UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ___________
Commission file number 0-21223
MEEMIC Holdings, Inc.
(Exact name of registrant as specified in its charter)
Michigan 38-3436541
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
691 North Squirrel Road, Suite 100 48321
Auburn Hills, Michigan (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (888) 463-3642
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes / / No /x/
The number of shares outstanding of the registrant's common stock, no par
value per share, as of June 4, 1999 was 1.
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at 3
March 31, 1999 (Unaudited) and
December 31, 1998
Condensed Consolidated Statements of Income 4
for the Three Months Ended March 31, 1999
and 1998 (Unaudited)
Condensed Consolidated Statements of 5
Comprehensive Income for the Three Months
Ended March 31, 1999 and 1998 (Unaudited)
Condensed Consolidated Statements of Cash Flows 6
for the Three Months Ended March 31, 1999 and
1998 (Unaudited)
Notes to Condensed Consolidated Financial 7-9
Statements (Unaudited)
Item 2. Management's Discussion and Analysis of 10-15
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 15
Market Risk
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 16
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Michigan Educational Employees Mutual Insurance
Company and Subsidiary
CONSOLIDATED BALANCE SHEETS
March 31, 1999
(Unaudited) December 31, 1998
------------------ -------------------
ASSETS
Investments:
Fixed maturities availale for sale, at fair value $120,547,164 $122,996,615
Short-term investments, at cost, which approximate fair value 1,906,496 1,906,496
------------------ -------------------
Total investments 122,453,660 124,903,111
Cash 5,031,710 3,977,602
Premiums due from policyholders 4,855,763 3,840,764
Amounts recoverable from reinsurers 42,181,247 43,066,086
Amounts recoverable from reinsurers, related party 19,186,651 16,193,962
Accrued investment income 1,551,396 1,604,457
Deferred federal income tax 3,342,315 3,338,251
Property and equipment, at cost, net of accumulated depreciation 2,426,559 2,148,550
Deferred policy acquisition costs 284,735 278,067
Intangibles assets, net of amortization 38,537,338 39,268,400
Other assets 766,042 710,369
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Total Assets $240,617,416 $239,329,619
------------------ -------------------
------------------ -------------------
LIABILITIES AND POLICYHOLDERS' SURPLUS
Liabilities:
Losses and loss adjustment expenses reserves $93,134,162 $92,297,908
Unearned premiums 30,866,486 31,585,769
Surplus note 21,500,000 21,500,000
Payable related to acquisition 18,034,497 18,215,289
Accrued expenses and other liabilities 9,107,416 8,386,744
Accrued expenses and other liabilities, related party 2,795,924 2,356,815
Premiums ceded payable 3,737,254 4,464,952
Premiums ceded payable, related party 7,812,707 7,552,920
Federal income taxes payable 844,801 744,801
------------------ -------------------
Total Liabilities: 187,833,247 187,105,198
------------------ -------------------
Policyholders' surplus:
Unassigned surplus 51,439,723 50,375,927
Accumulated other comprehensive income: Net unrealized
appreciation on investments, net of deferred federal
income taxes of $692,594 and $952,254 in 1999 and
1998, respectively 1,344,446 1,848,494
------------------ -------------------
Total policyholders' surplus 52,784,169 52,224,421
------------------ -------------------
Total liabilities and policyholders' surplus $240,617,416 $239,329,619
------------------ -------------------
------------------ -------------------
See the accompanying notes to the unaudited condensed financial statements.
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Michigan Educational Employees Mutual Insurance
Company and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME
for the three months ended March 31, 1999 and 1998 (Unaudited)
1999 1998
--------------------- ---------------------
Revenues and other income:
Premiums written $28,173,781 $26,088,609
Premiums ceded, related party (11,161,010) (10,379,885)
Premiums ceded, other (995,004) (992,977)
--------------------- ---------------------
Net premiums written 16,017,767 14,715,747
Decrease in unearned premiums, net
of prepaid reinsurance premiums 719,283 857,427
--------------------- ---------------------
Net premiums earned 16,737,050 15,573,174
Net investment income 1,762,267 1,678,320
Net realized invesment gains on fixed maturities 16,456 477
Other income 376,028 469,899
--------------------- ---------------------
Total revenues and other income 18,891,801 17,721,870
--------------------- ---------------------
Expenses:
Losses and loss adjustment expenses incurred, net 12,427,428 10,553,559
Policy acquisition and other underwriting expenses:
Policy acquisition and underwriting expenses 6,167,255 6,177,450
Ceding commissions, related party (3,348,303) (3,113,965)
Management fees, related party 517,808 493,151
--------------------- ---------------------
3,336,760 3,556,636
Interest expense, related party 450,616 450,616
Amortization expense 731,062 747,729
Other expense 6,880 16,512
--------------------- ---------------------
Total expenses 16,952,746 15,325,052
--------------------- ---------------------
Income from operations before federal
income taxes and extraordinary item 1,939,055 2,396,818
Federal income taxes 805,596 679,357
--------------------- ---------------------
Income before extraordinary item 1,133,459 1,717,461
Extraordinary item:
Early extinguishment of debt (69,664) -
--------------------- ---------------------
Net income* $1,063,795 $1,717,461
--------------------- ---------------------
--------------------- ---------------------
* Earning per share not meaningful.
See the accompanying notes to the unaudited condensed financial statements.
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Michigan Educational Employees Mutual Insurance
Company and Subsidiary
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
for the three months ended March 31, 1999 and 1998 (Unaudited)
1999 1998
------------------- ------------------
Comprehensive income:
Net income $1,063,795 $1,717,461
Net unrealized depreciation on investments,
net of reclassification adjustment and net
of deferred federal income taxes of
$(259,661) in 1999 and $(35,656) in 1998 (504,048) (69,214)
------------------- ------------------
Comprehensive income $559,747 $1,648,247
------------------- ------------------
------------------- ------------------
See the accompanying notes to the unaudited condensed financial statements.
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Michigan Educational Employees Mutual Insurance
Company and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 1999 and 1998 (Unaudited)
1999 1998
------------------ ------------------
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by $1,063,795 $1,717,461
operating activities:
Depreciation and amortization 939,354 861,882
Realized gains on investments (16,456) (477)
Net accretion of discounts on investments 22,771 10,983
Deferred federal income taxes 255,596 (270,641)
Extraordinary (gain)/loss on early extinguishment of debt 69,664 -
Changes in assets and liabilities:
Premiums due from policyholders (1,014,999) (203,973)
Amounts due from reinsurers (2,575,761) (3,020,300)
Accrued investment income 53,061 16,320
Deferred policy acquisition costs (6,668) 571,338
Other assets (55,673) (141,489)
Loss and loss adjustment expense reserves 836,254 2,532,973
Unearned premiums (719,283) (857,429)
Accrued expenses and other liabilities 1,159,781 2,276,784
Federal income taxes payable 100,000 500,000
------------------ ------------------
Net cash provided by operating activities 111,436 3,993,432
------------------ ------------------
Cash flows from investing activities:
Proceeds from maturity of securities available for sale 2,691,108 3,863,029
Purchases of securities available for sale (1,011,680) (6,040,096)
Proceeds from sales of property and equipment - 26,416
Purchases of property and equipment (486,300) (254,851)
------------------ ------------------
Net cash provided by (used in) investing activities 1,193,128 (2,405,502)
------------------ ------------------
Cash flows from financing activities:
Payment on payable related to acquisition (250,456) -
------------------ ------------------
Net cash used in financing activities (250,456) -
------------------ ------------------
Net increase in cash 1,054,108 1,587,930
Cash, beginning of year 3,977,602 2,204,325
------------------ ------------------
Cash, end of year $5,031,710 $3,792,255
------------------ ------------------
------------------ ------------------
Supplemental disclosure of cash flow information:
Federal income taxes paid $300,000 $300,000
------------------ ------------------
------------------ ------------------
See the accompanying notes to the unaudited condensed financial statements.
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MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE
COMPANY AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) DESCRIPTION OF BUSINESS
Michigan Educational Employees Mutual Insurance Company and
Subsidiary ("MEEMIC" or the "Company") is a Michigan-licensed property
and casualty mutual insurance company that operates as a single segment
writing full coverage private passenger automobile protection and
homeowner insurance products for educational employees and their
immediate families exclusively in the State of Michigan. MEEMIC sells
its insurance contracts through its wholly owned subsidiary, MEEMIC
Insurance Services Corp., d/b/a MEIA Insurance Agency, which is the
exclusive distributor of the Company's products. MEEMIC Holdings, Inc.
("Holdings") was formed to be the holding company for MEEMIC after its
conversion to a stock company. Before the conversion described in Note
(4) below, Holdings will not engage in any significant operations. On
the effective date of the conversion, MEEMIC will become a wholly owned
subsidiary of Holdings. See Note (4).
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.
(2) BASIS OF PRESENTATION
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiary, and have been
prepared in accordance with generally accepted accounting principles
("GAAP") for Form 10-Q and Rule 10-01 of Regulation S-X financial
information. Accordingly, they have not been audited and they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. All
significant intercompany transactions have been eliminated in
consolidation.
In the opinion of management, all adjustments (consisting of
normal recurring adjustments) considered necessary for a fair
presentation of financial position and results of operations have been
included. The operating results for the three month period ended March
31, 1999 are not necessarily indicative of the results to be expected
for the year ending December 31, 1999.
-7-
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
(3) RELATED PARTY TRANSACTIONS
Effective April 7, 1997, Professionals Insurance Company
Management Group ("Professionals"), which is the parent of ProNational
Insurance Company ("ProNational") signed a definitive agreement with
the Company whereby:
- Nominees of Professionals were elected to all six positions on the
MEEMIC Board of Directors;
- ProNational purchased a $21.5 million surplus note from MEEMIC;
- Effective July 1, 1997 ProNational began reinsuring 40 percent of
MEEMIC's net retained premiums on a quota share basis.
Professionals also provides MEEMIC with information system
services and certain consulting services under a management services
agreement. Fees for such services were $517,808 and $493,151 as of
March 31, 1999 and 1998, respectively.
MEEMIC's plan of conversion contemplates the conversion of the
$21.5 million surplus note of MEEMIC owned by Professionals into shares
of Holdings. After our conversion, Professionals will own at least
34.9% of the stock of Holdings, and if policyholders, officers and
directors do not purchase a significant number of shares in the
offering, Professionals may own significantly more than 51% of the
common stock after the conversion. The registration statement of
Holdings (No. 333-66671) should be consulted for a description of the
proposed conversion of MEEMIC and the expected role of Professionals.
The Company has a coinsurance treaty with ProNational to cede
40 percent of its net retained premiums on a quota share basis. Ceding
commissions were $3,348,303 and $3,113,965 as of March 31, 1999 and
1998, respectively. A summary of reinsurance amounts that were ceded to
ProNational for the three months ended March 31, 1999 and 1998 follows:
1999 1998
----------- -----------
Premiums earned . . . . . . . . . . . . $11,161,010 $10,379,885
Losses and loss adjustment expenses incurred $ 8,377,792 $ 5,627,267
-8-
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
(4) CONVERSION
On June 24, 1998, the Board of Directors approved a plan of
conversion for changing the corporate form of the Company from the
mutual form to the stock form. Under the plan, eligible policyholders,
officers and directors will have the opportunity to acquire stock in
Holdings, which will acquire all of the newly issued stock of the
Company upon conversion. Prior to the conversion, Holdings will not
engage in any significant operations and will not have assets or
liabilities. On September 2, 1998, The Michigan Insurance Bureau
concluded that MEEMIC's plan of conversion complied with applicable
laws and approved such plan. On April 20, 1999, the Securities and
Exchange Commission declared effective the registration statement on
Form S-1 filed by Holdings. The Company has also received a tax opinion
regarding the tax treatment of the conversion as a tax-free
reorganization.
At a special policyholder meeting held on May 25, 1999,
MEEMIC's plan of conversion was approved by policyholder vote. MEEMIC
expects to convert to a stock insurance company and become a wholly
owned subsidiary of Holdings, following the completion of its
subscription rights offering on June 17, 1999. The management services
agreement with Professionals will be terminated upon completion of the
conversion. Holdings has received preliminary approval for listing its
shares on the Nasdaq National Market. Final approval is subject to
meeting various conditions which are outside Holdings' control,
including a minimum number of shareholders, and a minimum number and
value of shares held by non-affiliates following the conversion.
-9-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Holdings was formed to be the holding company for MEEMIC after the
conversion. Before the conversion, Holdings will not engage in any significant
operations and is therefore not included in the following discussion. On the
effective date of the conversion, MEEMIC will become a wholly owned subsidiary
of Holdings.
The following discussion and analysis should be read in conjunction
with the condensed consolidated financial statements and the notes thereto
included elsewhere in this document and in our Form S-1 registration statement
(No. 333-66671).
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements (as the term is
defined in the federal securities laws) which involve risks and uncertainties.
We have identified several important factors which could cause actual results to
differ materially from any such results discussed in the forward-looking
information. All these factors are difficult to predict and many are beyond our
control. These important factors include:
- future economic conditions in the regional and national markets in
which the companies compete;
- financial market conditions, including, but not limited to, changes in
interest rates;
- inflation;
- estimates of loss reserves and trends in losses and loss adjustment
expenses;
- the effects of the year 2000 problem on us and third parties with whom
we do business;
- changing competition;
- the ability to carry out business plans;
- the ability 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 ability to maintain an excellent A.M. Best rating;
- the ability to obtain adequate reinsurance coverage at reasonable
rates; and
- our reinsurers' ability to fulfill their financial obligations to us.
-10-
OVERVIEW
MEEMIC provides private passenger automobile and homeowners
insurance primarily to educational employees and their immediate families in
the State of Michigan. MEEMIC sells its insurance contracts through over 90
sales representatives associated with the sales agency, which is the
exclusive distributor of MEEMIC's products. As of March 31, 1999, we had over
114,000 policies in force, representing 156,359 insured vehicles and 30,786
homeowner units.
FINANCIAL CONDITION
Our total assets increased to $240.6 million at March 31, 1999
compared to $239.3 million at December 31, 1998. The majority of our assets
consist of bonds, some preferred stocks, cash and short-term investments,
that in total were $127.5 million at March 31, 1999 and $128.9 million at
December 31, 1998. 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 has remained relatively constant at approximately
three years. At March 31, 1999, the portfolio had an average Standard &
Poor's security quality rating of AA (Excellent), and there were no
securities in default concerning the timely payment of interest and
principal. Our gross unrealized gains and gross unrealized losses in
investments in securities were $2,304,556 and $267,516, respectively, at
March 31, 1999 and $2,870,316 and $69,568, respectively, at December 31,
1998. 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 $93.1 million at March 31, 1999 compared to $92.3 million at December
31, 1998. The $0.8 million increase in reserves at March 31, 1999 was due to
an increase in homeowner claims from a January winter storm and due to
general allowances for growth in the number of insured vehicles and homeowner
policies in force.
Unearned premiums were $30.9 million at March 31, 1999 and $31.6
million at December 31, 1998. The decrease in unearned premiums at March 31,
1999 compared to December 31, 1998 of 2.2% is due to the timing of renewals
for the auto book of business that has a concentration of 6-month renewal
dates in April and October.
Other liabilities were $63.8 million at March 31, 1999 and $63.2
million at December 31, 1998. The increase in 1999 is due to the timing of
our payments for interest on the surplus note and for state association
assessments, payroll and retirement plan contributions. Additionally, the
liabilities at March 31, 1999 and December 31, 1998 include $2,278,116 and
$1,827,500, respectively, for interest on the $21.5 million surplus note and
management fees of $517,808 and $529,315, respectively, due to Professionals.
-11-
Our policyholder surplus was $52.8 million at March 31, 1999
compared to $52.2 million at December 31, 1998. This increase was due to net
income of $1.1 million, which was offset by a decrease in accumulated other
comprehensive income that consisted of unrealized losses on the investment
portfolio of $0.5 million during the three months ended March 31, 1999.
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:
- LOSS RATIO-This ratio compares our insurance losses to our net
premiums earned and indicates how much we are paying to
policyholders for claims compared to the amount of premiums we are
receiving from them. We discuss three components of the loss ratio
that relate to the three categories of insurance losses in our
business: automobile liability losses, automobile physical damage
losses and homeowners losses. The lower the percentage, the more
profitable our insurance business is.
- UNDERWRITING EXPENSES RATIO-This ratio compares our expenses to
obtain new business and renew existing business to our net
premiums earned and is used to measure how efficient we are at
obtaining business. 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 - THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE
MONTHS ENDED MARCH 31, 1998
Net income for the three months ended March 31, 1999 was $1.1
million compared to $1.7 million for the three months ended March 31, 1998.
Overall, our income from operations was $1.9 million for the three months
ended March 31, 1999 compared to $2.4 million for the three months ended
March 31, 1998. Expenses relating to interest on the surplus note and
management fees to Professionals were $1.0 million for each of the three
month periods.
Our direct premiums written were $28.2 million for the three months
ended March 31, 1999, an increase of $2.1 million, or 8%, compared to direct
premiums written of $26.1 million for the three months ended March 31, 1998.
Direct premiums written for automobile coverage were $25.9 million for the
three months ended March 31, 1999, an increase of 6.2% compared to $24.4
million for the three months ended March 31, 1998. The increase in auto
premiums was due to policyholder growth and an increase in the value of autos
being insured. The number of insured vehicles increased 5.3% to 156,359 at
March 31, 1999 from 148,481 at March 31, 1998. Our homeowners business also
continued to increase. Direct premiums written for homeowners
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were $2.2 million for the three months ended March 31, 1999, an increase of
37%, compared to $1.6 million for the three months ended March 31, 1998. The
increase in homeowners premiums was due to policyholder growth, a 7.6% rate
increase that went into effect October 1, 1998 and an increase in the value
of homes being insured. The number of homeowner policies in force increased
18.8% to 30,786 at March 31, 1999 from 25,917 at March 31, 1998.
Net premiums written were $16.0 million for the three months ended
March 31, 1999, an increase of 8.8% compared to $14.7 million for the three
months ended March 31, 1998. The increase in net premiums written was
comparable to the increase in direct premiums written. Net premiums earned
were $16.7 million for the three months ended March 31, 1999, an increase of
7.0%, compared to $15.6 million for the three months ended March 31, 1999.
Net premiums earned have lagged the increase in net premiums written due to
the business growth.
Total loss and loss adjustment expenses were $12.4 million for the
three months ended March 31, 1999, compared to $10.5 million for the three
months ended March 31, 1998. Overall, our loss ratio for the three months
ended March 31, 1999 was 63.3% compared to 56.8% for the three months ended
March 31, 1998. The higher loss ratio for the three months ended March 31,
1999 compared to 1998 was due to the homeowner losses resulting from the
January 1999 Michigan winter storm. The homeowner loss ratio for the first
quarter 1999 was 157.0% and for the first quarter 1998 was 54.1%. As a result
of the storm, we incurred $1.7 million in direct losses, $1.0 million in net
losses after quota share reinsurance, and 906 reported homeowner claims. The
loss experience from auto business has remained stable and favorable. The
auto liability loss ratio for the first quarter 1999 was 44.1% and for the
first quarter 1998 was 53.8%. The auto physical damage loss ratio for the
first quarter 1999 was 60.2% and for the first quarter 1998 was 58.6%. Our
combined ratio was 94.19% for three months ended March 31, 1999, compared to
90.61% for the three months ended March 31, 1998. This increased ratio was
due to the storm in January 1999.
Policy acquisition and underwriting expenses were $3.3 million for
the three months ended March 31, 1999, compared to $3.5 million for the same
period of 1998. The underwriting expenses ratio decreased to 19.9% for the
three months ended March 31, 1999, from 22.8% for the three months ended
March 31, 1998. The reduction in first quarter 1999 was due primarily to
higher deferred acquisition costs in 1997 that were expensed in 1998,
compared to lower deferred acquisition costs in 1998 that were expensed in
1999. Under the management services agreement, Professionals provides MEEMIC
with consulting and information system management services. In performing
these services, Professionals has employed and compensates the president and
the chief information officer of MEEMIC. These officers currently spend 95%
and 80% of their time, respectively, working at MEEMIC. Management fees were
approximately $0.5 million for each of the three month periods. Following the
conversion, the management services agreement will be terminated and these
two officers will become our employees. The cancellation of the management
services agreement combined with the additional salaries and expenses needed
to replace the services performed by Professionals is expected to increase
after-tax earnings by approximately $1 million annually over the remaining 8
years of the agreement.
-13-
Net investment income, before interest expense and excluding
realized investment gains, was $1.8 million for the three months ended March
31, 1999 compared to $1.7 million for the three months ended March 31, 1998.
Interest expense on the surplus note was $450,616 for each of the three
months ended March 31, 1999 and 1998. Gross realized gains were $16,456 and
$477 for the three months ended March 31, 1999 and 1998, respectively. There
were no realized investment losses during those same periods. The net
increase in net investment income was due principally to increases in
invested assets because of positive cash flows from operations. The
annualized total rate of return, which includes both income and changes in
market value of securities, was 3.19% for the three months ended March 31,
1999 and was 5.33% for the three months ended March 31, 1998. The reduction
of the return in the first quarter 1999 compared to the same period in 1998
was due to a reduction in security market values resulting from higher
interest rates.
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 payment obligations, and to maximize
opportunities to earn interest on those funds not immediately required.
The net increase in cash was $1,054,108 for the three months ended
March 31, 1999 compared to $1,587,930 for the three months ended March 31,
1998. Cash provided by operations for the three months ended March 31, 1999
was $111,436 compared to $3,993,432 for the three months ended March 31,
1998. The $3.9 million difference in cash provided by operations for the
first quarter 1999 compared to the first quarter 1998 was primarily due to
more loss and loss adjustment expenses being paid in first quarter 1999
compared to first quarter 1998 as a result of the January 1999 winter storm.
As a result of a greater amount of cash being used to pay for the 1999 storm
losses, the net cash used in investing activities for the three months ended
March 31, 1999 was correspondingly lower than for the three months ended
March 31, 1998.
MEEMIC is currently pursuing conversion to a stock company to
provide a source of capital for growth and expansion of its current auto and
homeowner products, as well as provide capacity for new product lines. The
conversion is expected to yield net proceeds of at least $29.8 million, after
payment of offering related expenses and a $500,000 donation to the MEEMIC
Foundation. The increased capital resources from the conversion will also
allow MEEMIC to retire liabilities under terms of the agency purchase
agreement and improve operational flexibility and financial capabilities for
business and regulatory purposes.
MEEMIC has a surplus note for $21.5 million, with interest payable
annually at a rate of rate of 8.5%. The entire principal and any accrued
unpaid interest is due on April 7, 2009. However, any repayment is subject to
written authorization by the Bureau and approval by the MEEMIC board of
directors. The surplus note of $21.5 million and unpaid interest to November
1, 1998 of $1,522,090 will be exchanged for Holdings common stock as part of
the conversion and the remaining accrued interest of approximately $1.2
million will be paid in cash.
-14-
EFFECTS OF NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards, or SFAS, No. 133 "Accounting for Derivative
Instruments and Hedging Activities" which is effective for fiscal quarters of
all fiscal years beginning after June 15, 2000. SFAS No. 133 requires that
all derivative instruments be recorded on the balance sheet at fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction, and if it is, the type of hedge
transaction. As MEEMIC does not use derivative instruments, we anticipate
that the adoption of SFAS No. 133 will not affect the results of operations
or financial position of MEEMIC.
YEAR 2000 COMPLIANCE
MEEMIC has completed an assessment of its computer programs and
personal computer software and has determined that all significant systems
are Year 2000 compliant. MEEMIC has incurred approximately $2 million for the
purchase of a new computer system for business processing, enhancement of its
telephone system, installation of new forms processing software and equipment
and upgrading its financial reporting systems, and does not anticipate
incurring additional remediation or assessment costs. These measures improve
operating efficiencies and are Year 2000 compliant. The purchase of these new
systems has not required MEEMIC to incur specific Year 2000 remediation
expenses. Additionally, MEEMIC has conducted Year 2000 investigation and
testing with its major third party vendors' software and hardware and has
determined that all significant hardware and software is Year 2000 compliant.
MEEMIC is in the process of assessing Year 2000 readiness of the leased
office space that MEEMIC occupies and expects to complete its assessment by
September 30, 1999. In the event that the office space is not year 2000
compliant, MEEMIC will activate its offsite disaster recovery location, which
has been determined to be Year 2000 compliant. While MEEMIC believes that
Year 2000 compliance issues have been reasonably addressed, both internally
and externally, no assurances can be given that all entities with whom MEEMIC
does business will be Year 2000 compliant. The foregoing disclosure contains
information regarding Year 2000 readiness which constitutes a "Year 2000
Readiness Disclosure" as defined in the Year 2000 Readiness Disclosure Act.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MANAGEMENT OF MARKET RISK
No material changes.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit Number Exhibit Description
-------------- -------------------
27 Financial Data Schedule
(b) Reports on Form 8-K.
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEEMIC Holdings, Inc.
DATE: June 4, 1999 /s/ Christine C. Schmitt
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Christine C. Schmitt
Treasurer and Chief Financial Officer
(as Chief Financial Officer and on
behalf of the registrant)
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