The Company leases approximately 55,000 square feet of office space to house its principal executive offices in Auburn Hills, Michigan. For investment purposes, the Company owns an 11.5 acre vacant parcel of land in Auburn Hills, Michigan.
accordance with statutory accounting practices, as prescribed or permitted by the Michigan Insurance Bureau.
(1)The weighted average shares outstanding at December 31, 1999 were 6,599,500 basic common shares and 6,879,500 common shares assuming dilution. There were no cash dividends declared during the periods presented. Earnings per share are computed on a pro forma basis assuming the conversion took place on January 1, 1999.
(2)Calculated by dividing losses and loss expenses by net premiums earned.
Our total assets increased to $274.6 million at December 31, 1999 from $239.3 million at December 31, 1998. The 14.8% increase in total assets is primarily a result of the conversion and related subscription offering. See the discussion under "Liquidity and Capital Resources" for further details.
Our recorded estimates of loss and loss adjustment expense reserves were $96.0 million at December 31, 1999 compared to $92.3 million at December 31, 1998. The $3.7 million increase in reserves for 1999 and the $7.4 million increase in reserves for 1998 are attributable to general
allowances for growth in the number of insured vehicles and homeowner policies in force. Reserves for losses incurred prior to 1999 were reduced by $7.0 million during 1999 as a result of favorable development in estimates of prior years' reserves on auto liability. Reserves for losses incurred prior to 1998 were reduced by $3.6 million during 1998. 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. As additional data subsequent to the tort reform emerges, we anticipate greater stability and accuracy 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, 1999 and 1998 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, 1999 and 1998 unearned premiums were $34.1 million and $31.6 million, respectively. The increase of 7.9% in unearned premiums at December 31, 1999 compared to December 31, 1998 was comparable to the growth in premiums written.
•underwriting expense ratio-This ratio compares our expenses to obtain new business and renew existing business to our net premiums earned and is used to measure how efficient we are at obtaining business. The lower the percentage, the more efficient we are.
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 $12.2 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.
Net investment income before interest expense was $8.3 million for 1999 compared to $7.0 million for 1998. The increase in net investment income before interest expense was due to increases in invested assets from proceeds of the conversion and related subscription offering and positive cash flow from operations. Interest expense on the surplus note was $906,000 for 1999 and $1.8 million for 1998. As a result of the surplus note conversion to common stock on July 1, 1999, there was no interest expense for the second half of 1999. Consistent with 1998, investment income for 1999 was earned primarily from interest income and not from realized capital gains and losses. The tax equivalent total rate of return, which includes both income and changes in market value of securities, was 2.72% for 1999 and was 7.49% for 1998. The reduced return in 1999 compared to 1998 was due to a reduction in security market values resulting from higher interest rates. The weighted average tax equivalent book yield of the fixed maturity portfolio was 6.93% for 1999, compared to 6.83% for 1998.
Results of Operations-Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net income for 1998 was $8.4 million compared to $6.6 million for 1997. MEEMIC's surplus increased by over 20% to $52.2 million at December 31, 1998. In 1997 MEEMIC's policyholder surplus also increased by over 20% to $43.3 million at December 31, 1997. Expenses relating to interest on the surplus note and management fees to Professionals amounted to $3.9 million in 1998 compared to $2.3 million in 1997.
Our combined ratio improved for the fourth consecutive year and was 87.6% for 1998 compared to 94.3% for 1997. Our income from operations was $12.2 million for 1998 compared to $9.3 million for 1997, and the after-tax return on equity was 19.3% in 1998 compared to 18.4% in 1997. Overall, our loss ratio for 1998 was 56.6% compared to 58.7% for 1997. The auto liability loss ratio for 1998 improved to 47.5% from 52.4% for 1997, and the auto physical damage loss ratio for 1998 improved to 58.5% from 59.8% for 1997. The homeowner loss ratio for 1998 also improved to 79.1% from 83.7% for 1997. These positive results are despite two severe Michigan storms occurring on May 31 and July 21, 1998 that resulted in $1.7 million in direct losses, $1 million in net losses after reinsurance and 2,020 reported claims. The favorable combined ratio in 1998 is attributable to: (i) continued overall favorable claims experience with reductions in claim frequency that more than offset increases in claim severity for 1998 compared to 1997, and (ii) reduced reinsurance rates from the 1997 contracts. Our underwriting gain for 1997 is primarily the result of more favorable claims experience and reduced rates from the 1997 reinsurance contracts.
We continued to reduce expenses and improve operational efficiencies in 1998. For the seventh consecutive year, our other underwriting expenses ratio has declined, and was 19.8% in 1998 compared to 24.6% in 1997. The significant decrease in 1998 was primarily due to the reduction in commission expense as a result of our acquisition of the agency.
Direct premiums written during 1998 for automobile coverage increased 5.1% to $103.5 million, from $98.5 million in 1997. The number of insured vehicles increased 5.6% to 155,211 at December 31, 1998 from 146,994 at December 31, 1997.
Our homeowners business also continued to increase. Direct premiums written during 1998 for homeowners increased 24% to $9.8 million, from $7.9 million in 1997. The number of homeowner policies in force increased 18.3% to 29,699 at December 31, 1998 from 25,114 at December 31, 1997.
The net increase in cash was $4.8 million for the year ended December 31, 1999 compared to $1.8 million for the year ended December 31, 1998. The $3.0 million additional increase in 1999 cash reflects additional working capital retained after the completion of the conversion and related subscription offering and the repayment of substantially all debt related to the 1997 acquisition of our sales agency. Cash provided by operations for the year ended December 31, 1999 was $19.9 million, compared to $17.1 million for the year ended December 31, 1998. The $2.8 million increase in cash provided by operations during 1999 compared to 1998 was primarily due to increased income from operations as a result of the cancellation of the quota share agreement with ProNational, whereby MEEMIC retained 40% more of its operating income during the second half of 1999.
The effects of inflation on the Company are considered in estimating reserves for unpaid losses and loss adjustment expenses, and in the premium rate-making process. The actual effects of inflation on the Company's results of operations cannot be accurately known until the ultimate settlement of 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.
Our fixed maturity investment portfolio was valued at $157 million at December 31, 1999 and had a duration of 3.97 years. The following table shows the effects of a change in interest rate on the fair value and duration of our portfolio. We have assumed an immediate increase or decrease of 1% or 2% in interest rate. You should not consider this assumption or the values shown in the table to be a prediction of actual future results.
MEEMIC Holdings, Inc. and subsidiaries (the "Company") is an insurance holding company incorporated under Michigan law in October 1998. The Company owns all of the issued and outstanding common stock of MEEMIC Insurance Services Corp. and MEEMIC Insurance Company, a stock insurance company incorporated under Michigan law. MEEMIC Insurance Company ("MEEMIC") (formerly "Michigan Educational Employees Mutual Insurance Company") is a property and casualty insurance company that operates as a single segment writing full coverage private passenger automobile protection and homeowner insurance products for educational employees and their immediate families exclusively in the State of Michigan. In September 1997, MEEMIC began selling its insurance contracts through its sister company, MEEMIC Insurance Services Corp., d/b/a MEIA Insurance Agency, which is the exclusive distributor of the Company's products. Prior to that, the Company's products were sold by Michigan Educators Insurance Agency, Inc. (see Note 3).
At December 31, 1999 and 1998, 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.
Losses and loss adjustment expense reserves represent the accumulation of individual case estimates for reported losses and loss adjustment expenses, bulk adjustments to case estimates and actuarial estimates for incurred but not reported losses and loss adjustment expenses, based upon the Company's actual experience, assumptions and projections as to claims frequency, severity, inflationary trends and settlement payments. The reserve for losses and loss adjustment expenses is intended to cover the ultimate net cost of all losses and loss adjustment expenses incurred but unsettled through the balance sheet date reduced for anticipated salvage and subrogation. Anticipated salvage and subrogation approximated $1,285,000 and $985,000 at December 31, 1999 and 1998, respectively. The reserve is stated gross of reinsurance ceded.
Intangibles primarily consist of the excess of cost over fair market value of net tangible assets of an acquired business. Intangible assets, including noncompete agreements, are amortized on a straight-line basis over periods ranging from 5 to 15 years. Accumulated amortization totaled $6,580,000 and $3,655,000 at December 31, 1999 and 1998, respectively.
Net income per share is calculated by dividing net income per share by the weighted-average number of common shares outstanding. The weighted-average common shares used for determining basic income per common share were 6,599,500 for the year ended December 31, 1999. The effect of dilutive stock options added 280,000 shares for the year ended December 31, 1999 for the computation of diluted income per common share. Earnings per share are computed on a pro forma basis assuming the conversion took place on January 1, 1999 (Note 3).
At a special policyholder meeting held on May 25, 1999, MEEMIC's plan of conversion was approved by policyholder vote. On July 1, 1999 MEEMIC converted to a stock insurance company and became a wholly-owned subsidiary of the Company. 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 Professional Group 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. As a result, Professionals Group owns approximately 77% of the issued and outstanding shares of the Company. Since July 2, 1999, the Company has been trading on the Nasdaq National Market under the symbol "MEMH".
On September 22, 1997, MEEMIC acquired the operations of its exclusive sales agency. The unaudited pro forma results of operations for the year ended December 31, 1997, of the sales agency as if the acquisition had occurred on January 1, 1997 would have been $76.6 million in total revenues and other income and $6.2 million in net income. This pro forma information does not purport to be indicative of what results would have been had the acquisition been made as of that date or of results which may occur in the future.
At December 31, 1999, U. S. Treasury notes and certificates of deposit with a carrying value of $1,960,000 were on deposit with regulatory authorities, as required by law.
Due to the short-term nature of other financial instruments such as cash, the premiums due from policyholders, amounts due from reinsurers and accrued investment income, the fair value of these items approximate their carrying value. Additionally, the carrying value approximates fair value of the payable related to acquisition due to the accelerated payment option available to the Company and the interest rate on the surplus note approximates current rates available to the Company.
The Company continually reviews its reinsurers, considering a number of factors, the most critical of which is their financial stability. Based on these reviews, the Company evaluates its position with
Effective July 1, 1997, the Company entered into a coinsurance treaty with ProNational to cede 40% of its net retained premiums on a quota share basis. The coinsurance treaty was terminated July 1, 1999. Ceding commissions were $7,227,000 in 1999, $12,995,000 in 1998 and $6,577,000 in 1997. A summary of reinsurance amounts, which are included above, that were ceded to ProNational follows:
The significant components of federal income tax expense are as follows:
December 31, 1999, 1998 and 1997, the reasons for these differences, and the tax effects thereof, are as follows:
At December 31, 1999 and 1998, property and equipment consisted of the following:
ProNational purchased the $21,500,000 surplus note from the Company on April 7, 1997. Interest was payable annually at a rate of 8.5%. Repayment of any principal or interest was subject to written authorization by the Commissioner of Insurance of the State of Michigan and approval by the Company's Board of Directors. At December 31, 1998, this note had an outstanding balance of $21,500,000 with accrued interest of $1,827,500. On May 26, 1998, the accrued interest for 1997 of $1,342,000 was paid to ProNational following the State and Board's approval.
The Company has a short-term incentive plan covering all full time permanent employees hired before March 1 for each plan year. Incentive payouts are based on achievement of corporate goals and are calculated as a percentage of base compensation. The charge to income under this plan was approximately $575,000 in 1999 and $500,000 in both 1998 and 1997, respectively.
In October 1998, the Company's Board of Directors and sole shareholder adopted a stock compensation plan to provide performance-based compensation to officers, directors and employees of the Company and MEEMIC. Pursuant to the stock compensation plan, 300,000 shares were reserved for future issuance by the Company upon exercise of stock options. If awards should expire, become unexercisable or be forfeited for any reason without having been exercised or without becoming fully vested in full, the shares of common stock subject to such awards would be available for the grant of additional awards under the stock compensation plan.
Option information regarding the stock compensation plan for the year ending December 31, 1999 follows:
Options outstanding as of December 31, 1999 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:
The fair value of options at date of grant was estimated using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 1999: dividend yield of 0%; expected volatility of 51.2%; risk-free interest rate of 5.84%; and expected life of 5 years for the stock compensation plan. The pro forma effect on net income for 1999 is not representative of the pro forma effect on net income for future years because additional stock option awards could be made in future years.
The Company is obligated under an operating lease for office space.
At December 31, 1999, future minimum lease payments are as follows:
The base rate will increase annually at the start of each new lease year by the percentage increase in the CPI-U (Common Price Index for all urban consumers).
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, 1999 and 1998, and statutory net income for the years ended December 31, 1999, 1998 and 1997, of MEEMIC Insurance
Approximately $219 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
Earnings per share are computed on a pro forma basis assuming the conversion took place on January 1, 1999 (Note 3).
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 year ended December 31, 1999.
MEEMIC Insurance Company (formerly "Michigan Educational Employees Mutual Insurance Company") (MEEMIC)-a stock insurance company incorporated under Michigan law on August 10, 1949.
Under terms of Holding's tax sharing agreement with its subsidiaries, income tax provisions for the individual companies are computed on a separate company basis.