**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

| **(Mark  One)** |                                                                                         |
|-----------------|----------------------------------------------------------------------------------------------|
|            |
| **ý**      | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                 |                                                                                              |  |

 

**For the quarterly period ended March31, 2002**

 

**OR**

 

| **o** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------------|

 

**For thetransition periodfrom                          to                          **

 

**Commissionfile number 001-14673**

 

**MEEMIC Holdings, Inc.**

(Exact name ofregistrant as specified in its charter)

 

| **Michigan**                                                                       |   | **38-3436541**                        |
|------------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization)                    |   | (I.R.S. Employer  Identification No.) |
|                                                                               |   |                                  |
| **691  North Squirrel Road, Suite 100  Auburn Hills, Michigan**                    |   | **48321**                             |
| (Zip Code)                                                                         |
| (Address of  principal executive offices)                                          |   |                                  |
|                                                                               |   |                                  |
| Registrant’s telephone  number, including area code:  **(888) 463-3642** |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.   Yes  ý  No  o

 

The number of sharesoutstanding of the registrant’s common stock, no par value per share, as of May10, 2002 was 6,683,563.

 

 

TABLE OF CONTENTS

 
| PART I.  | FINANCIAL INFORMATION |
|----------|-----------------------|
|     |                  |   |
|     | Item 1.               |  Financial Statements |
|     |                  |   |
|     |                  | Condensed  Consolidated Balance Sheets at March 31, 2002 (Unaudited) and December 31,  2001 |
|     |                  |   |
|     |                  | Condensed  Consolidated Statements of Income for the Three Months Ended March 31, 2002  and 2001 (Unaudited) |
|     |                  |   |
|     |                  | Condensed  Consolidated Statements of Comprehensive Income for the Three Months Ended  March 31, 2002 and 2001 (Unaudited) |
|     |                  |   |
|     |                  | Condensed  Consolidated Statements of Cash Flows for the Three Months Ended March 31,  2002 and 2001 (Unaudited) |
|     |                  |   |
|     |                  | Notes  to Condensed Consolidated Financial Statements (Unaudited) |
|     |                  |   |
|     | Item  2.              |  Management’s Discussion and Analysis of  Financial Condition and Results of Operations |
|     |                  |   |
|     | Item  3.              |  Quantitative and Qualitative Disclosures  About Market Risk |
|     |                  |   |
| Part II. | OTHER INFORMATION     |
|     |                  |   |
|     | Item 1.               |  Legal Proceedings |
|     |                  |   |
|     | Item 6.               |  Exhibits and Reports on Form 8-K |
|     |                  |   |
|     | Signatures            |

 

2

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**PART I.    FINANCIAL INFORMATION**

**Item 1.   Financial Statements**

 

**MEEMIC Holdings, Inc.**

**and Subsidiaries**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

 
|                                                                                                                                                                                |   | **March 31, 2002**                    |    | **December 31, 2001** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|---------|-----------------------|--------|
|                                                                                                                                                                                |   | **(Unaudited)**                       |    |                  |   |
|                                                                                                                                                                                |   | **(In thousands, except share data)** |    |
| **ASSETS**                                                                                                                                                                          |   |                                  |    |                  |   |
| Investments:                                                                                                                                                                        |   |                                  |    |                  |   |
| Fixed maturities available for sale, at fair value (amortized cost of  $179,454 and $181,989 in 2002 and 2001, respectively)                                                        |   | $                                     | 183,871 |                  | $      | 187,497 |   |
| Short-term investments, at cost, which approximates fair value                                                                                                                      |   | 2,939                                 |    | 2,922                 |   |
| Real estate, at cost                                                                                                                                                                |   | 2,300                                 |    | 2,300                 |   |
| Total investments                                                                                                                                                                   |   | 189,110                               |    | 192,719               |   |
| Cash and cash equivalents                                                                                                                                                           |   | 37,840                                |    | 29,948                |   |
| Premiums due from policyholders                                                                                                                                                     |   | 9,599                                 |    | 7,789                 |   |
| Amounts recoverable from reinsurers                                                                                                                                                 |   | 63,385                                |    | 62,423                |   |
| Amounts recoverable from reinsurers, related party                                                                                                                                  |   | 4,933                                 |    | 5,326                 |   |
| Accrued investment income                                                                                                                                                           |   | 2,604                                 |    | 2,647                 |   |
| Deferred federal income taxes                                                                                                                                                       |   | 3,803                                 |    | 3,181                 |   |
| Property and equipment, at cost, net of accumulated depreciation                                                                                                                    |   | 2,654                                 |    | 3,011                 |   |
| Deferred policy acquisition costs                                                                                                                                                   |   | 3,582                                 |    | 3,356                 |   |
| Intangible assets, net of amortization                                                                                                                                              |   | 30,465                                |    | 30,496                |   |
| Other assets                                                                                                                                                                        |   | 767                                   |    | 787                   |   |
| Total assets                                                                                                                                                                        |   | $                                     | 348,742 |                  | $      | 341,683 |   |
|                                                                                                                                                                                |   |                                  |    |                  |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                                      |   |                                  |    |                  |   |
| Liabilities:                                                                                                                                                                        |   |                                  |    |                  |   |
| Loss and loss adjustment expense reserves                                                                                                                                           |   | $                                     | 127,527 |                  | $      | 124,361 |   |
| Unearned premiums                                                                                                                                                                   |   | 43,796                                |    | 41,310                |   |
| Accrued expenses and other liabilities                                                                                                                                              |   | 10,282                                |    | 9,734                 |   |
| Accrued expenses and other liabilities, related party                                                                                                                               |   | 79                                    |    | 79                    |   |
| Premiums ceded payable                                                                                                                                                              |   | 2,367                                 |    | 4,479                 |   |
| Federal income taxes payable                                                                                                                                                        |   | 1,581                                 |    | 602                   |   |
| Total liabilities                                                                                                                                                                   |   | 185,632                               |    | 180,565               |   |
| Shareholders’ equity:                                                                                                                                                          |   |                                  |    |                  |   |
| Common stock, no par value; 10,000,000 shares authorized; 6,674,335  shares issued and outstanding in 2002 and 2001, respectively                                                   |   | 66,043                                |    | 66,043                |   |
| Additional paid-in capital                                                                                                                                                          |   | 46                                    |    | 46                    |   |
| Retained earnings                                                                                                                                                                   |   | 94,150                                |    | 91,449                |   |
| Accumulated other comprehensive income:  Net unrealized appreciation on investments, net of deferred  federal income taxes of $1,546 and $1,928 in 2002 and 2001, respectively |   | 2,871                                 |    | 3,580                 |   |
| Total shareholders’ equity                                                                                                                                                     |   | 163,110                               |    | 161,118               |   |
| Total liabilities and shareholders’ equity                                                                                                                                     |   | $                                     | 348,742 |                  | $      | 341,683 |   |

 

See the accompanying notes to the unauditedcondensed consolidated financial statements.

 

3

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**MEEMIC Holdings, Inc.**

**and Subsidiaries**

**CONDENSED CONSOLIDATED STATEMENTS OFINCOME**

**For the Three Months Ended March 31,2002 and 2001 (Unaudited)**

 
|                                                                           |   | **2002**                              |   | **2001**  |   |
|--------------------------------------------------------------------------------|--------|---------------------------------------|--------|-----------|--------|
|                                                                           |   | **(In thousands, except share data)** |   |
| Revenues and other income:                                                     |   |                                  |   |      |   |
| Premiums written                                                               |   | $                                     | 39,272 |      | $      | 32,457 |   |
| Premiums ceded                                                                 |   | (2,272                                | )      | (1,409    | )      |
| Net premiums written                                                           |   | 37,000                                |   | 31,048    |   |
| (Increase) decrease in unearned premiums, net of  prepaid reinsurance premiums |   | (2,494                                | )      | 125       |   |
| Net premiums earned                                                            |   | 34,506                                |   | 31,173    |   |
| Net investment income                                                          |   | 2,856                                 |   | 2,886     |   |
| Net realized investment losses on fixed maturities                             |   | —                                |   | (26       | )      |
| Other income                                                                   |   | 465                                   |   | 346       |   |
| Total revenues and other income                                                |   | 37,827                                |   | 34,379    |   |
|                                                                           |   |                                  |   |      |   |
| Expenses:                                                                      |   |                                  |   |      |   |
| Loss and loss adjustment expenses incurred, net                                |   | 26,549                                |   | 22,664    |   |
| Policy acquisition and other underwriting expenses:                            |   |                                  |   |      |   |
| Policy acquisition and underwriting expenses                                   |   | 7,466                                 |   | 7,290     |   |
| Management fees, related party                                                 |   | 83                                    |   | 161       |   |
|                                                                           |   | 7,549                                 |   | 7,451     |   |
| Amortization expense                                                           |   | 31                                    |   | 731       |   |
| Other expenses                                                                 |   | 58                                    |   | 38        |   |
| Total expenses                                                                 |   | 34,187                                |   | 30,884    |   |
| Income from operations before federal income taxes                             |   | 3,640                                 |   | 3,495     |   |
| Federal income taxes                                                           |   | 939                                   |   | 1,032     |   |
| Net income                                                                     |   | $                                     | 2,701  |      | $      | 2,463 |   |
|                                                                           |   |                                  |   |      |   |
| **Earnings per common share - basic**                                          |   |                                  |   |      |   |
| Net income per common share - basic                                            |   | $                                     | 0.40   |      | $      | 0.37 |   |
|                                                                           |   |                                  |   |      |   |
| **Earnings per common share - assuming  dilution**                             |   |                                  |   |      |   |
| Net income per common share - assuming dilution                                |   | $                                     | 0.40   |      | $      | 0.36 |   |
|                                                                           |   |                                  |   |      |   |
| Weighted average shares outstanding - basic                                    |   | 6,674,335                             |   | 6,655,500 |   |
|                                                                           |   |                                  |   |      |   |
| Weighted average shares outstanding - assuming  dilution                       |   | 6,754,566                             |   | 6,778,839 |   |

 

See the accompanyingnotes to the unaudited condensed consolidated financial statements.

 

4

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**MEEMIC Holdings, Inc.**

**and Subsidiaries**

**CONDENSED CONSOLIDATED STATEMENTS OFCOMPREHENSIVE INCOME**

**For the Three Months Ended March 31,2002 and 2001 (Unaudited)**

 
|                                                                                                                                                                      |   | **2002**           |       | **2001** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|------------|----------|--------|
|                                                                                                                                                                      |   | **(In thousands)** | ** ** |
| Comprehensive income:                                                                                                                                                     |   |               |       |     |   |
| Net income                                                                                                                                                                |   | $                  | 2,701      |     | $      | 2,463 |   |
| Net unrealized (depreciation) appreciation on  investments, net of reclassification adjustment and net of deferred federal  income tax of ($382) in 2002 and $599 in 2001 |   | (709               | )          | 1,111    |   |
| Comprehensive income                                                                                                                                                      |   | $                  | 1,992      |     | $      | 3,574 |   |

 

See the accompanyingnotes to the unaudited condensed consolidated financial statements.

 

5

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**MEEMIC Holdings, Inc.**

**and Subsidiaries**

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS**

**For the Three Months Ended March 31,2002 and 2001 (Unaudited)**

 
|                                                                               |   | **2002**           |   | **2001** |   |
|------------------------------------------------------------------------------------|--------|--------------------|--------|----------|--------|
|                                                                               |   | **(In thousands)** |   |
| Cash flows from operating activities:                                              |   |               |   |     |   |
| Net income                                                                         |   | $                  | 2,701  |     | $      | 2,463 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |   |               |   |     |   |
| Depreciation and amortization                                                      |   | 529                |   | 1,181    |   |
| Realized losses on investments                                                     |   | —             |   | 26       |   |
| Net accretion of discount on investments                                           |   | (11                | )      | (1       | )      |
| Deferred federal income taxes                                                      |   | (240               | )      | (64      | )      |
| Changes in assets and liabilities:                                                 |   |               |   |     |   |
| Premiums due from policyholders                                                    |   | (1,810             | )      | (1,140   | )      |
| Amounts due from reinsurers                                                        |   | (2,681             | )      | (2,143   | )      |
| Accrued investment income                                                          |   | 43                 |   | (31      | )      |
| Deferred policy acquisition costs                                                  |   | (226               | )      | (38      | )      |
| Other assets                                                                       |   | 20                 |   | 82       |   |
| Loss and loss adjustment expense reserves                                          |   | 3,166              |   | 1,002    |   |
| Unearned premiums                                                                  |   | 2,486              |   | (125     | )      |
| Accrued expenses and other liabilities                                             |   | 548                |   | 1,020    |   |
| Federal income taxes payable                                                       |   | 979                |   | 1,095    |   |
|                                                                               |   |               |   |     |   |
| Net cash provided by operating activities                                          |   | 5,504              |   | 3,327    |   |
|                                                                               |   |               |   |     |   |
| Cash flows from investing activities:                                              |   |               |   |     |   |
| Purchases of short-term investments                                                |   | (991               | )      | (8,897   | )      |
| Proceeds from sale or maturity of short-term  investments                          |   | 974                |   | 4,922    |   |
| Proceeds from maturity of securities available for  sale                           |   | 2,546              |   | 11,024   |   |
| Purchases of securities available for sale                                         |   | —             |   | (15,859  | )      |
| Proceeds from sales of property and equipment                                      |   | 19                 |   | 41       |   |
| Purchases of property and equipment                                                |   | (160               | )      | (417     | )      |
|                                                                               |   |               |   |     |   |
| Net cash provided by (used in) investing activities                                |   | 2,388              |   | (9,186   | )      |
|                                                                               |   |               |   |     |   |
| Net increase (decrease) in cash                                                    |   | 7,892              |   | (5,859   | )      |
| Cash, beginning of year                                                            |   | 29,948             |   | 21,093   |   |
|                                                                               |   |               |   |     |   |
| Cash, end of period                                                                |   | $                  | 37,840 |     | $      | 15,234 |   |
|                                                                               |   |               |   |     |   |
| Supplemental disclosure of cash flow information:                                  |   |               |   |     |   |
| Federal income taxes paid                                                          |   | $                  | 200    |     | $      | 0 |   |

 

See the accompanyingnotes to the unaudited condensed consolidated financial statements.

 

6

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**MEEMIC Holdings, Inc.**

**and Subsidiaries**

**Notes to Condensed Consolidated Financial Statements(Unaudited)**

 

**(1)           Description of Business**

 

MEEMIC Holdings, Inc.(“Holdings”) is an insurance holding company incorporated under Michigan law inOctober 1998.  Holdings owns all of theissued and outstanding common stock of MEEMIC Insurance Company (“MEEMIC”) andMEEMIC Insurance Services Corp.  MEEMICis a property and casualty insurance company that operates as a single segmentwriting full coverage private passenger automobile, homeowner, boat andumbrella insurance products primarily for educational employees and theirimmediate families exclusively in the State of Michigan. MEEMIC sells itsinsurance contracts through MEEMIC Insurance Services Corp., d/b/a MEIAInsurance Agency, which is the exclusive distributor of MEEMIC’s products.  Holdings and its subsidiaries are sometimesreferred to collectively as the “Company”.

 

**(2)           Basisof Presentation**

 

The accompanyingunaudited condensed consolidated financial statements include the accounts ofHoldings and its wholly-owned subsidiaries, and have been prepared inaccordance with accounting principles generally accepted in the United Statesfor Form 10–Q and Rule 10–01 of Regulation S-X financialinformation.  Accordingly, they have notbeen audited and they do not include all of the information and footnotesrequired by generally accepted accounting principles for complete financialstatements. All significant intercompany transactions have been eliminated inconsolidation.

 

In the opinion ofmanagement, all adjustments (consisting of normal recurring adjustments)considered necessary for a fair presentation of financial position and resultsof operations have been included.  Theoperating results for the three month period ended March 31, 2002 are notnecessarily indicative of the results to be expected for the year endingDecember 31, 2002.

 

In preparing thefinancial statements, management is required to make estimates and assumptionsthat affect the reported amounts of assets and liabilities as of the dates ofthe balance sheets and revenues and expenses for the periods then ended.  Actual results may differ from thoseestimates.

 

The most significantestimates that are susceptible to significant change in the near term relate tothe determination of the loss and loss adjustment expense reserves.  Although considerable variability isinherent in these estimates, management believes that the reserves areadequate.  The estimates are reviewedregularly and adjusted as necessary. Such adjustments are reflected in current operations.

 

7

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**(3)           RelatedParty Transactions**

 

ProNational InsuranceCompany (“ProNational”), a wholly-owned subsidiary of Professionals Group,Inc., owns 84.0% of the issued and outstanding shares of Holdings.  The Company has an Expense AllocationAgreement with ProNational covering indirect expenses and salaries of keycompany personnel.  Expenses related tothis agreement were $83,000 and $161,000 for the three months ended March 31,2002 and 2001, respectively.

 

On June 27, 2001,Professionals Group, Inc. and Medical Assurance, Inc. formed a new holdingcompany, ProAssurance Corporation, that owns all of the stock of MedicalAssurance, Inc. and Professionals Group, Inc. Medical Assurance, Inc., ProNational and MEEMIC continue to servepolicyholders under the umbrella of the new ProAssurance holding company.

 

On March 18, 2002,Holdings announced that it intends to acquire all of its outstanding shares ofstock not currently owned by ProAssurance Corporation (NYSE: PRA), for $29 pershare in cash (a total of 1,204,290 fully diluted shares). The proposedtransaction has been unanimously approved by Holdings’ Board of Directors,including its independent directors not affiliated with ProAssuranceCorporation. Following completion of the offer, Holdings intends to delist itsstock from the Nasdaq Stock Market and terminate the registration of its commonstock under the Securities Exchange Act of 1934, as amended.  Holdings intends to use primarily its ownexisting cash resources to fund the purchase of the shares.

 

No timetable has beenestablished for the transaction, although Holdings expects to proceedexpeditiously.  The transaction issubject to several conditions, including, without limitation, the negotiationof final terms of the transaction between the Board and the independentdirectors; the receipt of fairness opinions; the receipt of all requiredregulatory and bank approvals; the receipt of confirmation from insurancerating agencies that the repurchase would not impair the current A- rating ofMEEMIC or any of the other insurance subsidiaries of ProAssurance Corporation;and a favorable vote by a majority of the Holdings shareholders other than ProAssuranceCorporation and persons who are affiliated with ProAssurance Corporation.  These statements are subject to a variety ofrisks and uncertainties, including, without limitation the fulfillment of theconditions to the transaction described above. There can be no assurance thatthe transaction will be completed.

 

On March 18, 2002, acomplaint was filed against Holdings, its directors and its parent company,ProAssurance Corporation, in the 6th Circuit Court in OaklandCounty, Michigan by a purported shareholder of Holdings seeking to enjoin thetransaction described above.  The suit,which purports to be a class action on behalf of the minority shareholders,alleges, among other things that the transaction has been timed to freeze outthe minority shareholders, that the proposed transaction is unfair and thatProAssurance and the directors have violated their fiduciary duties.  The complaint also seeks damages

 

8

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in an undetermined amount.  The suit may delay or prevent progress towards the completion ofthe proposed transaction.

 

Holdings intends tovigorously defend itself and the other defendants against these claims.  Holdings believes that it has meritoriousdefenses to the claims made by the plaintiff, including without limitation, thefact that it has taken several steps to protect the rights of the minorityshareholders in the proposed transaction and to ensure its fairness.  These steps include permitting a committeeof two independent directors who have no other affiliation with Holdings orProAssurance Corporation to negotiate and approve the proposed transaction, andmaking the completion of the transaction subject to the approval of the holdersof a majority of the shares not owned by ProAssurance or its affiliates and thereceipt of fairness opinions from independent financial advisors.  There can be no assurance, however, as tothe outcome of this litigation and, if Holdings is not able to successfullydefend against the claims made by the plaintiff, the outcome of this litigationcould have a material adverse impact on the proposed transaction and on theCompany’s financial position, liquidity and results of operations.

 

**(4)           RevenueInformation**

 

The Company operates as asingle segment where private passenger automobile is the primary line, andhomeowners, boat and umbrella coverages are offered as an accommodationproduct.  Revenue is from unaffiliatedcustomers.  Net premiums written and netpremiums earned from each of these products is as follows:

 

For the Three Months Ended March 31, 2002 and 2001 (Unaudited):

 

|                   |   | **2002**            |   | **2001** |   |
|------------------------|--------|---------------------|--------|----------|--------|
|                   |   | **(In  thousands)** |   |
| Net  premiums written: |   |                |   |     |   |
| Personal  automobile   |   | $                   | 32,841 |     | $      | 28,010 |   |
| Homeowners             |   | 4,117               |   | 3,008    |   |
| Boat                   |   | 41                  |   | 29       |   |
| Umbrella               |   | 1                   |   | 1        |   |
| Total                  |   | $                   | 37,000 |     | $      | 31,048 |   |
|                   |   |                |   |     |   |
| Net  premiums earned:  |   |                |   |     |   |
| Personal  automobile   |   | $                   | 29,801 |     | $      | 27,466 |   |
| Homeowners             |   | 4,617               |   | 3,659    |   |
| Boat                   |   | 87                  |   | 48       |   |
| Umbrella               |   | 1                   |   | —   |   |
| Total                  |   | $                   | 34,506 |     | $      | 31,173 |   |

 

9

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**(5)           Effectsof New Accounting Pronouncements**

 

In June 2001, the Financial Accounting Standards Boardissued SFAS No. 141 “Business Combinations”. SFAS No. 141 requires that the purchase method of accounting be used forall business combinations with a closing date after June 30, 2001.  This statement eliminates thepooling-of-interest method of accounting for business combinations.  SFAS No. 141 also includes guidance on theinitial recognition and measurement of goodwill and other intangible assets ina business combination.  As the Companyhas not had a business combination after June 30, 2001, the adoption of SFASNo. 141 did not affect the results of operations or financial position of theCompany.

 

The Financial Accounting Standards Board has also issuedSFAS No. 142 “Goodwill and Other Intangible Assets” which supersedes APBOpinion 17 “Intangible Assets,” and is effective for fiscal years beginningafter December 15, 2001.  SFAS No. 142addresses how goodwill and other intangible assets should be accounted for infinancial statements upon acquisition and how these items should be accountedfor subsequent to acquisition.  Contraryto APB Opinion 17, SFAS No. 142 does not presume that goodwill and all otherintangible assets are wasting assets requiring amortization.  Instead, goodwill and intangible assets thathave indefinite useful lives will be tested at least annually forimpairment.  If goodwill and intangibleassets are deemed to be impaired, the change will be charged through theStatement of Operations.  SFAS No. 142requires additional disclosure of information about goodwill and otherintangible assets in the years subsequent to their acquisition.  Intangible assets net of accumulatedamortization were $30.5 million at March 31, 2002 and the Company determinedthere are currently no impaired intangible assets which have an indefiniteuseful life.  Thus, adopting SFAS No.142 did not affect the current results of operations with any additionalcharges for impairment, but has eliminated current annual amortization expenseof approximately $2.9 million.  TheCompany applied SFAS No. 142 on January 1, 2002.  The amortization expense, net income and earnings per share of theCompany as adjusted for this change for the period of initial application and priorperiod are as follows:

 

10

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|                                                      |   | **For the Three Months  Ended March 31,** |   |
|-----------------------------------------------------------|--------|-------------------------------------------|--------|
|                                                      |   |                                      |
|                                                      |   | **2002**                                  |   | **2001** |   |
| Reported  net income                                      |   | $                                         | 2,701  |   | $ | 2,463 |   |
| Add  back: Goodwill amortization                          |   | —                                    |   | 340 |   |
| Add  back: Sales Rep/Agency agreements amortization       |   | —                                    |   | 115 |   |
| Adjusted  net income                                      |   | $                                         | 2,701  |   | $ | 2,918 |   |
|                                                      |   |                                      |   |   |   |
| Earnings  per common share - basic                        |   |                                      |   |   |   |
| Reported  net income                                      |   | $                                         | 0.40   |   | $ | 0.37 |   |
| Goodwill  amortization                                    |   | —                                    |   | 0.05 |   |
| Sales  Rep/Agency agreements amortization                 |   | —                                    |   | 0.02 |   |
| Adjusted  net income per common share - basic             |   | $                                         | 0.40   |   | $ | 0.44 |   |
|                                                      |   |                                      |   |   |   |
| Earnings  per common share - assuming dilution            |   |                                      |   |   |   |
| Reported  net income                                      |   | $                                         | 0.40   |   | $ | 0.36 |   |
| Goodwill  amortization                                    |   | —                                    |   | 0.05 |   |
| Sales  Rep/Agency agreements amortization                 |   | —                                    |   | 0.02 |   |
| Adjusted  net income per common share - assuming dilution |   | $                                         | 0.40   |   | $ | 0.43 |   |

 

The Financial Accounting Standards Board also issuedSFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”which supercedes SFAS No. 121 “Accounting for the Impairment of Long-LivedAssets and for Long-Lived Assets to Be Disposed Of,” and the accounting andreporting provisions of APB Opinion No. 30 “Reporting the Results ofOperations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,Unusual and Infrequently Occurring Events and Transactions,” and is effectivefor fiscal years beginning after December 15, 2001.  SFAS No. 144 establishes a single accounting model for thedisposal of long-lived assets.  As theCompany does not hold long-lived assets, the adoption of SFAS No. 144 did notaffect the results of operations or financial position of the Company.

 

**Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

The following discussion and analysis should be readin conjunction with the condensed consolidated financial statements and thenotes thereto included elsewhere in this report and in the Company’s AnnualReport on Form 10-K for the year ended December 31, 2001.  The following discussion of our financialcondition and results of operations contains certain forward-looking statementsrelating to our anticipated future financial condition and operating resultsand our current business plans.  Theseforward-looking statements represent only our outlook as of the date of thisreport.  While we believe anyforward-looking statements we have made are reasonable, actual results coulddiffer materially since the statements are based on our current expectationsand are subject to risks and uncertainties. These risks and uncertainties are detailed from time to time in reportsfiled by the Company with the Securities and Exchange Commission.  See, for example, the disclosures in theCompany’s Annual Report on Form 10-K

 

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“Item 1 – Business – Forward-Looking Statements”.  Other factors not currently anticipated bymanagement may also materially and adversely affect the Company’s results ofoperations.  The Company does notundertake, and expressly disclaims any obligation, to update or alter itsforward-looking statements whether as a result of new information, futureevents or otherwise, except as required by applicable law.

 

**Overview**

 

We provide private passenger automobile, homeowners,boat and umbrella insurance primarily to educational employees and theirimmediate families in the State of Michigan through our MEEMIC subsidiary.  We sell our insurance contracts through over95 sales representatives associated with our insurance agency subsidiary, whichis the exclusive distributor of our products. As of March 31, 2002, we had 146,294 policies in force, representing174,236 insured vehicles, 49,863 homes, 2,078 boats and 774 personal umbrellapolicies.

 

**Financial Condition- March 31, 2002Compared to December 31, 2001**

 

Our total assets increased to $348.7 million at March31, 2002 from $341.7 million at December 31, 2001.  The majority of our assets consist of investments and cash, whichtotaled $227.0 million at March 31, 2002 and $222.7 million at December 31,2001.  We primarily invest in highquality bonds with the objective of providing stable income while maintainingliquidity at appropriate levels for our current and long-term requirements.  Investments consist primarily of governmentbonds, municipal bonds, collateralized mortgage obligations, and investmentgrade corporate bonds.  The modifiedduration of investments was 3.58 years at March 31, 2002 compared to 3.90 yearsat December 31, 2001.   The decrease inour modified duration of investments during the three months ended March 31,2002 was primarily the result of increased cash and cash equivalents at March31, 2002 compared to December 31, 2001 due to curtailing new long-terminvestment purchases for the potential short-term liquidity requirements of theproposed minority share buy back transaction. At March 31, 2002, the portfolio had an average Standard & Poor’ssecurity quality rating of AA (Excellent), and there were no securities indefault concerning the timely payment of interest and principal.  Our gross unrealized gains and grossunrealized losses in investments in securities were $5.5 million and $1.1million, respectively, at March 31, 2002 and $6.2 million and $732,000,respectively, at December 31, 2001. These changes in our gross unrealized gains and losses are a result offluctuating bond market values due to volatility of interest rates in themarketplace.

 

Our recorded estimates of loss and loss adjustmentexpense reserves were $127.5 million at March 31, 2002 compared to $124.4million at December 31, 2001.  The $3.1million net increase in reserves at March 31, 2002 was due to growth in thenumber of insured vehicles and homeowner policies in force.

 

Unearned premiums were $43.8 million at March 31, 2002and $41.3 million at December 31, 2001. The increase in unearned premiums at March 31, 2002 compared to December31, 2001 of 6.1% is due to the increase in premiums written and the timing ofrenewals for the auto book of business that has a concentration of 6-monthrenewal dates in April and October. Other liabilities were $14.3 million at March 31, 2002 and $14.9 millionat 

 

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December 31, 2001.  The decreaseat March 31, 2002 is due primarily to the timing of payments.

 

Our book value per common share outstanding was $24.44at March 31, 2002, compared to $24.14 at December 31, 2001.  Shareholders’ equity was $163.1 million atMarch 31, 2002, compared to $161.1 million at December 31, 2001.  This increase of $2.0 million was due to netincome of $2.7 million and a decrease in other comprehensive income of$709,000.  We expect to use retainedearnings to finance future growth and do not intend to pay any cash dividendsin the foreseeable future.

 

**Critical Accounting Policies**

 

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States requires usto make estimates and assumptions in certain circumstances that affect amountsreported in the accompanying condensed consolidated financial statements andrelated footnotes. These estimates and assumptions are evaluated on an on-goingbasis based on historical developments, market conditions, industry trends andother information we believe to be reasonable under the circumstances. Therecan be no assurance that actual results will conform to our estimates andassumptions, and that reported results of operations will not be materiallyadversely affected by the need to make accounting adjustments to reflect changesin these estimates and assumptions from time to time.  Item 7 of our Annual Report on Form 10-K discusses severalcritical accounting policies which we believe are most sensitive to estimatesand judgments and involve a higher degree of judgment and complexity. Therehave been no material changes to that information during the first quarter of2002.

 

**Results of Operations – Three MonthsEnded March 31, 2002 Compared to Three Months Ended March 31, 2001**

 

Net income for the three months ended March 31, 2002 was$2.7 million compared to  $2.5 millionfor the same period in 2001.  Our incomefrom operations before taxes was $3.6 million for the three months ended March31, 2002 compared to $3.5 million for the three months ended March 31,2001.  The increase in income fromoperations before taxes for the three months ended March 31, 2002 compared tothe same period in 2001 was due to a $700,000 reduction in goodwill and otherintangibles amortization and operating expense efficiencies, that werepartially offset by higher incurred losses.

 

Our direct premiums written were $39.3 million for thethree months ended March 31, 2002, an increase of 21% from the same period in2001.  Direct premiums written forautomobile coverage were $34.9 million for the three months ended March 31,2002, an increase of 19.5% compared to $29.2 million for the three months endedMarch 31, 2001.  Over 40% of theincreased premiums for autos was due to an increase in the statutoryassessments required by the Michigan Catastrophic Claims Association(“MCCA”).  The remaining increase inauto premiums reflects policyholder growth of 4.5% and an increase in the valueof autos being insured.  The number ofinsured vehicles increased to 174,236 at March 31, 2002 from 166,742 at March31, 2001.  Our homeowners business alsocontinued to increase.  Direct premiumswritten for homeowners were $4.3 million for the three months ended March 31,2002, an increase of 30.3%, compared to $3.3 million for the three months endedMarch 31, 2001.  The increase inhomeowners premiums was due to a 12% rate increase for homeowners that becameeffective October 1, 2001, an increase in the value of homes insured, andgrowth in the number of policyholders. The number of homeowner policies in force increased 15.2% to 49,863 at

 

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March 31, 2002 from 43,273 at March 31, 2001.  In addition to homeowners, we also offer boat and umbrellapolicies as an accommodation to our primary line of private passengerautomobile insurance.  Direct premiumswritten for boat and umbrella were $70,000 for the three months ended March 31,2002, compared to $49,000 for the same period in 2001.

 

Net premiums written were $37.0 million for the threemonths ended March 31, 2002, an increase of 19.4% compared to the same periodin 2001.  The percentage increase in netpremiums written was comparable to the percentage increase in direct premiumswritten for the three months ended March 31, 2002.  However, the increase in statutory assessments ceded to the MCCAwas greater than the increase in associated direct premiums written for thethree months ended March 31, 2002 due to the timing of the MCCA assessment andthe premiums ceded to the MCCA.  Thisincrease in ceded premiums was mostly offset by a $1.3 million reduction toceded premiums for the three months ended March 31, 2002 as a result of prioryears’ favorable loss experience that reduced the ceded premium payableliability at March 31, 2002.  Net premiumsearned were $34.5 million for the three months ended March 31, 2002, anincrease of 10.6%, compared to $31.2 million for the three months ended March31, 2001.  The increase in net premiumsearned for the three months ended March 31, 2002 lagged behind the increase innet premiums written due to the business growth and timing differences in whenrevisions for rate increases became effective, versus when they are earned foraccounting purposes.

 

Our combined ratio was 98.8% for the three monthsended March 31, 2002, compared to 96.6% for the three months ended March 31,2001.  Overall, our net loss ratio forthe three months ended March 31, 2002 was 69.6%, compared to 65.8% for thethree months ended March 31, 2001.

 

Net loss ratios for the personal automobile andhomeowners products were as follows:

 

For the Three Months Ended March 31:

 

|                           |   | **2002** |   | **2001** |   |
|--------------------------------|--------|----------|--------|----------|--------|
| Personal auto  liability       |   | 67.1     | %      | 49.6     | %      |
| Personal auto  physical damage |   | 66.5     | %      | 71.9     | %      |
| Total personal  auto           |   | 66.7     | %      | 64.5     | %      |
| Homeowners                     |   | 89.8     | %      | 76.7     | %      |
| Overall loss  ratio            |   | 69.6     | %      | 65.8     | %      |

 

The increases in net loss ratio and combined ratio forthe first quarter of 2002 were due to an increase in both the frequency andseverity of personal auto liability claims, in addition to an increase in thenumber of homeowner claims from wind and water-related damage.

 

Policy acquisition and underwriting expenses were $7.5million for each of the three months ended March 31, 2002 and March 31,2001.  The underwriting expenses ratiowas 21.9% for the three months ended March 31, 2002, compared to 23.9% for thethree months ended March 31, 2001.  Thelower expenses ratio for the three months ended March 31, 2002 was the resultof a premium tax refund of $400,000 from a prior year tax reduction andincreased efficiencies as costs increased at a slower pace than premiums volumeof business.  Amortization expense was$31,000 for the three months ended March 31, 2002, compared to $731,000 for thesame period in 2001.  The decrease wasdue to the adoption of SFAS No. 142.

 

Net investment income, excluding realized investmentgains and losses, was $2.9 million for each of the three months ended March 31,2002 and March 31, 2001. Consistent with 2001,

 

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investment income for the three months ended March 31, 2002 was attributableprimarily to interest income and not to realized capital gains.  Declining interest rates offset the positiveeffect of a larger portfolio during the three months ended March 31, 2002compared to the same period in 2001. The weighted average tax equivalent book yield of the fixed maturityportfolio was 6.89% for the three months ended March 31, 2002, compared to7.08% for the same period in 2001.  Theannualized tax equivalent total rate of return, which includes both income andchanges in market value of securities, was 4.51% for the three months endedMarch 31, 2002, compared to 10.90% for the three months ended March 31,2001.  The decreased return was due tolower interest rates and the downturn in the U.S. economy.

 

**Liquidityand Capital Resources**

 

Our primary sources of cash are from premiums,investment income and proceeds from maturities of portfolio investments.  The principal uses of cash are for paymentsof claims, commissions, taxes, operating expenses and purchases ofinvestments.  Cash flow and liquidityare managed in order to meet anticipated short-term payment obligations, and tomaximize opportunities to earn interest on those funds not immediatelyrequired.

 

Our cash increased by $7.9 million during the threemonths ended March 31, 2002 compared to a decrease of $5.9 million for the sameperiod in 2001.  The increase for thethree months ended March 31, 2002 was primarily the result of curtailing newlong-term investment purchases for the potential short-term liquidityrequirements of the proposed minority share buy back transaction.  Cash provided by operations for the threemonths ended March 31, 2002 was $5.5 million compared to $3.3 million for thethree months ended March 31, 2001.  The$2.2 million increase was primarily due to the increase in premiums writtenduring the three months ended March 31, 2002.

 

The proposed “going private” transaction described inNote 3 of the Notes to Condensed Consolidated Financial Statements will have amaterial effect on Holdings’ liquidity. The total amount to be paid in the transaction to holders of Holdingsstock and options is approximately $35 million, which is expected to be paidfrom Holdings’ existing cash and investments. We do not expect to incur indebtedness to finance the transaction or toaffect the reserves of MEEMIC, but Holdings’ cash and investments will bedepleted as a result of the transaction.

 

Historically, our liquidity requirements have been metby funds provided by operations.  Due tothe short-term nature of our products, a decrease in premiums or demand for ourproducts could have a significant impact on the availability of our funds.  Also, a substantial increase in paid claims,the occurrence of multi-catastrophe events or insolvency of our reinsurerscould negatively impact our cash flows and our timing and ability to pay ourliabilities.

 

Based on historical trends, market conditions and ourbusiness plans, we believe that our existing resources and sources of fundswill be sufficient to meet our short term and long term liquidity needs.  However, because economic, market andregulatory conditions may change, there can be no assurance that our funds willbe sufficient to meet these liquidity needs.

 

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**Item3.  Quantitative and QualitativeDisclosures About Market Risk**

 

Market risk is the risk of loss due to adverse changesin market rates and prices.  Our primarymarket risk exposure is to changes in interest rates.  The active management of interest rate risk is essential to ouroperations.

 

We manage market risk through an investment committeeconsisting of senior officers of the Company, consultants and a professionalinvestment advisor.  The committeeperiodically measures the impact that an instantaneous rise in interest rateswould have on the fair value of securities. The committee also measures the duration, or interest rate sensitivity,of a fixed income security or portfolio. Our investment policy limits the duration of our portfolio to a maximumof 300% of the duration of our liabilities.

 

We are vulnerable to interest rate risk because, likeother insurance companies, we invest primarily in fixed maturity securities,which are interest-sensitive assets.  Wedo not invest in fixed maturity securities for trading purposes.  Mortgage-backed securities, which make upapproximately 20% of our investment portfolio, are particularly susceptible tointerest rate changes.  We invest primarilyin classes of mortgage-backed securities that are less subject to prepaymentrisk and, as a result, somewhat less susceptible to interest rate risk thanother mortgage-backed securities.

 

Our fixed maturity investment portfolio was valued at$183.9 million at March 31, 2002 and had a duration of 3.58 years.  The following table shows the effects of achange in interest rate on the fair value and duration of our portfolio.  We have assumed an immediate increase ordecrease of 1% or 2% in interest rate.  Youshould not consider this assumption or the values shown in the table to be aprediction of actual future results.

 

| **Change in Rates** |   | **Portfolio  Value**        |    | **Change  in Value** |   | **Modified  Duration** |   |
|---------------------|--------|-----------------------------|---------|----------------------|--------|------------------------|--------|
|                |   | **(dollars  in thousands)** |    |
| +2%                 |   | $                           | 169,877 |                 | $      | (13,944                | )      | 3.96 |   |
| +1%                 |   | $                           | 176,850 |                 | $      | (7,021                 | )      | 3.90 |   |
|   0%           |   | $                           | 183,871 |                 | — |                   | 3.58   |   |
| -1%                 |   | $                           | 190,375 |                 | $      | 6,504                  |   | 3.24 |   |
| -2%                 |   | $                           | 196,544 |                 | $      | 12,673                 |   | 3.28 |   |

 

The other financial instruments, which include cash,premiums due from reinsurers and accrued investment income, do not produce asignificant difference in fair value when included in the market risk analysisdue to their short-term nature.

 

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**PART II.  OTHER INFORMATION**

 

**Item1. Legal Proceedings**

 

On March 18, 2002, a complaint was filed againstHoldings, its directors and its parent company, ProAssurance Corporation, inthe 6th Circuit Court in Oakland County, Michigan by a purportedshareholder of Holdings seeking to enjoin the transaction described above.  The suit, which purports to be a classaction on behalf of the minority shareholders, alleges, among other things thatthe transaction has been timed to freeze out the minority shareholders, thatthe proposed transaction is unfair and that ProAssurance and the directors haveviolated their fiduciary duties.  Thecomplaint also seeks damages in an undetermined amount.  The suit may delay or prevent progresstowards the completion of the proposed transaction.

 

Holdings intends to vigorously defend itself and theother defendants against these claims. Holdings believes that it has meritorious defenses to the claims made bythe plaintiff, including without limitation, the fact that it has taken severalsteps to protect the rights of the minority shareholders in the proposedtransaction and to ensure its fairness. These steps include permitting a committee of two independent directorswho have no other affiliation with Holdings or ProAssurance Corporation tonegotiate and approve the proposed transaction, and making the completion ofthe transaction subject to the approval of the holders of a majority of theshares not owned by ProAssurance or its affiliates and the receipt of fairnessopinions from independent financial advisors. There can be no assurance, however, as to the outcome of this litigationand, if Holdings is not able to successfully defend against the claims made bythe plaintiff, the outcome of this litigation could have a material adverseimpact on the proposed transaction and on the Company’s financial position,liquidity and results of operations.

 

**Item 6. Exhibits and Reports on Form8-K**

 

(a)           There are noexhibits required to be filed with this Report.

 

(b)           No reports on Form8-K were filed by Holdings during the three months ended March 31, 2002.

 

**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|                     | MEEMIC Holdings, Inc.                                              |
|--------------------------|--------------------------------------------------------------------|
|                     |                                                               |
|                     |                                                               |
| Date:  May 14, 2002 | /s/ Christine C.  Schmitt                                          |   |
|                     | Christine C. Schmitt                                               |
|                     | Its:   Chief Financial Officer, Secretary and  Treasurer |
|                     | (as principal  financial officer and on behalf of the registrant)  |

 

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