The following selected financial data are derived from our 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 in 1998 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
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 our financial condition and results of operations contains certain forward-looking statements relating to our anticipated future financial conditions and operating results and our current business plans. In the future, our financial condition and operating results could differ materially from those discussed herein and our current business plans could be altered in response to market conditions and other factors beyond our 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."
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. 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. As of December 31, 2000, Professionals owned 84.2% of the issued and outstanding shares of Holdings.
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, 2000, MEEMIC had over 132,000 policies in force, representing 166,535 insured vehicles, 41,927 homes, 1,103 boats and 492 umbrella policies.
•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 five components of the loss ratio that relate to the five categories of insurance losses in our business: automobile liability losses, automobile physical damage losses, homeowners losses, boat losses, and umbrella losses. The lower the percentage, the more profitable our insurance business is.
Results of Operations-Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Direct premiums written during 2000 for automobile coverage increased 4.4% to $114.4 million, from $109.6 million in 1999. The number of insured vehicles increased 3.4% to 166,535 at December 31, 2000 from 161,133 at December 31, 1999.
Results of Operations-Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
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.
The resources from the conversion allowed us to retire liabilities under the terms of the acquisition of the sales agency, and improved operational flexibility and financial capabilities for business and regulatory purposes. The conversion to a stock company and net proceeds from the related subscription offering provides us with a source of capital for growth and expansion capacity for our current and potential new product lines.
Insurance regulations limit our ability to transfer cash from MEEMIC to Holdings. See "Item 1 - Business-Insurance Regulatory Matters."
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
Our fixed maturity investment portfolio was valued at $168 million at December 31, 2000 and had a duration of 3.60 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.
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.
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 ("MEEMIC"), a stock insurance company incorporated under Michigan law. MEEMIC is a property and casualty insurance company that operates as a single segment writing full coverage private passenger automobile, homeowner, boat and umbrella insurance products primarily for educational employees and their immediate families exclusively in the State of Michigan. MEEMIC sells 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.
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. Certain amounts for 1998 have been reclassified to conform to 2000 presentation.
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 2000 or 1999 were deemed to be temporary.
Short-term investments, which consist principally of U. S. government securities, are stated at cost, which approximates fair value.
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 at December 31, 2000 and 1999. The reserve is stated gross of reinsurance ceded.
Policy acquisition costs, specifically commissions, are deferred, subject to ultimate recoverability from future income, including investment income, and amortized to expense over the period in which the related premiums are earned.
Commencing September 15, 2000 the Company is included in the consolidated federal income tax return with Professionals Group, Inc., (see Note 3). The method of allocation between the companies is subject to written agreement approved by the Board of Directors. Allocation is based upon separate
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 $9,504,000 and $6,580,000 at December 31, 2000 and 1999, respectively.
The Company records compensation expense for stock options only if the market price of the Company's stock, on the date of grant, exceeds the amount an individual must pay to acquire the stock.
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 6,603,796 for the year ended December 31, 2000 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 119,725 shares for the year ended December 31, 2000 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) gains on securities held as of the beginning of the year totaling ($64,743), ($20,203), and $31,012 in 2000, 1999, and 1998, respectively, had unrealized (depreciation) appreciation of ($40,141), $30,904, and $56,570 at the beginning of 2000, 1999, and 1998, respectively.
The amortized cost and estimated fair value of fixed maturities at December 31, 2000, by contractual maturity, are shown below. Expected maturities on certain corporate and mortgage-backed
securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
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. 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.
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 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 $742,000 and $304,000 for 2000 and 1999, respectively. 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, 2000, the Company's maximum current net retention, subject to certain adjustments of risk on any single coverage per claim after reinsurance is $200,000. In 2000, the Company was involved in two quota share reinsurance agreements. Since the Company began offering umbrella policies, a quota share reinsurance arrangement was entered into in which the Company retains 5% and cedes 95% of the liability on these policies. The Company also has a quota share reinsurance arrangement in 2000 whereby the Company ceded 40% of its homeowners liability before the effects of other reinsurance contracts. Ceding commissions on these agreements were $1,336,000 in 2000.
At December 31, 2000 and 1999, amounts due from reinsurers were as follows:
From July 1, 1997 through June 30, 1999, the Company had a coinsurance treaty with ProNational to cede 40% of its net retained premiums on a quota share basis. Ceding commissions were $7,227,000 in 1999 and $12,995,000 in 1998. A summary of reinsurance amounts, which are included above, that were ceded to ProNational follows:
Actual federal income taxes vary from amounts computed by applying the current federal income tax rate of 35% (34% for 1998) to income or loss before federal income taxes. For the years ended
December 31, 2000, 1999 and 1998, the reasons for these differences, and the tax effects thereof, are as follows:
At December 31, 2000 and 1999, property and equipment consisted of the following:
As a result of recent favorable developments in estimates of prior years' reserves on auto liability business, the provision for losses and loss adjustment expenses in 2000, 1999, and 1998 decreased by $9,503,000, $6,964,000, and $3,622,000, respectively. Management believes 1994 legislative tort reform in the State of Michigan produced better than expected loss experience and resulted in reductions in prior years' loss reserves in 2000, 1999, and 1998. The 1994 legislation became effective in 1996 and the effects were uncertain at that time. As time has passed, the data and effects of that reform have stabilized and management has reduced reserves related to prior accident years accordingly.
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 $688,000, $609,000, and $505,000 for 2000, 1999 and 1998, 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 $237,000, in 2000, $209,000, in 1999, and $172,000 in 1998.
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 $660,000 in 2000, $575,000 in 1999, and $500,000 in 1998.
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, the shares of common stock subject to such awards would be available for the grant of additional awards under the stock compensation plan.
*The net income per share as reported and proforma for 1999 are computed for the period July 1, 1999 (date of conversion) through December 31, 1999. 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.
Rental expense was $1,382,000, $1,258,000, and $1,146,000 in 2000, 1999 and 1998, respectively.
The Company operates as a single segment offering four insurance products-personal automobile, homeowners and as of March 1, 2000, boat and umbrella policies. 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 appearing under Item 14 present fairly, in all material respects, the financial position of MEEMIC Holdings, Inc. and its subsidiaries at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the accompanying index appearing under Item 14 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 of America, 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 our opinion.
These condensed financial statements should be read in conjunction with the accompanying consolidated financial statements and notes thereto of MEEMIC Holdings, Inc. and subsidiaries.