Meemic (MEMH) 10-Q 2000 Q3 Quarterly report

QuickLinks -- Click here to rapidly navigate through this document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2000

OR

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to               

Commission file number 001-14673

MEEMIC Holdings, Inc.
(Exact name of registrant as specified in its charter)

Michigan (State or other jurisdiction of incorporation or organization)	38-3436541 (I.R.S. Employer Identification No.)
691 North Squirrel Road, Suite 100 Auburn Hills, Michigan (Address of principal executive offices)	48321 (Zip Code)

Registrant's telephone number, including area code:(888) 463-3642

    Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/  No / /

    The number of shares outstanding of the registrant's common stock, no par value per share, as of November 9, 2000 was 6,599,500.

TABLE OF CONTENTS

			Page No.
PART I.	FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Condensed Consolidated Balance Sheets at September 30, 2000 (Unaudited) and December 31, 1999	3
		Condensed Consolidated Statements of Income for the Three Months and Nine Months Ended September 30, 2000 and 1999 (Unaudited)	4
		Condensed Consolidated Statements of Comprehensive Income for the Three Months and Nine Months Ended September 30, 2000 and 1999 (Unaudited)	5
		Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2000 and 1999 (Unaudited)	6
		Notes to Condensed Consolidated Financial Statements (Unaudited)	7-9
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	10-13
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	13-14
PART II.	OTHER INFORMATION
	Item 6.	Exhibits and Reports on Form 8-K	15
	Signatures		16

2

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

MEEMIC Holdings, Inc.
and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

			September 30, 2000			December 31, 1999
			(Unaudited)
			(In thousands, except share data)
ASSETS
Investments:
	Fixed maturities available for sale, at fair value (amortized cost of $171,625 and $160,112 in 2000 and 1999, respectively)		$	170,797		$	157,353
	Short-term investments, at cost, which approximates fair value			8,096			—
	Real estate, at cost			2,300			2,300
		Total investments		181,193			159,653
Cash				7,689			8,779
Premiums due from policyholders				7,104			4,754
Amounts recoverable from reinsurers				53,461			40,458
Amounts recoverable from reinsurers, related party				8,223			10,886
Accrued investment income				2,438			2,226
Deferred federal income taxes				4,316			4,637
Property and equipment, at cost, net of accumulated depreciation				4,298			3,185
Deferred policy acquisition costs				3,040			2,720
Intangible assets, net of amortization				34,151			36,344
Other assets				816			1,007
		Total assets	$	306,729		$	274,649
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
	Loss and loss adjustment expense reserves		$	106,958		$	96,009
	Unearned premiums			37,098			34,148
	Payable related to acquisition			1,040			1,066
	Accrued expenses and other liabilities			13,303			9,293
	Accrued expenses and other liabilities, related party			127			227
	Premiums ceded payable			6,330			5,552
	Federal income taxes payable			436			1,169
		Total liabilities		165,292			147,464
Shareholders' equity:
	Common stock, no par value; 10,000,000 shares authorized; 6,599,500 shares issued and outstanding in 2000 and 1999			65,295			65,295
	Retained earnings			76,681			63,711
	Accumulated other comprehensive loss:
		Net unrealized depreciation on investments, net of deferred federal income taxes of $290 and $938 in 2000 and 1999, respectively		(539	)		(1,821	)
		Total shareholders' equity		141,437			127,185
		Total liabilities and shareholders' equity	$	306,729		$	274,649

See the accompanying notes to the unaudited condensed consolidated financial statements.

3

MEEMIC Holdings, Inc.
and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

				Three Months Ended September 30,						Nine Months Ended September 30,
				2000			1999			2000			1999
				(In thousands, except share data)
Revenues and other income:
	Premiums written			$	33,824		$	31,469		$	97,570		$	91,387
	Premiums ceded, related party				—			—			—			(22,513	)
	Premiums ceded, other				(2,445	)		(1,077	)		(6,767	)		(3,124	)
		Net premiums written			31,379			30,392			90,803			65,750
	Increase in unearned premiums, net of prepaid reinsurance premiums				(1,217	)		(857	)		(2,951	)		(2,445	)
		Net premiums earned			30,162			29,535			87,852			63,305
	Net investment income				2,804			2,449			7,855			5,968
	Net realized investment losses on fixed maturities				(41	)		(18	)		(56	)		(21	)
	Other income				373			260			1,293			1,034
		Total revenues and other income			33,298			32,226			96,944			70,286
Expenses:
	Loss and loss adjustment expenses incurred, net				17,392			19,892			55,721			43,955
	Policy acquisition and other underwriting expenses:
		Policy acquisition and underwriting expenses			7,762			6,758			20,375			19,483
		Ceding commissions, related party			—			(468	)		—			(7,222	)
		Management fees, related party			70			150			301			1,215
					7,832			6,440			20,676			13,476
	Interest expense, related party				—			—			—			906
	Amortization expense				731			731			2,193			2,193
	Other expenses				27			1			58			8
		Total expenses			25,982			27,064			78,648			60,538
			Income from operations before federal income taxes and extraordinary item		7,316			5,162			18,296			9,748
Federal income taxes					1,961			1,458			5,326			2,995
			Income before extraordinary item		5,355			3,704			12,970			6,753
Extraordinary item:
	Early extinguishment of debt, net of federal income taxes of $681 and $747 for the three and nine month periods ended September 30, 1999				—			1,322			—			1,449
		Net income		$	5,355		$	5,026		$	12,970		$	8,202
Earnings per common share—basic
Income before extraordinary item per common share—basic				$	0.81		$	0.56		$	1.97
Income per share attributable to extraordinary item—basic					—			0.20			—
Net income per common share—basic				$	0.81		$	0.76		$	1.97
Earnings per common share—assuming dilution
Income before extraordinary item per common share—assuming dilution				$	0.80		$	0.55		$	1.93
Income per share attributable to extraordinary item—assuming dilution					—			0.20			—
Net income per common share—assuming dilution				$	0.80		$	0.75		$	1.93
Weighted average shares outstanding—basic					6,599,500			6,599,500			6,599,500
Weighted average shares outstanding—assuming dilution					6,734,426			6,704,033			6,711,797

See the accompanying notes to the unaudited condensed consolidated financial statements.

4

MEEMIC Holdings, Inc.
and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

			Three Months Ended September 30,					Nine Months Ended September 30,
			2000		1999			2000		1999
			(In thousands)
Comprehensive income:
	Net income		$	5,355	$	5,026		$	12,970	$	8,202
	Net unrealized appreciation (depreciation) on investments, net of reclassification adjustment and net of deferred federal income taxes of $592 and ($276) for three months in 2000 and 1999, respectively and $648 and ($1,269) for nine months in 2000 and 1999, respectively			1,099		(535	)		1,282		(2,463	)
		Comprehensive income	$	6,454	$	4,491		$	14,252	$	5,739

See the accompanying notes to the unaudited condensed consolidated financial statements.

5

MEEMIC Holdings, Inc.
and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended September 30, 2000 and 1999 (Unaudited)

					2000			1999
					(In thousands)
Cash flows from operating activities:
	Net income				$	12,970		$	8,202
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization				3,249			2,854
		Realized losses on investments				56			21
		Net accretion of discount on investments				1			67
		Deferred federal income taxes				(327	)		357
		Extraordinary gain on early extinguishment of debt				—			(2,196	)
		Changes in assets and liabilities:
			Premiums due from policyholders			(2,350	)		(1,445	)
			Amounts due from reinsurers			(9,562	)		(3,597	)
			Accrued investment income			(212	)		(264	)
			Deferred policy acquisition costs			(320	)		(1,303	)
			Other assets			191			(140	)
			Loss and loss adjustment expense reserves			10,949			3,765
			Unearned premiums			2,950			2,445
			Accrued expenses and other liabilities			3,910			(66	)
			Federal income taxes payable			(733	)		685
				Net cash provided by operating activities		20,772			9,385
Cash flows from investing activities:
	Proceeds from sale or maturity of short-term investments					—			948
	Purchases of short-term investments					(8,096	)		(951	)
	Proceeds from maturity of securities available for sale					19,095			12,045
	Purchases of securities available for sale					(30,666	)		(43,999	)
	Proceeds from sales of property and equipment					19			280
	Purchases of property and equipment					(2,188	)		(1,231	)
				Net cash used in investing activities		(21,836	)		(32,908	)
Cash flows from financing activities:
	Proceeds from initial public offering					—			42,973
	Initial public offering costs					—			(700	)
	Payment on payable related to acquisition					(26	)		(14,307	)
				Net cash (used in) provided by financing activities		(26	)		27,966
Net (decrease) increase in cash						(1,090	)		4,443
Cash, beginning of year						8,779			3,978
Cash, end of period					$	7,689			8,421
Supplemental disclosure of cash flow information:
	Federal income taxes paid				$	6,059		$	2,700
	Interest paid					—		$	2,734
Supplemental disclosure of noncash financing activities:
	Conversion of surplus note and accrued interest for MEEMIC Holdings, Inc. stock					—		$	23,022

See the accompanying notes to the unaudited condensed consolidated financial statements.

6

MEEMIC Holdings, Inc.
and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(1)  Description of Business

    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 Company and MEEMIC Insurance Services Corp. 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 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.

(2)  Basis of Presentation

    The accompanying unaudited condensed 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") as required by Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they have not been audited and they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. All significant intercompany transactions have been eliminated in consolidation.

    In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of financial position and results of operations have been included. The operating results for the three and nine month periods ended September 30, 2000 are not necessarily indicative of the results to be expected for the year ending December 31, 2000.

    In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the balance sheets and revenues and expenses for the periods then ended. Actual results may differ from those estimates.

    The most significant estimates that are susceptible to significant change in the near term relate to the determination of the losses and loss adjustment expense reserves. Although considerable variability is inherent in these estimates, management believes that the reserves are adequate. The estimates are reviewed regularly and adjusted as necessary. Such adjustments are reflected in current operations.

(3)  Conversion

    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

7

September 30, 2000, Professionals Group, Inc. owned 82.6% of the issued and outstanding shares of the Company.

    As contemplated in the conversion plan, the amount payable relating to the agency acquisition was substantially repaid. In accordance with the purchase agreement, certain former Agency shareholders elected to accelerate the individual amounts due to them related to the agency acquisition. Settlements of these early extinguishments of debt resulted in an extraordinary item reflected on the income statement.

(4)  Net Income Per Share

    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 three and nine months ended September 30, 2000. The effect of dilutive stock options added 134,926 shares and 112,297 for the three and nine month periods ended September 30, 2000 for the computation of diluted income per common share. The effect of dilutive stock options added 104,533 shares for the three months ended September 30, 1999.

(5)  Related Party Transactions

    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 $301,000 for the nine months ended September 30, 2000. Prior to July 1, 1999, Professionals Group, Inc. provided MEEMIC with information system services and certain consulting services under a Management Services Agreement. Fees for such services were $1.2 million for the nine months ended September 30, 1999. Also effective July 1, 1999, MEEMIC cancelled its quota share reinsurance contract with ProNational to cede 40 percent of its net retained premiums on a quota share basis. Ceding commissions were $468,000 and $7,222,000 for the three and nine month periods ended September 30, 1999, respectively. Premiums earned ceded to ProNational were $0 and $22,513,000 for the three and nine months ended September 30, 1999, respectively. Losses and loss adjustment expenses incurred of $501,000 and $16,097,000 were ceded to ProNational for the three and nine month periods ended September 30, 1999, respectively.

    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 early 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.

(6)  Revenue Information

    The Company operates as a single segment offering four insurance products—personal automobile, homeowners, and beginning March 1, 2000, boat and umbrella policies. All revenue is from unaffiliated

8

customers. Direct premiums written and net premiums earned from each of these products is as follows:

			Three Months Ended September 30,				Nine Months Ended September 30,
			2000		1999		2000		1999
			(In thousands)
Direct premiums written:
	Personal automobile		$	28,966	$	27,547	$	85,442	$	81,669
	Homeowners			4,746		3,922		11,887		9,718
	Boat			84		—		171		—
	Umbrella			28		—		70		—
		Total	$	33,824	$	31,469	$	97,570	$	91,387
Net premiums earned:
	Personal automobile		$	28,123	$	26,819	$	82,048	$	57,743
	Homeowners			2,002		2,716		5,754		5,562
	Boat			36		—		48		—
	Umbrella			1		—		2		—
		Total	$	30,162	$	29,535	$	87,852	$	63,305

9

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations

    The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and the notes thereto included elsewhere in this document and in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. 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 under "Item 1—Business—Forward-Looking Statements" in the Company's Annual Report on Form 10-K for the year ended December 31, 1999.

Overview

    We provide private passenger automobile, homeowners, boat and umbrella insurance primarily to educational employees and their immediate families in the State of Michigan. We sell our insurance contracts through over 90 sales representatives associated with our insurance agency subsidiary, which is the exclusive distributor of our products. As of September 30, 2000, we had 129,518 policies in force, representing 167,266 insured vehicles, 40,489 homes, 857 boats and 393 personal umbrella policies.

Financial Condition—September 30, 2000 Compared to December 31, 1999

    Our total assets increased to $306.7 million at September 30, 2000 from $274.6 million at December 31, 1999. The majority of our assets consist of investments and cash, which together totaled $188.9 million at September 30, 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. Our portfolio consists primarily of government bonds, municipal bonds, collateralized mortgage obligations, and investment grade corporate bonds. The modified duration of investments was 3.75 years at September 30, 2000 compared to 3.97 years at December 31, 1999. At September 30, 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. Our gross unrealized gains and gross unrealized losses in investments in securities were $1.1 million and $1.9 million, respectively, at September 30, 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 $107.0 million at September 30, 2000 compared to $96.0 million at December 31, 1999. The $11.0 million increase in reserves at September 30, 2000 was due to general allowances for growth in the number of insured vehicles and homeowner policies in force.

    Unearned premiums were $37.1 million at September 30, 2000 and $34.1 million at December 31, 1999. The 8.8% increase in unearned premiums at September 30, 2000 compared to December 31, 1999 is larger than the growth in premiums written due to a quota share agreement effective January 1, 2000 whereby 40% of our homeowners business is ceded to an unrelated reinsurer.

    Other liabilities were $21.2 million at September 30, 2000 and $17.3 million at December 31, 1999. The increase in 2000 for accrued expenses and other liabilities is 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.

10

    Our shareholders' equity increased $14.2 million to $141.4 million at September 30, 2000 from $127.2 million at December 31, 1999. This increase was due to net income of $13.0 million, and an increase in other comprehensive income that consisted of unrealized gains on the investment portfolio of $1.2 million.

Results of Operations—Three and Nine Months Ended September 30, 2000 Compared to Three and Nine Months Ended September 30, 1999

    Net income for the three and nine months ended September 30, 2000 was $5.4 million and $13.0 million, respectively, compared to $5.0 million and $8.2 million for the same periods in 1999. Overall, our income from operations before taxes and extraordinary item was $7.3 million and $18.3 million, respectively, for the three and nine months ended September 30, 2000 compared to $5.2 million and $9.7 million for the same periods in 1999. The primary reason for the increase in income from operations before taxes and extraordinary item for the three month period ended September 30, 2000 compared to 1999 was due primarily to a continuation of favorable loss experience on both current and prior accident years' auto liability business, which we believe is due to legislative tort reform that became effective in 1996. The primary reason for the increase in income from operations before taxes and extraordinary item for the nine months ended September 30, 2000 compared to 1999 was due to the termination of the ProNational quota share agreement, the repayment of the $21.5 million surplus note and the cancellation of the management agreement with Professionals Group, Inc., all of which occurred in July 1999 in connection with the conversion. Net income for the three months ended September 30, 1999 included a $1.3 million gain due to an extraordinary item for early extinguishment of debt that was payable to former agency shareholders.

    Our direct premiums written were $33.8 million and $97.6 million for the three and nine months ended September 30, 2000, respectively, an increase of 7.5% and 6.8%, respectively compared to comparable periods in 1999. Direct premiums written for automobile coverage were $29.0 million and $85.4 million for the three and nine months ended September 30, 2000, respectively, an increase of 5.2% and 4.6%, respectively, compared to the comparable periods in 1999. The increases in auto premiums reflect policyholder growth and an increase in the value of autos being insured. The number of insured vehicles increased 2.8% to 167,266 at September 30, 2000 from 162,741 at September 30, 1999. Our homeowners business also continued to increase. Direct premiums written for homeowners were $4.7 million and $11.9 million for the three and nine months ended September 30, 2000, respectively, an increase of 21.0% and 22.3%, respectively, compared to the comparable periods in 1999. The increases in homeowners premiums were due to growth in the number of homes insured and an increase in the value of homes being insured. The number of homeowner policies in force increased 18.9% to 40,489 at September 30, 2000 from 34,040 at September 30, 1999. On March 1, 2000, we also began offering boat and umbrella policies, which contributed $112,000 and $241,000 to direct written premiums for the three and nine months ended September 30, 2000.

    Net premiums written were $31.4 million and $90.8 million for the three and nine months ended September 30, 2000, respectively, an increase of 3.2% and 38.1%, respectively, compared to the comparable periods in 1999. Net premiums earned were $30.2 million and $87.9 million for the three and nine months ended September 30, 2000, respectively, an increase of 2.1% and 38.8%, respectively, compared to the comparable periods in 1999. The increases in net premiums written and net premiums earned for the three months ended September 30, 2000 were due to the increase in direct premiums written. The increases in net premiums written and net premiums earned for the nine months ended September 30, 2000 were primarily due to the cancellation of the ProNational quota share agreement and to the increase in direct premiums written.

    Our combined ratio was 83.6% and 87.0% for the three and nine months ended September 30, 2000, respectively, compared to 89.2% and 90.7% for the three and nine months ended September 30, 1999, respectively. Overall, our net loss ratio for the three and nine months ended September 30, 2000

11

was 49.6% and 55.9%, respectively, compared to 59.5% and 59.8% for the three and nine months ended September 30, 1999, respectively.

    Net loss ratios for the personal automobile and homeowners products were as follows:

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2000		1999		2000		1999
Personal auto liability	17.9	%	64.9	%	35.8	%	54.4	%
Personal auto physical damage	58.1	%	58.4	%	62.5	%	58.2	%
Total personal auto	45.1	%	60.5	%	53.8	%	57.0	%
Homeowners	111.2	%	50.0	%	84.9	%	89.0	%
Overall loss ratio	49.6	%	59.5	%	55.9	%	59.8	%

    Although the auto physical damage loss ratios for third quarter are comparable, the first nine months of 2000 was higher than the same period in 1999 due to a hailstorm in Michigan in the second quarter of 2000 and increased costs of auto repair parts. The increase in auto physical damage losses in 2000 was more than offset by a reduction in auto liability losses for bodily injury claims, which resulted in more favorable personal auto loss ratios for the third quarter and first nine months of 2000 compared to the same periods in 1999. The homeowners loss ratios for the third quarter and first nine months of 2000 were also affected by the hailstorm, in addition to general increases in both frequency and severity of homeowner claims. However, the homeowners loss ratio for the nine months of 2000 was still lower than the same period in 1999 due to the more severe January 1999 winter storm.

    Policy acquisition and underwriting expenses were $7.8 million and $20.7 million for the three and nine months ended September 30, 2000, respectively, compared to $6.4 million and $13.5 million for the same periods in 1999. The underwriting expenses ratios were 26.0% and 23.5% for the three and nine months ended September 30, 2000 respectively, compared to 21.8% and 21.3% for comparable periods in 1999. The increases in 2000 are due primarily to the cancellation of the quota share agreement with ProNational whereby MEEMIC was receiving a commission for business ceded. The increase in underwriting expenses for 2000 from eliminating the ceding commission was offset by a corresponding decrease in loss adjustment expenses for 2000, also as a result of the cancellation of the quota share agreement with ProNational. Additionally, the underwriting expense ratio for the three months ended September 30, 2000 included additional costs for investments in technology and adjustments for statutory fees and employee incentive programs.

    Net investment income, before interest expense and excluding realized investment gains, was $2.8 million and $7.9 million for the three and nine months ended September 30, 2000, respectively, compared to $2.4 million and $6.0 million for the three and nine months ended September 30, 1999, respectively. These increases in investment income were due to increases in invested assets from positive cash flow from operations and, with respect to the nine month period, from the proceeds of the conversion and related subscription offering. Consistent with 1999, investment income for the three and nine months ended September 30, 2000 was earned primarily from interest income and not from realized capital gains and losses. The annualized tax equivalent total rate of return, which includes both income and changes in market value of securities, was 10.97% and 8.69% for the three and nine months ended September 30, 2000, respectively, compared to 4.65% and 2.80% for the three and nine months ended September 30, 1999, respectively. The increase of the returns in 2000 was due to higher interest rates and a lower level of security market value reductions. The weighted average tax equivalent book yield of the fixed maturity portfolio was 7.20% for the nine months ended September 30, 2000 compared to 6.39% for the same period in 1999.

12

Liquidity and Capital Resources

    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 to meet anticipated short-term payment obligations, and to maximize opportunities to earn interest on funds which are not immediately required.

    Cash provided by operations for the nine months ended September 30, 2000 was $20.8 million compared to $9.4 million for the nine months ended September 30, 1999. The $11.4 million increase was primarily due to retaining more of our premiums as a result of terminating the ProNational quota share agreement. The net decrease in cash overall was $1.1 million for the nine months ended September 30, 2000 compared to a net increase in cash of $4.4 million for the nine months ended September 30, 1999. The $1.1 million decrease in cash reflects a net increase in new investments from $20.8 million provided by operations and $1.1 million in previously uninvested funds.

Effects of New Accounting Pronouncements

    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.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Management of Market Risk

    Market risk is the risk of loss due to adverse changes in market rates and prices. Our primary market risk exposure is to changes in interest rates. The active management of interest rate risk is essential to our operations.

    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 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.

    Our fixed maturity investment portfolio was valued at $170.8 million at September 30, 2000 and had a duration of 3.75 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

13

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.

Change in Rates	Portfolio Value		Change in Value			Modified Duration
	(dollars in thousands)
+2%	$	157,806	$	(12,991	)	3.80
+1%	$	164,172	$	(6,625	)	3.90
0%	$	170,797				3.75
-1%	$	177,420	$	6,623		3.49
-2%	$	183,659	$	12,862		3.30

    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.

14

PART II.  OTHER INFORMATION

Item 6.  Exhibits and Reports on Form 8-K

(a)

Exhibit

Exhibit Number	Exhibit Description
27	Financial Data Schedule

(b)

Reports on Form 8-K.



None.

15

SIGNATURES

    Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	MEEMIC HOLDINGS, INC.
DATE: November 9, 2000	/s/ CHRISTINE C. SCHMITT   Christine C. Schmitt Treasurer and Chief Financial Officer (as Chief Financial Officer and on behalf of the registrant)

16

QuickLinks

TABLE OF CONTENTS
PART II. OTHER INFORMATION
SIGNATURES