reported in conformity with GAAP, with statutory net income and statutory surplus, as determined in accordance with statutory accounting practices, prescribed or permitted by the OFIS.
(1)The weighted average shares outstanding at December 31, 2001, 2000 and 1999 were 6,665,617, 6,603,796 and 6,599,500 basic common shares, respectively, and 6,768,075, 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.
(5)The sum of the statutory net 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 2001 Edition (Priv. Pass. Automobile and Homeowners Quantitative Analysis Report). Data unavailable for the year ended December 31, 2001.
We provide private passenger automobile, homeowners, boat and umbrella insurance primarily to educational employees and their immediate families in the State of Michigan through our MEEMIC subsidiary. MEEMIC sells its insurance contracts through over 95 sales representatives associated with our MEIA Agency subsidiary, which is the exclusive distributor of MEEMIC's products and on December 30, 1999 became a wholly-owned subsidiary of Holdings. As of December 31, 2001, MEEMIC had 143,663 policies in force, representing 175,545 insured vehicles, 48,461 homes, 2,042 boats and 717 umbrella policies.
Our total assets increased to $341.7 million at December 31, 2001 from $309.5 million at December 31, 2000. This 10.4% increase in total assets is due to the earnings from 2001 and overall business growth. Our cash and investments, which consist of bonds, real estate, and some preferred stocks totaled $222.7 million at December 31, 2001 and $198.1 million at December 31, 2000. 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 3.90 years at December 31, 2001 compared to 3.60 years at December 31, 2000. As of December 31, 2001 and 2000, 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. However, the carrying value of three securities issued by California electric utilities was written down a total of $1.5 million in the second quarter of 2001 for other than temporary declines in fair value due to uncertainty associated with those utilities. Our gross unrealized gains and gross unrealized losses in investments in securities were $6.2 million and $732,000, respectively, at December 31, 2001 and $3.2 million and $1.5 million, respectively, at December 31, 2000. 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.
At December 31, 2001 and 2000, unearned premiums were $41.3 million and $36.8 million, respectively. The increase of 12.2% in unearned premiums at December 31, 2001 compared to December 31, 2000 was comparable to the growth in net premiums written.
Other liabilities at December 31, 2001 were $14.9 million, compared to $18.9 million at December 31, 2000. The decrease in 2001 for other liabilities was due to a decrease in premiums ceded payable due primarily to the cancellation of the homeowners quota share agreement in 2001 and the timing of payments. Additionally, other liabilities at December 31, 2001 were lower than December 31, 2000 as a result of the payment of capital lease obligations.
Our book value per common share outstanding was $24.14 at December 31, 2001, compared to $22.03 at December 31, 2000. Shareholders' equity was $161.1 million at December 31, 2001, compared to $146.6 million at December 31, 2000. The increase of 9.9% in shareholders' equity was primarily due to net income of $12.0 million, and an increase in other comprehensive income that consisted of unrealized gains on the investment portfolio of $2.5 million during the year ended December 31, 2001. We also issued 68,000 additional shares of Holdings common stock upon exercise of employee stock options in 2001 at $10 per share. This was partially offset by the retirement of shares in connection with the incentive plan of 5,100 shares and by shares used in cashless transactions of 4,410 shares, all at $10 per share. Additionally, $179,000 was recorded as a reduction to additional-paid-in capital as a result of $606,000 of premium paid on the repurchase of surrendered securities related to employee stock options and the incentive plan trust, offset by a tax benefit of $427,000 from employee stock options exercised. We expect to use retained earnings to finance future growth and do not intend to pay any cash dividends in the foreseeable future.
Losses and Loss Adjustment Expense Reserves. Losses and loss adjustment expense reserves represent the sum of (i) accumulation of individual case estimates for reported losses and loss adjustment expenses, (ii) bulk adjustments to case estimates and (iii) actuarial estimates for incurred but not reported losses and loss adjustment expenses. These estimates are 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, taking into account amounts we may be able to recover through reinsurance, and less amounts we estimate we can recover through salvage and subrogation. To the extent that loss trends develop in a way that is materially different than we have estimated, our estimates may require revision and we would adjust our reserves by increasing or decreasing the "loss and loss adjustment expense, net" amount for the relevant period.
•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 item 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 net loss ratio for 2000 was 57.6%, compared to 58.4% for 1999. The auto liability net loss ratio for 2000 was 39.7%, compared to 52.4% for 1999, and the auto physical damage net loss ratio for 2000 was 62.1% compared to 58.5% in 1999. The homeowner net loss ratio was 96.0% for 2000, compared to 77.4% for 1999. For 2000, the boat net 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.
Cash provided by operations that was deemed available for investment was invested in full compliance with our investment policy. Likewise, proceeds of $22.9 million for 2001 and $25.6 million for 2000, substantially from matured and called investments, were reinvested in similar high quality investments. During 2001 and 2000, we did not have any significant voluntary sales of long-term fixed maturity securities.
The Financial Accounting Standards Board also issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" which supercedes SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30 "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," and is effective for fiscal years beginning after December 15, 2001. SFAS No. 144 establishes a single accounting model for the disposal of long-lived assets. As the Company does not hold long-lived assets, the adoption of SFAS No. 144 will not affect the results of operations or financial position of the Company.
The other financial instruments, which include cash, premiums due from reinsurers and accrued investment income, do not produce a significant difference in fair value when included in the market risk analysis due to their short-term nature.
At December 31, 2001 and 2000, 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.
Short-term investments, which consist principally of money market mutual funds and U. S. government securities, are stated at cost, which approximates fair value.
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 $12,428,000 and $9,504,000 at December 31, 2001 and 2000, respectively.
The carrying value of intangibles is periodically reviewed to determine if any impairment has occurred. The Company measures the potential impairment of recorded goodwill based on the estimated undiscounted cash flows of the entity acquired over the remaining amortization period.
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 6,665,617 and 6,603,796 for the years ended December 31, 2001 and 2000, respectively and 6,599,500 for the period July 1, 1999 (the date of conversion) through December 31, 1999. The effect of dilutive stock options added 102,458 and 119,725 shares for the years ended December 31, 2001 and 2000, respectively and 102,689 shares for the period July 1, 1999 (date of conversion) through December 31, 1999, for the computation of diluted income per common share.
Accumulated other comprehensive income consists solely of unrealized gains or losses on the Company's available for sale securities. Realized investment losses on securities held as of the beginning of the year totaling ($1,566,239), ($64,743) and ($20,203) in 2001, 2000, and 1999, respectively, had unrealized (depreciation) appreciation of ($309,809), ($40,141), and $30,904 at the beginning of 2001, 2000, and 1999, respectively.
As contemplated in the conversion plan, the amount payable relating to the agency acquisition was substantially repaid in 1999. In accordance with the purchase agreement, certain former Agency shareholders elected to accelerate the individual amount due to them related to the agency acquisition. Settlements of these early extinguishments of debt resulted in an extraordinary item reflected on the 1999 income statement. The remaining amount payable relating to the Agency acquisition was repaid in 2001 in accordance with the agency purchase agreement.
A summary of amortized cost, gross unrealized gains and losses and estimated fair value of investments in securities as of December 31, 2001 and 2000, follows:
In 2001, 2000, and 1999, the Company did not have any significant voluntary sales of fixed maturity securities. A summary of the sources of net investment income follows:
At December 31, 2001, U. S. Treasury notes and certificates of deposit with a carrying value of $2,095,000 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.
At December 31, 2001 and 2000, amounts due from reinsurers were as follows:
The Michigan Catastrophic Claims Association ("MCCA") is an unincorporated nonprofit association created by Michigan law to provide unlimited coverage in excess of $250,000 per occurrence for personal injury losses. Every insurer engaged in writing personal protection insurance coverage in Michigan is required to be a member of the MCCA and the MCCA acts in the same manner as a reinsurer covering any personal injury losses incurred by the company in excess of $250,000. Member companies of the MCCA are charged an annual assessment, based on the number of vehicles for which coverage is written, to cover losses reported by all member companies. Accordingly, there is no direct relationship between the annual premiums and losses ceded to MCCA.
The Company also has a qualified defined contribution money purchase plan, covering substantially all employees, in which the Company is required to make a contribution on behalf of each participant in an amount equal to 3 percent of eligible compensation. The charge to income under this plan was $211,000 in 2001, $237,000, in 2000, and $209,000, in 1999.
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
In October 1998, Holdings' Board of Directors and sole shareholder adopted a stock compensation plan to provide performance-based compensation to officers, directors and employees of Holdings and MEEMIC. Pursuant to the stock compensation plan, 300,000 shares were reserved for future issuance by Holdings 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.
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 Holdings' common stock, on the date of grant. These options vest and become exercisable in equal annual installments over a five year period beginning July 1, 2000, (except in the event of a change in control of the Company, in which case all options granted become immediately vested), 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 are credited to shareholders' equity. As a result of the completion of the ProAssurance merger, all options granted became fully vested on June 28, 2001.
Options outstanding as of December 31, 2001 under the stock compensation plan consisted of the following:
The Company applies APB Opinion 25 and related interpretations in accounting for the plan. Accordingly, no compensation cost has been recognized for the stock option plan. There were no options granted in 2001 or 2000. 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:
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, 2001 and 2000, and
statutory net income for the years ended December 31, 2001, 2000 and 1999, of MEEMIC (as filed with the OFIS), to the amounts shown in the accompanying financial statements follows:
The Company participates in the Property and Casualty Guarantee Association ("Association") of the State of Michigan which protects policyholders and claimants against losses due to insolvency of insurers. When an insolvency occurs, the Association is authorized to assess member companies up to the amount of the shortfall of funds, including expenses. Member companies are assessed based on the type and amount of insurance written during the previous calendar year. Assessments to date are not significant; however, the ultimate liability for future assessments is not known. Accordingly, the Company is unable to predict whether such future assessments will materially affect the financial condition of the Company.
The unaudited operating results by quarter for 2001 and 2000 are summarized below:
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141 "Business Combinations". SFAS No. 141 requires that the purchase method of accounting be used for all business combinations with a closing date after June 30, 2001. This statement eliminates the pooling-of-interest method of accounting for business combinations. SFAS No. 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets in a business combination.
On March 18, 2002 Holdings announced that it intends to acquire all of its outstanding shares of stock not currently owned by ProAssurance Corporation, for $29 per share in cash (a total of 1,204,290 fully diluted shares). The proposed transaction has been unanimously approved by the Company's Board of Directors, including its independent Directors not affiliated with ProAssurance Corporation. Following completion of the offer, the Company intends to delist its stock from the Nasdaq Stock Market and terminate the registration of its common stock under the Securities Exchange Act of 1934, as amended. The Company intends to use primarily its own existing cash resources to fund the purchase of the shares.
No timetable has been established for the transaction, although the Company expects to proceed expeditiously. The transaction is subject to several conditions, including without limitation, the negotiation of final terms of the transaction between the Board and the independent Directors; the receipt of fairness opinions; the receipt of all required regulatory and bank approvals; the receipt of confirmation from insurance rating agencies that the repurchase would not impair the current A- rating of MEEMIC Insurance Company or any of the other insurance subsidiaries of ProAssurance Corporation; and a favorable vote by a majority of the MEEMIC Holdings shareholders other than ProAssurance Corporation and persons who are affiliated with ProAssurance Corporation. These statements are subject to a variety of risks and uncertainties, including without limitation the fulfillment of the conditions to the transaction described above. There can be no assurance that the transaction will be completed.
We have audited the accompanying consolidated balance sheet of MEEMIC Holdings, Inc. and Subsidiaries (the "Company") as of December 31, 2001, and the related consolidated statements of income, shareholders' equity and comprehensive income and cash flows for the year then ended. Our audit also included the 2001 financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The consolidated financial statements of MEEMIC Holdings, Inc. and Subsidiaries for the year ended December 31, 2000, were audited by other auditors whose report, dated February 2, 2001, expressed an unqualified opinion on those statements.
In our opinion, the 2001 financial statements referred to above present fairly, in all material respects, the consolidated financial position of MEEMIC Holdings, Inc. and Subsidiaries at December 31, 2001, and the consolidated results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related 2001 financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
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. At December 31, 2001, Professionals Group, Inc. and its parent company, ProAssurance Corporation, owned 84.0% of the issued and outstanding shares of Holdings.