The following selected financial data are derived from the Company's consolidated financial statements, except for selected statutory data, which are presented in accordance with statutory accounting practices. Information for periods prior to the formation of Holdings relates to MEEMIC and its subsidiary. The data should be read in conjunction with the consolidated financial statements, related notes and other financial information included elsewhere in this report. See also Note 1 of the Company's consolidated financial statements. Statutory financial statistics are presented to provide information that can be readily compared to statistics of other companies in the property and casualty insurance industry to evaluate the Company's performance. These statistics should be evaluated along with the generally accepted accounting principles, or GAAP, information presented herein. See Note 16 of the consolidated financial statements for a discussion of the principal differences between GAAP and statutory accounting practices, and for a reconciliation of consolidated net income and equity, as reported in conformity with GAAP, with statutory net income and statutory surplus, as determined in
(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, an independent insurance rating organization, Best's Aggregate & Averages-Property-Casualty (Priv. Pass. Automobile and Homeowners Quantitative Analysis Report). Data unavailable for the year ended December 31, 1999.
The following discussion and analysis should be read in conjunction with the consolidated financial statements and the notes thereto included elsewhere in this report. The following discussion of the financial condition and results of operations of the Company contains certain forward-looking statements relating to anticipated future financial conditions and operating results of the Company and its current business plans. In the future, the financial condition and operating results of the Company could differ materially from those discussed herein and its current business plans could be altered in response to market conditions and other factors beyond the Company's control. Important factors that could cause or contribute to such differences or changes include those discussed elsewhere in this report. See the disclosures under "Item 1 - Business-Forward Looking Statements".
MEEMIC provides private passenger automobile and homeowners insurance primarily to educational employees and their immediate families in the State of Michigan. On July 1, 1999 MEEMIC completed its conversion to a stock company, changed its name to MEEMIC Insurance Company and became a wholly-owned subsidiary of Holdings. Pursuant to the plan of conversion, Professionals converted the $21.5 million surplus note of MEEMIC owned by ProNational into stock and fulfilled its obligations as a standby purchaser in the conversion. After the conversion, Professionals, through ProNational, owns approximately 77% of the issued and outstanding shares of Holdings.
Other liabilities at December 31, 1999 were $17.3 million, compared to $63.2 million at December 31, 1998. The decrease in 1999 was primarily due to repayments of liabilities related to the agency acquisition of $17.1 million, the conversion of the $21.5 million surplus note with Professionals into Holdings common stock, and the cancellation of the quota share reinsurance agreement with ProNational effective July 1, 1999. Additionally, the liabilities at December 31, 1998 included $1.8 million for interest on the $21.5 million surplus note that was repaid on July 1, 1999 in conjunction with MEEMIC's conversion to a stock company.
Shareholders' equity increased by 244% to $127.2 million at December 31, 1999, compared to $52.2 million at December 31, 1998. The increase in shareholders' equity was primarily due to the $65.3 million capital infusion as a result of the conversion and related subscription offering. The Company also had net income of $13.3 million in 1999 which contributed to the increase, but the increase was offset in part by a $3.7 million decrease in accumulated other comprehensive income, consisting of net unrealized losses on the investment portfolio during the year ended December 31, 1999. See "Results of Operations-Year Ended December 31, 1999 compared to Year Ended December 31, 1998." 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.
•loss ratio-This ratio compares our insurance losses to our net premiums earned and indicates how much we are paying to policyholders for claims compared to the amount of premiums we are receiving from them. We discuss three components of the loss ratio that relate to the three categories of insurance losses in our business: automobile liability losses, automobile physical damage losses and homeowners losses. The lower the percentage, the more profitable our insurance business is.
Net income for 1999 was $13.3 million compared to $8.4 million for 1998. The primary reasons for the increase in net income for 1999 compared to 1998 were the termination of the quota share agreement between MEEMIC and ProNational, the repayment of the $21.5 million surplus note and the $17.1 million agency acquisition debt, and the cancellation of the management agreement with Professionals, all of which occurred in July 1999 in connection with the conversion. Effective July 1, 1999, MEEMIC now retains approximately $45 million in additional annual premiums that had been ceded to ProNational. Expenses relating to interest on the surplus note and management fees to Professionals decreased to $2.3 million in 1999 compared to $3.9 million in 1998. The cancellation of the management services agreement is expected to increase our after tax earnings by approximately $1 million annually. As a result of repaying debt related to the agency acquisition, the Company had a net extraordinary gain on early extinguishment of debt of $1.5 million in 1999 and $200,000 in 1998.
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-scale mailer machine, developed a new automatic deposit payment system for billing and has started to implement a voice response unit for routine billing calls.
Total direct premiums written increased to $122.4 million in 1999 from $113.3 million in 1998. Our direct written premiums have increased 8.0% in 1999 due to policyholder growth and a 7.6% homeowner rate increase that went into effect October 1, 1998. With the continued growth in our homeowners business, our product mix in terms of exposures by line is now 18% homeowners and 82% personal automobile. Net premiums written in 1999 increased to $95.6 million, or 44.4% from 1998. The increase in net premiums written for 1999 was primarily attributable to the cancellation of a 40% quota share reinsurance agreement with ProNational and the increase in direct premiums written. Net premiums earned for 1999 were $93.0 million compared to $64.0 million for 1998. The 45.3% increase in net premiums earned in 1999 is also a result of the quota share cancellation whereby fewer premiums were ceded in 1999 than in 1998.
Direct premiums written during 1999 for automobile coverage increased 5.9% to $109.6 million, from $103.5 million in 1998. The number of insured vehicles increased 3.8% to 161,133 at December 31, 1999 from 155,211 at December 31, 1998.
Our homeowners premiums written also continued to increase. Direct premiums written during 1999 for homeowners increased 31.2% to $12.8 million, from $9.8 million in 1998. The number of homeowner policies in force increased 18.9% to 35,309 at December 31, 1999 from 29,699 at December 31, 1998.
Our primary sources of cash are from premiums, investment income and proceeds from maturities of portfolio investments. The principal uses of cash are for payments of claims, commissions, taxes, operating expenses and purchases of investments. Cash flow and liquidity are managed in order to meet anticipated short-term and long-term payment obligations, and to maximize opportunities to earn interest on those funds not immediately required.
Net proceeds from the conversion 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 expected to be used to support additional premium writings and business expansion.
With the continued growth in our homeowner policies, we have entered into a homeowners quota share reinsurance arrangement with American Re effective January 1, 2000. As a result of this change, we will cede approximately $5 million in annual homeowner premiums and 40% of the related claims during 2000.
Cash provided by operations and deemed available for investment was employed in full compliance with our investment policy. Likewise, proceeds of $16.4 million for 1999 and $13.9 million for 1998, substantially from matured and called investments, were reinvested in similar high quality investments. During 1999, 1998 and 1997, we did not have any significant voluntary sales of our long-term fixed maturity securities.
The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards, or SFAS, No. 133 "Accounting for Derivative Instruments and Hedging Activities" which 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. As the Company does not use derivative instruments, we anticipate that the adoption of SFAS No. 133 will not affect the results of operations or financial position of the Company.
The Company has completed an assessment of its computer programs and personal computer software and has determined that all significant systems are Year 2000 compliant. To date, the Company spent a total of approximately $3 million for the purchase of a new computer system for business processing, enhancement of its telephone system, installation of new forms processing software and equipment and upgrading its financial reporting systems, and does not anticipate incurring additional remediation or assessment costs. We have received written assurances from the third party vendors of such systems, equipment and software, that such items are Year 2000 compliant. The purchase of these new systems, which are expected to improve operating efficiencies, did not require the Company to incur specific Year 2000 remediation expenses. Additionally, we have conducted Year 2000 investigation and testing with our major third party vendors' software and hardware and determined that all significant hardware and software is Year 2000 compliant. While the Company believes that Year 2000 compliance issues have been reasonably addressed, both internally and externally, no assurances can be given that all entities with whom we do business will be Year 2000 compliant. The foregoing disclosure contains information regarding Year 2000 readiness which constitutes a "Year 2000 Readiness Disclosure" as defined in the Year 2000 Readiness Disclosure Act.
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 20% 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.
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. The payable related to acquisition is not significantly affected by market risk as the discount rate for early extinguishment is fixed.
*Earnings per share are computed on a pro forma basis assuming the conversion took place on January 1, 1999 (Note 3).
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, and have been prepared in accordance with generally accepted accounting principles ("GAAP"), which vary in certain respects from statutory accounting practices followed in reporting to insurance regulatory authorities (see Note 16 for the effect of such differences). All material intercompany balances and transactions have been eliminated. The financial information for periods prior to the formation of MEEMIC Holdings, Inc. relates to MEEMIC and its subsidiary.
A decline in the fair value of an available-for-sale security below cost that is deemed other than temporary results in a charge to income, resulting in the establishment of a new cost basis for the security. All declines in fair values of the Company's investment securities in 1999 or 1998 were deemed to be temporary.
Upon sale or retirement, the cost and related accumulated depreciation of assets disposed of are removed from the accounts; any resulting gain or loss is reflected in income.
Accumulated other comprehensive income consists solely of unrealized gains or losses on the Company's available for sale securities. Realized investment (losses) gains on securities held as of the beginning of the year totaling ($20,203), $31,012, and $32,214 in 1999, 1998, and 1997, respectively, had unrealized appreciation of $30,904, $56,570, and $43,949 at the beginning of 1999, 1998 and 1997, respectively.
On June 24, 1998, the Board of Directors approved a plan of conversion for changing the corporate form of MEEMIC from the mutual form to the stock form. Under the plan, eligible policyholders, officers and directors had the opportunity to acquire stock in the Company, which would
acquire all of the newly issued stock of MEEMIC upon conversion. Prior to the conversion, the Company did not engage in any significant operations and did not have assets or liabilities. On September 2, 1998, The Michigan Insurance Bureau concluded that MEEMIC's plan of conversion complied with applicable laws and approved such plan. On April 20, 1999, the Securities and Exchange Commission declared effective the registration statement on Form S-1 filed by the Company. MEEMIC has also received a tax opinion regarding the tax treatment of the conversion as a tax-free reorganization.
As contemplated in the conversion plan, the amount payable relating to the agency acquisition was substantially repaid. At the request of certain former Agency shareholders, management approved an acceleration of individual amounts due to them related to the agency acquisition. The settlement of this early extinguishment of debt resulted in an extraordinary gain of $1,524,000 and $214,000, net of $785,000 and $110,000 of federal income taxes for 1999 and 1998, respectively.
A summary of amortized cost, gross unrealized gains and losses and estimated fair value of investments in securities as of December 31, 1999 and 1998, follows:
The amortized cost and estimated fair value of fixed maturities at December 31, 1999, by contractual maturity, are shown below. Expected maturities on certain corporate and mortgage-backed
In 1999, 1998 and 1997, the Company did not have any significant voluntary sales of fixed maturity securities. A summary of the sources of net investment income follows:
(Decreases) increases in net unrealized gains of fixed maturities were $(5,560,000), $873,000, and $986,000 at December 31, 1999, 1998 and 1997, respectively.
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments", requires disclosures of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate the value. In situations where quoted market prices are not available, fair values are to be based on estimates using present value or other valuation techniques. SFAS No. 107 excludes certain insurance-related assets and liabilities and all nonfinancial instruments from its disclosure requirements.
Professionals Group provided MEEMIC with information system services and certain consulting services under a Management Services Agreement. Fees for such services were $1,066,000 for 1999, $2,073,000 for 1998 and $1,005,000 for 1997 and were included in other underwriting expenses. The Management Services Agreement was terminated effective July 1, 1999. As of July 1, 1999 MEEMIC entered into an Expense Allocation Agreement with ProNational covering indirect expenses and salaries of key company personnel. Expenses related to this agreement were $304,000 for 1999. Also effective July 1, 1999, MEEMIC canceled its quota share reinsurance contract with ProNational (Note 7).
The Company has various excess of loss and quota share reinsurance agreements. As of December 31, 1999, the Company's maximum current net retention, subject to certain adjustments of risk on any single coverage per claim after reinsurance is $150,000.
reinsurers with respect to existing and future reinsurance. At December 31, 1999, amounts due from reinsurers were as follows:
Income tax expense is computed under the liability method, whereby deferred income taxes reflect the estimated future tax effects of temporary differences between the carrying value of assets and liabilities for financial reporting purposes and those for income tax purposes.
Actual federal income taxes vary from amounts computed by applying the current federal income tax rate of 34% (35% for 1999) to income or loss before federal income taxes. For the years ended
of each participant in an amount determined annually by the Company's Board of Directors. However, such elective contribution for a year may, at the discretion of the Company, be omitted in a year in which a net loss is experienced. The charge to income under this plan was $609,000, $505,000, and $477,000 for 1999, 1998 and 1997, respectively.
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 $209,000, in 1999, $172,000 in 1998, and $170,000 in 1997.
Rental expense was $1,258,000, $1,146,000, and $981,000 in 1999, 1998 and 1997, respectively.
MEEMIC Insurance Company is required to file financial statements prepared in accordance with statutory insurance accounting practices ("SAP") prescribed or permitted by the Michigan Insurance Bureau. The Company does not utilize any permitted accounting practices.
Company (as filed with the Michigan Insurance Bureau), to the amounts shown in the accompanying financial statements follows:
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 policyholders' surplus as of the preceding year end. As of December 31, 1999, amounts available for payment of dividends in year 2000 without prior regulatory approval of the Bureau is approximately $8.7 million.
The Company operates as a single segment offering two insurance products-homeowners and personal automobile. Revenue is from unaffiliated customers. Net premiums written and net premiums earned from each of these products is as follows:
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of MEEMIC Holdings, Inc. and Subsidiaries (the "Company") at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedules listed in the index appearing under Item 14 of this Form 10-K, present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
MEEMIC Insurance Services Corporation (MEIA Agency)-a business corporation incorporated under Michigan law on May 16, 1997, that represents over 90 insurance sales representatives, which is the exclusive distributor of our products. Although 90% of MEIA Agency's business is MEEMIC, the agency represents and receives sales commissions from other insurance carriers who do business in Michigan. On December 30, 1999 upon approval from the Michigan Insurance Bureau, MEEMIC paid a dividend consisting of MEIA Agency to Holdings. This dividend rearranged the organizational structure of Holdings, such that MEEMIC and MEIA Agency are sister corporations as opposed to a parent/subsidiary relationship and MEIA Agency is a wholly-owned subsidiary of Holdings.