Meemic 10K405 2001 Annual report (delinquent filer disclosure)

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

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2001

o	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

Securities registered pursuant to Section 12(b) of the Act:None

Securities registered pursuant to Section 12(g) of the Act:Common stock, no par value per share

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 ý No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

There were 6,674,335 shares of the registrant's common stock outstanding as of March 15, 2002.

Based on the closing price of shares of the registrant's common stock as reported on The Nasdaq Stock Market® on March 15, 2002 ($26.00) the aggregate market value of the shares of the registrant's common stock held by non-affiliates of the registrant as of March 15, 2002 was $24,437,296. For purposes of this computation only, all officers, directors and 5% beneficial owners of the registrant are assumed to be affiliates.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's Proxy Statement for its 2002 Annual Meeting of Shareholders filed pursuant to Regulation 14A are incorporated by reference into Part III hereof.

TABLE OF CONTENTS

		Page No.
PART I
Item 1.	Business	3
	General	3
	Products	4
	Marketing	4
	Underwriting	5
	Claims	5
	Loss and Loss Adjustment Expense Reserves	6
	Reinsurance Ceded	9
	Investments	10
	A.M Best Company Rating	12
	Competition	12
	Insurance Regulatory Matters	13
	Employees	15
	Executive Officers of Registrant	15
	Forward-Looking Statements	16
Item 2.	Properties	17
Item 3.	Legal Proceedings	17
Item 4.	Submission of Matters to a Vote of Security Holders	17
PART II
Item 5.	Market for Registrant's Common Equity and Related Shareholder Matters	18
Item 6.	Selected Financial Data	18
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	20
	Overview	20
	Financial Condition	20
	Critical Accounting Policies	21
	Description of Ratios Analyzed	22
	Results of Operations	22
	Liquidity and Capital Resources	24
	Effects of Inflation	25
	Effects of New Accounting Pronouncements	25
	Management of Market Risk	26
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	26
Item 8.	Financial Statements and Supplementary Data	27
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	57
PART III
Item 10.	Directors and Executive Officers of the Registrant	57
Item 11.	Executive Compensation	57
Item 12.	Security Ownership of Certain Beneficial Owners and Management	57
Item 13.	Certain Relationships and Related Transactions	57
PART IV
Item 14.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K	57
	Signatures	59

PART 1

Item 1. Business

General

MEEMIC Holdings, Inc. ("Holdings") was incorporated in Michigan in October 1998 and is the holding company for MEEMIC Insurance Company ("MEEMIC") and MEEMIC Insurance Services Corporation ("MEIA Agency"). Holdings conducts all of its operations through MEEMIC and MEIA Agency. On July 1, 1999, MEEMIC completed its conversion to a stock company and became a wholly-owned subsidiary of Holdings. Holdings common stock began trading on the Nasdaq National Market under the symbol "MEMH" following the completion of the conversion. The principal office is located at 691 North Squirrel Road, Auburn Hills, Michigan 48321, and the telephone number is (888) 463-3642. Holdings and its consolidated subsidiaries are referred to collectively in this report as the Company.

MEEMIC, which began operations in 1950, is a Michigan-licensed property and casualty insurance company that provides personal lines insurance primarily to educational employees and their immediate families in the State of Michigan. Private passenger automobile protection is MEEMIC's primary line of business, representing approximately 86% of all business written. In order to provide for the insurance needs of our auto customers, MEEMIC also offers homeowners, boat and umbrella policies. As of December 31, 2001, MEEMIC had 143,663 policies in force, consisting of 92,709 automobile policies (covering 173,545 vehicles), 48,461 homeowner policies (covering 48,461 homes), 1,776 boat policies (covering 2,042 boats) and 717 umbrella policies.

MEEMIC Holdings, Inc. and its subsidiaries are owned by ProNational Insurance Company ("ProNational'), a wholly-owned subsidiary of Professionals Group, Inc. At December 31, 2001, ProNational owned 84.0% of the issued and outstanding shares of Holdings. On June 27, 2001, Professionals Group Inc. and Medical Assurance, Inc. formed a new holding company, ProAssurance Corporation, that owns all of the stock of Medical Assurance, Inc. and Professionals Group, Inc. Medical Assurance, Inc., ProNational and MEEMIC continue to serve policyholders under the umbrella of the new ProAssurance holding company.

On March 18, 2002 Holdings announced that it intends to acquire all of its outstanding shares of stock not currently owned by ProAssurance Corporation (NYSE: PRA), for $29 per share in cash (a total of 1,204,290 fully diluted shares). The proposed transaction, which likely will be structured as a merger, 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.

On March 18, 2002, a complaint was filed against the Company, its directors and its parent company, ProAssurance Corporation, in the 6th Circuit Court in Oakland County, Michigan by a purported shareholder of the Company seeking to enjoin the transaction described above. The suit, which purports to be a class action on behalf of the minority shareholders, alleges, among other things that the transaction has been timed to freeze out the minority shareholders, that the proposed transaction is unfair and that ProAssurance and the directors have violated their fiduciary duties. The complaint also seeks damages in an undetermined amount. The suit may delay or prevent progress toward the completion of the proposed transaction.

The Company has not responded to the complaint but intends to vigorously defend itself and the other defendants against these claims. The Company believes that it has meritorious defenses to the claims made by the plaintiff, including without limitation, the fact that it has taken several steps to protect the rights of the minority shareholders in the proposed transaction and to ensure its fairness. These steps include permitting a committee of two independent directors who have no other affiliation with MEEMIC Holdings or ProAssurance Corporation to negotiate and approve the proposed transaction, and making the completion of the transaction subject to the approval of the holders of a majority of the shares not owned by ProAssurance or its affiliates and the receipt of fairness opinions from independent financial advisors. There can be no assurance, however, as to the outcome of this litigation and, if the Company is not able to successfully defend against the claims made by the plaintiff, the outcome of this litigation could have a material adverse impact on the proposed transaction and on the Company's financial position, liquidity and results of operations.

Products

MEEMIC offers private passenger automobile, homeowners, boat and umbrella insurance primarily to educational employees and their immediate families in the state of Michigan. The Company is also licensed in Minnesota and Ohio, but does not write business in those states. Although we apply for licenses in other states from time to time, there can be no assurance that the new licenses will be granted or that MEEMIC will operate in those other states. MEEMIC operates as a single segment where private passenger automobile is the primary line, and homeowners, boat and umbrella coverages are offered as an accommodation product.

MEEMIC's personal automobile policy provides policyholders with protection against claims resulting from bodily injury and property damage liability and automobile physical damage. When sold in conjunction with a homeowners policy, MEEMIC provides a multi-policy discount. The homeowners policy, in addition to insuring the policyholders' primary residence, provides optional coverage for seasonal homes and dwellings under construction. MEEMIC's personal line umbrella insurance covers excess liability up to $5 million. The following table sets forth the direct premiums written, net

premiums earned and net loss ratios by product for the periods indicated. The ratios are explained in "Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations."

			Year Ended December 31,
			2001		% of Total		2000		% of Total		1999		% of Total
			(In thousands)
Direct premiums written:
	Personal automobile		$	122,754	86.3	%	$	114,388	87.8	%	$	109,553	89.5	%
	Homeowner			19,064	13.4	%		15,618	12.0	%		12,811	10.5	%
	Boat			366	0.2	%		196	0.1	%		—	—
	Umbrella			128	0.1	%		88	0.1	%		—	—

		Total	$	142,312	100.0	%	$	130,290	100.0	%	$	122,364	100.0	%

Net premiums earned:
	Personal automobile		$	116,864	87.7	%	$	110,486	93.2	%	$	84,574	90.9	%
	Homeowner			16,107	12.1	%		7,947	6.7	%		8,460	9.1	%
	Boat			277	0.2	%		92	0.1	%		—	—
	Umbrella			4	0.0	%		3	0.0	%		—	—

		Total	$	133,252	100.0	%	$	118,528	100.0	%	$	93,034	100.0	%

Net loss and loss adjustment expenses ratios:
	Personal automobile				67.3	%			62.0	%			65.5	%
	Homeowner				92.7	%			109.1	%			88.4	%
	Boat				24.9	%			83.2	%			—
	Umbrella				0.0	%			0.0	%			—
		Total			70.3	%			65.2	%			67.6	%

Marketing

MEEMIC markets its products through over 95 sales representatives associated with our sales agency, MEIA Agency, which is the exclusive distributor of our products. The representatives are unique in that most of them also belong to the educational community and sell to their peers.

Although we underwrite approximately 92% of the business produced by our sales agency, the agency represents and receives sales commissions from other insurance carriers that do business in Michigan. In general, these carriers offer products that MEEMIC does not currently offer, or insure a class of business that does not meet MEEMIC's underwriting guidelines. By offering complementary insurance products through other companies, MEEMIC's policyholders have the convenience of being able to purchase a full range of insurance products through a single agent. We benefit by having a base of potential customers for products we may intend to offer in the future.

MEIA Agency conducts quarterly meetings with its sales representatives, establishes benchmarks and goals, conducts technical training and sponsors continuing education programs. The representatives provide important information to us about the marketplace and needs of our customers. This information is used to develop new products and new product features. MEIA Agency recruits and trains new sales representatives to work in underserviced areas of the state. Sales representatives are paid a fixed base commission with some opportunity for contingent bonuses, based upon the representative's production and loss ratios.

During 2001, one sales representative accounted for 4.9% of direct premiums written by MEEMIC. No other sales representative accounted for more than 4.2% of direct premiums written. The top 10 representatives accounted for 32.3% of direct premiums written during the year.

MEEMIC provides personal computer software that allows sales representatives to quote rates for boat, homeowners, and personal auto insurance. In addition, we have a home page on the internet for the public that is periodically updated with pertinent information on MEEMIC, its products, and how to locate a sales representative.

Underwriting

We rely to a significant degree on information provided by our sales representatives in underwriting risks. Agency representatives have the authority to bind coverage for a thirty-day period. The majority of the representatives are involved with the educational community in a teaching capacity. This enhances the representatives' ability to act as field underwriters since they have a general understanding of lifestyles and insurance needs within the educational community to effectively pre-screen applicants.

We evaluate and accept applications for insurance based on consistently applied underwriting guidelines. MEEMIC's processing system provides modifications for some of these guidelines and underwriting supervisors regularly audit the work of individual underwriters to ensure adherence to our guidelines. Our 24 underwriters monitor policyholder deviations from the underwriting guidelines to assist in decisions related to cancellation and non-renewal.

Claims

In responding to claims, we emphasize timely investigation, evaluation and fair settlement while controlling claims expense and maintaining adequate reserves. A staff of 66 experienced individuals provide prompt service with a caring attitude to policyholders and other claimants. Their commitment to quality service has proven to be a strong marketing tool for agency sales representatives.

While the claims operation is centralized in Auburn Hills, Michigan, several multi-line resident adjusters are located in cities throughout Michigan. We have also established a network of automobile glass and body shops that provide damage appraisals and repairs according to established company guidelines. Independent adjusters are used when claim volume rises. A reinspection audit program ensures that repairs are completed timely, economically and to the satisfaction of the policyholder.

Audits of liability claim files are conducted regularly by claims department managers and reinsurers. Less than 1% of all claims result in litigation. Litigation is initially reviewed by MEEMIC's in-house legal counsel in determining whether the file is outsourced to an outside specialist or handled internally and is monitored by the claims department.

Loss and Loss Adjustment Expense Reserves

MEEMIC is required by applicable insurance laws and regulations to maintain reserves for payment of losses and loss adjustment expenses for reported claims and for claims incurred but not reported, arising from policies that have been issued. These laws and regulations require that we provide for the ultimate cost of those claims without regard to how long it takes to settle them or the time value of money. The determination of reserves involves actuarial and statistical projections of what we expect to be the cost of the ultimate settlement and administration of such claims based on facts and circumstances then known, estimates of future trends in claims severity, and other variable factors such as inflation and changing judicial theories of liability.

The estimation of ultimate liability for losses and loss adjustment expenses is an inherently uncertain process and does not represent an exact calculation of that liability. Our current reserve policy recognizes this uncertainty by maintaining reserves at a level providing for the possibility of adverse development relative to the estimation process. We do not discount our reserves to recognize the time value of money or otherwise.

When a claim is reported to MEEMIC, claims personnel establish a "case reserve" for the estimated amount of the ultimate payment. This estimate reflects an informed judgment based upon general insurance reserving practices and on the experience and knowledge of the estimator regarding the nature and value of the specific claim, the severity of injury or damage, and the policy provisions relating to the type of loss. Case reserves are periodically adjusted by the claims staff as more information becomes available.

We maintain reserves for claims incurred but not reported to provide for future reporting of already incurred claims and developments on reported claims. The reserve for claims incurred but not reported is determined by estimating our ultimate liability for both reported and non-reported claims and then subtracting the case reserves for reported claims.

Each quarter, we compute our estimated liability using principles and procedures applicable to the lines of business written. The establishment of loss reserves is an inherently uncertain process; there can be no assurance that losses will not exceed our loss reserves. Adjustments in aggregate reserves, if any, are reflected in the operating results of the period during which such adjustments are made. As required by insurance regulatory authorities, we receive a statement of opinion by our appointed actuary concerning the adequacy of statutory reserves. The results of these actuarial studies have consistently indicated that our reserves are adequate.

The following table provides a reconciliation of beginning and ending loss and loss adjustment expenses reserve balances of MEEMIC for the years ended December 31, 2001, 2000 and 1999, as prepared in accordance with generally accepted accounting principles.

			Years Ended December 31,
			2001			2000			1999
			(In thousands)
Balance, beginning of year			$	107,256		$	96,009		$	92,298
	Less reinsurance balance recoverable			54,618			49,446			53,333

		Net balance, beginning of year		52,638			46,563			38,965
Incurred related to:
	Current year			100,218			86,730			69,822
	Prior years			(6,516	)		(9,503	)		(6,964	)

		Total incurred		93,702			77,227			62,858
Paid related to:
	Current year			65,225			56,014			42,376
	Prior years			22,182			15,138			12,884

		Total paid.		87,407			71,152			55,260

Net balance, end of year				58,933			52,638			46,563
Plus reinsurance recoverable				65,428			54,618			49,446

		Balance, end of year	$	124,361		$	107,256		$	96,009

As a result of recent favorable developments in estimates of prior years' reserves on auto liability business, management has reduced reserves for those prior accident years at December 31, 2001, 2000 and 1999 by $6,516,000, $9,503,000 and $6,964,000, respectively. In 1994, the State of Michigan enacted legislative tort reform effective in 1996 and the effects were uncertain at that time. These tort reform measures resulted in a significant increase in the number of claims reported to us in 1996 from attorneys attempting to file claims prior to the effective date of the new tort reform act. This changed the reporting pattern of claims and made it difficult for management to analyze data for reserves. The difficulty in analyzing the data along with the uncertainties of the effects of the new laws required management to establish higher reserves than it ordinarily would. As time has passed, the data and

effects of the tort reform act have stabilized and management has reduced reserves related to prior accident years accordingly.

The following table shows the development of the net liability for unpaid losses and loss adjustment expenses from 1992 through 2001 for MEEMIC. The top line of the table shows the original estimated liabilities at the balance sheet date, including losses incurred but not yet reported. The upper portion of the table shows the cumulative amounts subsequently paid as of successive years with respect to the liability. The lower portion of the table shows the re-estimated amount of the previously recorded liability based on experience as of the end of each succeeding year. The estimates change as claims settle and more information becomes known about the ultimate frequency and severity of claims for individual years. The redundancy (deficiency) exists when the re-estimated liability at each December 31 is less (greater) than the prior liability estimate. The "cumulative redundancy" (deficiency) depicted in the table, for any particular calendar year represents the aggregate change in the initial estimates over all subsequent calendar years.

		Year Ended December 31,
		1992		1993		1994	1995	1996	1997	1998	1999		2000		2001
		(In thousands)
Liability for unpaid losses and LAE net of reinsurance recoverable		16,337		19,144		26,102	29,570	35,696	38,016	38,965	46,563		52,638		58,933
Cumulative net paid as of:
	End of Year	6,881		11,811		13,705	12,765	14,806	11,492	12,882	15,140		22,181
	Two Years Later	13,184		17,814		19,047	19,012	19,747	15,472	16,871	20,620
	Three Years Later	15,343		19,830		21,833	21,411	21,428	17,361	19,393
	Four Years Later	16,310		20,608		22,859	21,970	22,169	18,360
	Five Years Later	16,721		20,972		23,120	22,293	22,751
	Six Years Later	17,003		21,108		23,379	22,662
	Seven Years Later	17,136		21,292		23,733
	Eight Years Later	17,315		21,448
	Nine Years Later	17,404
Re-estimated net liability as of:
	End of Year	15,220		22,785		26,700	26,843	28,944	34,392	31,999	37,062		46,122
	Two Years Later	17,996		23,138		25,353	25,166	28,845	27,352	25,876	32,044
	Three Years Later	18,548		22,180		24,547	25,175	26,792	22,621	23,519
	Four Years Later	17,602		21,837		24,568	25,114	24,951	20,770
	Five Years Later	17,561		21,880		25,378	24,254	24,415
	Six Years Later	17,645		22,741		24,854	23,771
	Seven Years Later	18,360		22,309		24,519
	Eight Years Later	18,073		21,958
	Nine Years Later	17,786
Net Cumulative (deficiency) redundancy		(1,449	)	(2,814	)	1,583	5,799	11,281	17,246	15,446	14,519		6,516
Gross liability—end of year				58,802		69,007	71,114	80,353	84,921	92,298	96,009		107,256		124,361
Reinsurance recoverables				39,658		42,905	41,544	44,657	46,905	53,333	49,446		54,618		65,428

Net Liability—end of year				19,144		26,102	29,570	35,696	38,016	38,965	46,563		52,638		58,933

Gross reestimated liability—latest				63,528		68,232	69,113	69,314	74,346	84,147	98,824		114,736
Reestimated reinsurance recoverables—latest				41,570		43,713	45,342	44,899	53,576	60,628	66,780		68,614

Net reestimated liability—latest				21,958		24,519	23,771	24,415	20,770	23,519	32,044		46,122

Gross Cumulative (deficiency) redundancy				(4,726	)	775	2,001	11,039	10,575	8,151	(2,815	)	(7,480	)

In evaluating the information in the table above, it should be noted that each column includes the effects of changes in amounts for prior periods. The table does not present accident year or policy year

development data. Conditions and trends that have affected the development of liabilities in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on this table.

As shown in the reserve development table, reserves for unpaid losses and LAE net of reinsurance recoverable established at year end 1994 through 2000 developed positively, or lower than expected. In 1992 and 1993, we reserved at the low end of the recommended actuarial range of estimates. During 1994, we began to state reserves on a more conservative basis by reserving above the midpoint of the actuarial range of reserve estimates. This change in reserving philosophy was necessary, as the reserves established at the low end of the range for 1992 and 1993 had proven to be deficient. The change, which added $3.6 million to overall reserve levels, was not a change in actuarial methods, but rather a change in management estimates. The reserves estimated in both the earlier years and current years were stated within actuarially determined ranges. Statutory accounting principles require reserves to be reported on a net basis—i.e., after reinsurance. Generally accepted accounting principles require reserves to be reported on a gross basis—i.e. before reinsurance, with a corresponding asset established for the reinsurance recoverable. When compared on either a gross or net basis, the statutory and GAAP reserves are identical.

Reinsurance Ceded

In accordance with industry practice, we transfer, or cede, to other insurance companies some of our potential liability under insurance policies we have underwritten. This practice helps us

•: reduce our net liability on individual risks,
•: reduce our risk from natural catastrophes,
•: stabilize our underwriting results, and
•: increase our underwriting capacity.

As payment for sharing a portion of our risk, we are also required to share a part of the premium we receive on the related policies. Transferring or ceding insurance liability to another insurance company is called "reinsurance ceded."

MEEMIC determines the amount and scope of reinsurance coverage to purchase each year based upon an evaluation of the risks accepted, consultations with reinsurance brokers and a review of market conditions, including the availability and pricing of reinsurance. For the years ended December 31, 2001 and 2000, MEEMIC ceded to reinsurers $4.6 million and $9.1 million of earned premiums, respectively. The decrease of $4.5 million in amounts ceded to reinsurers for the year ended December 31, 2001 over 2000 was due to the termination of a homeowner quota share agreement effective January 1, 2001.

MEEMIC's reinsurance arrangements are generally renegotiated annually. Our largest net insured amount on any risk is $200,000. Individual property risks in excess of $200,000 are covered on an excess of loss basis up to $1,000,000 per risk. Casualty risks that are in excess of $200,000 are covered on an excess of loss basis, up to $3,000,000 per occurrence. Additionally, the Michigan Catastrophic Claims Association, or MCCA, provides wage loss and unlimited lifetime medical coverage in excess of $250,000 per occurrence for personal injury losses. Coverages described herein were in place for 2001.

Catastrophic reinsurance provides additional protection from significant aggregate loss exposure arising from a single event such as windstorm, hail, tornado, hurricane, earthquake, riot, blizzard, freezing temperatures or other extraordinary events. We have purchased catastrophe reinsurance for automobile physical damage, homeowners and boat property damage in four layers up to $15,000,000 in excess of $1,000,000 with each layer subject to a retention of 5%.

Since MEEMIC began offering umbrella policies in 2000, we have a quota share reinsurance arrangement under which we retain 5% and cede 95% of our liability on these policies. We also had a quota share reinsurance arrangement in 2000 whereby we ceded 40% of our homeowners liability before the effects of other reinsurance contracts.

The following table identifies our principal reinsurers, their percentage participation in our aggregate reinsured risk based upon premiums paid by MEEMIC during 2001 and their respective A. M. Best Company ratings as of December 31, 2001. A.M. Best Company classifies "A" and "A-" ratings as "Excellent" and "A++" ratings as "Superior". Other than the entities listed below, no single reinsurer's percentage participation in 2001 exceeded 3% of total ceded reinsurance premiums:

	A.M. Best Company Rating	Amounts Due from Reinsurers			2001 Total Ceded Premiums Written		% of 2001 Total Ceded Premiums Written
	(In thousands)
MCCA	Not Rated	$	51,318		$	2,451	53.6	%
ProNational Insurance Company	A-		5,326			—	—
American Re	A++		3,458			702	15.3
Gerling Global Reins Corp.	A		2,451			658	14.4
Dorinco Insurance Company	A		993			325	7.1
Other	—		(276	)		433	9.6

		$	63,270		$	4,569	100.0	%

We annually review the financial stability of all of our reinsurers. This review includes a ratings analysis of each reinsurer participating in a reinsurance contract. On the basis of this review, as of December 31, 2001, we concluded that there was no material risk of not being paid by our reinsurers. No material difficulties have been experienced by us in collecting amounts due from reinsurers. We believe that our reinsurance is maintained with financially stable reinsurers and that any reinsurance security we have is adequate to protect our interests. However, our inability to collect on our reinsurance, or the inability of our reinsurers to make payments under the terms of reinsurance, due to insolvency or otherwise, could have a material adverse effect on our future results of operations and financial condition.

The MCCA is an unincorporated nonprofit association created by Michigan law. Every insurer engaged in writing personal protection insurance coverage in Michigan is required to be a member of the MCCA. Although the MCCA acts in the same manner as a reinsurer, it is not an insurance company and hence is not rated by A.M. Best Company.

Michigan law provides that the MCCA assessments charged to member companies for the reinsurance protection can be recognized in the rate-making process and passed on to policyholders. MCCA covers all personal injury losses incurred by MEEMIC and all other member companies 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 the losses reported by all member companies. Accordingly, there is no direct relationship between the annual premiums and losses ceded to MCCA. The MCCA requires large reserves to cover Michigan's lifetime medical benefits, which are paid out over many years. We periodically review the actuarial projections provided by the MCCA to monitor its surplus or deficit. We currently estimate that MCCA has neither a surplus nor a deficit.

Investments

All of our investment securities are classified as available-for-sale in accordance with Statement of Financial Accounting Standard No. 115.

An important component of our operating results has been the return on invested assets. Our investment objective is to maximize current returns while maintaining safety of capital together with adequate liquidity for our insurance operations. As of December 31, 2001, 98.1% of our investment portfolio consisted of investment grade fixed income securities and short-term investments. Approximately 57.6% of our fixed income portfolio was rated AAA by Standard & Poor's as of December 31, 2001, and the portfolio had an overall average credit quality rating of AA. Our investments are managed by an outside investment advisor.

The following table sets forth information concerning our investments. In our financial statements, investments are carried at fair value as established by quoted market prices on secondary markets. The cost column in the table represents the original cost of preferred stock and the original cost of fixed income securities as adjusted for amortization of premium and accretion of discount.

			At December 31, 2001				At December 31, 2000
			Cost		Fair Value		Cost		Fair Value
			(In thousands)
Fixed income securities
	United States government and government agencies and authorities		$	18,176	$	18,620	$	16,039	$	16,076
	Obligations of states, municipalities and political subdivisions			96,219		97,951		81,410		83,371
	Corporate obligations			32,489		33,777		32,449		31,927
	Collateralized mortgage obligations			27,258		27,936		28,193		28,567
	Asset backed securities			5,758		5,968		4,336		4,452

		Total fixed income securities:		179,900		184,252		162,427		164,393
Preferred stock				2,089		3,245		3,752		3,473
Real estate				2,300		2,300		2,300		2,300

	Total		$	184,289	$	189,797	$	168,479	$	170,166

The table below sets forth the maturity profile of our combined fixed maturity investments as of December 31, 2001, substituting average life for mortgage-backed securities. Fixed maturities are carried at fair value in the consolidated financial statements of MEEMIC. Collateralized and asset-backed securities consist of mortgage pass-through holdings and securities backed by credit card receivables, auto loans and home equity loans. Our securities follow a structured principal repayment schedule and are rated "AA" or better by Standard & Poor's. These securities are presented separately in the maturity schedule due to the inherent risk associated with prepayment.

	Amortized Cost		Fair Value		Portion of Fair Value
	(In thousands)
1 year or less	$	9,592	$	9,808	5.2	%
More than 1 year through 5 years		50,682		52,765	28.2
More than 5 year through 10 years		56,601		57,770	30.8
More than 10 years		30,009		30,005	16.0
Collateralized and asset backed securities		33,016		33,904	18.1
Redeemable preferred stocks		2,089		3,245	1.7

	$	181,989	$	187,497	100.0	%

As of December 31, 2001, the average duration of our fixed maturity investments, including collateralized and asset-backed securities which are subject to paydown was 3.90 years. As a result, the market value of our investments may fluctuate significantly in response to changes in interest rates. In addition, we may experience investment losses to the extent our liquidity needs require the disposition of fixed maturity securities in unfavorable interest rate environments.

Our net investment income, the annualized and tax equivalent total rates of return which include both income and changes in the market value of securities, and the weighted average tax equivalent book yield for the three years ended December 31, 2001, 2000 and 1999 were as follows:

	Year Ended December 31,
	2001			2000			1999
	(In thousands)
Net investment income	$	11,182		$	10,768		$	8,285
Annualized total rate of return		7.01	%		8.57	%		1.80	%
Tax equivalent total rate of return		8.22	%		9.80	%		2.72	%
Weighted average tax equivalent book yield		6.93	%		7.13	%		6.93	%

The economy slowed considerably in 2001 and 2000, which resulted in a bond rally that boosted returns. This is in contrast to 1999 returns, which were negatively affected by fluctuating interest rates.

A. M. Best Company Rating

A. M. Best Company, which rates insurance companies, currently assigns an "A-" (Excellent) rating (its fourth highest rating category out of 15 categories) to MEEMIC. A. M. Best Company assigns "A" or "A-" ratings to companies which, in its opinion, have demonstrated excellent overall performance when compared to the standards established by A. M. Best Company. Companies rated "A" and "A-" have a strong ability to meet their obligations to policyholders over a long period of time. In evaluating our financial and operating performance, A. M. Best Company reviews our profitability, leverage and liquidity, as well as our book of business, the adequacy and soundness of our reinsurance, the quality and estimated market value of our assets, the adequacy of our loss reserves, the adequacy of our surplus, our capital structure, the experience and competency of our management and our market presence. A.M. Best Company ratings are based on factors of concern to policyholders and are not directed toward the protection of investors. No assurance can be given that A. M. Best Company will not reduce our current rating in the future.

Competition

The property and casualty insurance business is highly competitive. We have many Michigan-based competitors, as well as competitors from other states, for our insurance products. Some of these competitors are larger and have much greater financial, technical and operating resources than we have. We compete primarily based on the following factors:

•: the price of our insurance products,
•: the quality of our insurance products,
•: the quality and speed of our service and claims response,
•: our financial strength,
•: our A.M Best Company rating and other ratings,
•: our sales and marketing capability, and
•: our technical expertise.

Our ability to compete successfully depends on a number of factors, many of which are out of our control, such as market conditions, A.M. Best Company and other ratings, and regulatory conditions. We believe that we compete on the basis of consistently competitive pricing and friendly, high quality service. In addition, our peer to peer selling methods give us a competitive advantage because our customers are often more comfortable buying through a fellow educational professional than through a full-time insurance agent. We also believe our underwriting selectivity is desirable to our customers, who enjoy the prestige of being identified as one of our preferred group of insured customers.

Insurance Regulatory Matters

General. Insurance companies are subject to supervision and regulation in the states in which they transact business relating to numerous aspects of their business and financial condition. The primary purpose of this supervision and regulation is to protect policyholders. The extent of such regulation varies, but generally derives from state statutes, which delegate regulatory, supervisory and administrative authority to state insurance departments.

Michigan insurance companies such as MEEMIC are subject to supervision and regulation by the State of Michigan Office of Financial and Insurance Services, or OFIS. The authority of the OFIS includes:

•: establishing standards of solvency which must be met and maintained by insurers,
•: licensing insurers and agents to do business,
•: establishing guidelines for the nature of and limitations on investments by insurers,
•: reviewing premium rates for various lines of insurance,
•: reviewing the provisions which insurers must make for current losses and future liabilities,
•: reviewing transactions involving a change in control, and
•: approving policy forms.

The OFIS also requires the filing of annual and other reports relating to the financial condition of insurance companies doing business in Michigan. Additionally, Holdings is subject to regulation as an insurance holding company because of its ownership of MEEMIC.

Examinations are regularly conducted by the OFIS every three to five years. The OFIS's last examination of MEEMIC was as of December 31, 1997. This examination did not result in any adjustments to the financial position of MEEMIC. In addition, there were no substantive qualitative matters indicated in the examination report that had a material adverse impact on the operations of MEEMIC.

Risk-Based Capital Requirements. In addition to state-imposed insurance laws and regulations, the OFIS administers the requirements adopted by the National Association of Insurance Commissioners, or NAIC, that require insurance companies to calculate and report information under a risk-based formula that attempts to measure capital and surplus needs based on the risks in a company's mix of products and investment portfolio. Under this formula, we first determine our risk-based capital base level by taking into account risks with respect to our assets and underwriting risks relating to our liabilities and obligations. We then compare our "total adjusted capital" to the base level. Our "total adjusted capital" is determined by subtracting our liabilities from our assets in accordance with rules established by the OFIS. A ratio of total adjusted capital to risk-based capital of less than 2.0 to 1.0 may give rise to enhanced regulatory scrutiny or even a regulatory takeover of the insurer, depending on the extent to which the ratio is less than 2.0 to 1.0.

MEEMIC's ratio has always exceeded 2.0 to 1.0 in the past, but there can be no assurance that the requirements applicable to MEEMIC will not increase in the future. As of December 31, 2001, MEEMIC's risk-based capital base level was $6.1 million and its total adjusted capital was $80.1 million yielding a ratio of 13.0 to 1.0.

Guaranty Fund. We participate in the Property and Casualty Guaranty Association of the State of Michigan, or the Association, 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.

MEEMIC makes accruals for its portion of assessments when notified of assessments by the Association.

Holding Company Regulation. Most states, including Michigan, have enacted legislation that regulates insurance holding company systems. Each insurance company in a holding company system is required to register with the insurance supervisory agency of its state of domicile and furnish information concerning the operations of companies within the holding company system that may materially affect the operations, management or financial condition of the insurers within the system. These laws permit the OFIS and any other relevant insurance departments to examine MEEMIC, Holdings and their respective insurance subsidiaries at any time, to require disclosure of material transactions between MEEMIC, Holdings and ProAssurance Corporation (the parent company of Professionals Group, Inc. and ProNational Insurance Company, Inc.), and to require prior approval of transactions, such as extraordinary dividends from MEEMIC to Holdings. All transactions within the holding company systems between MEEMIC, Holdings, ProAssurance Corporation, and their respective subsidiaries must be fair and equitable. Under Michigan law, the maximum dividend that may be paid by MEEMIC to Holdings during any twelve-month period without prior regulatory approval of the OFIS is the greater of 10% of MEEMIC's statutory surplus as reported on the most recent annual statement filed with the OFIS, and the net income of MEEMIC for the period covered by such annual statement excluding realized capital gains on investments. As of December 31, 2001, the amount available for payment of dividends in 2002 without prior regulatory approval of the OFIS is approximately $9.2 million.

Change in Control. The Michigan Insurance Code requires that the OFIS receive prior notice of and approve a change of control for either MEEMIC or Holdings. The Michigan Insurance Code contains a complete definition of "control." In simplified terms, a person, corporation, or other entity would obtain "control" of MEEMIC or Holdings if they possessed, had a right to acquire possession, or had the power to direct any other person acquiring possession, directly or indirectly, of 10% or more of the voting securities of either company. To obtain approval for a change of control, the proposed acquirer must file an application with the OFIS containing detailed information such as the identity and background of the acquirer and its affiliates, the sources of and amount of funds to be used to effect the acquisition, and financial information regarding the proposed acquirer.

Michigan No-Fault Automobile Insurance. Under a pure no-fault automobile insurance system, responsibility for an automobile accident is not at issue. Each policyholder's own insurance company pays for his or her medical expenses and lost wages, regardless of who caused the accident, and the individuals relinquish the right to sue to recover damages. The objective of such a system is to eliminate the delays and costs of court disputes associated with the tort system, encourage prompt payment of compensation and return a larger percentage of insurance premium dollars to accident victims. No state has yet adopted a pure no-fault system.

Michigan's modified no-fault system, originally enacted in 1973, limits lawsuits relating to automobile accidents. For example, a suit for damages is permitted under Michigan's no-fault law when an injured person has suffered death, permanent serious disfigurement or serious impairment of bodily function. Damages are assessed on the basis of comparative fault, except that damages will not be assessed in favor of a party who is more than 50% at fault.

Michigan's no-fault law also requires insurers to provide unlimited medical coverage to automobile accident victims. The cost of providing such unlimited medical coverage has somewhat offset the savings typically associated with a non-monetary threshold. In response, the MCCA was established to spread the costs of medical coverage to all policyholders. The MCCA essentially acts as a reinsurer for all Michigan automobile insurers, reimbursing for amounts paid on personal injury protection claims in excess of $250,000. Participation is required for all Michigan-licensed automobile and motorcycle insurers.

The Michigan Essential Insurance Act. The Michigan Essential Insurance Act requires an insurer to insure every applicant for automobile insurance who meets the minimum requirements and the insurer's underwriting rules. The underwriting rules must be applied uniformly to all applicants and policyholders. Each insurer must file its underwriting rules with the Insurance Commissioner. In addition, the Essential Insurance Act also limits rating criteria that insurers may employ, requires insurers to develop a "secondary" or merit rating plan under which premium surcharges are levied on poor drivers, establishes a joint underwriting association to provide insurance to individuals who cannot obtain coverage in the insurance market and regulates other types of coverages and informational requirements.

According to the provisions of the Essential Insurance Act, insurers whose statutory surplus as of December 31, 1979 was $4,000,000 or less could file for an exemption. MEEMIC filed and received an exemption from the provisions of the Essential Insurance Act. We cannot predict whether MEEMIC's exemption from the Essential Insurance Act will be continued.

Employees

As of December 31, 2001, we had 190 employees. None of the employees are covered by a collective bargaining unit and we believe that employee relations are good.

Executive Officers of Registrant

Set forth below is information about the executive officers as of December 31, 2001. Executive officers are appointed annually by, and serve at the pleasure of, Holdings' Board of Directors.

Name	Age	Position with Holdings	Position with MEEMIC
A. Derrill Crowe	65	Chairman	—
Victor T. Adamo	54	Chief Executive Officer	Chairman
Lynn M. Kalinowski	50	President	President and Chief Executive Officer
Christine C. Schmitt	45	Chief Financial Officer, Secretary and Treasurer	Senior Vice President, Chief Financial Officer, Secretary and Treasurer
William P. Sabados	52	Chief Information Officer	Senior Vice President and Chief Information Officer

A. Derrill Crowe has been Chairman of Holdings and a director of MEEMIC since September 2001. Dr. Crowe has been the Chairman and Chief Executive Officer of ProAssurance Corporation since its formation on June 28, 2001, which is the new holding company and parent of Holdings. Dr. Crowe has been Chairman of the Board and President of Medical Assurance, Inc. since its organization in 1995 and has served as director and President of The Medical Assurance Company, Inc. since its organization in 1976.

Victor T. Adamo has been Chief Executive Officer of Holdings since September 2001 and was Chairman of Holdings from October 1998 to September 2001. Mr. Adamo has been a director of Holdings since October 1998 and is also the Chairman and a director of MEEMIC. Mr. Adamo has been the Vice Chairman and President of ProAssurance Corporation since June 2001. Mr. Adamo has been the Chief Executive Officer, President and a director of Professionals Group since 1996, and a director of ProNational, where he has held various positions including Chief Executive Officer, since 1985. Prior to joining ProNational, Mr. Adamo was in private legal practice from 1975 to 1985 and represented ProNational in corporate legal matters.

Lynn M. Kalinowski has been President of Holdings and MEEMIC since September 2001 and has been a director of Holdings since October 1998 and a director and Executive Vice President of MEEMIC since May 1997. Mr. Kalinowski also served as President of MEEMIC from January 1993 to May 1997. Prior to joining MEEMIC in 1993, Mr. Kalinowski was the President of Southern Michigan Mutual Insurance Company and previously served as Director of Financial Analysis for the Michigan Insurance Bureau (now the State of Michigan Office of Financial and Insurance Services).

Christine C. Schmitt has been Treasurer and Chief Financial Officer of Holdings since October 1998, Secretary of Holdings and MEEMIC and a director of MEEMIC since September 2001, and Senior Vice President and Chief Financial Officer of MEEMIC since joining the Company in 1993. Prior to joining MEEMIC, Ms. Schmitt was Director of Finance of the Hayman Company, a property management company. Ms. Schmitt is a Certified Public Accountant with thirteen years experience with the public accounting firm of Coopers & Lybrand LLP.

William P. Sabados has been Chief Information Officer of Holdings and a director of MEEMIC since September 2001, and has been Senior Vice President and Chief Information Officer of MEEMIC since joining the Company as an officer in 1997. Mr. Sabados has been Chief Information Officer of ProAssurance Corporation and Professionals since June 2001 and July 1998 respectively, and is also a director and Chief Information Officer of ProNational. From 1987 to 1997, he was Vice President of Information Systems for the Investor Insurance Group. Prior to that, Mr. Sabados served as Director of Membership Billing for Blue Cross/Blue Shield North East Ohio in Cleveland Ohio since 1984.

Forward-Looking Statements

We make forward-looking statements in this report and may make such statements in future filings with the SEC. We may also make forward-looking statements in our press releases or other public or shareholder communications. Our forward-looking statements are subject to risks and uncertainties and include information about our expectations and possible or assumed future results of our operations. When we use any of the words "believes," "expects," "anticipates," "estimates" or similar expressions, we are making forward-looking statements.

We claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 for all of our forward-looking statements. While we believe that our forward-looking statements are reasonable, you should not place undue reliance on any such forward-looking statements, which speak only as of the date made. You should understand that a number of factors, all of which are difficult to predict and many of which are beyond our control, could affect our future results and performance and any other expectations expressed in our forward-looking statements. This could cause our actual results, performance and experience to differ materially from those expressed in our forward-looking statements. Factors that might cause such a difference include the following:

•: an increase in the frequency and severity of claims;
•: an increase in the frequency and severity of catastrophic events or acts of terrorism;
•: our potential inability to change and implement new sales force contracts;
•: future adverse economic conditions in the regional and national markets in which the companies compete;
•: adverse changes in financial market conditions, including, but not limited to, changes in interest rates;
•: a higher inflation rate;
•: inadequate estimates of loss reserves and adverse trends in losses and loss adjustment expenses;

•: intensified competition;
•: the potential inability to carry out business plans;
•: the potential inability to enter new markets successfully and capitalize on growth opportunities;
•: adverse changes in applicable laws, regulations or rules governing insurance holding companies and insurance companies, and environmental, tax or accounting matters;
•: the potential inability to maintain an excellent A.M. Best Company rating;
•: the potential inability to obtain adequate reinsurance coverage at reasonable rates; and
•: our reinsurers' potential inability to fulfill their financial obligations to us.

Other factors we do not currently anticipate may also materially and adversely affect our results of operations. We do not undertake, and expressly disclaim any obligation, to update or alter our forward-looking statements whether as a result of new information, future events or otherwise, except as required by applicable law.

Item 2. Properties

The Company leases approximately 55,000 square feet of office space to house its principal executive offices in Auburn Hills, Michigan. For investment purposes, the Company owns an 11.5 acre vacant parcel of land in Auburn Hills, Michigan.

Item 3. Legal Proceedings

See also "Item 1—Business—General." As a personal lines insurer, we have many routine matters in current litigation. It is not anticipated that these routine cases will have a material adverse effect on our financial condition and results of operations.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of Holdings shareholders during the fourth quarter of 2001.

PART II

Item 5. Market for Registrant's Common Equity and Related Shareholder Matters

Shares of common stock of Holdings trade on The Nasdaq Stock Market(r) under the symbol "MEMH". The table below sets forth the high and low sale prices for the common stock for each quarter during the last two years.

	High		Low
2001
Fourth Quarter	$	25.00	$	21.72
Third Quarter	$	26.79	$	20.70
Second Quarter	$	31.99	$	19.30
First Quarter	$	26.25	$	21.56

	High		Low
2000
Fourth Quarter	$	25.00	$	20.25
Third Quarter	$	24.63	$	17.00
Second Quarter	$	18.75	$	14.88
First Quarter	$	16.00	$	13.13

As of March 15, 2002 there were 1,211 record holders of shares of the common stock based on the records of the Company's transfer agent.

Holdings has not declared or paid any cash dividends on its common stock. Holdings may pay cash dividends on the common stock at times determined by the board of directors and when legally allowed. Payment of dividends by Holdings may be contingent on the receipt of dividends from MEEMIC. The payment of dividends by MEEMIC is subject to limitations imposed by the Michigan Insurance Code. See "Item 1—Business—Insurance Regulatory Matters." Holdings does not intend to pay any cash dividends in the foreseeable future.

Item 6. Selected Financial Data

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 15 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 accordance with statutory accounting practices, prescribed or permitted by the OFIS.

			Years Ended December 31,
			2001			2000			1999			1998			1997
			(Dollars in thousands, except share data)
Revenue Data:
	Direct premiums written		$	142,312		$	130,290		$	122,364		$	113,258		$	106,349
	Net premiums written			137,743			121,136			95,596			66,190			75,000
	Net premiums earned			133,252			118,528			93,034			64,040			67,830
	Net investment income			11,182			10,768			8,285			6,958			6,677
	Net realized investment (losses) gains			(1,540	)		(65	)		(20	)		31			32
	Other income			1,713			1,713			1,877			2,111			841

		Total revenues		144,607			130,944			103,176			73,140			75,380
Losses and Expenses:
	Losses and loss adjustment expenses			93,702			77,227			62,858			43,452			47,302
	Policy acquisition and other underwriting expenses			31,679			28,127			19,132			12,658			16,690
	Interest expense			—			—			906			1,827			1,342
	Amortization expense			2,924			2,924			2,924			2,941			714
	Conversion costs			—			—			—			783			—
	Other expenses			103			174			15			31			31

		Total expenses		128,408			108,452			85,835			61,692			66,079
Income from operations before federal income taxes				16,199			22,492			17,341			11,448			9,301
Federal income taxes				4,180			6,773			5,531			3,296			2,672

Income before extraordinary item				12,019			15,719			11,810			8,152			6,629
Extraordinary item				—			—			1,525			214			—

Net income			$	12,019		$	15,719		$	13,335		$	8,366		$	6,629

Earnings per common share—basic(1)
	Income before extraordinary item per common share—basic		$	1.80		$	2.38		$	1.33
	Income per share attributable to extraordinary item—basic			—			—			0.21

	Net income per common share—basic		$	1.80		$	2.38		$	1.54

Earnings per common share—diluted(1)
	Income before extraordinary item per common share—diluted		$	1.78		$	2.34		$	1.31
	Income per share attributable to extraordinary item—diluted			—			—			0.21

Net income per common share—diluted			$	1.78		$	2.34		$	1.52

Balance Sheet Data, end of year:
	Total investments		$	192,719		$	177,025		$	159,653		$	124,903		$	111,543
	Total assets			341,683			309,474			274,649			239,330			214,858
	Net losses and loss adjustment expense reserves			124,361			107,256			96,009			92,298			84,921
	Total liabilities			180,565			162,867			147,464			187,106			171,576
	Total shareholders' equity			161,118			146,607			127,185			52,224			43,282
	Book value per common share		$	24.14		$	22.03		$	19.27			N/A			N/A
GAAP Ratios:
	Net loss and loss adjustment expenses ratio(2)			70.3	%		65.2	%		67.6	%		67.8	%		69.7	%
	Policy acquisition and other underwriting expense ratio(3)			23.8	%		23.7	%		20.5	%		19.8	%		24.6	%
	Combined ratio(4)			94.1	%		88.9	%		88.1	%		87.6	%		94.3	%
Statutory Data:
	Combined ratio(5)			95.8	%		90.5	%		93.3	%		92.1	%		92.9	%
	Industry combined ratio(6)			—			111.3	%		106.1	%		105.6	%		100.6	%
	Statutory surplus		$	80,093		$	79,304		$	74,611		$	40,373		$	34,513
	Ratio of net written premiums to statutory surplus			1.72			1.53			1.28			1.64			2.17

(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.
(2): Calculated by dividing net losses and loss expenses by net premiums earned.
(3): Calculated by dividing other underwriting expenses by net premiums earned.
(4): The sum of the GAAP net loss and loss adjustment expense ratio and the total underwriting expense ratio.
(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.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

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. These forward-looking statements represent only our outlook as of the date of this report. While we believe any forward-looking statements we have made are reasonable, actual results could differ materially since the statements are based on our current expectations and are subject to risks and uncertainties. These risks and uncertainties are discussed elsewhere in this report. See the disclosures under "Item 1—Business—Forward Looking Statements." Other factors not currently anticipated by management may also materially and adversely affect the Company's results of operations. The Company does not undertake, and expressly disclaims any obligation, to update or alter its forward-looking statement whether as a result of new information, future events or otherwise, except as required by applicable law.

Overview

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.

Financial Condition

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.

Our recorded estimates of loss and loss adjustment expense reserves were $124.4 million at December 31, 2001 compared to $107.3 million at December 31, 2000. The $17.1 million increase in reserves for 2001 was primarily due to general allowances for growth in the number of insured vehicles and homeowner policies in force, and the cancellation of the homeowner quota share reinsurance agreement effective January 1, 2001. Reserves for losses incurred prior to 2001 were reduced by $6.5 million during 2001 as a result of favorable developments in estimates of prior years' reserves on auto liability. Reserves for losses incurred prior to 2000 were reduced by $9.5 million during 2000. This

was caused by the unanticipated reduction in the frequency of claims. We believe this reduction resulted from the 1994 legislative tort reforms in the State of Michigan, which reduced the frequency and shortened the reporting pattern of claims. The 1994 legislation became effective in 1996 and the effects were uncertain at that time. As additional data subsequent to the tort reform has emerged, we anticipate greater stability in the reserve estimates. Uncertainties inherent in the loss estimation process will invariably cause differences in actual ultimate liabilities from estimates. Aggregate loss reserves at December 31, 2001 and 2000 have been certified by an independent actuarial firm and are believed to be a reasonable provision for all unpaid loss and loss expense obligations under the terms of MEEMIC's policies and agreements.

At December 31, 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.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related footnotes. These estimates and assumptions are evaluated on an on-going basis based on historical developments, market conditions, industry trends and other information we believe to be reasonable under the circumstances. There can be no assurance that actual results will conform to our estimates and assumptions, and that reported results of operations will not be materially adversely affected by the need to make accounting adjustments to reflect changes in these estimates and assumptions from time to time. The following policies are those we believe to be the most sensitive to estimates and judgments. Our significant accounting policies are more fully described in Note 2 to our consolidated financial statements.

Revenue Recognition. We recognize insurance premium income on a monthly pro rata basis over the respective terms of the policies in force. Unearned premiums represent the portion of premiums written applicable to the unexpired terms of the policies in-force. Reinsurance arrangements are prospective contracts for which prepaid reinsurance premiums are amortized ratably over the related policy terms based on the estimated ultimate amounts to be paid. Changes in estimated outcomes are recognized currently.

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.

Investments. 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. Available-for-sale securities are recorded at fair value, with unrealized gains and losses, net of the related income tax effect, excluded from income and reported as a separate component of shareholders' equity. A decline in the fair value of an available-for-sale security below cost that we judge not to be temporary results in a charge to income.

Description of Ratios Analyzed

In the analysis of our results that follows, we refer to various financial ratios that investors use to analyze and compare the results of insurance companies. These ratios include:

•: net loss and loss adjustment expenses ratio—This ratio compares our insurance losses and claim settling and adjusting expenses after deducting reinsurance 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 net loss and loss adjustment expenses 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.
•: policy acquisition and other underwriting expenses ratio—This ratio compares our expenses to obtain new business and renew existing business to our net premiums earned. The lower the percentage, the more efficient we are.
•: 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.

Results of Operations—2001 Compared to 2000

Net income for 2001 was $12.0 million compared to $15.7 million for 2000. Our income from operations before taxes was $16.2 million and $22.5 million for 2001 and 2000, respectively, and the after-tax return on equity was 8.2% in 2001 compared to 12.4% in 2000. The primary reasons for the decreases were higher claim losses of $6.7 million from harsher winter weather, a $1.5 million loss recognized on three California electric utility securities deemed to have other than temporary declines in fair value and $1.3 million in expenses related to severance payments to officers who left the Company following the ProAssurance transaction involving the Company's parent, Professionals Group, Inc..

Total direct premiums written increased to $142.3 million in 2001 from $130.3 million in 2000. Our direct premiums written have increased 9.2% in 2001 due to an increase in the number of homes and autos insured, an increase in the values of autos and homes being insured and a 12% rate increase for homeowners that became effective October 1, 2001. With the continued growth in our homeowners business, our product mix in terms of exposures by line at December 31, 2001 was 77.2% personal automobile, 21.6% homeowners, 0.9% boat and 0.3% umbrella policies. Net premiums written for 2001 increased to $137.7 million, or 13.7% from 2000, and net premiums earned for 2001 increased to $133.3 million, or 12.5% from 2000. In addition to the reasons previously noted, the increase also reflects the cancellation, effective January 1, 2001, of a quota share agreement under which we ceded 40% of our homeowners business during 2000. We are now retaining this homeowners business.

Direct premiums written during 2001 for automobile coverage increased 7.3% to $122.8 million, from $114.4 million in 2000. The number of insured vehicles increased 4.2% to 173,545 at December 31, 2001 from 166,535 at December 31, 2000. Our homeowners premiums written also continued to increase. Direct premiums written during 2001 for homeowners increased 22.4% to $19.1 million, from $15.6 million in 2000. The number of homeowner policies in force increased 15.6% to 48,461 at December 31, 2001 from 41,927 at December 31, 2000. Auto and homeowner premiums increased at a faster rate than the number of insured vehicles and homes, due to the increased value of existing homes and an increase in the number of higher valued autos and homes overall.

Our combined ratio was 94.1% for 2001 compared to 88.9% for 2000. Overall, our net loss ratio for 2001 was 62.6%, compared to 57.6% for 2000. The auto liability net loss ratio for 2001 was 49.8%, compared to 39.7% for 2000, and the auto physical damage net loss ratio for 2001 was 65.3% compared to 62.1% in 2000. The homeowner net loss ratio was 82.6% for 2001, compared to 96.0% for 2000. For 2001, the boat net loss ratio was 22.9% compared to 76.6% for 2000 and there were no umbrella losses. The increases in net loss ratio and combined ratio for the year ended December 31, 2001 were due to increases in both the frequency and severity of personal auto liability and physical damage claims, which more than offset the improvement in homeowner claims. The improvement in the homeowner net loss ratio for 2001 was primarily due to the effects of premium increases from higher valued homes and the rate increase effective October 1, 2001.

Our policy acquisition and other underwriting expenses ratio increased slightly to 23.8% for 2001, compared to 23.7% for 2000. This increase is primarily the result of the $1.3 million in severance expenses incurred in 2001 in connection with the ProAssurance merger. This increase was partially offset by increased efficiencies from maintaining level costs over increased volume of business.

Net investment income before interest expense was $11.2 million for 2001 compared to $10.8 million for 2000. The increase in net investment income before interest expense was due principally to increases in invested assets because of positive cash flows from operations, that were partially offset by declining interest rates. Additionally, a $1.5 million loss was recognized in June 2001 on three securities issued by California electric utilities deemed to have other than temporary declines in fair value. Consistent with 2000, investment income for 2001 was earned primarily from interest income and not from realized capital gains and losses. The tax equivalent total rate of return, which includes both income and changes in market value of securities, was 8.22% for 2001 and 9.80% for 2000. The decreased return in 2001 compared to 2000 was due to declining interest rates and the downturn in the U.S. economy. The weighted average tax equivalent book yield of the fixed maturity portfolio was 6.93% for 2001, compared to 7.13% for 2000.

Results of Operations—2000 Compared to 1999

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.

Total direct premiums written increased to $130.3 million in 2000 from $122.4 million in 1999. Our direct written premiums have increased 6.5% in 2000 due primarily to business growth. Additionally, auto and homeowner premiums increased at a faster rate than the number of insured vehicles and homes due to the increased value of existing homes and an increase in the number of higher valued autos and homes overall. With the continued growth in our homeowners business, our product mix in terms of exposures by line is 20% homeowners and 79% personal automobile, with the remainder made up by umbrella and boat. Net premiums written for 2000 increased to $121.1 million, or 26.7% from 1999. Net premiums earned for 2000 were $118.5 million compared to $93.0 million for 1999. The increase in net premiums written and earned for 2000 was due to the cancellation of the quota share reinsurance contract on July 1, 1999 with ProNational in connection with MEEMIC's conversion and general business growth.

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. Our homeowners premiums written also continued to increase. Direct premiums written during 2000 for homeowners increased 21.9% to $15.6 million, from $12.8 million in 1999. The number of homeowner policies in force increased 18.7% to 41,927 at December 31, 2000 from 35,309 at December 31, 1999.

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.

Our policy acquisition and other underwriting expenses ratio increased to 23.7% for 2000, compared to 20.5% for 1999. The increase in other underwriting expense for 2000 compared to 1999 includes additional costs for investments in technology and increased costs for sales force incentives. MEEMIC installed a new computer system and mailer machine, and implemented an automatic deposit payment system for billing and a voice response unit for routine billing calls.

Net investment income before interest expense was $10.8 million for 2000 compared to $8.3 million for 1999. The increase in net investment income before interest expense was due principally to increases in invested assets because of positive cash flows from operations. Interest expense on the surplus note was $906,000 for 1999. As a result of the surplus note conversion to common stock on July 1, 1999, there was no interest expense for 2000. Consistent with 1999, investment income for 2000 was earned primarily from interest income and not from realized capital gains and losses. The tax equivalent total rate of return, which includes both income and changes in market value of securities, was 9.80% for 2000 and 2.72% for 1999. The increased return in 2000 compared to 1999 was due to a slowing economy and the resulting bond rally. The weighted average tax equivalent book yield of the fixed maturity portfolio was 7.13% for 2000, compared to 6.93% for 1999.

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 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.

Our cash increased $8.9 million during 2001 compared to an increase of $12.3 million during 2000. Cash provided by operations during 2001 was $24.3 million, compared to $27.0 million during 2000. The increases in 2001 were less than the increases in 2000 primarily due to substantially higher loss payments made in 2001 from increased auto and homeowner claims reported in both 2001 and 2000, which were partially offset by increased efficiencies from maintaining level operating costs over increased volume of business.

Historically, our liquidity requirements have been met by funds provided by operations. Due to the short-term nature of our products, a decrease in premiums or demand for our products could have a significant impact on the availability of our funds. Also, a substantial increase in paid claims, the occurrence of multi-catastrophe events or insolvency of our reinsurers could negatively impact our cash flows and our timing and ability to pay our liabilities.

Based on historical trends, market conditions and our business plans, we believe that our existing resources and sources of funds will be sufficient to meet our short term and long term liquidity needs. However, because economic, market and regulatory conditions may change, there can be no assurance that our funds will be sufficient to meet these liquidity needs.

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.

Insurance regulations limit our ability to transfer cash from MEEMIC to Holdings. See "Item 1—Business—Insurance Regulatory Matters."

Effects of Inflation

The effects of inflation on the Company are considered in estimating reserves for unpaid losses and loss adjustment expenses, and in the premium rate-making process. The actual effects of inflation on the Company's results of operations cannot be accurately known until the ultimate settlement of claims. However, based upon the actual results reported to date, we believe that the Company's loss reserves, including reserves for losses that have been incurred but not yet reported, make adequate provision for the effects of inflation.

Effects of New Accounting Pronouncements

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.

The Financial Accounting Standards Board has also issued SFAS No. 142 "Goodwill and Other Intangible Assets" which supersedes Opinion 17 "Intangible Assets," and is effective for fiscal years beginning after December 15, 2001. SFAS No. 142 addresses how goodwill and other intangible assets should be accounted for in financial statements upon acquisition and how these items should be accounted for subsequent to acquisition. Contrary to Opinion 17, SFAS No. 142 does not presume that goodwill and all other intangible assets are wasting assets requiring amortization. Instead, goodwill and intangible assets that have indefinite useful lives will be tested at least annually for impairment. If goodwill and intangible assets are deemed to be impaired, the change will be charged through the Statement of Operations. SFAS No. 142 requires additional disclosure of information about goodwill and other intangible assets in the years subsequent to their acquisition. Intangible assets net of accumulated amortization were $30.5 million at December 31, 2001 and the Company determined there are currently no impaired intangible assets. Thus, adopting SFAS No. 142 would not affect the current

results of operations with any additional charges for impairment, but would eliminate current annual amortization expense of $2.9 million.

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.

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 17% 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 $187.5 million at December 31, 2001 and had a duration of 3.90 years. The portfolio was valued at $167.9 million at December 31, 2000 and had a duration of 3.60 years. The following tables show 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. Our investment policy did not materially change during 2001.

	At December 31, 2001
Change in rates	Portfolio value		Change in value			Modified duration
	(Dollars in thousands)
+2%	$	174,141	$	(14,604	)	4.23
+1%	$	180,187	$	(7,310	)	4.18
0%	$	187,497		—		3.90
-1%	$	194,232	$	6,735		3.48
-2%	$	202,101	$	13,356		3.57

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.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

See "Item 7—Management's Discussions and Analysis of Financial Condition and Results of Operations—Management of Market Risk."

Item 8. Financial Statements and Supplementary Data

MEEMIC Holdings, Inc. and Subsidiaries

Consolidated Balance Sheets

December 31, 2001 and 2000

				2001		2000
				(In thousands, except share data)
Assets
Assets:
	Investments
		Fixed maturities available for sale, at fair value		$	187,497	$	167,866
		Short-term investments, at cost, which approximates fair value			2,922		6,859
		Real estate, at cost			2,300		2,300

			Total investments		192,719		177,025
Cash and cash equivalents					29,948		21,093
Premiums due from policyholders					7,789		5,859
Amounts recoverable from reinsurers					62,423		50,472
Amounts recoverable from reinsurers, related party					5,326		7,263
Accrued investment income					2,647		2,462
Deferred federal income taxes					3,181		3,610
Property and equipment, at cost, net of accumulated depreciation					3,011		3,922
Deferred policy acquisition costs					3,356		2,784
Intangible assets, net of amortization					30,496		33,420
Federal income taxes recoverable					—		761
Other assets					787		803

			Total assets	$	341,683	$	309,474

Liabilities and Shareholders' Equity
Liabilities:
	Loss and loss adjustments expense reserves			$	124,361	$	107,256
	Unearned premiums				41,310		36,755
	Payable related to acquisition				—		1,040
	Accrued expenses and other liabilities				9,734		11,512
	Accrued expenses and other liabilities, related party				79		141
	Premiums ceded payable				4,479		6,163
	Federal income taxes payable				602		—

			Total liabilities		180,565		162,867

Commitments and contingencies (Note 16)					—		—
Shareholders' equity:
	Common stock, no par value; 10,000,000 shares authorized; 6,674,335 and 6,655,500 shares issued and outstanding in 2001 and 2000, respectively				66,043		65,855
	Additional paid-in capital				46		225
	Retained earnings				91,449		79,430
	Accumulated other comprehensive income:
		Net unrealized appreciation on investments, net of deferred federal income taxes of $1,928 and $590 in 2001 and 2000, respectively			3,580		1,097

			Total shareholders' equity		161,118		146,607

			Total liabilities and shareholders' equity	$	341,683	$	309,474

The accompanying notes are an integral part of the consolidated financial statements.

MEEMIC Holdings, Inc. and Subsidiaries

Consolidated Statements of Income

For the Years Ended December 31, 2001, 2000 and 1999

				2001			2000			1999
				(In thousands, except share data)
Revenues and other income:
	Premiums written			$	142,312		$	130,290		$	122,364
	Premiums ceded, related party				—			—			(22,513	)
	Premiums ceded, other				(4,569	)		(9,154	)		(4,255	)

			Net premiums written		137,743			121,136			95,596
Increase in unearned premiums, net of prepaid reinsurance premiums					(4,491	)		(2,608	)		(2,562	)

			Net premiums earned		133,252			118,528			93,034
Net investment income					11,182			10,768			8,285
Net realized investment losses on fixed maturities					(1,540	)		(65	)		(20	)
Other income					1,713			1,713			1,877

			Total revenues and other income		144,607			130,944			103,176

Expenses:
	Losses and loss adjustment expenses, net (including ($190), ($192) and $15,072 ceded to related party in 2001, 2000 and 1999, respectively)				93,702			77,227			62,858
	Policy acquisition and other underwriting expenses:
		Other policy acquisition and underwriting expenses			31,176			27,385			24,990
		Ceding commissions, related party			—			—			(7,227	)
		Management fees, related party			503			742			1,369

					31,679			28,127			19,132
Interest expense, related party					—			—			906
Amortization expense					2,924			2,924			2,924
Other expenses					103			174			15

			Total expenses		128,408			108,452			85,835

			Income from operations before federal income taxes and extraordinary item		16,199			22,492			17,341
Federal income taxes					4,180			6,773			5,531

	Income before extraordinary item				12,019			15,719			11,810
Extraordinary item:
	Gain on early extinguishment of debt, net of federal income taxes of $785				—			—			1,525

			Net income	$	12,019		$	15,719		$	13,335

Earnings per common share—basic*
Income before extraordinary item per common share—basic				$	1.80		$	2.38		$	1.33
Income per share attributable to extraordinary item—basic					—			—			0.21

Net income per common share—basic				$	1.80		$	2.38		$	1.54

Earnings per common share—assuming dilution*
Income before extraordinary item per common share—assuming dilution				$	1.78		$	2.34		$	1.31
Income per share attributable to extraordinary item—assuming dilution					—			—			0.21

Net income per common share—assuming dilution				$	1.78		$	2.34		$	1.52

Weighted average shares outstanding—basic					6,665,617			6,603,796			6,599,500

Weighted average shares outstanding—assuming dilution					6,768,075			6,723,521			6,702,189

*: Earnings per share for 1999 are computed for the period July 1, 1999 (date of conversion) through December 31, 1999.
The accompanying notes are an integral part of the consolidated financial statements.

MEEMIC Holdings, Inc. and Subsidiaries

Consolidated Statements of Shareholders' Equity and Comprehensive Income

For the Years Ended December 31, 2001, 2000 and 1999

	Common stock		Retained earnings		Accumulated other comprehensive income			Additional paid-in capital			Total shareholders' equity
	(In thousands)
Balances, January 1, 1999	$	—	$	50,376	$	1,848		$	—		$	52,224
Net income				13,335								13,335
Issuance of common stock		65,295										65,295
Net depreciation on investment securities						(3,669	)					(3,669	)

Balances, December 31, 1999		65,295		63,711		(1,821	)					127,185
Net income				15,719								15,719
Issuance of common stock		560										560
Tax benefit from employee stock options									225			225
Net appreciation on investment securities						2,918						2,918

Balances, December 31, 2000		65,855		79,430		1,097			225			146,607
Net income				12,019								12,019
Issuance of common stock		188										188
Tax benefit from employee stock options and incentive plans									427			427
Premium paid on buyback of surrendered securities									(606	)		(606	)
Net appreciation on investment securities						2,483						2,483

Balances, December 31, 2001	$	66,043	$	91,449	$	3,580		$	46		$	161,118

		Years ended December 31,
		2001		2000		1999
Comprehensive income:
	Net income	$	12,019	$	15,719	$	13,335
	Net unrealized appreciation (depreciation) on investments, net of reclassification adjustment and net of deferred federal income taxes of $1,338 in 2001, $1,528 in 2000, and ($1,890) in 1999		2,483		2,918		(3,669	)

	Comprehensive income	$	14,502	$	18,637	$	9,666

The accompanying notes are an integral part of the consolidated financial statements.

MEEMIC Holdings, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

For the Years Ended December 31, 2001, 2000 and 1999

					2001			2000			1999
					(In thousands, except share data)
Cash flows from operating activities:
	Net income				$	12,019		$	15,719		$	13,335
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization				4,778			4,420			3,987
		Realized losses on investments				1,540			65			20
		Net (accretion of discount)/amortization of premiums on investments				(4	)		(24	)		89
		Deferred federal income taxes				(908	)		(501	)		591
		Extraordinary gain on early extinguishment of debt				—			—			(2,310	)
		Changes in assets and liabilities:
			Premiums due from policyholders			(1,930	)		(1,105	)		(913	)
			Amounts due from reinsurers			(11,698	)		(5,780	)		1,450
			Accrued investment income			(185	)		(236	)		(621	)
			Deferred policy acquisition costs			(572	)		(64	)		(2,441	)
			Other assets			16			204			(297	)
			Loss and loss adjustment expense reserves			17,105			11,247			3,711
			Unearned premiums			4,555			2,607			2,562
			Accrued expenses and other liabilities			(2,258	)		2,133			299
			Federal income taxes payable/recoverable			1,789			(1,705	)		423

				Net cash provided by operating activities		24,247			26,980			19,885

Cash flows from investing activities:
	Purchases of short-term investments					(12,802	)		(12,995	)		(951	)
	Proceeds from sale or maturity of short-term investments					16,739			6,136			2,857
	Proceeds from maturity of securities available for sale					22,942			25,613			16,377
	Purchases of securities available for sale					(40,288	)		(31,721	)		(56,402	)
	Proceeds from sales of property and equipment					58			159			287
	Purchases of property and equipment					(1,001	)		(2,392	)		(2,386	)
	Purchase of real estate					—			—			(2,300	)

				Net cash used in investing activities		(14,352	)		(15,200	)		(42,518	)

Cash flows from financing activities:
	Proceeds from issuance of common stock					—			560			—
	Proceeds from initial public offering					—			—			42,973
	Initial public offering costs					—			—			(700	)
	Payment on payable related to acquisition					(1,040	)		(26	)		(14,839	)

				Net cash (used in) provided by financing activities		(1,040	)		534			27,434

Net increase in cash and cash equivalents						8,855			12,314			4,801
Cash and cash equivalents, beginning of year						21,093			8,779			3,978

Cash and cash equivalents, end of year					$	29,948		$	21,093		$	8,779

Supplemental disclosures of cash flow information:
	Federal income taxes paid				$	4,501		$	8,500		$	5,300

	Interest paid				$	—		$	—		$	2,734

Supplemental disclosure of noncash financing activities:
	Common stock issued in cashless exercise of employee stock options and net of 4,410 shares surrendered in incentive plans				$	239

	Conversion of surplus note and accrued interest for MEEMIC Holdings, Inc. stock										$	23,022

The accompanying notes are an integral part of the consolidated financial statements.

MEEMIC Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

1. Description of Business

MEEMIC Holdings, Inc. ("Holdings") and subsidiaries (collectively with Holdings, 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 for educational employees and their immediate families exclusively in the State of Michigan. The Company's insurance contracts are sold through MEEMIC Insurance Services Corp., d/b/a MEIA Insurance Agency, which is the exclusive distributor of the Company's products.

2. Summary of Significant Accounting Policies

Basis of presentation

The accompanying consolidated financial statements 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 15 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 Holdings relates to MEEMIC and MEIA Insurance Agency.

Cash and cash equivalents

Cash equivalents include money market funds with original maturities of less than three months.

Investments

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.

Available-for-sale securities are recorded at fair value, with unrealized gains and losses, net of the related income tax effect, excluded from income and reported as a separate component of shareholders' equity.

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 2001 or 2000 were deemed to be temporary, except for a $1.5 million loss recognized in the second quarter of 2001 on California electric utility investment securities.

Short-term investments, which consist principally of money market mutual funds and U. S. government securities, are stated at cost, which approximates fair value.

Premiums and discounts are amortized or accreted, respectively, over the life of the related debt security as an adjustment to yield using the yield-to-maturity method. Dividends and interest income are recognized when earned. Realized gains and losses are included in earnings and are derived using the specific-identification method for determining the cost of securities sold.

Real estate, which consists of vacant land available for sale, is stated at cost.

Revenue recognition

Insurance premium income is recognized on a monthly pro rata basis over the respective terms of the policies in-force and unearned premiums represent the portion of premiums written which is applicable to the unexpired terms of the policies in-force.

Reinsurance arrangements are prospective contracts for which prepaid reinsurance premiums are amortized ratably over the related policy terms based on the estimated ultimate amounts to be paid. Changes in estimated outcomes are recognized currently.

Losses and loss adjustment expense reserves

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 $1,485,000 and $1,285,000 at December 31, 2001 and 2000, respectively. The reserve is stated gross of reinsurance ceded.

Property, equipment and depreciation

Property and equipment are recorded at cost, net of accumulated depreciation. Depreciation is computed either on the straight-line or accelerated methods over periods ranging from three to seven years. Maintenance, repairs and minor renewals are charged to expense as incurred.

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.

Deferred policy acquisition costs

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.

Federal income taxes

Deferred federal income tax assets and liabilities are recognized for the expected future tax consequences attributable to differences between the financial statement carrying amount of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Commencing September 15, 2000, the Company is included in the consolidated federal income tax return with Professionals Group, Inc., parent of ProNational Insurance Company, Inc. Commencing June 28, 2001, the Company is included in the consolidated federal income tax return with

ProAssurance Corporation, the new parent of Professionals Group. The method of allocation between the companies is subject to written agreement approved by the Board of Directors. Allocation is based upon separate return calculations with current credit for net losses. Intercompany tax balances are reconciled at least annually.

Intangibles

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.

Stock-based compensation

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

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

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.

Use of estimates

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 and Reorganization

On July 1, 1999, MEEMIC converted from a mutual to a stock insurance company and became a wholly-owned subsidiary of Holdings. Prior to the conversion, Holdings did not engage in any significant operations and did not have assets or liabilities. Since July 2, 1999, stock of Holdings has been trading on the Nasdaq National Market under the symbol "MEMH". Net proceeds of the initial public offering 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 Holdings. 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. At December 31, 2001, Professionals Group, Inc. owned 84.0% of the issued and outstanding shares of Holdings.

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.

On June 27, 2001, Professionals Group, Inc. and Medical Assurance, Inc. formed a new holding company, ProAssurance Corporation, that owns all of the stock of Medical Assurance, Inc. and Professionals Group, Inc. Medical Assurance, Inc., ProNational and MEEMIC continue to serve policyholders under the umbrella of the new ProAssurance holding company.

Upon completion of the ProAssurance merger, certain officers of Holdings left the Company and were paid severance benefits pursuant to change of control agreements. A $1,335,500 charge for severance payments to these officers was recorded in the second quarter of 2001.

4. Investments

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:

			2001
			Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
			(In thousands)
Fixed maturities available for sale:
	U.S. Treasury securities and obligations of U.S. government corporations and agencies		$	18,176	$	462	$	18	$	18,620
	Debt securities issued by states of the United States and political subdivisions of the states			96,219		2,216		484		97,951
	Corporate debt securities			32,489		1,363		75		33,777
	Mortgage-backed securities:
		Government		27,258		806		128		27,936
		Other		3,753		115		—		3,868
	Other asset-backed securities			2,005		95		—		2,100
	Redeemable preferred stocks			2,089		1,183		27		3,245

		Total	$	181,989	$	6,240	$	732	$	187,497

			2000
			Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
			(In thousands)
Fixed maturities available for sale:
	U.S. Treasury securities and obligations of U.S. government corporations and agencies		$	16,039	$	151	$	114	$	16,076
	Debt securities issued by states of the United States and political subdivisions of the states			81,410		2,046		85		83,371
	Corporate debt securities			32,449		409		931		31,927
	Mortgage-backed securities:
		Government		28,193		412		38		28,567
		Other		2,242		72		—		2,314
	Other asset-backed securities			2,094		44		—		2,138
	Redeemable preferred stocks			3,752		17		296		3,473

		Total	$	166,179	$	3,151	$	1,464	$	167,866

The amortized cost and estimated fair value of fixed maturities at December 31, 2001, 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.

			Amortized Cost		Estimated fair value
			(In thousands)
Due in one year or less			$	9,592	$	9,808
Due after one year through five years				50,682		52,765
Due after five years through ten years				56,601		57,770
Due after ten years				30,009		30,005

				146,884		150,348
Mortgage-backed securities:
	Government			27,258		27,936
	Other			3,753		3,868
Other asset-backed securities				2,005		2,100
Redeemable preferred stocks				2,089		3,245

		Total	$	181,989	$	187,497

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:

			Years ended December 31,
			2001		2000		1999
			(In thousands)
Fixed maturities			$	10,095	$	9,597	$	7,525
Short-term investments and cash				1,377		1,464		1,079

		Total investment income		11,472		11,061		8,604
	Less investment expenses			290		293		319

		Net investment income	$	11,182	$	10,768	$	8,285

Increases (decreases) in net unrealized gains of fixed maturities were $3,821,000, $4,446,000, and ($5,559,000) at December 31, 2001, 2000, and 1999, respectively.

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.

5. Fair Value of Financial Instruments

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.

6. Related Party Transactions

In 1999, Professionals Group provided MEEMIC with information system services and certain consulting services under a Management Services Agreement that was terminated effective July 1, 1999. Fees for such services were $1,065,000 for 1999 and were included in other underwriting expenses. 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 $503,000, $742,000 and $304,000 for 2001, 2000 and 1999, respectively. Also effective July 1, 1999, MEEMIC canceled its quota share reinsurance contract with ProNational (Note 7).

7. Reinsurance

In the normal course of business, the Company seeks to reduce the loss that may arise from events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers. Amounts receivable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. Although reinsurance agreements contractually obligate the Company's reinsurers to reimburse the Company for their proportionate share of losses, they do not discharge the primary liability of the Company. The Company remains liable for the ceded amount of reserves for unpaid losses and loss adjustment expenses and unearned premiums in the event the assuming insurance organizations are unable to meet their contractual obligations.

The Company has various excess of loss and quota share reinsurance agreements. As of December 31, 2001, 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 2001, the Company had one quota share reinsurance agreement for umbrella policies and had cancelled its quota share agreement for homeowners. 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 had 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 $192,000 in 2001 and $1,336,000 in 2000.

The Company continually reviews its reinsurers, considering a number of factors, the most critical of which is their financial stability. Based on these reviews, the Company evaluates its position with reinsurers with respect to existing and future reinsurance.

At December 31, 2001 and 2000, amounts due from reinsurers were as follows:

		Amounts due from reinsurers
		2001		2000
		(In thousands)
Michigan Catastrophic Claims Association		$	51,405	$	36,079
American Reinsurance Company			6,671		9,188
Gerling Global Reinsurance Corp. of America			2,414		2,647
Continental Casualty Company			499		1,129
Other			1,434		1,429

			62,423		50,472
ProNational Insurance Company, related party			5,326		7,263

	Total amounts due from reinsurers	$	67,749	$	57,735

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.

Amounts due from reinsurers consisted of amounts related to:

		December 31,
		2001			2000
		(In thousands)
Paid losses and loss adjustment expenses		$	2,257		$	3,117
Unpaid losses and loss adjustment expense			65,428			54,571
Unearned premium reserves			64			47

	Amounts recoverable from reinsurers		67,749			57,735
Premiums ceded payable			(4,479	)		(6,163	)

	Net amount due from reinsurers	$	63,270		$	51,572

7. Reinsurance (Continued)

Premiums earned and losses and loss adjustment expenses are net of the following reinsurance ceded amounts:

	Years ended December 31,
	2001		2000		1999
	(In thousands)
Premiums earned	$	4,552	$	9,107	$	26,768
Losses and loss adjustment expenses incurred		21,274		18,246		16,723

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. A summary of reinsurance amounts, which are included above, that were ceded to ProNational follows:

	2001			2000			1999
	(In thousands)
Premiums earned	$	—		$	—		$	22,513
Losses and loss adjustment expenses incurred		(190	)		(192	)		15,072

8. Federal Income Taxes

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.

The provision for federal income taxes consists of the following:

		Years ended December 31,
		2001			2000			1999
		(In thousands)
Current		$	5,088		$	7,274		$	4,940
Deferred			(908	)		(501	)		591

	Total provision for federal income tax	$	4,180		$	6,773		$	5,531

The significant components of federal income tax expense are as follows:

	Years ended December 31,
	2001		2000		1999
	(In thousands)
Continuing operations	$	4,180	$	6,773	$	5,531
Extraordinary item		—		—		785
Shareholders' equity		911		1,303		(1,890	)

	$	5,091	$	8,076	$	4,426

Actual federal income taxes vary from amounts computed by applying the current federal income tax rate of 35% to income or loss before federal income taxes. For the years ended December 31, 2001, 2000 and 1999, the reasons for these differences, and the tax effects thereof, are as follows:

		Years ended December 31,
		2001			2000			1999
		(In thousands)
Expected tax expense		$	5,670		$	7,872		$	6,069
Dividends received deduction			(19	)		(56	)		(40	)
Tax-exempt interest			(1,392	)		(1,241	)		(821	)
Other, net			(79	)		198			323

	Total federal income tax	$	4,180		$	6,773		$	5,531

The tax effects of temporary differences that give rise to deferred income tax assets and deferred federal income tax liabilities follow:

			Years ended December 31,
			2001		2000
			(In thousands)
Deferred federal income tax assets arising from:
	Loss and loss adjustment expense reserves		$	1,745	$	1,557
	Unearned premium reserves			2,887		2,573
	Accruals for fringe benefits			791		900
	Advanced premiums			130		111
	Depreciation on property and equipment			139		—
	Write down on investments			542		—
	Other, net			92		82

		Total deferred federal income tax assets		6,326		5,223

Deferred federal income tax liabilities arising from:
	Deferred policy acquisition costs			1,174		974
	Unrealized gains on investments			1,928		591
	Salvage and subrogation recoverable			39		34
	Other, net			4		14

		Total deferred federal income tax liabilities		3,145		1,613

		Net deferred federal income taxes	$	3,181	$	3,610

9. Property and Equipment

At December 31, 2001 and 2000, property and equipment consisted of the following:

		Years ended December 31,
		2001			2000
		(In thousands)
Data processing equipment, including software		$	4,693		$	4,028
Furniture, fixtures and equipment			4,019			3,939

			8,712			7,967
Accumulated depreciation			(5,701	)		(4,045	)

	Total property and equipment, net	$	3,011		$	3,922

10. Deferred Policy Acquisition Costs

Changes in deferred policy acquisition costs are summarized as follows:

		Years ended December 31,
		2001			2000			1999
		(In thousands)
Net asset balance, beginning of year		$	2,784		$	2,720		$	278

Amounts deferred:
	Commissions to agents		11,400			10,511			14,841
	Ceding commission income		(192	)		(1,336	)		(7,227	)

Net amounts deferred			11,208			9,175			7,614
Net amortization			(10,636	)		(9,111	)		(5,172	)

Net asset balance, end of year		$	3,356		$	2,784		$	2,720

11. Loss and Loss Adjustment Expense Reserves

Activity in loss and loss adjustment expense reserves is summarized as follows:

			Years ended December 31
			2001			2000			1999
			(In thousands)
Balance, beginning of year			$	107,256		$	96,009		$	92,298
	Less reinsurance balance recoverable			54,618			49,446			53,333

		Net balance, beginning of year		52,638			46,563			38,965
Incurred related to:
	Current year			100,218			86,730			69,822
	Prior years			(6,516	)		(9,503	)		(6,964	)

		Total incurred		93,702			77,227			62,858
Paid related to:
	Current year			65,225			56,014			42,376
	Prior years			22,182			15,138			12,884

		Total paid		87,407			71,152			55,260

Net balance, end of year				58,933			52,638			46,563
Plus reinsurance balances recoverable				65,428			54,618			49,446

		Balance, end of year	$	124,361		$	107,256		$	96,009

As a result of recent favorable development in estimates of prior years' reserves on auto liability business, the provision for losses and loss adjustment expenses in 2001, 2000, and 1999 decreased by $6,516,000, $9,503,000, and $6,964,000, 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 2001, 2000, and 1999. 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.

12. Employee Benefit Plans

The Company has a qualified defined contribution 401(k) plan which covers substantially all of its employees. The Company matches 50% of employees' contributions up to a maximum rate of 2.5% of eligible compensation. In addition, the Company is required to make an elective contribution on behalf 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 $679,000, $688,000, and $609,000 for 2001, 2000 and 1999, 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 $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

are calculated as a percentage of base compensation. The charge to income under this plan was approximately $560,000 in 2001, $660,000 in 2000, and $575,000 in 1999.

13. Stock Options and Awards

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.

Option information regarding the stock compensation plan is as follows:

	Years ended December 31,
	2001			2000			1999
	Shares	Weighted average exercise price		Shares	Weighted average exercise price		Shares	Weighted average exercise price
Outstanding at beginning of year	224,000	$	10	280,000	$	10	—	$	—
Granted	—		—	—		—	280,000		10
Exercised	68,000		10	56,000		10	—		—
Canceled	16,000		—	—		—	—		—

Outstanding at end of year	140,000	$	10	224,000	$	10	280,000	$	10

Options exercisable at end of year	140,000			—			—

Weighted average fair-value of options granted during the year		$	—		$	—		$	5.14

Options outstanding as of December 31, 2001 under the stock compensation plan consisted of the following:

Options Outstanding					Options Exercisable
Range of exercise prices	Number	Weighted average remaining contractual life	Weighted average exercise price		Number	Weighted average exercise price
$10	140,000	7.5	$	10	140,000	$	10

Options available for grant at end of year	20,000

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:

		2001		2000		1999
		(In thousands)
Net income:
	As reported	$	12,019	$	15,719	$	13,335
	Pro forma		11,829		15,529		13,240
Net income per common share—assuming dilution*:
	As reported	$	1.78	$	2.34	$	1.52
	Pro forma	$	1.75	$	2.31	$	1.50

*: 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.

14. Lease Agreements

The Company is obligated under an operating lease for office space.

14. Lease Agreements (Continued)

At December 31, 2001, future minimum lease payments are as follows:

2002	$	967,000
2003		967,000
2004		967,000
2005		967,000
2006		830,000

	$	4,698,000

The base rate will increase annually at the start of each new lease year by the percentage increase in the CPI-U (Common Price Index for all urban consumers).

Rental expense was $1,432,000, $1,382,000, and $1,258,000 in 2001, 2000 and 1999, respectively.

15. Statutory Insurance Accounting Practices

MEEMIC is required to file financial statements prepared in accordance with statutory insurance accounting practices ("SAP") prescribed or permitted by the State of Michigan Office of Financial and Insurance Services ("OFIS"). The Company does not utilize any permitted accounting practices.

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:

		Year ended December 31,
		2001			2000
		(In thousands)
Statutory capital and surplus		$	80,093		$	79,304
Net unrealized (depreciation) appreciation on securities available for sale			5,508			1,687
Deferred policy acquisition costs capitalized for GAAP			3,356			2,784
Deferred federal income taxes recorded for GAAP			3,181			3,610
Assets nonadmitted for SAP			10,286			11,473
Common stock issued			4,248			4,060
Accumulated intercompany dividends			57,815			43,315
Deferred tax assets recorded for statutory basis			(4,003	)		—
Prepaid pension costs for unvested contributions			(412	)		—
Premium paid on buyback on surrendered securities			(606	)		—
Retained earnings attributable to MEEMIC Holdings, Inc.			1,652			374

	Total shareholders' equity per accompanying consolidated balance sheets	$	161,118		$	146,607

		Years ended December 31,
		2001			2000		1999
		(In thousands)
Statutory net income		$	9,275		$	14,508	$	8,732
Deferred federal income tax expense recorded for GAAP			908			501		(591	)
Deferred policy acquisition costs capitalized for GAAP			572			64		2,442
Prepaid pension costs			(14	)		—		—
Net income attributable to non-insurance subsidiary			833			621		3,024
Net income (loss) attributable to MEEMIC Holdings, Inc.			429			25		(272	)
Other			16			—		—

	Net income per accompanying consolidated statements of income	$	12,019		$	15,719	$	13,335

On January 1, 2001, significant changes to the statutory basis accounting became effective. The cumulative effect of these changes, known as the Codification guidance, was recorded as a direct adjustment to statutory surplus. The effect of the adoption on MEEMIC's statutory surplus was an increase of $4.0 million as of January 1, 2001, primarily due to the recording of a deferred tax asset.

16. Contingencies

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.

17. Shareholders' Equity

Approximately $260 million of consolidated assets represents assets of the Company's insurance operations that may not be transferred to Holdings in the form of dividends, loans or advances without prior regulatory approval. The amount of dividends that the Company's insurance subsidiary can pay to Holdings in any 12-month period is limited to the greater of statutory net income for the preceding year, excluding realized capital gains on investments, or 10% of unassigned surplus as of the preceding year end. As of December 31, 2001, amounts available for payment of dividends in year 2002 without prior regulatory approval of the OFIS is approximately $9.2 million.

18. Revenue Information

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

			Year ended December 31,
			2001		2000		1999
			(In thousands)
Direct premiums written:
	Personal automobile		$	122,754	$	114,388	$	109,553
	Homeowners			19,064		15,618		12,811
	Boat			366		196		—
	Umbrella			128		88		—

		Total	$	142,312	$	130,290	$	122,364

Net premiums earned:
	Personal automobile		$	116,864	$	110,486	$	84,574
	Homeowners			16,107		7,947		8,460
	Boat			277		92		—
	Umbrella			4		3		—

		Total	$	133,252	$	118,528	$	93,034

19. Concentration and Credit Risk

Premiums written through the Company's sales agency approximated 90% of direct written premiums in each of the years 2001, 2000 and 1999. Additionally, in each of these years, the top ten agents produced, in aggregate, approximately 32% of direct written premiums.

All premiums are directly billed to policyholders, and premiums due are secured by the related unearned premiums. When insureds fail to pay their premiums, coverage is canceled. Premiums are collected in advance of being earned. Subsequent scheduled payments are monitored to prevent the Company from providing coverage beyond the date for which payment has been received. In the opinion of management, the amounts carried on the accompanying consolidated balance sheets are collectible.

20. Quarterly Financial Data (Unaudited)

The unaudited operating results by quarter for 2001 and 2000 are summarized below:

			Total revenues and other income		Income before income taxes and extraordinary item		Net income		Net income per common share— assuming dilution
			(In thousands, except share data)
2001:
	1st Quarter		$	34,379	$	3,495	$	2,463	.36
	2nd Quarter			34,319		1,866		1,556	.23
	3rd Quarter			38,060		6,189		4,630	.68
	4th Quarter			37,849		4,649		3,370	.50

		Year	$	144,607	$	16,199	$	12,019

2000:
	1st Quarter		$	31,443	$	3,727	$	2,487	.36
	2nd Quarter			32,203		7,252		5,128	.76
	3rd Quarter			33,298		7,316		5,355	.80
	4th Quarter			34,000		4,197		2,749	.41

		Year	$	130,944	$	22,492	$	15,719

21. Accounting Changes

The Financial Accounting Standards Board also issued SFAS No. 142 "Goodwill and Other Intangible Assets" which supersedes Opinion 17 "Intangible Assets," and is effective for fiscal years beginning after December 15, 2001. SFAS No. 142 addresses how goodwill and other intangible assets should be accounted for subsequent to acquisition. Contrary to Opinion 17, SFAS No. 142 does not

presume that goodwill and all other intangible assets are wasting assets requiring amortization. Instead, goodwill and intangible assets that have indefinite useful lives will be tested at least annually for impairment. If goodwill and intangible assets are deemed to be impaired, the change will be charged through the Statement of Operations. SFAS No. 142 requires additional disclosure of information about goodwill and other intangible assets in the years subsequent to their acquisition. Intangible assets net of accumulated amortization were $30.5 million at December 31, 2001 and the Company determined there are currently no impaired intangible assets. Thus, adopting SFAS No. 142 would not affect the current results of operations with any additional charges for impairment, but would eliminate current annual amortization expense of $2.9 million.

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.

22. Subsequent Event

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.

Report of Independent Auditors

Board of Directors and Shareholders
of MEEMIC Holdings, Inc.

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.

We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

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.

Ernst & Young LLP

February 1, 2002, except for Note 22, as to which the date is March 18, 2002
Birmingham, Alabama

Report of Independent Accountants

To the Board of Directors and Shareholders
of MEEMIC Holdings, Inc.:

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 the results of their operations and their cash flows for each of the two 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.

PricewaterhouseCoopers LLP

Grand Rapids, Michigan
February 2, 2001

SCHEDULE II—CONDENSED FINANCIAL INFORMATION OF REGISTRANT

MEEMIC HOLDINGS, INC. (PARENT COMPANY)

CONDENSED BALANCE SHEETS

December 31, 2001 and 2000

			2001			2000
			(In thousands, except share data)
Assets
Investment in subsidiaries:
	MEEMIC Insurance Company		$	98,024		$	98,860
	MEEMIC Insurance Services Corporation			30,069			29,236

		Total investment in subsidiaries		128,093			128,096
Fixed maturities available for sale, at fair value				10,103			—
Short-term investments				—			4,922

		Total investments		138,196			133,018

Cash				22,706			13,453
Accrued investment income				189			9
Federal income taxes recoverable				27			127

		Total assets	$	161,118		$	146,607

Liabilities and Shareholders' Equity
Liabilities:
	Accrued expenses and other liabilities, related party		$	2		$	—

		Total liabilities		2			—
Shareholders' equity:
	Common stock, no par value; 10,000,000 shares authorized; 6,674,335 and 6,655,500 shares issued and outstanding in 2001 and 2000, respectively			66,043			65,855
	Retained earnings			95,073	��		80,752

		Total shareholders' equity		161,116			146,607

		Total liabilities and shareholders' equity	$	161,118		$	146,607

These condensed financial statements should be read in conjunction with the accompanying consolidated financial statements and notes thereto of MEEMIC Holdings, Inc. and subsidiaries.

See accompanying notes to the condensed financial information of registrant.

		2001			2000		1999
		(In thousands)
Revenues and other income:
Net investment income		$	713		$	570	$	87
Dividend income from subsidiary			14,500			8,700		6,000

	Total revenues and other income		15,213			9,270		6,087

Expenses:
Contribution to MEEMIC Foundation			—			500		500
Other expenses			54			33		—

	Total expenses		54			533		500

	Income before federal income taxes and equity in undistributed income (loss) of subsidiaries		15,159			8,737		5,587
Federal income taxes			231			13		(140	)

	Income before equity in undistributed income (loss) of subsidiaries		14,928			8,724		5,727
Equity in undistributed income (loss) of subsidiaries			(2,909	)		6,995		7,608

	Net income	$	12,019		$	15,719	$	13,335

These condensed financial statements should be read in conjunction with the accompanying consolidated financial statements and notes thereto of MEEMIC Holdings, Inc. and subsidiaries.

See accompanying notes to the condensed financial information of registrant.

			2001			2000			1999
			(In thousands)
Cash flows from operating activities:
Net income			$	12,019		$	15,719		$	13,335
Adjustments to reconcile net income to net cash provided by operating activities:
	Equity in undistributed (loss) income of subsidiaries			2,909			(6,995	)		(7,608	)
	Increase in accrued investment income			(180	)		(9	)		—
	Increase (decrease) in accrued expenses and other liabilities, related party			2			(28	)		28
	Decrease in federal income taxes recoverable			100			13			(140	)

		Net cash provided by operating activities		14,850			8,700			5,615

Cash flows from investing activities:
Purchases of short-term investments				—			(4,922	)		—
Proceeds from sale or maturity of short-term investments				4,922			—			—
Purchases of securities available for sale				(10,103	)		—			(38,773	)

		Net cash used in investing activities		(5,181	)		(4,922	)		(38,773	)

Cash flows from financing activities:
Proceeds from initial public offering				—			—			42,973
Proceeds from common stock issuance				188			560			—
Premium paid on buyback of surrendered securities				(604	)		—			—
Premium paid on buyback of surrendered securities				—			—			(700	)

		Net cash provided by financing activities		(416	)		560			42,273

Net increase in cash				9,253			4,338			9,115
Cash, beginning of year				13,453			9,115			—

Cash, end of year			$	22,706		$	13,453		$	9,115

Supplemental disclosure of noncash investing activities:
	Dividend received-MEEMIC Insurance Services Corp.								$	28,615

Supplemental disclosure of noncash financing activities:
	Conversion of surplus note and accrued interest into MEEMIC Holdings, Inc. stock								$	23,022

These condensed financial statements should be read in conjunction with the accompanying consolidated financial statements and notes thereto of MEEMIC Holdings, Inc. and subsidiaries.

See accompanying notes to the condensed financial information of registrant.

(1) DESCRIPTION OF BUSINESS

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.

Holdings owns all of the issued and outstanding common stock of the following entities:

MEEMIC Insurance Company (MEEMIC)—a stock insurance company which began operations in 1950 under Michigan law.

MEEMIC Insurance Services Corporation ("MEIA Agency")—a business corporation incorporated under Michigan law on May 16, 1997, which is the exclusive distributor of our products and represents over 95 insurance sales representatives. Although 92.2% of MEIA Agency's revenues are attributable to 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 State of Michigan Office of Financial and Insurance Services, MEEMIC paid a dividend to Holdings consisting of all of the outstanding shares of MEIA Agency's capital stock. 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.

(2) FEDERAL INCOME TAXES

Commencing September 15, 2000, Holdings is included in the consolidated federal income tax return with Professionals Group, Inc., parent of ProNational Insurance Company, which directly owned 84.0% of Holdings at December 31, 2001. Commencing June 28, 2001, Holdings is included in the consolidated federal income tax return with ProAssurance Corporation. The method of allocation between the companies is subject to written agreement approved by the Board of Directors. Allocation is based upon separate return calculations with current credit for net losses. Intercompany tax balances are reconciled at least annually.

SCHEDULE IV—REINSURANCE

MEEMIC HOLDINGS, INC. AND SUBSIDIARIES

For the Years Ended December 31, 2001, 2000 and 1999

	Gross amount		Ceded to other companies		Assumed from other companies	Net amount		Percentage of amount assumed to
	(In thousands)
Property and liability insurance premiums:
Year ended December 31, 2001	$	142,312	$	4,569	—	$	137,743	—
Year ended December 31, 2000	$	130,290	$	9,154	—	$	121,136	—
Year ended December 31, 1999	$	122,364	$	26,768	—	$	95,596	—

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

PART III

Item 10. Directors and Executive Officers of the Registrant

The information called for by this item with respect to the directors of Holdings will be reported in Holdings' Proxy Statement for its 2002 Annual Meeting of Shareholders under the captions "Election of Directors" (excluding the Audit Committee Report) and"Section 16(a) Beneficial Ownership Reporting Compliance." Such information is incorporated herein by reference.

Item 11. Executive Compensation

The information called for by this item with respect to executive compensation of Holdings will be reported in Holdings' Proxy Statement for its 2002 Annual Meeting of Shareholders under the captions "Executive Compensation" (excluding the Compensation Committee Report and the Stock Performance Graph) and "Election of Directors—Director Compensation." Such information is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The information called for by this item with respect to the security ownership of certain beneficial owners and management of Holdings will be reported in Holdings' Proxy Statement for its 2002 Annual Meeting of Shareholders under the caption "Voting Securities and Principal Holders." Such information is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions

The information called for by this item with respect to certain relationships and related transactions of Holdings will be reported in Holdings' Proxy Statement for its 2002 Annual Meeting of Shareholders under the caption "Related Party Transactions." Such information is incorporated herein by reference.

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

Index to Financial Statements and Financial Statement Schedules

(a)(1) and (2)

Financial Statements:

Consolidated balance sheets as of December 31, 2001 and 2000

Consolidated statements of income for each of the years ended December 31, 2001, 2000 and 1999

Consolidated statements of shareholders' equity and comprehensive income for each of the years ended December 31, 2001, 2000, and 1999

Consolidated statements of cash flows for each of the years ended December 31, 2001, 2000 and 1999

Notes to consolidated financial statements

Reports of independent accountants

Financial Statement Schedules:

II. Condensed financial information of registrant

IV. Reinsurance

All other schedules for which provision is made in Regulation S-X either (i) are not required under the related instructions or are inapplicable and, therefore, have been omitted, or (ii) the information required is included in the consolidated financial statements or the notes thereto that are a part hereof.

(a)(3) The exhibits included as part of this report are listed in the attached Exhibit Index, which is incorporated herein by reference.

(b) Reports on Form 8-K

No reports on Form 8-K were filed during the three months ended December 31, 2001.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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: March 27, 2002		By:	/s/ VICTOR T. ADAMO Victor T. Adamo Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date

/s/ VICTOR T. ADAMO Victor T. Adamo	Director and Chief Executive Officer (Principal Executive Officer)	March 27, 2002
/s/ AUBREY D. CROWE Aubrey D. Crowe	Director	March 27, 2002
/s/ LYNN M. KALINOWSKI Lynn M. Kalinowski	Director and President	March 27, 2002
/s/ JOHN F. DODGE, JR. John F. Dodge, Jr.	Director	March 27, 2002
/s/ THOMAS E. HOEG Thomas E. Hoeg	Director	March 27, 2002
/s/ ANN F. PUTALLAZ Ann F. Putallaz	Director	March 27, 2002
/s/ JAMES O. WOOD James O. Wood	Director	March 27, 2002
/s/ CHRISTINE C. SCHMITT Christine C. Schmitt	Chief Financial Officer, Secretary and Treasurer (Principal Financial and Accounting Officer)	March 27, 2002

EXHIBIT INDEX

The following lists the exhibits which are filed as part of this report. Those which have been previously filed are incorporated by reference to such previous filing as indicated below. The Commission file number is 1-14673.

Exhibit Number		Exhibit Description
2.1		Plan of Conversion dated June 24, 1998.(3)
3.1		Articles of Incorporation.(3)
3.2		Amended and restated bylaws of MEEMIC Holdings, Inc. as of September 19, 2001.(4)
10.1		Agreement between MEEMIC, Professionals Insurance Company Management Group and PICOM Insurance Company dated February 7, 1997.(3)
10.4		Quota Share Reinsurance Contract between MEEMIC and PICOM Insurance Company effective July 1, 1997.(3)
10.5		Asset Purchase Agreement between MEEMIC Insurance Services Corporation, Michigan Educators Insurance Agency, Inc. and Michigan Educators Life Insurance Agency, Inc. dated September 22, 1997.(3)
10.6		Inter-Creditor Agreement between MEEMIC Insurance Services Corporation, MEEMIC and Professionals Insurance Company Management Group dated September 22, 1997.(3)
10.7		Agreement of Guaranty between MEEMIC, Michigan Educators Insurance Agency, Inc. and Michigan Educators Life Insurance Agency, Inc. dated September 22, 1997.(3)
*10.8		MEEMIC Amended and Restated Incentive Plan dated as of December 31, 1997.(3)
*10.9		MEEMIC Holdings, Inc. Stock Compensation Plan dated October 21, 1998.(3)
*10.10		Severance/Benefits Agreement with Lynn M. Kalinowski dated August 10, 1993.(3)
10.11		Escrow Agreement, by and among MEEMIC, MEEMIC Holdings, Inc., ChaseMellon Shareholder Services, L.L.C. and The Chase Manhattan Bank, N.A., dated April 16, 1999.(3)
10.12		Expense Allocation Agreement between MEEMIC and ProNational Insurance Company dated July 1, 1999.(2)
*10.13		Form of Stock Option Agreement under the MEEMIC Holdings, Inc. Stock Compensation Plan.(2)
10.14		Tax Allocation Agreement between MEEMIC and ProNational Insurance Company dated September 15, 2000.(6)
*10.20		Severance Compensation Agreement between ProAssurance Corporation, MEEMIC Insurance Company, MEEMIC Holdings, Inc. and Lynn M. Kalinowski dated June 27, 2001.(4)
*10.21		Severance Compensation Agreement between ProAssurance Corporation, MEEMIC Insurance Company, MEEMIC Holdings, Inc. and Christine C. Schmitt dated June 27, 2001.(4)
*10.22		Severance Compensation Agreement between ProAssurance Corporation, MEEMIC Insurance Company, MEEMIC Holdings, Inc. and William P. Sabados dated June 27, 2001.(4)
16.1		Letter from PricewaterhouseCoopers LLP regarding change in certifying accountant.(5)
21.1		Subsidiaries of Registrant(2)
23.1(a)		Consent of Ernst & Young LLP(1)
23.1(b)		Consent of PricewaterhouseCoopers LLP(1)

*: Current management contracts or compensatory plans or arrangements.
(1): Filed herewith.

(2): Annual Report on Form 10-K for the year ended December 31, 1999.
(3): Form S-1, No. 333-66671.
(4): Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2001.
(5): Current Report on Form 8-K dated August 7, 2001.
(6): Annual Report on Form 10-K for the year ended December 31, 2000.

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TABLE OF CONTENTS
PART 1
PART II
MEEMIC Holdings, Inc. and Subsidiaries Consolidated Balance Sheets December 31, 2001 and 2000
MEEMIC Holdings, Inc. and Subsidiaries Consolidated Statements of Income For the Years Ended December 31, 2001, 2000 and 1999
MEEMIC Holdings, Inc. and Subsidiaries Consolidated Statements of Shareholders' Equity and Comprehensive Income For the Years Ended December 31, 2001, 2000 and 1999
MEEMIC Holdings, Inc. and Subsidiaries Consolidated Statements of Cash Flows For the Years Ended December 31, 2001, 2000 and 1999
MEEMIC Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements
Report of Independent Auditors
Report of Independent Accountants
SCHEDULE II—CONDENSED FINANCIAL INFORMATION OF REGISTRANT MEEMIC HOLDINGS, INC. (PARENT COMPANY) CONDENSED BALANCE SHEETS December 31, 2001 and 2000
SCHEDULE IV—REINSURANCE MEEMIC HOLDINGS, INC. AND SUBSIDIARIES For the Years Ended December 31, 2001, 2000 and 1999
PART III
PART IV
SIGNATURES
EXHIBIT INDEX

Meemic (MEMH) Inactive 10-K4052001 FY Annual report (delinquent filer disclosure)