reported in conformity with GAAP, with statutory net income and statutory surplus, as determined in accordance with statutory accounting practices, as prescribed or permitted by the OFIS.
(1)The weighted average shares outstanding at December 31, 2000 and 1999 were 6,603,796 and 6,599,500 basic common shares, respectively, and 6,723,521 and 6,702,189 common shares, respectively, assuming dilution. Earnings per share for 1999 are computed for the period July 1, 1999 (date of conversion) through December 31, 1999. There were no cash dividends declared during the periods presented. (2)Calculated by dividing losses and loss expenses by net premiums earned. (3)Calculated by dividing other underwriting expenses by net premiums earned. (4)The sum of the GAAP loss and loss adjustment expense ratio and the total underwriting expense ratio. (5)The sum of the statutory loss and loss adjustment expense ratio and the total underwriting expense ratio. (6)As reported by A.M. Best Company, an independent insurance rating organization, Best's Aggregate & Averages-Property-Casualty 2000 Edition (Priv. Pass. Automobile and Homeowners Quantitative Analysis Report). Data unavailable for the year ended December 31, 2000.
On June 23, 2000, Professionals Group, Inc. and Medical Assurance, Inc. jointly announced that they have signed a definitive agreement to consolidate the two companies. The agreement is subject to required regulatory and shareholder approvals and is expected to be completed in 2001. Under terms of the definitive agreement the two parties will form a new holding company, ProAssurance Corporation, which will own all of the stock of Medical Assurance, Inc. and Professionals Group, Inc. Medical Assurance, Inc., ProNational and MEEMIC will continue to serve policyholders under the umbrella of the new holding company, and A.M. Best Company has these companies under review pending the completion of this proposed transaction.
Our total assets increased to $309.5 million at December 31, 2000 from $274.6 million at December 31, 1999. This 12.7% increase in total assets is due to the earnings from 2000 and overall business growth. The majority of our assets consist of bonds, real estate, some preferred stocks, cash and short-term investments that in total were $198.1 million at December 31, 2000 and $168.4 million at December 31, 1999. We primarily invest in high quality bonds with the objective of providing stable income while maintaining liquidity at appropriate levels for our current and long-term requirements. The portfolio consists primarily of government bonds, municipal bonds, collateralized mortgage obligations, and investment grade corporate bonds. The modified duration of investments was 3.60 years at December 31, 2000 compared to 3.97 years at December 31, 1999. As of December 31, 2000 and 1999, the portfolio had an average Standard & Poor's security quality rating of AA (Excellent), and there were no securities in default concerning the timely payment of interest and principal. Our gross unrealized gains and gross unrealized losses in investments in securities were $3.2 million and $1.5 million, respectively, at December 31, 2000 and $488,000 and $3.2 million, respectively, at December 31, 1999. These changes in our gross unrealized gains and losses are a result of fluctuating bond market values due to volatility of interest rates in the marketplace.
Our recorded estimates of loss and loss adjustment expense reserves were $107.3 million at December 31, 2000 compared to $96.0 million at December 31, 1999. The $11.3 million increase in reserves for 2000 was primarily due to general allowances for growth in the number of insured vehicles and homeowner policies in force. Reserves for losses incurred prior to 2000 were reduced by $9.4 million during 2000 as a result of favorable developments in estimates of prior years' reserves on auto liability. Reserves for losses incurred prior to 1999 were reduced by $7.0 million during 1999. This was caused by the unanticipated reduction in the frequency of claims. We believe this reduction resulted from the 1994 legislative tort reforms in the State of Michigan, which reduced the frequency and shortened the reporting pattern of claims. The 1994 legislation became effective in 1996 and the effects were uncertain at that time. As additional data subsequent to the tort reform has emerged, we anticipate greater stability in the reserve estimates. Uncertainties inherent in the loss estimation process will invariably cause differences in actual ultimate liabilities from estimates. Aggregate loss reserves at December 31, 2000 and 1999 have been certified by an independent actuarial firm and are believed to be a reasonable provision for all unpaid loss and loss expense obligations under the terms of MEEMIC's policies and agreements.
At December 31, 2000 and 1999, unearned premiums were $36.8 million and $34.1 million, respectively. The increase of 7.9% in unearned premiums at December 31, 2000 compared to December 31, 1999 was comparable to the growth in premiums written.
Other liabilities at December 31, 2000 were $18.9 million, compared to $17.3 million at December 31, 1999. The increase in 2000 for other liabilities was due primarily to the acquisition of a mail processing machine, which was recorded as a capital lease and the timing of payments related to statutory fees and assessments.
Our book value per common share outstanding was $22.03 at December 31, 2000, compared to $19.27 at December 31, 1999. Shareholders' equity was $146.6 million at December 31, 2000, compared to $127.2 million at December 31, 1999. The increase of 15.3% in shareholders' equity was primarily due to net income of $15.7 million, and an increase in other comprehensive income that consisted of unrealized gains on the investment portfolio of $2.9 million during the year ended December 31, 2000. The Company also issued 56,000 additional shares of common stock related to employee stock options exercised in 2000 at $10 per share. Additionally, $225,000 was recorded as additional-paid-in capital as a result of a tax benefit from the employee stock options. We expect to use retained earnings to increase the Company's capital base and finance future growth and do not intend to pay any cash dividends in the foreseeable future.
In the analysis of our results that follows, we refer to various financial ratios that investors use to analyze and compare the results of insurance companies. These ratios include:
•underwriting expense ratio-This ratio compares our expenses to obtain new business and renew existing business to our net premiums earned. The lower the percentage, the more efficient we are.
•combined ratio-This ratio compares (a) the sum of our expenses to obtain new business and renew existing business, our insurance losses and our expenses related to settling and adjusting claims to (b) our net premiums earned. The lower the percentage, the more profitable our
insurance business is. If the percentage is higher than 100%, our insurance business may not be profitable.
Net income for 2000 was $15.7 million compared to $13.3 million for 1999. Our income from operations before taxes and extraordinary item was $22.5 million and $17.3 million for 2000 and 1999, respectively, and the after-tax return on equity was 12.4% in 2000 compared to 25.5% in 1999. The primary reason for the increase in income from operations before taxes and extraordinary items for 2000 compared to 1999 was due to our business growth and the retention of more of our premiums from reinsurance contracts.
Our combined ratio was 88.9% for 2000 compared to 88.1% for 1999. Overall, our loss ratio for 2000 was 57.6%, compared to 58.4% for 1999. The auto liability loss ratio for 2000 was 39.7%, compared to 52.4% for 1999, and the auto physical damage loss ratio for 2000 was 62.1% compared to 58.5% in 1999. The homeowner loss ratio was 96.0% for 2000, compared to 77.4% for 1999. For 2000, the boat loss ratio was 76.6% and there were no umbrella losses. The overall claims experience for the year 2000 was slightly better than 1999, because increases in vehicle damage and property losses from storms in the year 2000 were more than offset by reductions in auto liability losses.
Our other underwriting expenses ratio increased to 23.7% for 2000, compared to 20.5% for 1999. The increase in other underwriting expense for 2000 compared to 1999 includes additional costs for investments in technology and increased costs for sales force incentives. MEEMIC installed a new computer system and mailer machine, and implemented an automatic deposit payment system for billing and a voice response unit for routine billing calls.
Total direct premiums written increased to $130.3 million in 2000 from $122.4 million in 1999. Our direct written premiums have increased 6.5% in 2000 due primarily to business growth. Additionally, auto and homeowner premiums increased at a faster rate than the number of insured vehicles and homes due to the increased value of existing homes and an increase in the number of higher valued autos and homes overall. With the continued growth in our homeowners business, our product mix in terms of exposures by line is now 20% homeowners and 79% personal automobile, with the remainder made up by umbrella and boat. Net premiums written for 2000 increased to $121.1 million, or 26.7% from 1999. Net premiums earned for 2000 were $118.5 million compared to $93.0 million for 1999. The increase in net premiums written and earned for 2000 was due to the cancellation of the quota share reinsurance contract on July 1, 1999 with ProNational in connection with the conversion and general business growth.
Our homeowners premiums written also continued to increase. Direct premiums written during 2000 for homeowners increased 21.9% to $15.6 million, from $12.8 million in 1999. The number of homeowner policies in force increased 18.7% to 41,927 at December 31, 2000 from 35,309 at December 31, 1999.
Our combined ratio was 88.1% for 1999 compared to 87.6% for 1998. Our income from operations was $17.3 million for 1999 compared to $11.4 million for 1998, and the after-tax return on equity was 25.5% in 1999 compared to 19.3% in 1998. This increase in income for 1999 over 1998 was primarily due to the changes noted above in connection with the conversion. Overall, our loss ratio for 1999 was 58.4%, compared to 56.6% for 1998. The auto liability loss ratio for 1999 was 52.4%, compared to 47.5% for 1998, and the auto physical damage loss ratio for 1999 and 1998 remained constant at 58.5%. The homeowner loss ratio was 77.4% for 1999, compared to 79.1% for 1998. The mild weather conditions for both 1999 and 1998 have resulted in fewer reported claims.
Our other underwriting expenses ratio increased slightly to 20.5% for 1999, compared to 19.8% for 1998. During 1999 and the beginning of 2000, MEEMIC has increased its investments in technology to support future growth. MEEMIC purchased a new computer system and a large mailer machine, developed a new automatic deposit payment system for billing and has started to implement a voice response unit for routine billing calls.
The net increase in cash was $12.3 million for the year ended December 31, 2000 compared to $4.8 million for the year ended December 31, 1999. Cash provided by operations for the year ended December 31, 2000 was $27.0 million, compared to $19.9 million for the year ended December 31, 1999. The net increase in cash and cash provided by operations during 2000 compared to 1999 was primarily due to our business growth and the retention of more of our premiums from reinsurance contracts.
Net proceeds from the 1999 conversion to a stock company and related subscription offering were $43.0 million, before offering costs of $700,000 and a donation to the MEEMIC Foundation of $500,000. MEEMIC policyholders subscribed for 1.5 million shares of common stock in Holdings. Also pursuant to the conversion, Professionals converted the $21.5 million surplus note plus accrued interest of $1.5 million into 2.3 million shares at $10 per share of Holdings common stock, and purchased an additional 2.8 million shares in the subscription offering as standby underwriter. After repayment of debt related to the agency acquisition, the remaining net proceeds of approximately $30 million were invested and are being used to support additional premium writings and business expansion.
Cash provided by operations and deemed available for investment was employed in full compliance with our investment policy. Likewise, proceeds of $25.6 million for 2000 and $16.4 million for 1999, substantially from matured and called investments, were reinvested in similar high quality investments. During 2000, 1999 and 1998, we did not have any significant voluntary sales of our long-term fixed maturity securities.
claims. However, based upon the actual results reported to date, we believe that the Company's loss reserves, including reserves for losses that have been incurred but not yet reported, make adequate provision for the effects of inflation.
The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards, or SFAS, No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activities" which amends SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities," and is effective for fiscal quarters of all fiscal years beginning after June 15, 2000 (as amended by SFAS No. 137). SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. SFAS No. 138 addresses a limited number of issues that have caused problems for enterprises applying SFAS No. 133. As the Company does not use derivative instruments, we anticipate that the adoption of SFAS No. 133 and No. 138 will not affect the results of operations or financial position of the Company.
We manage market risk through an investment committee consisting of senior officers of the Company, consultants and a professional investment advisor. The committee periodically measures the impact that an instantaneous rise in interest rates would 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 maximum of 300% of the duration of our liabilities.
We are vulnerable to interest rate risk because, like other insurance companies, we invest primarily in fixed maturity securities, which are interest-sensitive assets. We do not invest in fixed maturity securities for trading purposes. Mortgage-backed securities, which make up approximately 18% of our investment portfolio, are particularly susceptible to interest rate changes. We invest primarily in classes of mortgage-backed securities that are less subject to prepayment risk and, as a result, somewhat less susceptible to interest rate risk than other mortgage-backed securities.
*Earnings per share for 1999 are computed for the period July 1, 1999 (date of conversion) through December 31, 1999.
Cash equivalents include money market funds with original maturities of less than three months.
At December 31, 2000 and 1999, all of the Company's securities are classified as available-for-sale and are those securities that would be available to be sold in response to the Company's liquidity needs, changes in market interest rates and asset-liability management strategies, among others.
Available-for-sale securities are recorded at fair value, with unrealized gains and losses, net of the related income tax effect, excluded from income and reported as a separate component of shareholders' equity.
Real estate, which consists of vacant land available for sale, is stated at cost.
Reinsurance arrangements are prospective contracts for which prepaid reinsurance premiums are amortized ratably over the related policy terms based on the estimated ultimate amounts to be paid. Changes in estimated outcomes are recognized currently.
On July 1, 1999 MEEMIC converted from a mutual to a stock insurance company and became a wholly-owned subsidiary of the Company. Prior to the conversion, the Company did not engage in any significant operations and did not have assets or liabilities. Since July 2, 1999, the Company has been trading on the Nasdaq National Market under the symbol "MEMH". Net proceeds of the initial public offering of the Company were $42,973,000, before offering costs of $700,000 and a donation to the MEEMIC Foundation of $500,000. MEEMIC policyholders subscribed for 1,533,983 shares of common stock in the Company. Also pursuant to the plan of conversion, Professionals Group, Inc. converted a $21.5 million surplus note (plus accrued interest) of MEEMIC owned by ProNational Insurance Company ("ProNational"), a wholly-owned subsidiary of Professionals Group, Inc. into 2,302,209 shares of the Company; and, Professionals Group, Inc. fulfilled its obligations as standby purchaser by purchasing an additional 2,763,308 shares in the subscription offering. Since the conversion, Professionals Group, Inc. has continued to purchase additional shares in the open market. At December 31, 2000, Professionals Group, Inc. owned 84.2% of the issued and outstanding shares of the Company.
On June 23, 2000, Professionals Group, Inc. and Medical Assurance, Inc. jointly announced that they have signed a definitive agreement to consolidate the two companies. The agreement is subject to required regulatory and shareholder approvals and is expected to be completed in 2001. Under terms of the definitive agreement the two parties will form a new holding company, ProAssurance Corporation, that will own all of the stock of Medical Assurance, Inc. and Professionals Group, Inc. Medical Assurance, Inc., ProNational and MEEMIC will continue to serve policyholders under the umbrella of the new holding company.
A summary of amortized cost, gross unrealized gains and losses and estimated fair value of investments in securities as of December 31, 2000 and 1999, follows:
In 2000, 1999, and 1998, the Company did not have any significant voluntary sales of fixed maturity securities. A summary of the sources of net investment income follows:
Increases (decreases) in net unrealized gains of fixed maturities were $4,446,000, ($5,560,000), and $873,000 at December 31, 2000, 1999, and 1998, respectively.
At December 31, 2000, U. S. Treasury notes and certificates of deposit with a carrying value of $2,040,000 were on deposit with regulatory authorities, as required by law.
The stock compensation plan is administered by the compensation committee of the board of directors. On the effective date of the conversion, July 1, 1999, 280,000 options were granted at fair value, the subscription price of the Company's common stock, on the date of grant. These options vest and become exercisable in equal installments over a five year period beginning July 1, 2000, and expire on July 1, 2009. No charge to operations was recorded with respect to authorization, grant or exercise of options. Proceeds received upon exercise would be credited to shareholders' equity.
Option information regarding the stock compensation plan for the years ended December 31, 2000 and December 31, 1999 follows:
Options outstanding as of December 31, 2000 under the stock compensation plan consisted of the following:
The Company applies APB Opinion 25 and related interpretations in accounting for these plans. Accordingly, no compensation cost has been recognized for these stock option plans. Had compensation cost for these plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS No. 123, the Company's net income (in thousands) and net income per common share-assuming dilution would have been reduced to the pro forma amounts below for options granted in 1999:
At December 31, 2000, future minimum lease payments are as follows:
MEEMIC Insurance Company is required to file financial statements prepared in accordance with statutory insurance accounting practices ("SAP") prescribed or permitted by the State of Michigan Office of Financial and Insurance Services ("OFIS"). The Company does not utilize any permitted accounting practices.
Accounting practices used to prepare statutory-basis financial statements differ in some respects from GAAP. A reconciliation of statutory capital and surplus at December 31, 2000 and 1999, and statutory net income for the years ended December 31, 2000, 1999 and 1998, of MEEMIC Insurance
Company (as filed with the OFIS), to the amounts shown in the accompanying financial statements follows:
On January 1, 2001, significant changes to the statutory basis of accounting will become effective. The cumulative effect of these changes, known as the Codification guidance, will be recorded as a direct adjustment to statutory surplus. The effect of adoption is expected to be an increase of approximately $3.6 million (unaudited) to surplus. The Company expects that statutory surplus after adoption will continue to be in excess of the regulatory risk-based capital requirements.
Approximately $237 million of consolidated assets represents assets of the Company's insurance operations that may not be transferred to the Company in the form of dividends, loans or advances without prior regulatory approval. The amount of dividends that the Company's insurance subsidiary can pay to the Company in any 12-month period is limited to the greater of statutory net income for the preceding year, excluding realized gains (losses) on sales of investments, or 10% of capital and surplus as of the preceding year end. As of December 31, 2000, amounts available for payment of dividends in 2001 without prior regulatory approval of the OFIS is approximately $14.5 million.
MEEMIC Holdings, Inc. (Holdings) is an insurance holding company incorporated under Michigan law on October 21, 1998. From October 21, 1998 (date of inception) through June 30, 1999 Holdings was inactive, until July 1, 1999 when MEEMIC Insurance Company completed its conversion to a stock company and became a wholly-owned subsidiary of Holdings. Accordingly, condensed financial information for Holdings is only being presented for the years ended December 31, 2000 and 1999. Also, certain amounts for 1999 have been reclassified to conform to 2000 presentation.
MEEMIC Insurance Company (MEEMIC)-a stock insurance company incorporated under Michigan law on August 10, 1949.
Commencing September 15, 2000 Holdings is included in the consolidated federal income tax return with Professionals Group, Inc., parent of ProNational Insurance Company, which owned 84.2% of Holdings at December 31, 2000. Under terms of Holdings' tax sharing agreements with its subsidiaries and its parent, income tax provisions for the individual companies are computed on a separate company basis.