Bond
maturities are primarily selected to maximize total return. The Company believes
that its cash and investments combined with its internally generated funds will
be sufficient to meet its present and reasonably foreseeable operating and
capital requirements and will not need to borrow funds from external sources.
The Company had no material capital expenditure commitments as of December 31,
1998.

The Company's bylaws require that MMIHC Class A Common Stock issued to MMIC
policyholders be redeemed when a physician ceases to be insured by MMIC for any
reason. The redemption value per share is calculated by dividing the net book
value of the Company, excluding the net book value of MMIC (other shareholders'
equity) from the calculation, by the number of MMIHC Class A Common Shares
outstanding. More details about the redeemable stock and the actual redemptions
during the years 1998, 1997 and 1996 are found in Note 2 to the consolidated
financial statements. This limited redemption value preserves the capital of
MMIC which is separately disclosed as other shareholders' equity in the
consolidated financial statements. The consolidated statements of changes in
other shareholders' equity found in the accompanying consolidated financial
statements provide the details of additions to and reductions in other
shareholders' equity.

From time to time the Board of Directors of MMIC declares dividends payable to
MMIHC to maintain the redemption value of the Company's Class A Common Stock and
to provide capital for new ventures entered into by Solutions. A $2,000,000
dividend was declared in September of 1998 and paid in November of 1998 for
those reasons mentioned above. No dividends were declared or paid by MMIC to
MMIHC in 1997. In July 1996, a dividend of $327,000 was paid to MMIHC as
required by a provision of the MMIC/MLM merger agreement. Per the merger
agreement, the amount was sufficient to maintain the per share redemption value
of MMIHC's Class A Common Stock at the same per share value immediately after
the merger as immediately before the merger. A $260,000 dividend was declared in
November of 1995 and paid in February of 1996 primarily to maintain the
redemption value of the Company's Class A Common Stock.

14

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

RESULTS OF OPERATIONS

NET PREMIUMS EARNED increased $2,098,000 in 1998 from 1997. Although
policyholder rates remained relatively level, new business generated
approximately $1,263,000 of additional earned premium. The remaining increase
was the result of the following significant factors:

1. The estimated reinsurance premium applicable to the treaty years
1992-1994 and 1995-1997, which is based in part on reinsured claims
experience, was reduced $2,550,000 on a net basis in 1998. This
compares to a net reduction for those treaty years of $2,950,000 in
1997 resulting in a net DECREASE in premium between years of $400,000.

2. The Company negotiated lower rates on its 1998 reinsurance
contract that reduced ceded premiums by $1,031,000 compared to 1997. This
INCREASED 1998 net premiums earned.

3. In 1998, $789,000 was received from the commutation of a reinsurance
treaty covering the 1991 year. Since no reinsurance commutation
occurred in 1997, premiums INCREASED from 1997 to 1998 by $789,000.

4. Retrospective premium credits of $5,200,000 for Minnesota
policyholders and $280,000 for North Dakota policyholders were
recorded in 1998. The premium credits for 1997 were $5,000,000 for
Minnesota policyholders only. The difference between years resulted in
a $480,000 DECREASE in 1998 net premiums earned.

Net premiums earned increased $1,749,000 in 1997 from 1996. Although
policyholder rates remained relatively level for 1996 and 1997, an increase in
the number of policyholders in 1997 resulted in additional earned premium of
$500,000. The remaining increase was the result of the following significant
factors:

1. The estimated reinsurance premium applicable to the treaty years
1992-1994 and 1995-1997, which is based in part on reinsured claims
experience, was reduced $2,950,000 in 1997 versus an increase of
$925,000 in 1996. This resulted in a net INCREASE in premium between
years of $3,875,000.

2. The Company recorded an increase of $1,171,000 in the Iowa Development
Experience Liability account in 1997. A similar increase of $2,901,000
was recorded in 1996. While these increased liabilities both reduce
premium, the difference in the amounts between years caused an
INCREASE in net premiums earned from 1996 to 1997 of $1,730,000.

3. In 1996, $2,194,000 was received from the commutation of a reinsurance
treaty covering the years 1989 and 1990. This increased 1996 premiums.
Since there was no counterpart in 1997, premiums DECREASED $2,194,000
from 1996 to 1997.

15

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

4. A number of other prior year reinsurance premium adjustments recorded
in 1996 increased 1996 premiums by $2,143,000. With no counterpart in
1997, the difference between years DECREASED 1997 premiums by
$2,143,000.

NET INVESTMENT INCOME decreased $590,000 from 1997 to 1998 and $552,000 from
1996 to 1997. Although total invested assets has increased over the same time
period, the fixed maturity component of invested assets has decreased due to the
Company's efforts to maximize total return and diversify the portfolio as
referred to earlier under the Liquidity and Capital Resources section. Since it
is the largest contributor to the Company's investment income, the decrease in
fixed maturity investments decreased investment income. Yields on fixed maturity
investments also declined over the same time period further contributing to the
decrease in investment income.

REALIZED CAPITAL GAINS increased $2,465,000 to $8,949,000 in 1998 and increased
$4,713,000 to $6,484,000 in 1997. During 1998, approximately $1,175,000 of net
capital gains were realized through the allocation of $15,000,000 to
international equities in January of 1998. The remaining $7,774,000 of 1998 net
realized capital gains resulted from the management of the portfolio on a
pre-tax total return basis within the parameters set by the Board's Investment
Committee. During 1997, the fixed income portfolio was restructured to pursue
the newly adopted pre-tax total return objective resulting in net realized
capital gains of $4,916,000. An additional $1,568,000 of net capital gains were
realized in 1997 in the normal course of managing the investment portfolio. 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
Board's Investment Committee. This policy was revised in 1997 as previously
discussed under the Liquidity and Capital Resources section. The Investment
Committee meets with outside investment managers approximately four times per
year.

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 $37,494,000 for 1998 compared to $31,834,000 in
1997 and $32,257,000 in 1996. This results in an increase of 17.8 % between 1998
and 1997 versus a slight decrease of 1.3% between 1997 and 1996. As shown in
Note 5 of the consolidated financial statements, the current year's provision
for loss and loss adjustment expense, which is based upon policyholder exposure,
expected frequency of losses, and severity of losses, was fairly stable for the
years 1998, 1997 and 1996. Loss and loss adjustment expenses also include
adjustments of prior years' estimates. These adjustments to the liability for
loss and loss adjustment expense are evaluated by management and supported by an
outside actuarial review performed at the conclusion of the year. As shown in
Note 5 of the consolidated financial statements, these evaluations resulted in a
reduction in estimated liabilities applicable to prior years of $4,433,000,
$8,352,000 and $8,844,000, respectively in 1998, 1997 and 1996. The less
favorable development on prior years is the primary reason for the greater
incurred loss and loss adjustment expenses in 1998.

16

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

The following schedule summarizes the development of the liability for loss and
loss adjustment expense from 1988 through 1998. This schedule is presented net
of reinsurance which the Company believes best explains the development as it
affects operating results. The Company has a conservative loss reserving policy
which, when coupled with a moderation of malpractice insurance losses beginning
approximately in 1986 for the Company and across the industry, has resulted in
redundancies in liabilities greater than expected. The table indicates that the
redundancy in loss liabilities, which develop as actual results become known,
has significantly decreased from the high at December 31, 1990. Loss and loss
adjustment expense liabilities have not been discounted in the Company's
financial statements.

17

DEVELOPMENT OF LIABILITY FOR LOSS AND LOSS ADJUSTMENT EXPENSE
(THOUSANDS OF DOLLARS)

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
-------------------------------------------------------------------------------------------------------

Liability for unpaid loss
and loss adjustment
expense $74,577 $89,630 $97,375 $100,167 $98,617 $105,589 $88,227 $96,424 $90,342 $89,394 $94,467

Cumulative amount of
liability paid through:
1 year later 12,067 10,585 13,973 19,112 21,422 25,251 26,879 33,454 30,097 28,755
2 years later 19,043 21,890 28,643 32,798 37,498 42,685 46,925 53,132 44,562
3 years later 24,143 30,869 35,305 39,906 45,227 51,087 55,534 59,568
4 years later 26,241 35,015 37,624 42,752 46,226 53,594 57,129
5 years later 27,561 35,115 38,298 43,994 46,823 53,288
6 years later 27,695 35,187 39,505 44,370 46,810
7 years later 27,695 35,295 39,861 44,420
8 years later 27,695 35,295 39,862
9 years later 27,695 35,295
10 years later 27,695

Liability re-estimated as
of:

1 year later 65,928 73,244 83,359 83,991 94,633 80,960 85,595 87,580 81,990 84,961
2 years later 51,379 62,056 64,876 74,883 69,490 75,364 76,365 79,665 76,542
3 years later 43,516 52,010 56,351 53,538 65,568 64,586 67,891 77,294
4 years later 35,753 44,582 42,075 52,833 56,426 57,851 65,794
5 years later 31,052 37,872 41,771 45,892 52,388 56,785
6 years later 29,052 37,617 39,519 43,760 53,014
7 years later 29,002 35,882 38,929 43,563
8 years later 28,724 35,882 38,929
9 years later 28,724 35,882
10 years later 28,724

Cumulative redundancy 45,853 53,748 58,446 56,604 45,603 48,804 22,433 19,130 13,800 4,433

18

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

UNDERWRITING, ACQUISITION AND INSURANCE EXPENSES increased $1,189,000 from
$5,509,000 in 1997 to $6,698,000 in 1998. Approximately $469,000 of the increase
came from increases in variable expenses such as commissions and premium taxes
that resulted from the greater premium volume. The remaining increase was
largely due to additional staff needed to manage Company growth and added costs
from the conversion to a new insurance company operating system.

Underwriting, acquisition and insurance expenses increased $828,000 from 1996 to
1997. Approximately $425,000 of the increase was due to payments to state
medical societies, for the first time in 1997, under license and endorsement
agreements. The remaining increase reflected the increase in overall cost of
operating the Company in 1997 with employee salaries and benefits being the
largest component.

OTHER OPERATING EXPENSES increased $2,503,000 from $1,086,000 in 1997 to
$3,589,000 in 1998. Approximately $2,344,000 of the increase was from operating
two new, non-insurance companies, Solutions and MedPower. Both Solutions and
MedPower began active operations as of the beginning of 1998 as described in
Item 1 of this Form 10-K. The remaining increase resulted primarily from added
costs of operating the holding company.

Other operating expenses increased $228,000 from $858,000 in 1996 to $1,086,000
in 1997. Approximately $131,000 of the increase was from researching and forming
the new business development company that became Solutions. The remaining
increase resulted primarily from additional stock issuance expenses.

INCOME BEFORE INCOME TAXES decreased to $8,637,000 in 1998 compared to
$13,763,000 in 1997. The decrease resulted primarily from less favorable
development on loss liabilities estimated in prior years and added expenses from
operating two non-insurance companies newly formed at the beginning of 1998.

Income before income taxes increased to $13,763,000 in 1997 from $8,939,000 in
1996 primarily from the reversal of loss liabilities established in prior years
and additional net realized capital gains from the repositioning of the
investment portfolio.

INCOME TAXES decreased to $2,689,000 for 1998 compared to $4,463,000 for 1997.
The effective tax rates for 1998 and 1997 were 31.1% and 32.4%, respectively.
The principal factor in the decline in the effective tax rate was a recovery of
prior taxes recorded in 1998.

Income taxes increased to $4,463,000 for 1997 compared to $1,458,000 for 1996.
The effective tax rates for 1997 and 1996 were 32.4% and 16.3%, respectively.
The increase in the effective tax rate for 1997 was primarily due to a reduction
in tax-exempt investment income due to the 1997 repositioning of the investment
portfolio that eliminated tax-exempt municipal bonds. A 1997 payment of prior
year taxes and tax-exempt life insurance proceeds received in 1996 also
contributed to the increase in the effective tax rate in 1997.

19

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

NET INCOME realized by the Company was $5,948,000 for 1998 compared to
$9,300,000 for 1997 because of the factors discussed above. Basic net income per
share decreased to $48.36 for 1998 from $77.79 per share for 1997. Diluted net
income per share decreased to $43.65 for 1998 from $70.23 per share for 1997.

Also due to the factors discussed above, the Company realized net income of
$9,300,000 for 1997 compared to net income of $7,481,000 for 1996. Basic net
income per share increased to $77.79 for 1997 from $64.45 per share for 1996.
Diluted net income per share increased to $70.23 for 1997 from $58.33 per share
for 1996.

YEAR 2000 ISSUE

The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have time sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculation causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send billings, or
engage in similar normal business activities.

A Year 2000 Task Force was formed in early 1998 consisting of members of senior
and departmental management to evaluate and monitor the Year 2000 issue,
identify the causes and consequences to the Company, and develop courses of
action including contingency plans as deemed necessary. The Year 2000 Task Force
assessment includes the following key areas: internal computer hardware and
software, significant business partners and vendors and insurance policy
exposure.

An evaluation of the Year 2000 readiness of all significant internal computer
hardware and software applications and devices was completed in the latter
part of 1998. The evaluation identified three pieces of network hardware and
one subsidiary operating system that were not Year 2000 compliant. The three
pieces of network hardware did not impact time sensitive operations and
therefore did not pose any significant Year 2000 risk to the Company. The
operating system used by the MedPower subsidiary is in the process of being
converted to a new, Year 2000 compliant platform. The new operating system is
expected to be fully operational by June 1999 with a total conversion cost
estimated at $250,000. The conversion was approximately 60% completed and had
expenditures of approximately $150,000 as of the date of this Form 10-K
filing. As a result of the above evaluation, management believes that the
Year 2000 issue has been adequately addressed with respect to internal use
hardware and software.

20

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

A Year 2000 compliance inquiry was prepared and mailed in early October of 1998
to all of the Company's key business partners and service vendors. Responses are
being evaluated and follow-up will be performed during 1999 as appropriate. No
assurances, however, can be given that the systems of other companies on which
the Company's operations rely will become Year 2000 compliant in a timely
manner, or that the failure by a third party to become Year 2000 compliant would
not have a material adverse effect on the company.

A multi-departmental team consisting of claims, risk management and underwriting
management studied and carefully assessed the exposure that might exist in the
policies issued by MMIC. The majority of the exposure is related to medical
equipment that contains computer chips and may be affected by the Year 2000 bug.
This is primarily an exposure for the products liability carrier. All hospital
insureds have been surveyed to monitor their compliance to MMIC guidelines on
medical equipment. All current hospital insureds are in compliance. At this
point, no coverage change or exclusion has been enacted for the medical
malpractice professional liability policy. A Year 2000 exclusion became
effective January 1, 1999 on all premises and general liability policies issued
by MMIC. This exclusion will continue through the 2000 policy year. MMIC has
communicated its Year 2000 exposure preparedness to its reinsurers and they
fully support the plan as developed. While MMIC feels confident in the
completeness of its due diligence on Year 2000 exposure, it is not yet possible
to determine whether Year 2000 claims will be made against these policies or if
such claims will be held to have merit and what potential financial impact may
result.

Although the Company expects to complete its Year 2000 remediation in 1999,
there are risks if its efforts are delayed or fail. A delay or failure in
remedying a Year 2000 issue, caused by internal computer hardware or software
errors or failures, or by key business partners and service vendors who fail to
become Year 2000 compliant could, in a worst case, interrupt the Company's
business. Depending upon the extent and duration of the business interruption
resulting from non-compliance issues, such interruption could have a material
adverse effect on the Company's business, financial condition, and results of
operations. Although the Company believes the likelihood is remote based on the
due diligence performed as described previously, the potential does exist in a
worst case scenario for claims to be made by MMIC policyholders for Year 2000
failures they experience. Depending on whether such claims are deemed to have
merit and to the extent and amount these claims are awarded compensation, such
claims could have a material adverse effect on the Company's business, financial
condition, and results of operations.

21

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

The Year 2000 Task Force has developed contingency plans for the Company with
the exception of the MedPower subsidiary which is in the process of developing a
separate contingency plan. MedPower's contingency plan is expected to be
completed by June 1999. If the Company encounters Year 2000 problems with
respect to internal computer hardware and software, core functions can be
processed manually until the problems are remedied. If unanticipated Year 2000
problems occur with key service vendors, essential services can be handled
manually or through other vendors until the problems are resolved. The Year 2000
Task Force will be evaluating the need to test backup manual systems and
identify alternative key service vendors. In the event Year 2000 claims are made
on policies written by MMIC, the Company believes these claims will be without
merit and will vigorously defend its position. Although the Company believes its
contingency plans will be adequate, no assurances can be given that such plans
will address all risks that may actually arise.

The anticipated completion dates for Year 2000 compliance and the Company's
contingency plans and the cost estimates for the completion of Year 2000
modifications are based on management's best estimates utilizing current data
regarding available resources, coordination with third parties and other
relevant factors and information about systems conversion. No assurances,
however, can be given that these estimates will be achieved and actual results
may differ from those anticipated.

Readers are reminded that forward-looking statements contained in this
description of the Company's treatment of the Year 2000 issue should be read in
conjunction with the Company's following disclosures under the heading
"Cautionary Note Regarding Forward-Looking Statements."

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Statements other than historical information contained in this Form 10-K are
considered to be "forward-looking statements" within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities Act
of 1934, as amended.

All forward-looking statements address matters that involve risks and
uncertainties. Accordingly, in addition to the factors discussed in this Form
10-K, there are or will be other important factors that could cause actual
results to differ materially from those indicated in such statements. These
factors include but are not limited to:

i. the impact of changing market conditions on the Company's business
strategy;

ii. the effects of increased competition on pricing, coverage terms,
retention of customers and ability to attract new customers;

iii. greater severity or frequency of the types of losses that the Company
insure;

22

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

iv. faster or more adverse loss development experience than that on which
the Company based its underwriting, reserving, and investment
practices;

v. developments in global financial markets which could adversely affect
the performance of the Company's investment portfolio;

vi. litigation, regulatory or tax developments which could adversely
affect the Company's business;

vii. risks associated with the introduction of new products and services;

viii. dependence on key personnel;

ix. the impact of mergers and acquisitions; and

x. failure of the Company or significant third parties to achieve Year
2000 compliance or material expense incurred in connection with such
compliance.

The facts set forth above should be considered in 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 forgoing
list of important factors. By this cautionary note, the Company intends to avail
itself of the safe harbor from liability with respect to forward-looking
statements provided by Section 27A and Section 21E referred to above.

ITEM 7a. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT
MARKET RISK

Market risk is the risk of loss that may occur when fluctuations in interest and
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 and equity price risk on its investment in equity
securities.

As disclosed previously, 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. Under the current investment policy, management does not use
derivative instruments to manage exposure to either interest rate risk or equity
price risk. Professional outside investment managers adjust portfolio
characteristics, such as sector and average life, based on their outlook of
market conditions within the parameters set by the Company's investment policy
as approved by the Investment Committee of the Board of Directors.

23

ITEM 7a. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT
MARKET RISK (CONTINUED)

Based on the effective duration of the fixed maturity investment portfolio as of
December 31, 1998, 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 $8,500,000. Based primarily on past
annual performance relative to the Standard & Poors 500 Market Index (S&P 500),
an abrupt ten percent decrease in the S&P 500 would adversely affect the fair
value of equity securities by approximately $10,000,000 at December 31, 1998.
The Company believes that there would be no material effect on its net income
and cash flows in either scenario. This effect on net income and cash flows does
not consider the possible effects a change in economic activity could have in
such an environment. Investors, customers, regulators and legislators could
respond to these fluctuations in ways the Company cannot foresee. Because the
Company cannot be certain what specific actions would be taken and their
effects, the above sensitivity analyses assume no significant changes in the
Company's financial structure.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements of Midwest Medical Insurance Holding
Company and Subsidiaries are presented on the following pages 25 through 53 of
this Annual Report on Form 10-K.

24

Midwest Medical Insurance Holding Company and Subsidiaries

Consolidated Financial Statements

Years ended December 31, 1998, 1997 and 1996

CONTENTS

Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . 26

Consolidated Financial Statements

Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . . 27
Consolidated Statements of Income. . . . . . . . . . . . . . . . . . . . . 28
Consolidated Statements of Changes in Other Shareholders' Equity . . . . . 29
Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . . . 30
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . 31

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, 1998 and 1997, and
the related consolidated statements of income, changes in other shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1998. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Midwest Medical
Insurance Holding Company and Subsidiaries at December 31, 1998 and 1997, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. 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 herein.

/s/ ERNST & YOUNG LLP

Minneapolis, Minnesota
February 1, 1999

26

Midwest Medical Insurance Holding Company and Subsidiaries

Consolidated Balance Sheets

(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)

DECEMBER 31
1998 1997
-----------------------

ASSETS
Investments:
Fixed maturities at fair value (cost: 1998--$161,430;
1997--$170,590) $164,652 $171,975
Equity securities at fair value (cost: 1998--$41,907
1997--$21,576) 86,553 50,862
Short-term 3,556 13,909
Other 10,000 10,000
-----------------------
264,761 246,746

Cash 647 2,378
Accrued investment income 1,739 2,341
Reinsurance recoverable 16,499 19,117
Amounts due from reinsurers 3,191 -
Other assets 8,646 4,933
-----------------------
Total assets $295,483 $275,515
-----------------------
-----------------------
LIABILITIES, REDEEMABLE STOCK AND OTHER
SHAREHOLDERS' EQUITY
Liabilities:
Unpaid losses and loss adjustment expenses $110,964 $107,806
Unearned premiums 8,173 6,072
Retrospective premiums 8,543 9,905
Deferred income taxes 10,966 3,592
Amounts due reinsurers - 2,984
Other liabilities 6,244 11,389
-----------------------
Total liabilities 144,890 141,748

Redeemable stock:
Class A Common Stock--authorized 300,000 shares,
issued and outstanding 125,682 shares in 1998
and 121,322 shares in 1997 8,146 7,476
Class B Common Stock--authorized, issued and outstanding 1 share 1 1
-----------------------
8,147 7,477

Other shareholders' equity 142,446 126,290
-----------------------
Total liabilities, redeemable stock and other
shareholders' equity $295,483 $275,515
-----------------------
-----------------------

SEE ACCOMPANYING NOTES.

27

Midwest Medical Insurance Holding Company and Subsidiaries

Consolidated Statements of Income

(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)

YEAR ENDED DECEMBER 31
1998 1997 1996
-------------------------------------

Revenues:
Net premiums earned $35,014 $32,916 $31,177
Net investment income 10,919 11,509 12,061
Realized capital gains 8,949 6,484 1,771
Other 1,536 1,283 1,726
-------------------------------------
56,418 52,192 46,735

Losses and expenses:
Losses and loss adjustment expenses 37,494 31,834 32,257
Underwriting, acquisition and insurance expenses 6,698 5,509 4,681
Other operating expenses 3,589 1,086 858
-------------------------------------
47,781 38,429 37,796
-------------------------------------
Income before income taxes 8,637 13,763 8,939

Income taxes 2,689 4,463 1,458
-------------------------------------
Net income $5,948 $9,300 $7,481
-------------------------------------
-------------------------------------

Income per common share $48.36 $77.79 $64.45
-------------------------------------
-------------------------------------

Income per common share--assuming dilution $43.65 $70.23 $58.33
-------------------------------------
-------------------------------------

SEE ACCOMPANYING NOTES.

28

Midwest Medical Insurance Holding Company and Subsidiaries

Consolidated Statements of Changes in Other Shareholders' Equity

(IN THOUSANDS)

ACCUMULATED
OTHER
PAID-IN RETAINED COMPREHENSIVE
TOTAL CAPITAL EARNINGS INCOME
-------------------------------------------------------

Balance at December 31, 1995 $103,292 $12,789 $78,204 $12,299
Comprehensive income:
Net income 7,481 - 7,481 -
Other comprehensive income:
Unrealized gains on securities net of $1,468 in taxes 2,726 - - 2,726
Reclassification adjustment for gains included in net
income net of $620 in taxes (1,151) - - (1,151)
--------
Total comprehensive income 9,056
Net income of non-insurance entities includable in Class A
Common Stock redemption value (1,070) - (1,070) -
-----------------------------------------------------
Balance at December 31, 1996 111,278 12,789 84,615 13,874
Comprehensive income:
Net income 9,300 - 9,300 -
Other comprehensive income:
Unrealized gains on securities net of $5,491 in taxes 10,199 - - 10,199
Reclassification adjustment for gains included in net
income net of $2,269 in taxes (4,215) - - (4,215)
--------
Total comprehensive income 15,284
Net income of non-insurance entities includable in Class A
Common Stock redemption value (272) - (272) -
-----------------------------------------------------
Balance at December 31, 1997 126,290 12,789 93,643 19,858
Comprehensive income:
Net income 5,948 - 5,948 -
Other comprehensive income:
Unrealized gains on securities net of $9,111 in taxes 16,921 - - 16,921
Reclassification adjustment for gains included in net
income net of $3,132 in taxes (5,817) - - (5,817)
--------
Total comprehensive income 17,052
Dividend paid by Midwest Medical Insurance Company to
Midwest Medical Insurance Holding Company (2,000) - (2,000) -
Net loss of non-insurance entities includable in Class A
Common Stock redemption value 1,104 - 1,104 -
-----------------------------------------------------
Balance at December 31, 1998 $142,446 $12,789 $98,695 $30,962
-----------------------------------------------------
-----------------------------------------------------

SEE ACCOMPANYING NOTES.

29

Midwest Medical Insurance Holding Company and Subsidiaries

Consolidated Statements of Cash Flows

(IN THOUSANDS)

YEAR ENDED DECEMBER 31
1998 1997 1996
---------------------------------------

OPERATING ACTIVITIES
Net income $ 5,948 $ 9,300 $ 7,481
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Decrease in accrued investment income 602 437 97
Decrease in reinsurance recoverable 2,618 3,057 2,938
Increase in amounts due from reinsurers (3,191) - -
(Increase) decrease in other assets (3,713) 1,518 1,015
Deferred tax provision 1,354 1,494 298
Increase (decrease) in unpaid losses and loss
adjustment expenses 3,158 (2,231) (10,227)
Increase (decrease) in unearned premiums 2,101 (788) (173)
Decrease in retrospective premiums (1,362) (933) (26)
Decrease in amounts due reinsurers (2,984) (4,290) (544)
(Decrease) increase in other liabilities (5,145) 3,287 (236)
Accretion of bond discount, net of premium amortization (266) (618) (1,080)
Realized capital gains (8,949) (6,484) (1,771)
Compensation expense for vested Class A common shares 224 253 156
---------------------------------------
(9,605) 4,002 (2,072)
INVESTING ACTIVITIES
Purchases of fixed maturity investments and equity securities (401,922) (311,947) (75,684)
Sales of fixed maturity investments and equity securities 398,717 316,982 54,293
Calls and maturities of fixed maturity investments 1,250 - 16,250
Net sales (purchases) of short-term investments 6,502 (6,011) 7,117
Capitalization of Midwest Medical Solutions, Inc. 3,850 - -
---------------------------------------
8,397 (976) 1,976
FINANCING ACTIVITIES
Redemption of Class A Common Stock (523) (648) (608)
---------------------------------------

(Decrease) increase in cash (1,731) 2,378 (704)
Cash at beginning of year 2,378 - 704
---------------------------------------
Cash at end of year $ 647 $ 2,378 $ -
---------------------------------------
---------------------------------------

SEE ACCOMPANYING NOTES.

30

Midwest Medical Insurance Holding Company and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 1998

1. ACCOUNTING POLICIES

ORGANIZATION AND OPERATIONS

The Minnesota Medical Insurance Exchange (Exchange) began operations in
October 1980 as a reciprocal or inter-insurance exchange organized under Chapter
71A of the Minnesota Statutes. Minnesota Medical Management, Inc. (MMMI) was the
Exchange's attorney-in-fact and was responsible for management of the Exchange.

On November 30, 1988, the Exchange was reorganized into a stock insurance
company, Midwest Medical Insurance Company (MMIC), under the statutes of the
State of Minnesota. Concurrently, MMMI merged with the Midwest Medical Insurance
Holding Company (MMIHC) which then acquired all outstanding shares of the
reorganized stock company.

Effective July 1, 1993, MMIC merged with Iowa Physicians Mutual Insurance Trust
(IPMIT), a physician-owned professional liability insurance company providing
insurance coverage to Iowa physicians. As provided for in the agreement and plan
of merger, IPMIT was merged into MMIC. The merger was accounted for as a
pooling-of-interests.

During 1995, MMIHC formed MMIHC Insurance Services, Inc. (Services) to provide
agency services for the distribution of complementary insurance products and
services to physicians, clinics and hospitals.

Effective June 5, 1996, MMIC merged with Medical Liability Mutual Insurance
Company of Nebraska (MLM), a physician-owned professional liability insurance
company providing insurance coverage to Nebraska physicians. As provided for in
the agreement and plan of merger, MLM was merged into MMIC. The merger was
accounted for as a pooling-of-interests and, accordingly, the consolidated
financial statements include the combined financial position and results of
operations of MMIHC and MLM for all periods presented.

During 1997, MMIHC formed Midwest Medical Solutions, Inc. (Solutions) as a
business development company to strengthen and promote the independence and
interdependencies of physicians, clinics and hospitals that MMIC serves.
Business development opportunities being pursued include practice enhancement,
strategic consulting, and electronic processing and integration services and
support.

31

Midwest Medical Insurance Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (continued)

1. ACCOUNTING POLICIES (CONTINUED)

Effective January 1, 1998, Solutions purchased the assets and operations of
MedPower Information Resources, Inc. (MedPower). MedPower processes and
electronically submits medical claims for a network of over 100 provider
entities. MedPower also provides various information consulting and network
support services.

MMIHC provides management and administrative services to MMIC for a fee
generally equal to the cost of services provided plus ten percent. The insurance
company provides professional liability insurance to physicians, clinics,
hospitals and healthcare systems in Minnesota, Iowa, Nebraska, Wisconsin,
Illinois, North Dakota and South Dakota.

Insurance policies issued by MMIC are on a "claims made" basis and provide
coverage for the policyholder for claims first made against the policyholder and
reported to MMIC during the policy period for claims which occurred on or after
the retroactive date stated in the policy.

MMIC provides, upon payment of an additional premium, a reporting endorsement
which extends the period in which claims otherwise covered by the "claims made"
policy may be reported to MMIC. In the event of death or permanent disability of
a policyholder, the reporting endorsement is issued without additional premium.
Upon retirement, as defined in the policy, a policyholder with at least five
years of consecutive coverage with MMIC is eligible for a credit toward the
additional premium for the reporting endorsement.

Prior acts coverage may be purchased by policyholders who were previously
insured under a "claims made" policy with another professional liability insurer
for an additional premium at the option of the insured in lieu of purchasing
reporting endorsement coverage from the previous insurer.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of MMIHC and its
wholly-owned subsidiaries, MMIC, Services, and Solutions, which includes
Solution's wholly-owned subsidiary, MedPower. All transactions between MMIHC and
its subsidiaries have been eliminated in consolidation with the exception of the
distribution of capital to MMIHC by MMIC in the form of dividends.

32

Midwest Medical Insurance Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (continued)

1. ACCOUNTING POLICIES (CONTINUED)

Hereafter, MMIHC, MMIC, Services, Solutions and MedPower shall be collectively
referred to as the Company unless the reference pertains to a specific entity.

BASIS OF PRESENTATION

The consolidated financial statements have been presented in conformity with
generally accepted accounting principles, which differ in certain respects from
statutory accounting practices followed by MMIC in reporting to the Department
of Commerce of the State of Minnesota (see Note 10).

COMPREHENSIVE INCOME

As of January 1, 1998, the Company adopted Statement 130, REPORTING
COMPREHENSIVE INCOME. Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net income or shareholders'
equity. Statement 130 requires unrealized gains or losses on the Company's
available-for-sale securities, which prior to adoption were reported separately
in shareholders' equity, to be included in other comprehensive income. Prior
year financial statements have been reclassified to conform to the requirements
of Statement 130.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses, as
well as disclosure of contingent assets and liabilities at the date of the
financial statements. Actual results could differ from those estimates.

33

Midwest Medical Insurance Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (continued)

1. ACCOUNTING POLICIES (CONTINUED)

INVESTMENTS

The Company manages its investment portfolio to achieve its long-term investment
objective of providing for the financial stability of the Company through
preservation of assets and maximization of total portfolio return. Although
management believes the Company has the ability to hold its fixed maturity
investment portfolio to maturity, these investments are classified as "available
for sale" as management may take advantage of opportunities to increase total
return through sales of selected securities in response to changing market
conditions.

Consistent with management's classification of its investment in debt and equity
securities as available for sale, such investments are carried at fair value
with unrealized holding gains and losses reflected as a component of other
comprehensive income, net of applicable deferred taxes.

Fair values are based on quoted market prices, where available. For fixed
maturity investments not actively traded, fair values are estimated using values
obtained from independent pricing services.

Short-term investments are principally money market funds backed by U.S.
government securities and are recorded at cost which approximates fair value.

Other investments are less than twenty percent equity interests in non-traded
real estate investment trusts and are recorded at cost.

Realized gains and losses on sales of investments are reported on a pre-tax
basis as a component of income and are determined on the specific identification
basis.

34

Midwest Medical Insurance Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (continued)

1. ACCOUNTING POLICIES (CONTINUED)

LOSSES AND LOSS ADJUSTMENT EXPENSES

The liability for unpaid losses and loss adjustment expenses represents an
estimate of the ultimate cost of all such amounts which are unpaid at the
balance sheet dates. The liability is based on both case-by-case estimates and
statistical analysis and projections using the historical loss experience of
MMIC, and gives effect to estimates of trends in claim severity and frequency.
These estimates are continually reviewed and, as adjustments become necessary,
such adjustments are included in current operations. MMIC believes that the
estimate of the liability for losses and loss adjustment expenses is reasonable.

PREMIUMS

Premiums received are recorded as earned ratably over the lives of the policies
to which they apply. A portion of premiums received is deferred to recognize
MMIC's obligation to provide reporting endorsement coverage without additional
premium upon the death, disability or retirement of policyholders. This amount
is recorded as an unearned premium reserve and represents the actuarially
determined present value of future benefits to be provided less the present
value of future revenues to be received.

MMIC has a retro premium program whereby physicians may receive credits against
future premiums based upon loss experience of MMIC. Amounts to be returned under
the program are accrued when approved by the Board of Directors and reflected as
a reduction in net premiums earned.

REINSURANCE

MMIC cedes reinsurance in order to reduce its liability on individual risks and
to enable it to write business at limits it otherwise would be unable to accept.
All reinsurance contracts are excess-of-loss contracts which indemnify MMIC for
losses in excess of a stated retention limit up to the policy limits.

Reinsurance receivables and recoverables and prepaid reinsurance premiums are
reported as assets and reserve liabilities are reported gross of reinsurance
credits.

35

Midwest Medical Insurance Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (continued)

1. ACCOUNTING POLICIES (CONTINUED)

ACQUISITION COSTS

Acquisition costs are expensed when incurred. Due to the nature of its
operations, MMIC does not pay significant amounts in commissions.

INCOME TAXES

The Company files a consolidated tax return with its subsidiaries. Income tax
expense is allocated to the subsidiaries based upon separate company taxable
income under a tax-sharing agreement. The Company uses the asset and liability
method of accounting for income taxes. Deferred income tax assets or liabilities
are recognized for the temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and amounts used for
income tax purposes.

EARNINGS PER SHARE

Basic earnings per share (EPS) is computed by dividing income available to
common shareholders by the weighted-average number of common shares outstanding
for the year. Diluted EPS reflects the potential dilution that could occur if
earned but unissued shares of Class A common stock were issued.

RECLASSIFICATIONS

Certain amounts in the prior years' financial statements have been reclassified
to conform with the current year presentation.

2. REDEEMABLE STOCK

Effective November 30, 1988, MMIC policyholders earn Class A Common Shares for
each month of service pursuant to a stock allocation formula based on
underwriting risk classification. Shares earned by new policyholders are not
issued until the end of five years of continuous coverage under an MMIC policy
(the vesting date). The Company does not record any amounts related to unissued
Class A Common Shares. At the vesting date, the issued shares are recorded at
the then current redemption value (see Note 12).

36

Midwest Medical Insurance Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (continued)

2. REDEEMABLE STOCK (CONTINUED)

The Company accounts for these shares by increasing Common Stock by the par
value ($.01 per share) of the newly issued shares, increasing paid-in capital by
the excess of the redemption value over par and charging stock compensation
expense for the full redemption value. Once vested, policyholders will continue
to earn shares for each month they remain insured with MMIC according to the
stock allocation formula. The Company accounts for additional shares issued to
vested policyholders by increasing Common Stock for the par value of the shares
and decreasing retained earnings by the same amount.

MMIC policyholders whose initial effective date was on or before the November
30, 1988 reorganization, IPMIT policyholders whose initial effective date was on
or before December 31, 1992 and MLM policyholders whose initial effective date
was on or before December 31, 1995 became fully vested upon initial receipt of
their shares without regard to their length of coverage. These policyholders
will continue to earn and receive additional Class A shares for each month they
remain insured with MMIC. The Company accounts for these shares similar to
additional shares issued to other fully vested shareholders.

In accordance with the Articles of Incorporation and By-laws of MMIHC, only
active policyholders of MMIC may own shares of Class A Common Stock of MMIHC. At
each meeting of the shareholders, every Class A shareholder having the right to
vote shall be entitled to one vote, either in person or by proxy, regardless of
the number of Class A shares held by the individual.

Class A shareholders are required to redeem their shares with MMIHC upon
termination as policyholders of MMIC. The net redemption value (NRV) of the
shares is equal to the net book value of MMIHC, excluding the amount of net book
value that is attributable to MMIC, divided by the number of outstanding Class A
Common Shares of MMIHC at the semi-annual valuation dates of June 30 and
December 31 of each year. The amount paid upon redemption is the redemption
value determined at the most recent semi-annual valuation.

MMIHC has issued one share of Class B voting stock which carries with it the
right to elect the Board of Directors of MMIHC. The voting rights are currently
exercised by the Minnesota Medical Association and the Iowa Medical Society. A
majority of the Class A shareholders may at any time, by a two-thirds vote,
elect to redeem the Class B share at cost.

37

Midwest Medical Insurance Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (continued)

2. REDEEMABLE STOCK (CONTINUED)

Following is the detail of changes in redeemable stock for each of the three
years in the period ended December 31, 1998 (in thousands, except for share and
per share amounts):

ACCUMULATED
CLASS A COMMON STOCK CLASS B MMIHC MMIHC OTHER
-------------------- COMMON PAID-IN RETAINED COMPREHENSIVE
TOTAL SHARES AMOUNT STOCK CAPITAL EARNINGS INCOME
-------------------------------------------------------------------------

Balance at December 31, 1995 $6,975 116,251 $ 1 $1 $4,752 $2,164 $ 57
Comprehensive income:
Net income of non-insurance entities includable
in Class A Common Stock redemption value 1,070 - - - - 1,070 -
Other comprehensive income:
Unrealized gains on securities net of $6 in taxes 11 - - - - - 11
------
Total comprehensive income 1,081
Redemption of shares due to policyholder terminations
by effective date:
January 1, 1996 to June 30, 1996; NRV of $60.00 (377) (6,277) (1) - (259) (117) -
July 1, 1996 to December 31, 1996; NRV of $57.84 (231) (3,995) - - (159) (72) -
Issuance of shares to vested policyholders - 9,540 1 - - (1) -
Initial issuance of shares to policyholders upon vesting 156 2,690 - - 156 - -
----------------------------------------------------------------------
Balance at December 31, 1996 (CARRIED FORWARD) 7,604 118,209 1 1 4,490 3,044 68

38

Midwest Medical Insurance Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (continued)

2. REDEEMABLE STOCK (CONTINUED)

ACCUMULATED
CLASS A COMMON STOCK CLASS B MMIHC MMIHC OTHER
-------------------- COMMON PAID-IN RETAINED COMPREHENSIVE
TOTAL SHARES AMOUNT STOCK CAPITAL EARNINGS INCOME
-------------------------------------------------------------------------

Balance at December 31, 1996 (BROUGHT FORWARD) $7,604 118,209 $ 1 $1 $4,490 $3,044 $ 68
Comprehensive income:
Net income of non-insurance entities includable
in Class A Common Stock redemption value 272 - - - - 272 -
Other comprehensive income:
Unrealized gains on securities net of $6 in taxes 11 - - - - - 11
------
Total comprehensive income 283
Redemption of shares due to policyholder terminations
by effective date:
January 1, 1997 to June 30, 1997; NRV of $64.33 (278) (4,363) - - (165) (113) -
July 1, 1997 to December 31, 1997; NRV of $62.12 (370) (5,943) (1) - (220) (149) -
Issuance of shares to vested policyholders - 9,406 1 - - (1) -
Initial issuance of shares to policyholders upon vesting 253 4,013 - - 253 - -
Other (15) - - - - (15) -
------------------------------------------------------------------------
Balance at December 31, 1997 (CARRIED FORWARD) 7,477 121,322 1 1 4,358 3,038 79

39

Midwest Medical Insurance Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (continued)

2. REDEEMABLE STOCK (CONTINUED)

ACCUMULATED
CLASS A COMMON STOCK CLASS B MMIHC MMIHC OTHER
-------------------- COMMON PAID-IN RETAINED COMPREHENSIVE
TOTAL SHARES AMOUNT STOCK CAPITAL EARNINGS INCOME
-------------------------------------------------------------------------

Balance at December 31, 1997 (BROUGHT FORWARD) $ 7,477 121,322 $ 1 $1 $4,358 $ 3,038 $ 79
Comprehensive income:
Net loss of non-insurance entities includable in
Class A Common Stock redemption value (1,104) - - - - (1,104) -
Other comprehensive income:
Unrealized gains on securities net of $39 in taxes 73 - - - - - 73
-------
Total comprehensive income (1,031)
Redemption of shares due to policyholder terminations
by effective date:
January 1, 1998 to June 30, 1998; NRV of $61.63 (251) (4,070) - - (147) (104) -
July 1, 1998 to December 31, 1998; NRV of $54.70 (272) (4,935) (1) - (160) (111) -
Issuance of shares to vested policyholders - 9,437 1 - - (1) -
Initial issuance of shares to policyholders upon vesting 224 3,928 - - 224 - -
Dividend from MMIC 2,000 - - - 2,000 - -
------------------------------------------------------------------------
Balance at December 31, 1998 $ 8,147 125,682 $ 1 $1 $6,275 $ 1,718 $152
------------------------------------------------------------------------
------------------------------------------------------------------------

40

Midwest Medical Insurance Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (continued)

3. INVESTMENTS

Components of net investment income are summarized as follows (in thousands):

1998 1997 1996
---------------------------------

Fixed maturities $ 9,340 $10,901 $11,561
Equity securities 820 523 380
Short-term investments 926 939 904
Other investments 855 - -
---------------------------------
11,941 12,363 12,845
Investment expenses (1,022) (854) (784)
---------------------------------
$10,919 $11,509 $12,061
---------------------------------
---------------------------------

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

DECEMBER 31, 1998
-----------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-----------------------------------------------

Fixed maturities:
MMIC:
United States Government $110,729 $ 2,729 $ (70) $113,388
Public utilities 1,609 5 - 1,614
Industrial and other 49,092 651 (93) 49,650
-----------------------------------------------
Total $161,430 $ 3,385 $(163) $164,652
-----------------------------------------------
-----------------------------------------------
Equity securities:
MMIHC $ 520 $ 234 $ - $ 754
MMIC 41,387 45,297 (885) 85,799
-----------------------------------------------
Total $ 41,907 $ 45,531 $(885) $ 86,553
-----------------------------------------------
-----------------------------------------------

41

Midwest Medical Insurance Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (continued)

3. INVESTMENTS (CONTINUED)

DECEMBER 31, 1997
-----------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-----------------------------------------------

Fixed maturities:
MMIHC:
United States Government $ 1,255 $ - $ - $ 1,255
Industrial and other 53 - - 53
MMIC:
United States Government 97,234 801 (36) 97,999
State and other political
subdivisions 32,991 383 - 33,374
Industrial and other 39,057 257 (20) 39,294
-----------------------------------------------
Total $170,590 $ 1,441 $(56) $171,975
-----------------------------------------------
-----------------------------------------------
Equity securities:
MMIHC $ 981 $ 122 $ - $ 1,103
MMIC 20,595 29,164 - 49,759
-----------------------------------------------
Total $ 21,576 $ 29,286 $ - $ 50,862
-----------------------------------------------
-----------------------------------------------

The components of the unrealized appreciation on available for sale
securities as of December 31 are as follows (in thousands):

1998 1997
----------------- -----------------
MMIHC MMIC MMIHC MMIC
----------------- -----------------

Fixed maturities:
Gross unrealized gains $ - $ 3,385 $ - $ 1,441
Gross unrealized losses - (163) - (56)

Equity securities:
Gross unrealized gains 234 45,297 122 29,164
Gross unrealized losses - (885) - -
----------------- -----------------
234 47,634 122 30,549
Deferred income taxes (82) (16,672) (43) (10,691)
----------------- -----------------
$ 152 $ 30,962 $ 79 $ 19,858
----------------- -----------------
----------------- -----------------

42

Midwest Medical Insurance Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (continued)

3. INVESTMENTS (CONTINUED)

The amortized cost and market value of fixed maturities at December 31, 1998, by
contractual maturity, are shown below (in thousands). Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.

AMORTIZED MARKET
COST VALUE
------------------------

Due in one year or less $ 6,192 $ 6,221
Due after one year through five years 40,322 40,982
Due after five years through ten years 27,671 28,309
Due after ten years 87,245 89,140
------------------------
$161,430 $164,652
------------------------
------------------------

Proceeds from sales of available for sale investments and the related gross
realized gains and losses are as follows (in thousands):

GROSS GROSS
PROCEEDS REALIZED REALIZED
FROM SALES GAINS LOSSES
--------------------------------

Year ended December 31, 1998:
Fixed maturities $382,048 $3,600 $(769)
Equity securities 16,669 6,404 (286)

Year ended December 31, 1997:
Fixed maturities 310,235 5,806 (884)
Equity securities 6,747 2,109 (547)

Year ended December 31, 1996:
Fixed maturities 46,735 803 (214)
Equity securities 7,558 1,347 (165)

Net unrealized appreciation of fixed maturities increased (decreased) by
$1,837,000, $(2,197,000) and $(4,691,000) and net unrealized appreciation of
equity securities increased by $15,360,000, $11,417,000 and $7,140,000 for the
years ended December 31, 1998, 1997 and 1996, respectively.

43

Midwest Medical Insurance Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (continued)

4. RETROSPECTIVE PREMIUMS

The components of retrospective premiums at December 31 are as follows (in
thousands):

1998 1997
-------------------

Retrospective premium credits declared:
Minnesota policyholders $5,200 $5,000
North Dakota policyholders 280 -
Iowa policyholders active at date of merger
and renewing in 1999 and 1998 3,063 3,100
Favorable development on pre-merger IPMIT
liabilities not yet approved for credit - 1,805
-------------------
$8,543 $9,905
-------------------
-------------------

A provision of the agreement and plan of merger between IPMIT and the Company
requires that any favorable development of certain pre-merger liabilities of
IPMIT be paid to the former IPMIT policyholders who remain active MMIC insureds
as of the date of payment through a retrospective premium credit. The agreement
further stipulates that any amounts due under this provision must be finalized
using financial information available as of December 31, 1998. Final amounts due
under this provision will be paid to physician insureds in early 1999. Actual
payments of $3,073,000 and $2,501,000 were made to former IPMIT policyholders in
1998 and 1997, respectively. Actual retrospective premium payments made to
Minnesota policyholders' accounts in 1998 and 1997 were $5,008,000 and
$4,803,000, respectively.

A provision of the agreement and plan of merger between MLM and the Company
requires that any favorable development of certain pre-merger liabilities of MLM
be paid to the former MLM policyholders who remain active MMIC insureds as of
the date of payment through a retrospective premium credit. The agreement
further stipulates that any amounts due under this provision must be settled no
later than June 5, 2001. As of December 31, 1998, there has been no favorable
development and therefore there is no accrual related to this provision.

44

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):

1998 1997 1996
--------------------------------------

Balance as of January 1, net of reinsurance
recoverables $ 89,394 $ 90,342 $ 96,424

Incurred related to:
Current year 41,927 40,186 41,101
Prior years (4,433) (8,352) (8,844)
--------------------------------------
Total incurred 37,494 31,834 32,257

Paid related to:
Current year 3,666 2,685 4,885
Prior years 28,755 30,097 33,454
--------------------------------------
Total paid 32,421 32,782 38,339
--------------------------------------

Balance as of December 31, net of reinsurance
recoverables 94,467 89,394 90,342

Reinsurance recoverables at December 31 16,497 18,412 19,695
--------------------------------------
Balance as of December 31, gross $110,964 $107,806 $110,037
--------------------------------------
--------------------------------------

The Company continually evaluates emerging trends in the development of loss
liabilities including the trends related to the pre-merger IPMIT and MLM
business. Based on this analysis, management periodically adjusts their
estimates of ultimate losses. See Note 4 regarding retrospective premium credits
paid and accrued.

45

Midwest Medical Insurance Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (continued)

6. INCOME TAXES

Components of income taxes are as follows (in thousands):

1998 1997 1996
---------------------

Current provision $1,335 $2,969 $1,160

Deferred tax provision 1,354 1,494 298
---------------------
$2,689 $4,463 $1,458
---------------------
---------------------

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

1998 1997 1996
---------------------------------------

Income before tax at the federal statutory rate
of 35% $ 3,023 $ 4,817 $ 3,129
Tax-exempt income (net of proration adjustment) - (775) (1,374)
Dividends received deductions (net of proration
adjustment) (99) (89) (78)
State income taxes, net of federal tax benefit 37 198 50
Payment of prior year taxes - 300 -
Recovery of prior year taxes (267) - -
Proceeds on life insurance - - (368)
Other (5) 12 99
---------------------------------------
$ 2,689 $ 4,463 $ 1,458
---------------------------------------
---------------------------------------

46

Midwest Medical Insurance Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (continued)

6. INCOME TAXES (CONTINUED)

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

1998 1997 1996
-------------------------------------

Discounting of post-1986 unpaid losses and loss
adjustment expenses $ 842 $ 323 $1,190
Liabilities not currently deductible 596 636 (274)
Unearned premiums (151) 57 6
Utilization of alternative minimum tax carryforwards - 496 -
Alternative minimum tax carryforwards - - (496)
Other 67 (18) (128)
-------------------------------------
$1,354 $1,494 $ 298
-------------------------------------
-------------------------------------

The Company made income tax payments of $3,041,000, $1,518,000 and $3,260,000 in
1998, 1997 and 1996, respectively.

The components of the net deferred income tax (liability) asset as of December
31 are as follows (in thousands):

1998 1997
------------------------

Deferred tax assets:
Unpaid losses and loss adjustment expenses $ 4,154 $ 4,996
Liabilities not currently deductible 1,079 1,675
Unearned premiums 628 477
Other 550 552
------------------------
6,411 7,700
Deferred tax liabilities:
Unrealized gains (16,754) (10,734)
Other (623) (558)
------------------------
(17,377) (11,292)
------------------------
$(10,966) $(3,592)
------------------------
------------------------

47

Midwest Medical Insurance Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (continued)

6. INCOME TAXES (CONTINUED)

Management has determined that no valuation allowances were necessary for
unrealizable portions of deferred tax assets. This was supported primarily
through the presence of taxable income in carryback years and reversals of
existing temporary differences which provide taxable income in future years. A
portion of the deferred tax assets was supported through reliance on available
tax planning strategies which could be implemented at no cost.

7. REINSURANCE

To reduce overall risk, including exposure to large losses, the Company
participates in various reinsurance programs. MMIC would only become liable for
losses in excess of stipulated amounts in the event that any reinsuring company
were unable to meet its obligations under the existing agreement. Management is
not aware of any such default at December 31, 1998. Reinsurance recoverables on
paid and unpaid losses of $16,277,000 and $16,141,000 are associated with a
single reinsurer, General Reinsurance Corporation, at December 31, 1998 and
1997, respectively.

MMIC is authorized to issue policies with limits not to exceed $12,000,000 for
each claim and $14,000,000 in the aggregate under each policy in any one policy
year. Limits in excess of $12,000,000 for each claim and $14,000,000 annual
aggregate are available to physicians and clinics through reinsurance placed on
a facultative basis by MMIC. The Company generally retains the first $750,000 of
each claim and reinsures the remainder through a treaty under which premiums are
subject to adjustment based on experience.

Total ceded reinsurance premiums, before the effects of treaty commutations, for
the years ended December 31, 1998, 1997 and 1996 were $3,104,000, $3,329,000 and
$6,416,000, respectively. Loss and loss adjustment expenses incurred are net of
applicable reinsurance of $2,240,000, $2,455,000 and $2,459,000 for the years
ended December 31, 1998, 1997 and 1996, respectively.

In 1998, the Company commuted reinsurance treaties covering the period January
1, 1991 through December 31, 1991. Net premiums recovered as a result of these
commutations of $789,000 have been included in net premiums earned in 1998.

In 1996, the Company commuted reinsurance treaties covering the period January
1, 1989 through December 31, 1990. Net premiums recovered as a result of these
commutations of $2,194,000 have been included in net premiums earned in 1996.

48

Midwest Medical Insurance Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (continued)

8. OTHER COMMITMENTS

In the normal course of claim settlement, MMIC negotiates structured settlements
including the purchase of annuities from life insurance companies with an A+
rating from A.M. Best (an industry rating organization) at the date of issue and
a minimum of $100 million in surplus. These annuities guarantee a stream of
payments to the claimant holding the annuity. The majority of these settlements
have been assigned to the life insurance company which releases MMIC from any
future contractual liability to the claimant. MMIC and its reinsurers could only
become liable for ultimate settlement of those claims which have not been
assigned. At December 31, 1998 and 1997, respectively, non-assigned structured
settlements guaranteed $5,820,000 and $12,299,000 of payments under annuity
contracts for which MMIC and its reinsurers paid $2,627,000 and $4,726,000. In
the event that the insurance company issuing the annuity was unable to meet its
obligation under the terms provided, MMIC would be liable for the ultimate
settlement.

9. BENEFIT PLANS

The Company has a non-contributory defined contribution pension plan covering
substantially all employees. Contributions to the plan are based upon each
covered employee's salary. The Company also sponsors a 401(k) plan covering
substantially all employees and provides a fifty percent match on employee
contributions subject to certain limitations. Total contributions charged to
expense for the years ended December 31, 1998, 1997 and 1996 were $521,000,
$393,000 and $371,000, respectively.

The Company provides an unfunded Supplemental Executive Retirement Plan (SERP)
which is a non-qualified, defined benefit retirement plan covering certain
Company officers. Benefits are based upon years of service and compensation.
Although the plan is technically unfunded, the Company invests in specified
assets which are designed to coordinate with the projected obligation under the
SERP. The net periodic pension cost for this plan was $404,000, $363,000 and
$323,000 for the years ended December 31, 1998, 1997 and 1996, respectively. The
liability recognized in the consolidated balance sheets at December 31, 1998 and
1997 related to this plan was $2,439,000 and $2,192,000, respectively.

49

Midwest Medical Insurance Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (continued)

9. BENEFIT PLANS (CONTINUED)

The Company also provides medical benefits to retirees through a defined benefit
post-retirement plan which covers substantially all employees. The net periodic
post-retirement benefit cost for the years ended December 31, 1998, 1997 and
1996 was $41,000, $27,000 and $30,000, respectively. As of December 31, 1998 the
plan was fully funded. As of December 31, 1997, the net post-retirement benefit
plan liability was $4,000.

10. RECONCILIATION WITH STATUTORY ACCOUNTING PRINCIPLES

The following is a reconciliation of net income and shareholders' equity under
generally accepted accounting principles with that reported for MMIC on a
statutory basis (in thousands):

Net Income

YEAR ENDED DECEMBER 31
1998 1997 1996
------------------------------------

As reported under generally accepted
accounting principles $5,948 $ 9,300 $ 7,481
(Income) loss of non-insurance entities 1,104 (272) (1,070)
------------------------------------
On the basis of generally accepted accounting
principles, MMIC only 7,052 9,028 6,411
Additions (deductions):
Deferred income taxes 1,390 1,525 445
Other - - 123
------------------------------------
On the basis of statutory accounting principles $8,442 $10,553 $6,979
------------------------------------
------------------------------------

50

Midwest Medical Insurance Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (continued)

10. RECONCILIATION WITH STATUTORY ACCOUNTING PRINCIPLES (CONTINUED)

Shareholders' Equity

DECEMBER 31
1998 1997 1996
---------------------------------

As reported under generally accepted
accounting principles $142,446 $126,290 $111,278
Additions (deductions):
Deferred income taxes 11,526 4,158 (590)
Unrealized (gain) loss on fixed maturities (3,222) (1,385) (3,580)
Other (34) (3) (41)
---------------------------------
On the basis of statutory accounting
principles $150,716 $129,060 $107,067
---------------------------------
---------------------------------

The equity of MMIHC, exclusive of the carrying value of its investment in MMIC,
is subject to redemption and therefore reported outside of shareholders' equity
under the caption redeemable stock. As a result, consolidated other
shareholders' equity as reported on the balance sheets represents equity of MMIC
only under generally accepted accounting principles.

Under Minnesota insurance statutes, MMIC is required to maintain statutory
surplus in excess of ten times its per occurrence reinsurance retention limit.
The minimum level is $7,500,000 for 1998 and 1997.

51

Midwest Medical Insurance Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (continued)

11. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except for share and per share amounts):

1998 1997 1996
--------------------------------

Numerator for basic and dilutive
earnings per share available
to common shareholders $5,948 $9,300 $7,481
--------------------------------
--------------------------------
Denominator:
Denominator for basic earnings
per share--weighted average
shares 123,004 119,554 116,071

Effect of dilutive securities:
Unvested shares 13,247 12,873 12,188
--------------------------------
Denominator for dilutive
earnings per share--adjusted
weighted-average shares and
assumed conversions 136,251 132,427 128,259
--------------------------------
--------------------------------
Basic earnings per share $48.36 $77.79 $64.45
--------------------------------
--------------------------------
Diluted earnings per share $43.65 $70.23 $58.33
--------------------------------
--------------------------------

52

Midwest Medical Insurance Holding Company and Subsidiaries

Notes to Consolidated Financial Statements (continued)

12. NET REDEMPTION VALUE

The net redemption value per share of the Class A common shares was as follows:

CLASS A NET REDEMPTION
MMIHC COMMON SHARES VALUE PER
NET EQUITY OUTSTANDING SHARE
-----------------------------------------
(000S)

December 31, 1994 $7,712 116,855* $66.00
------ ------
------ ------
December 31, 1995 $6,975 116,251* $60.00
------ ------
------ ------
December 31, 1996 $7,604 118,209 $64.33
------ ------
------ ------
December 31, 1997 $7,477 121,322 $61.63
------ ------
------ ------
December 31, 1998 $8,147 125,682 $64.81
------ ------
------ ------

* Includes pro forma shares related to merger.

53

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE

None.

54

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS

The names and ages of the directors of MMIHC and MMIC, the year each first
became a director, and the number of Class A Common Shares owned by each as of
December 31, 1998, are as follows:

CLASS A
COMMON
DIRECTOR PRINCIPAL SHARES
NAME AGE SINCE OCCUPATION OWNED
- -----------------------------------------------------------------------------------------

Michael Abrams 37 1996 Exec V.P. Iowa Medical Society -
John R. Balfanz, M.D. 53 1995 Physician 15
Gail P. Bender 51 1996 Physician 23
James R. Bishop, M.D. 57 1994 Physician -
David P. Bounk 52 1995 President and CEO -
Roger L. Frerichs, M.D. 59 1988 Surgeon 88
Richard Geier, Jr., M.D. 58 1995 Physician 24
Anthony C. Jaspers, M.D. 51 1996 Physician 52
Russel J. Kuzel, M.D. 46 1997 Physician 27
Wayne F. Leebaw, M.D. 55 1994 Physician 25
Steven A. McCue, M.D. 57 1995 Physician 126
William J. McMillan, Jr. M.D. 51 1997 Physician 70
Harold W. Miller, M.D. 51 1996 Physician 27
Anton S. Nesse, M.D. 60 1989 Radiologist 54
Mark D. Odlund, M.D. 46 1996 Physician 88
G. William Orr, M.D. 63 1996 Physician 56
Norman Rinderknecht, M.D. 64 1993 Physician 97
Paul S. Sanders, M.D. 54 1984 CEO-MN Medical Assoc. -
Richard D. Schmidt, M.D.
Secretary 55 1990 Physician 152
Judith F. Shank, M.D. 56 1999 Physician 15
Andrew J. K. Smith, M.D.
Chairman of Board 56 1990 Neurological Surgeon 199
G. David Spoelhof, M.D. 45 1989 Physician 48
Tom D. Throckmorton, M.D. 53 1997 Physician 72
R. Bruce Trimble, M.D.
Vice Chair of Board 58 1993 Physician 23

The Bylaws of MMIHC provide that MMIHC's Board of Directors shall include the
following: (1) up to 20 physicians divided into three classes and elected for
staggered three-year terms; (2) for as long as the Class B Common Share is
outstanding, the Chief Executive Officer of the MMA and the Executive Vice
President of the IMS, both of whom shall be ex-officio directors; (3) the
President of MMIHC as an ex-officio director; and (4) such additional ex-officio
and

55

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(CONTINUED)

advisory members as the Board of Directors may determine. At least two-thirds of
the voting members of the Board of Directors must be physician directors. All
physician directors must be members of a state medical association and insured
by MMIC. The MMA, which has the exclusive right to elect directors, has agreed
to elect the directors nominated by a committee of the Board of Directors.

The Bylaws of MMIC provide that the directors of MMIHC shall also serve as the
directors of MMIC, with the exception of any outside directors of MMIHC. Outside
directors are persons who are not policyholders of MMIC or members of any state
medical society. There are currently no outside directors of MMIHC so the Boards
of MMIHC and MMIC are identical at this time.

Pursuant to the merger with IPMIT, the Bylaws of MMIHC were amended to provide
for the election of directors who are members of the IMS in a number, when
compared to the total number of directors, which is proportionate to the number
of Iowa insureds compared to the total number of MMIC insureds, subject to a
minimum of two Iowa directors, one of whom shall be the Executive Vice President
of the IMS, for as long as the Class B Common Share is outstanding. The MMA has
placed the Class B Voting Share in a voting trust which requires the trustee to
vote the share for the election of the Iowa directors nominated by the IMS.

Directors serve until their successors are elected and qualified, or until their
prior resignation, removal, death or disqualification.

As of December 31, 1998, the directors of MMIHC, as a group, owned 1,283 Class A
Common Shares or 1.0 percent of the total Class A Common Shares outstanding as
of such date. No executive officer owned any Class A Common Shares as of such
date.

All of the directors have been principally engaged in the practice of medicine
for more than five years, except for Dr. Sanders who has been the Executive Vice
President of the MMA since 1990, Michael Abrams who has been the Executive Vice
President of the Iowa Medical Society beginning in 1996 and David P. Bounk who
has been the President and CEO of MMIHC since 1991. Prior to 1990, Dr. Sanders
was principally engaged in the practice of medicine. Prior to 1996 Michael
Abrams was Director, Government Relations of the Indiana Medical Association for
nine years.

The Chairman of the Board of Directors (currently Dr. Smith) is paid an annual
fee of $38,528. All members of the Board of Directors currently are paid $750
for each meeting of the Board of Directors they attend. In addition, members of
the Executive Committee currently are paid $750 for each meeting of the
Executive Committee they attend, and committee chairmen are paid $600 for each
meeting of the standing committee they chair. Other members of standing
committees currently are paid between $300 and $500, depending upon distance
traveled, for each committee meeting they attend.

56

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(CONTINUED)

EXECUTIVE OFFICERS

The names, ages and positions of the executive officers of MMIHC and MMIC are as
follows:

PERIOD OF SERVICE
POSITION AS PRINCIPAL
NAME AGE WITH COMPANY AN OFFICER OCCUPATION
- ------------------------------------------------------------------------------------------

David P. Bounk 52 President and Chief 8/1/90 to date President and Chief
Executive Officer Executive Officer

Niles A. Cole 37 Vice President-Finance 1998 to date Vice President-Finance
and Treasurer and Treasurer

Jack L. Kleven 52 Senior Vice President 1986 to date Senior Vice President
and Chief Operating and Chief Operating
Officer Officer

Elizabeth S. Lincoln 45 Vice President-Law and 1990 to date Vice President-Law and
Health Policy Health Policy

Gerald M. O'Connell 44 Vice President - 1998 to date Vice President -
Marketing Marketing

Michael G. Rutz 45 Vice President- 5/15/95 to date Vice President-
Underwriting Underwriting

Mr. Bounk has over 30 years experience in the insurance industry and joined
MMIHC and MMIC as President and Chief Executive Officer in August 1990. From
July 1982 through July 1990, he was Executive Vice President and Chief Operating
Officer of Missouri Medical Insurance Company, a corporation providing
malpractice insurance to physicians in Missouri. Mr. Bounk has an MBA degree in
finance.

Mr. Bounk has an employment agreement which renews annually for successive
calendar-year terms unless it is terminated by either party at least 60 days
prior to any renewal date. The agreement provides that Mr. Bounk's base salary
will be adjusted annually by the Executive Committee. If the agreement is
terminated by MMIHC for cause or by Mr. Bounk voluntarily, he is entitled to
receive his base salary for 30 days thereafter. If the agreement is terminated
by MMIHC without cause, Mr. Bounk is entitled to receive his base salary for six
months thereafter, plus one additional month for each year of service, subject
to a maximum of 12 additional

57

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(CONTINUED)

months, and then only until he commences new employment or self-employment. The
agreement also prohibits Mr. Bounk from competing with MMIHC for one year
following his termination of employment.

Effective January 1, 1997, the Company entered into termination agreements with
the executive officers. These agreements provide a severance package to these
executives in the event of termination of employment without cause.

Mr. Cole has over 15 years experience in the insurance industry, including 6
years with Washington State Physician's Insurance Association. He has been in
his current position since March 1998. He has BS degrees in accounting and
finance.

Mr. Kleven has over 25 years experience in medical malpractice claims adjusting
and management. He joined the Exchange in 1983, and was Vice President, Claims
since March 1986. He was promoted to Chief Operating Officer on January 1, 1998.
Prior to joining the Exchange, he was a liability manager at The St. Paul
Companies for six years. He has a BS degree in business.

Ms. Lincoln has over 15 years experience in medical professional liability risk
management. She joined the Exchange in 1982, and was Vice President, Risk
Management since January 1990. She transferred to Vice President, Law and Health
Policy, effective January 1, 1998. She has a law degree.

Mr. Rutz has over 20 years experience in the insurance industry, including 10
years in medical malpractice. From June 1986 through April 1994, he was Senior
Regional Underwriting Manager with St. Paul Fire and Marine Insurance Company.
From May 1994 through April 1995, he was Vice President with Alexander and
Alexander, insurance brokers. He joined the Company in May 1995 as Vice
President-Underwriting. He has a BS degree in resource management.

Mr. O'Connell has over 22 years in the medical malpractice segment of the
insurance industry. From 1977 to 1995, he was with St. Paul Fire and Marine
Insurance Company holding various marketing and underwriting management
positions. He joined the Company in October 1996. He has a BS in Agriculture
Business Management with an emphasis in Insurance.

Officers serve until their successors are appointed by the Board of Directors,
or until their prior resignation, removal or death.

58

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(CONTINUED)

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 1998, 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.

ITEM 11. EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table summarizes compensation paid by MMIHC to its five most
highly compensated executive officers for services rendered in all capacities
during the last three years.

CASH COMPENSATION
NAME OF INDIVIDUAL CAPACITIES IN --------------------- ALL OTHER
OR NUMBER IN GROUP WHICH SERVED SALARY BONUS COMPENSATION(a)
- ------------------------------------------------- ---------------------------------------

David P. Bounk President and Chief 1998 $200,187 $85,830 $32,272
Executive Officer 1997 187,088 56,126 20,963
1996 170,080 51,024 17,687

Jack L. Kleven Senior Vice President and 1998 167,716 61,636 30,847
Chief Operating Officer 1997 145,840 43,752 17,193
1996 132,420 39,796 17,384

Elizabeth S. Lincoln Vice President-Law 1998 108,015 33,080 29,242
and Health Policy 1997 102,871 30,861 13,286
1996 97,020 29,106 14,319

Gerald M. O'Connell Vice President-Marketing 1998 109,000 34,749 21,739
1997 95,077 11,530 17,850
1996 24,900 2,423 4,608

Michael G. Rutz Vice President- 1998 119,816 36,694 31,406
Underwriting 1997 114,110 34,233 14,113
1996 108,680 32,604 14,980

(a) Includes employer contributions to qualified retirement plans and the term
and cash surrender value of supplemental life insurance premiums.

59

ITEM 11. EXECUTIVE COMPENSATION (CONTINUED)

MMIHC also maintains a Supplemental Executive Retirement Plan ("SERP") which
provides an annual retirement benefit for an executive officer who retires at
age 62 with 10 years of service of 70% of the officer's final average salary.
Benefits are reduced for years of service less than 10 and retirement prior to
age 62. The annual benefit payable under the SERP is reduced by 50% of the
officer's primary Social Security benefit and by the annual benefit (expressed
in the form of an annuity) of the officer's accrued benefits under MMIHC's
current money purchase pension plan and a predecessor plan. The estimated annual
benefits payable upon retirement at normal retirement age for the executive
officers in the Summary Compensation table are as follows: Mr. Bounk--$201,500;
Mr. Kleven--$125,900; Ms. Lincoln--$82,000; Mr. Rutz--$147,100 and Mr.
O'Connell--$96,400. The estimated annual retirement benefits were calculated
assuming salary increases of five percent per year, discounted four percent per
year for future inflation to express the estimated benefits in today's dollars.

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.

60

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, Inc. for the year ended December 31, 1998 are
included in this annual report (Form 10-K) in Item 8:

Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Income for the years ended December 31, 1998,
1997 and 1996
Consolidated Statements of Changes in Other Shareholders' Equity for the
years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996
Notes to Consolidated Financial Statements

(a)(2) The following consolidated financial statement schedules of Midwest
Medical Insurance Holding Company, Inc. 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 1998.

61

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 19, 1999
-------------------------------------- --------------
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 19, 1999
- ----------------------------
David P. Bounk

/s/ Niles Cole Principal Financial Officer and March 19, 1999
- ---------------------------- Principal Accounting Officer
Niles Cole

* Director, Chairman of the Board March 19, 1999
- ----------------------------
Andrew J.K. Smith, M.D.

* Director March 19, 1999
- ----------------------------
Michael Abrams

* Director March 19, 1999
- ----------------------------
John R. Balfanz, M.D.

* Director March 19, 1999
- ----------------------------
Gail P. Bender, M.D.

62

* Director March 19, 1999
- ----------------------------
James R. Bishop, M.D.

* Director March 19, 1999
- ----------------------------
Roger L. Frerichs, M.D.

* Director March 19, 1999
- ----------------------------
Richard Geier, Jr., M.D.

* Director March 19, 1999
- ----------------------------
Anthony C. Jaspers, M.D.

- ---------------------------- Director March 19, 1999
Russel J. Kuzel, M.D.

* Director March 19, 1999
- ----------------------------
Wayne F. Leebaw, M.D.

* Director March 19, 1999
- ----------------------------
Steven A. McCue, M.D.

* Director March 19, 1999
- ----------------------------
William J. McMillan, Jr. M.D.

* Director March 19, 1999
- ----------------------------
Harold W. Miller, M.D.

* Director March 19, 1999
- ----------------------------
Anton S. Nesse, M.D.

* Director March 19, 1999
- ----------------------------
Mark D. Odlund, M.D.

63

* Director March 19, 1999
- ----------------------------
G. William Orr, M.D.

* Director March 19, 1999
- ----------------------------
Norman Rinderknecht, M.D.

* Director March 19, 1999
- ----------------------------
Paul S. Sanders, M.D.

* Director, Secretary March 19, 1999
- ----------------------------
Richard D. Schmidt, M.D.

* Director March 19, 1999
- ----------------------------
Judith F. Shank, M.D.

* Director March 19, 1999
- ----------------------------
G. David Spoelhof, M.D.

* Director March 19, 1999
- ----------------------------
Tom D. Throckmorton, M.D.

* Director, Vice Chairman March 19, 1999
- ----------------------------
R. Bruce Trimble, M.D.

* By: /s/ David P Bounk March 19, 1999
----------------------------
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.

64

Midwest Medical Insurance Holding Company and Subsidiaries
(Parent Company)

Schedule II--Condensed Financial Information of Registrant

Balance Sheets

DECEMBER 31
1998 1997
-----------------------
(IN THOUSANDS)

ASSETS
Fixed maturities $ - $ 1,308
Short-term investments 1,310 2,730
Investment in subsidiaries 145,032 126,290
Accrued investment income - 40
Other 8,385 6,881
-----------------------
Total assets $154,727 $137,249
-----------------------
-----------------------
LIABILITIES, REDEEMABLE STOCK AND
OTHER SHAREHOLDERS' EQUITY

LIABILITIES
Accounts payable $ 43 $ 111
Accrued expenses and other liabilities 4,091 3,371
-----------------------
4,134 3,482
REDEEMABLE STOCK
Class A Common Stock 8,146 7,476
Class B Common Stock 1 1
-----------------------
8,147 7,477
OTHER SHAREHOLDERS' EQUITY
Additional paid-in capital 12,789 12,789
Retained earnings, comprised of undistributed
earnings of subsidiaries 98,695 93,643
Unrealized appreciation on investments, net
of income taxes 30,962 19,858
-----------------------
142,446 126,290
-----------------------
Total liabilities, redeemable stock and
other shareholders' equity $154,727 $137,249
-----------------------
-----------------------

SEE ACCOMPANYING NOTE.

65

Midwest Medical Insurance Holding Company and Subsidiaries
(Parent Company)

Schedule II--Condensed Financial Information of Registrant (continued)

Statements of Income

YEAR ENDED DECEMBER 31
1998 1997 1996
-------------------------------------
(IN THOUSANDS)

REVENUES
Management fee from subsidiaries $14,038 $9,901 $8,706
Investment income 489 64 726
Other income 7 2 4
-------------------------------------
14,534 9,967 9,436
EXPENSES
Operating and administrative 14,267 9,535 8,357
-------------------------------------
Income before income taxes and other items 267 432 1,079
Income tax expense 104 162 9
-------------------------------------
Income before equity in undistributed income
of subsidiaries 163 270 1,070
Equity in undistributed income of subsidiaries 5,785 9,030 6,411
-------------------------------------
Net income $ 5,948 $9,300 $7,481
-------------------------------------
-------------------------------------

SEE ACCOMPANYING NOTE.

66

Midwest Medical Insurance Holding Company and Subsidiaries
(Parent Company)

Schedule II--Condensed Financial Information of Registrant (continued)

Statements of Cash Flows

YEAR ENDED DECEMBER 31
1998 1997 1996
---------------------------------------
(IN THOUSANDS)

Net cash (used in) provided by operating
activities $ (366) $ (527) $ (877)

INVESTING ACTIVITIES
Purchase of fixed maturities (21,758) (38,979) (20,469)
Sales of fixed maturities 22,826 38,701 20,289
Calls and maturities of fixed maturities 250 - -
Sales of short-term investments, net 1,420 1,453 1,338
Capitalization of Solutions (3,850) - -

FINANCING ACTIVITIES
Redemption of Class A Common Stock (522) (648) (608)
Dividend from MMIC 2,000 - 327
---------------------------------------
Increase in cash - - -
Cash at beginning of year - - -
---------------------------------------
Cash at end of year $ - $ - $ -
---------------------------------------
---------------------------------------

SEE ACCOMPANYING NOTE.

67

Midwest Medical Insurance Holding Company and Subsidiaries
(Parent Company)

Schedule II--Condensed Financial Information of Registrant (continued)

Note to Condensed Financial Statements

December 31, 1998

The accompanying condensed financial statements should be read in conjunction
with the consolidated financial statements and notes thereto of Midwest Medical
Insurance Holding Company and Subsidiaries.

See Note 2 to the consolidated financial statements of Midwest Medical Insurance
Holding Company and Subsidiaries for a description of the redeemable stock.

68

Midwest Medical Insurance Holding Company and Subsidiaries

Schedule IV--Reinsurance

COL. A COL. B COL. C COL. D COL. E COL. F
- --------------------------------------------------------------------------------------
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED TO
AMOUNT COMPANIES COMPANIES AMOUNT NET
- --------------------------------------------------------------------------------------
(IN THOUSANDS)

Year ended December 31, 1998:
Insurance premiums:
Property/casualty insurance $37,518 $2,601 $97 $35,014 0.3%

Year ended December 31, 1997:
Insurance premiums:
Property/casualty insurance 36,511 3,595 - 32,916 N/A

Year ended December 31, 1996:
Insurance premiums:
Property/casualty insurance 34,006 2,829 - 31,177 N/A

NOTE TO SCHEDULE IV:

Ceded premiums for the years ended December 31, 1998, 1997 and 1996 are net of
reductions (additions) in ceded premiums related to swing rated reinsurance
treaties of $2,550,000, $(3,688,000), and $748,000 respectively. Ceded premiums
in 1996 are also net of proceeds from commutations of reinsurance covering the
period January 1, 1989 through December 31, 1990 of $2,194,000. Ceded premiums
in 1998 are also net of proceeds from commutations of reinsurance covering the
period January 1, 1991 through December 31, 1991 of $789,000.

69

Midwest Medical Insurance Holding Company and Subsidiaries

Schedule VI--Supplemental Information Concerning Property/
Casualty Insurance Operations

DECEMBER 31 YEAR ENDED DECEMBER 31
- ----------------------------------------------------------- ----------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E COL. F COL. G COL. H COL. I COL. J COL. K
- ----------------------------------------------------------- ----------------------------------------------------------------------
LOSSES AND LOSS
ADJUSTMENT EXPENSES
RESERVES FOR INCURRED RELATED TO AMORTIZATION PAID
DEFERRED UNPAID LOSSES DISCOUNT, ------------------ OF DEFERRED LOSSES
AFFILIATION POLICY AND LOSS IF ANY, NET (1) (2) POLICY AND LOSS
WITH ACQUISITION ADJUSTMENT DEDUCTED IN UNEARNED EARNED INVESTMENT CURRENT PRIOR ACQUISITION ADJUSTMENT PREMIUMS
REGISTRANT COSTS EXPENSES COLUMN C PREMIUMS PREMIUMS INCOME YEAR YEAR COSTS EXPENSES WRITTEN
- -----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)

Consolidated
property/
casualty
entities

1998 N/A $110,964 N/A $8,173 $35,014 $10,919 $41,927 $(4,433) N/A $32,421 $39,431

1997 N/A 107,806 N/A 6,072 32,916 11,509 40,186 (8,352) N/A 32,782 35,722

1996 N/A 110,037 N/A 6,860 31,177 12,061 41,101 (8,844) N/A 38,339 31,167

70

ANNUAL REPORT ON FORM 10-K

ITEM 14(a)(3) AND 14(c)
EXHIBITS

Midwest Medical Insurance Holding Company

Index to Exhibits

REGULATION
S-K
EXHIBIT TABLE SEQUENTIAL
ITEM REFERENCE PAGE NO.
- -----------------------------------------------------------------------------------

Restated Articles of Incorporation of the registrant 3A.(1)
(Form S-4, Exhibit 3C).

Bylaws of the registrant (Form S-4, Exhibit 3D). 3B.(1)

Voting Trust Agreement. 9.(1)

Governance Agreement between the registrant and the 10A.(1)
Minnesota Medical Association, holder of the
registrant's Class B Common Share, dated November 30,
1988.

Lease for office space between the registrant and 10B.(1)
Lexington Property Fund, L.P. Limited Partnership, dated
March 26, 1991.

Management Agreement between the registrant and Midwest 10C.(4)
Medical Insurance Company, dated November 30, 1988, as
amended January 1, 1990, January 1, 1991, and
January 1, 1996.

Agency Agreement with Vaaler Insurance, Inc. pursuant 10D.(1)
to which Vaaler acts as agent of the registrant in
North Dakota, dated April 21, 1989.

Agreement of Reinsurance between Midwest Medical 10E.(5)
Insurance Company and General Reinsurance Corporation,
effective January 1, 1998.

Letter of Employment Agreement between the registrant 10F.(2)
and David P. Bounk, President and Chief Executive
Officer of the registrant and Midwest Medical Insurance
Company, dated January 1, 1993.

71

Index to Exhibits (continued)

REGULATION
S-K
EXHIBIT TABLE SEQUENTIAL
ITEM REFERENCE PAGE NO.
- -----------------------------------------------------------------------------------

1998 Officers Short-term Incentive Plan of the registrant. 10G.(5)

Supplemental Executive Retirement Plan of the registrant. 10H.(1)

Plan and Agreement of Merger, without exhibits. 10I.(1)

Agency Agreement with IMS Services pursuant to which IMS 10J.(3)
Services acts as agent of the registrant in Iowa, dated
July 1, 1993

Subsidiaries of the registrant. 21.(5)

Power of attorney. 24.(5)

Financial Data Schedule 27.(5)

- --------------------------
(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 1993 Annual Report on Form 10-K.

(4) Filed with 1996 Annual Report on Form 10-K.

(5) Filed with this Annual Report on Form 10-K.

72