<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 25, 1999
REGISTRATION NO. 333-66671
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
MEEMIC HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
MICHIGAN 6331 38-3436541
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) No.)
</TABLE>
691 NORTH SQUIRREL ROAD, SUITE 100
AUBURN HILLS, MICHIGAN 48321
(888) 463-3642
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
--------------------------
R. KEVIN CLINTON
PRESIDENT
691 NORTH SQUIRREL ROAD, SUITE 100
AUBURN HILLS, MICHIGAN 48321
(888) 463-3642
(Name and address, including zip code, and telephone number,
including area code, of agent for service)
--------------------------
COPIES TO:
MARK A. METZ, ESQ.
Dykema Gossett PLLC
400 Renaissance Center
Detroit, Michigan 48243
(313) 568-5434
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), please check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / ____________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / / ____________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / / ____________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER SHARE OFFERING PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
Subscription rights...................... 108,048(1) $0.00 $0.00 $0.00
Common Stock, no par value............... 4,297,791 $10.00 $42,977,910 $18,348.00
</TABLE>
(1) Includes the subscription rights issued for each qualifying policy as of
June 24, 1998, and to each eligible officer and director. The subscription
rights are being issued at no charge and which the Company has determined
have no fair market value. See "Plan of Distribution--Subscription Rights."
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
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<PAGE>
MEEMIC HOLDINGS, INC.
[LOGO]
UP TO 4,297,791 SHARES OF COMMON STOCK
THROUGH 108,048 SUBSCRIPTION RIGHTS
We are in the process of converting Michigan Educational Employees Mutual
Insurance Company, or MEEMIC, into a company that is owned by shareholders. As
part of this process, we are offering MEEMIC policyholders, officers and
directors the opportunity to become shareholders of MEEMIC Holdings, Inc., or
Holdings, a new company that will own MEEMIC after the conversion. To
participate in the offering, you must purchase a minimum of 100 shares of
Holdings common stock before 5:00 p.m. on , 1999. The maximum number
of shares you may purchase is 10,744 for each policy you owned on June 24, 1998.
The conversion requires the approval of the policyholders. We have scheduled
a special meeting of policyholders for , 1999. Until policyholders
approve the conversion and the offering is completed, we will hold the proceeds
of the offering in a non-interest bearing escrow account with The Chase
Manhattan Bank, N.A. If the conversion is not approved, we will promptly refund
the money you sent with your stock order.
Because this is our initial offering of common stock, there is currently no
public market for the common stock. We have applied to have the common stock
listed on the Nasdaq National Market under the symbol "MEMH" following the
conversion. The listing is dependent on our selling enough shares to
policyholders to satisfy the applicable listing requirements.
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<S> <C>
- - Price per share.......................................... $10.00
- - Number of shares in the offering (minimum and maximum)... 3,097,791 to 4,297,791
- - Net proceeds............................................. $29,777,910 to
$41,777,910
- - Net proceeds per share................................... $9.61 to $9.72
</TABLE>
------------------------
THE COMMON STOCK IS A RISKY INVESTMENT.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATOR HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS , 1999
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING IS A SUMMARY OF WHAT WE BELIEVE IS THE MOST IMPORTANT
INFORMATION FOR YOU TO KNOW ABOUT THE OFFERING. BECAUSE IT IS A SUMMARY, IT DOES
NOT CONTAIN ALL THE INFORMATION THAT MAY BE IMPORTANT TO YOU. TO UNDERSTAND THE
OFFERING FULLY, YOU SHOULD CAREFULLY READ THIS ENTIRE DOCUMENT.
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<S> <C>
WHO WE ARE................... MEEMIC is an insurance company which offers automobile and
homeowners insurance primarily to Michigan educational
employees. As of December 31, 1998, MEEMIC had more than
112,000 policies in force and total consolidated assets of
$239 million. After the conversion, the primary assets of
Holdings will be MEEMIC's stock and a portion of the
offering proceeds. Holdings does not expect to engage in any
significant amount of business itself. Our principal office
is at 691 North Squirrel Road, Suite 100, Auburn Hills,
Michigan 48326, telephone (888) 4-MEEMIC. For additional
information about MEEMIC's business, see "Business of
MEEMIC."
WHO CONTROLS US.............. We are controlled by Professionals Group, Inc., a company
that owns and operates ProNational Insurance Company.
Professionals invested $21.5 million in MEEMIC in 1997 and
replaced the former directors as part of the investment.
Professionals will control Holdings and MEEMIC after the
conversion and, as a result, Holdings and MEEMIC will be
considered subsidiaries of Professionals. In addition,
Professionals may own a majority or more of the common stock
after the conversion.
SUBSCRIPTION RIGHTS.......... We are making this offering of Holdings common stock to
holders of MEEMIC insurance policies and to directors and
officers of MEEMIC through subscription rights. A
subscription right is a right to purchase Holdings common
stock. You are receiving one subscription right for each
policy you owned as of June 24, 1998. You are prohibited by
law from transferring your subscription right. If you
violate this prohibition your subscription right will be
terminated.
HOW DO I BUY STOCK IN THE
OFFERING................... To buy common stock in the offering, sign and complete the
enclosed stock order form and send it to us with your
payment in the envelope provided for "Stock Reply" c/o
ChaseMellon Shareholder Services, P.O. Box 3307, South
Hackensack, New Jersey 07606 no later than , 1999.
Payment may be made by check or money order payable to
ChaseMellon Shareholder Services. You have no right to
modify or withdraw your investment without our consent. We
may reject an incomplete or late stock order or a stock
order received from any policyholder who does not live in
Michigan. If you have questions regarding this offering,
please call our stock offering information line at (877)
MEEMIC-1.
</TABLE>
2
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<S> <C>
EFFECT OF THE OFFERING AND
CONVERSION................. After the offering and the conversion are completed,
Holdings will be a publicly held company which owns all of
the stock of MEEMIC. If you exercise your subscription right
and purchase stock in the offering, you will become a
shareholder of Holdings when the conversion becomes
effective. If you do not exercise your subscription right,
you will have no ownership interest in MEEMIC or Holdings
after the conversion. The insurance coverage under your
policy will not be affected by the conversion or by your
response to the offering.
WHY ARE WE DOING THE
CONVERSION................. We are doing the conversion to provide funds to support our
current business, to support future growth and expansion, to
reduce our liabilities, to improve our ability to raise
future capital and to allow our policyholders, directors and
officers to participate in MEEMIC's success. See "The
Conversion--Actions of the Independent Committee and the
Board of Directors."
DETERMINATION OF OFFERING
PRICE...................... We determined the $10.00 per share offering price based upon
a valuation analysis of MEEMIC meeting the requirements of
the Michigan Insurance Code. For additional details, see
"The Conversion--Stock Price and Number of Shares to be
Issued."
USE OF PROCEEDS.............. Most of the money we collect from the offering will be used
to purchase MEEMIC's stock. The remainder will be used for
working capital and to make a donation to the MEEMIC
Foundation. MEEMIC will use the funds it receives from
Holdings to pay obligations it owes as a result of its
purchase of the assets of its sales agency and to grow and
operate its business. For additional details, see "Use of
Proceeds."
OVERSUBSCRIPTION............. If we receive subscriptions for more shares than the maximum
number being offered, your subscription may be reduced. Our
method for dealing with oversubscription is described in
detail under "Plan of Distribution--Rules for
Oversubscription."
UNDERSUBSCRIPTION............ Professionals has agreed, in the standby purchase and option
agreement it signed with MEEMIC, to purchase any shares not
purchased by policyholders, officers and directors up to the
offering minimum of 3,097,791 shares. If policyholders,
officers and directors do not buy the maximum 4,297,791
shares being offered for sale, that agreement also gives
Professionals the right to buy the remaining shares but does
not require it to do so.
</TABLE>
3
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<TABLE>
<S> <C>
SHARES OUTSTANDING
IMMEDIATELY AFTER THE
OFFERING................... After the offering, there will be at least 5,400,000 shares
issued and outstanding, including 2,302,209 shares to be
issued to Professionals in connection with the conversion of
the surplus note representing its prior investment. More
shares will be issued if more than the minimum number are
sold in the offering.
SHARE OWNERSHIP IMMEDIATELY
AFTER THE OFFERING......... The exact number of shares to be issued in the offering
depends on the number of shares purchased by policyholders,
officers and directors and whether Professionals buys more
shares than it is required to purchase under the standby
purchase and option agreement. The following table
illustrates the holdings of policyholders, officers and
directors and Professionals assuming policyholders, officers
and directors together purchase (a) no shares, (b) one half
of the minimum number to be sold in the offering, (c) the
minimum number to be sold in the offering, and (d) the
maximum number to be sold in the offering. We have assumed
that if officers and directors purchase any shares, they
will purchase 282,250 shares, which is the total amount they
have indicated to us that they intend to purchase. The table
assumes that Professionals will choose to purchase the
maximum number of shares it is entitled to purchase at
$10.00 under the standby purchase and option agreement.
</TABLE>
<TABLE>
<CAPTION>
(A) (B) (C) (D)
<S> <C> <C> <C> <C>
Policyholders.................. 0 1,266,645 2,815,541 4,015,541
Directors and officers......... 0 282,250 282,250 282,250
Professionals
Surplus note............... 2,302,209 2,302,209 2,302,209 2,302,209
Standby obligation......... 3,097,791 1,548,896 0 0
Standby right.............. 1,200,000 1,200,000 1,200,000 0
--------- --------- --------- ---------
Total...................... 6,600,000 5,051,105 3,502,209 2,302,209
--------- --------- --------- ---------
--------- --------- --------- ---------
Total outstanding.............. 6,600,000 6,600,000 6,600,000 6,600,000
Policyholder % owned........... 0% 19.2% 42.7% 60.8%
Directors and officers %
owned........................ 0% 4.3% 4.3% 4.3%
Professionals % owned.......... 100% 76.5% 53.0% 34.9%
</TABLE>
<TABLE>
<S> <C>
The standby purchase and option agreement also gives
Professionals the one-time option to buy additional shares
from Holdings during the twelve months after the conversion
so that Professionals can assure itself of owning a majority
of the common stock. The exercise price of the option will
be at least $14.00 per share and will depend upon the market
value of the stock when the option is exercised. The option
is described in more detail under "The Conversion--The
Standby Purchase and Option Agreement."
The maximum number of shares that Professionals could own
immediately after the conversion would not be more than
6,600,000 shares, even if the option is exercised. See
"Security Ownership."
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
TERMINATION OF THE OFFERING.. We have the right to terminate the offering and not
consummate the conversion. If we terminate the offering,
your money will be promptly refunded, without interest.
DIVIDEND POLICY.............. We do not intend to pay dividends to shareholders of
Holdings. Moreover, the payment of any dividends from MEEMIC
to Holdings and from Holdings to its shareholders is subject
to a number of regulatory conditions intended to protect
policyholders. These are described under "Business of
MEEMIC--Insurance Regulatory Matters."
</TABLE>
5
<PAGE>
RISK FACTORS
Before you invest in the common stock, you should carefully consider the
following risk factors, together with the other information in this document.
THE DEVELOPMENT OF AN ACTIVE TRADING MARKET IS NOT ASSURED, SO YOU MAY HAVE
DIFFICULTY SELLING YOUR STOCK.
There is no established market for the common stock since Holdings has never
issued capital stock before. Although we have applied to have the common stock
traded on the Nasdaq National Market, the listing requires the satisfaction of
several conditions which are outside our control. Satisfaction of these
conditions is largely dependent on a significant level of participation by
policyholders in the offering. We cannot guarantee that enough policyholders
will purchase shares in the offering to satisfy the Nasdaq listing conditions.
If the common stock is not listed on the Nasdaq National Market, it may not be
followed by market analysts or the investment community, which may reduce the
amount of market activity in the common stock and make it more difficult for you
to sell your stock. Even if the common stock is listed on the Nasdaq, we cannot
guarantee that the number of shares held by investors other than officers,
directors and Professionals after the offering will be sufficient to result in
an active trading market for the common stock, or that the stock will be
followed by market analysts. See "Market For the Common Stock."
HOLDINGS WILL BE DEPENDENT ON MEEMIC'S RESULTS AND ABILITY TO DISTRIBUTE CASH
AND MAY NOT HAVE SUFFICIENT FUNDS TO PAY ITS EXPENSES AND DEBTS.
Holdings will be a separate legal entity with no significant operations
other than holding the stock of MEEMIC. Though Holdings may borrow money or sell
securities to raise funds in the future, its principal source of funds will be
dividends from MEEMIC. Holdings' right to receive dividends is subject to
regulatory restrictions as well as prior claims of creditors. Consequently, its
ability to pay any expenses or debts it may have and to pay dividends to you
will be limited. See "Business of MEEMIC--Insurance Regulatory Matters."
PROFESSIONALS WILL BE IN CONTROL AFTER THE CONVERSION AND, AS A RESULT, YOU WILL
NOT BE ABLE TO AFFECT THE OUTCOME OF ANY SHAREHOLDER VOTE.
Professionals is in control of MEEMIC and will be in control of Holdings and
MEEMIC after the offering. Professionals will own at least 34.9% of the common
stock 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. In
addition, Professionals has an option which is designed to allow Professionals
to purchase additional shares after the offering to insure that it will own 51%
of the common stock if it wishes. As a majority shareholder, Professionals will
continue to be able to control our board of directors and our activities.
Although you would be entitled to vote on matters presented for shareholder
approval, you would not have the ability to affect the outcome of the vote if
Professionals is the majority shareholder. See "The Conversion--The Standby
Purchase and Option Agreement" for a description of the rights and obligations
of Professionals to buy common stock.
AN ADJUSTMENT TO INCREASE OUR LOSS RESERVES WOULD NEGATIVELY AFFECT INCOME AND
COULD AFFECT THE STOCK PRICE.
We maintain capital and surplus as required by the Michigan Insurance
Bureau. We also maintain reserves to cover our estimated losses and loss
adjustment expenses. Determining the appropriate level of these reserves is an
inherently uncertain process and we cannot assure you that our actual losses
will not exceed our reserves. If our reserves are too low and we have to
increase them, the adjustment will
6
<PAGE>
reduce income during the period in which the adjustment is made and may cause
the common stock's market price to fall.
CONCENTRATION OF OUR EARNINGS IN PERSONAL LINES INSURANCE MAY NEGATIVELY AFFECT
OUR RESULTS IF REGULATORY OR COMPETITIVE CONDITIONS CHANGE IN THAT BUSINESS.
All of our business is currently in one type of insurance known as personal
lines insurance. Our earnings could be adversely affected by regulatory or
competitive changes affecting rates or other aspects of the personal lines
insurance business to a greater extent than if our business was diversified.
CONCENTRATION OF OUR BUSINESS IN MICHIGAN MAY NEGATIVELY AFFECT OUR RESULTS IF
CONDITIONS IN MICHIGAN CHANGE FOR THE WORSE.
We currently do business only in Michigan. As a result, our revenues and
earnings are subject to prevailing economic, regulatory, demographic and other
conditions in Michigan, as well as the impact of natural catastrophes, to a
greater extent than if we did business in several states or regions.
INSURANCE INDUSTRY REGULATION MAY NEGATIVELY AFFECT OUR RESULTS AND OUR STOCK
PRICE.
We are subject to supervision and regulation by the Michigan Insurance
Bureau with respect to many aspects of our business and financial condition. We
are also subject to various accounting and financial requirements established by
the National Association of Insurance Commissioners. Failure to comply with
these regulations and requirements could result in consequences ranging from a
regulatory examination to a regulatory takeover of MEEMIC and would likely have
an adverse effect on our results of operations and our stock price. In addition,
these regulations and requirements, as well as the state insurance statutes,
could change or additional restrictions could be imposed which are more
burdensome to us and which negatively affect our profitability. Because these
regulations and requirements are for the protection of policyholders, changes in
these regulations and requirements may not be in your best interest as a
shareholder.
CHANGES IN PREVAILING INTEREST RATES MAY NEGATIVELY AFFECT OUR RESULTS AND OUR
STOCK PRICE.
We have invested a significant portion of our investment portfolio in fixed
income securities. In recent years, we have earned our investment income
primarily from interest income on this portfolio. Lower interest rates could
reduce the return on our portfolio and the amount of this income if we must
reinvest at rates below those we have on securities currently in the portfolio.
The reduced investment income could also have a negative effect on our cash
flows. Higher interest rates could reduce the market value of our fixed income
investments. See "Business of MEEMIC--Investments."
CYCLICAL FACTORS AFFECTING OUR INDUSTRY CAN REDUCE OUR PROFITABILITY AND OUR
STOCK PRICE.
The property and casualty insurance industry is highly cyclical. Our
profitability and the profitability of the industry as a whole can be affected
significantly by
- price competition,
- regulatory changes,
- volatile weather conditions,
- legal developments affecting insurer liability and the size of jury
awards, and
- fluctuations in interest rates and other investment factors.
Profitability can also be affected significantly by investment returns and other
general economic conditions and trends, such as inflationary pressure that may
affect the adequacy of reserves.
7
<PAGE>
REINSURANCE MAY NOT BE AVAILABLE TO US IN THE FUTURE, WHICH WOULD INCREASE OUR
BUSINESS RISK AND NEGATIVELY AFFECT OUR RESULTS AND THE STOCK PRICE.
Our operations rely in part on the use of reinsurance arrangements to limit
and manage the amount of risk retained, to stabilize underwriting results and
increase underwriting capacity. The availability and cost of reinsurance are
subject to prevailing market conditions and may vary significantly over time.
Reinsurance may not be available to us in the future at commercially reasonable
rates. If it is not available at reasonable rates, our operating results and the
stock price could be negatively affected.
OUR REINSURANCE MAY BE INSUFFICIENT TO COVER LOSS AND CREDIT RISK, WHICH COULD
NEGATIVELY AFFECT OUR OPERATING RESULTS AND OUR STOCK PRICE.
We are subject to loss and credit risk with respect to the reinsurers we
deal with because buying reinsurance does not relieve us of our liability to
policyholders. The insolvency or inability of any reinsurer to meet its
obligations to us may have a material adverse effect on our business and results
of operations. In addition, it is possible that the losses we experience on
risks we have reinsured will exceed the coverage limits on the reinsurance. If
our reinsurers are not capable of fulfilling their financial obligations to us
or if the amount of our reinsurance is not sufficient, our operating results
would be negatively affected and our stock price may decrease as a result. See
"Business of MEEMIC--Reinsurance Ceded" for additional information on our
reinsurance practices.
A CHANGE IN OUR A.M. BEST RATING WOULD MAKE IT DIFFICULT FOR US TO COMPETE.
Ratings assigned by A.M. Best Company, Inc. are an important factor
influencing the competitive position of insurance companies. We currently have
an A.M. Best rating of A- (Excellent). If our rating is reduced, it could weaken
our competitive position and have an adverse impact on our financial position
and results of operations.
A.M. Best ratings are based upon factors of concern to policyholders and are
not directed toward the protection of investors. As such, our A.M. Best rating
should not be relied upon as a basis for an investment decision to purchase
common stock.
INSURANCE COMPANY INSOLVENCY LAWS SEVERELY LIMIT THE RIGHTS OF SHAREHOLDERS OF
HOLDINGS IF MEEMIC FAILS.
If MEEMIC fails to pay its debts as they become due, or liquidates or
reorganizes, the shareholders of Holdings will have no right to proceed against
the assets of MEEMIC or to cause its liquidation under federal or state
bankruptcy laws. Under the Michigan Insurance Code, all creditors of MEEMIC,
including policyholders, would be entitled to payment in full from MEEMIC's
assets before the shareholders of Holdings would be entitled to receive any
distribution from MEEMIC. See "Business of MEEMIC--Insurance Regulatory
Matters."
8
<PAGE>
FORWARD-LOOKING INFORMATION
This document contains forward-looking statements 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 those discussed under
"Risk Factors" and those listed below:
- 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; and
- adverse changes in applicable laws, regulations or rules governing
insurance holding companies and insurance companies, and environmental,
tax or accounting matters.
We do not undertake any obligation to publicly release any revisions which may
be made to any forward-looking statements to reflect events or circumstances
occuring after the date of this prospectus.
THE CONVERSION
PLAN OF CONVERSION
We are in the process of converting MEEMIC into a company that is owned by
shareholders. The terms of the conversion are governed by the Michigan Insurance
Code and our plan of conversion. The plan of conversion was approved by the
Michigan Insurance Bureau and was unanimously approved by MEEMIC's board of
directors. Before the offering and the conversion can be completed, the plan of
conversion must also be approved by at least two-thirds of the votes cast by
policyholders at a special meeting of policyholders to be held on ,
1999. You are entitled to vote at the meeting and participate in this offering
only if you were a policyholder on June 24, 1998, the date on which the board of
directors approved the plan of conversion. Once policyholders have approved the
plan of conversion, the conversion will be completed and become effective when
we file MEEMIC's revised articles of incorporation with the Bureau.
BACKGROUND
Two sets of transactions occurred during 1997 which are important for
potential investors to know about in order to understand the progression of
events leading to the conversion and this offering.
In April 1997, MEEMIC and Professionals completed the following series of
transactions.
- Professionals contributed $21.5 million to MEEMIC to increase MEEMIC's
working capital in exchange for a "surplus note" which bears interest at
8.5% per year and is payable on April 7, 2009. Principal and interest
generally may not be paid under the surplus note unless the payment is
approved by the Bureau and MEEMIC's board of directors and only if MEEMIC
had sufficient surplus earnings. Repayment of the surplus note is
subordinate to MEEMIC's other liabilities.
9
<PAGE>
- Professionals agreed to manage MEEMIC's operations and finances and to
provide information system services and strategic advice under a
management services agreement. MEEMIC pays a fee under this agreement
equal to $2.10 per month for each policy in force on the first day of the
month, up to a maximum of $2.1 million per year plus reasonable expenses.
The management services agreement expires in April 2007, but may be
terminated on 120 days written notice if the surplus note has been repaid.
- The MEEMIC directors resigned and were replaced on the board by nominees
of Professionals, giving Professionals control of MEEMIC.
- MEEMIC agreed to a quota share reinsurance arrangement with ProNational,
which became effective July 1, 1997. Under this arrangement, MEEMIC
transfers to ProNational a 40% share of its net liability resulting from
losses occurring under policies written or renewed during the term of the
agreement and pays to ProNational 40% of its net written premiums on these
policies. The amount of liabilities transferred is reduced by any other
applicable reinsurance and the amount paid by MEEMIC is reduced by a share
of MEEMIC's expenses. The reinsurance agreement can be terminated by
either company at any time after payment of the surplus note with 45 days
written notice. For more information regarding reinsurance, see "Business
of MEEMIC--Reinsurance Ceded."
Another important transaction in our development occurred in September 1997,
when MEEMIC, through a subsidiary, acquired the personal lines insurance agency
and life insurance agency operations of the companies acting as its exclusive
sales agency, along with the exclusive rights to sell and market our products.
The price of the acquisition was 3.75% of all premiums written through the
agency from the date of the acquisition through July 2004, with $22.5 million
paid at closing and at least an additional $20.5 million guaranteed. As a result
of the conversion, the sellers have the right to cause this obligation to be
paid immediately by adding $2 million to the minimum payment remaining unpaid
and then discounting the total unpaid amount to its present value. We considered
this acquisition to be vital to our long-term plan because it allowed us to
consolidate our marketing and sales functions and operate much more efficiently.
The $21.5 million invested by Professionals was used to pay the purchase price.
Professionals also provided a guarantee as security for the payment of the
remaining part of the purchase price.
ACTIONS OF THE INDEPENDENT COMMITTEE AND THE BOARD OF DIRECTORS
Following the acquisition of the sales agency, we began to consider
converting MEEMIC to a company owned by shareholders. Recognizing their
fiduciary obligations and the dual roles of Messrs. Adamo, Clinton and McCabe
and Ms. Flood as directors or officers of both MEEMIC and Professionals, the
board of directors established an independent committee composed of Messrs. Hoeg
and Kalinowski to determine whether MEEMIC should do a conversion.
ABN AMRO Incorporated, an independent investment banking firm knowledgeable
about the insurance industry and experienced in insurance company conversions
like the one being proposed, was retained to serve as a financial advisor to
MEEMIC and the independent committee and to determine an estimated market value
of the converted company after the conversion. With the assistance of ABN AMRO,
the independent committee reviewed strategic and financial alternatives to
determine whether MEEMIC should convert and, if it should, how the conversion
should be structured. The independent committee concluded, and advised the board
of directors, that Holdings should be formed for the purpose of holding the
stock of MEEMIC and that Holdings should offer its common stock to eligible
policyholders and officers and directors as part of a conversion plan drafted in
compliance with the Insurance Code.
As part of its advice to the independent committee and the board, ABN AMRO
estimated the market value of Holdings after the offering to be within a range
of $54 million to $66 million, with a
10
<PAGE>
mid-point valuation of $60 million. The independent committee was responsible
for preparing the plan of conversion and for negotiating the terms of the
conversion documents as they related to Professionals.
The independent committee, in recommending the conversion to the board of
directors, reached the following conclusions:
- the valuation analysis prepared by ABN AMRO provided a valuation which is
fair and equitable to policyholders from a financial point of view,
- the plan of conversion complied with the Insurance Code,
- the plan of conversion allocated subscription rights in a manner that is
fair to the policyholders,
- the conversion would not adversely affect the interests of the
policyholders, and
- the conversion would benefit policyholders and raise additional capital to
fund MEEMIC's future business plans.
The board approved the plan of conversion and the related transactions and
documentation on June 24, 1998. The board decided to proceed with the conversion
in order to
- increase our available funds to provide additional financial security for
our policyholders and to invest in technology to improve customer service,
- support our future product lines and growth,
- provide us with the ability to improve our operational flexibility by
providing alternatives for addressing the surplus note and related
agreements with Professionals,
- provide policyholders an opportunity to participate in our success,
- create incentives to officers, directors and employees to maximize our
performance, and
- provide a means for diversifying our business opportunities and improving
our ability to raise capital in the future.
The Bureau approved the plan of conversion and related documentation on
September 2, 1998.
INTERPRETATION AND AMENDMENT OF THE PLAN OF CONVERSION
The board of directors of MEEMIC has the exclusive authority to interpret
and apply the provisions of the plan of conversion to particular facts and
circumstances and to make all determinations necessary or desirable to implement
the plan of conversion. The plan of conversion states that any interpretation or
determination made by the board in good faith and based on the information and
assistance which were then reasonably available will be final, conclusive and
binding. The plan of conversion also states that neither MEEMIC nor its
directors, officers, employees or agents will be liable to any person in
connection with any such interpretation or determination.
The plan of conversion may only be amended, withdrawn or terminated by the
affirmative vote of not less than two-thirds ( 2/3) of the directors of MEEMIC
then in office AND approval of the Bureau.
STOCK PRICE AND NUMBER OF SHARES TO BE ISSUED
THE ESTIMATED VALUATION RANGE. The Insurance Code requires that the
subscription offering range be consistent with an independent appraisal of the
estimated market value of Holdings following the conversion of MEEMIC. Under the
Insurance Code, this amount may be discounted by an amount that the appraiser
deems necessary to attract full subscription for the shares. On June 24, 1998,
MEEMIC obtained an appraisal meeting these requirements from ABN AMRO. The
valuation analysis estimated
11
<PAGE>
the market value of Holdings following the conversion to be $60,000,000,
assuming completion of the transactions contemplated by the plan of conversion.
The valuation analysis included a discount, as permitted by the Insurance Code,
in an amount ABN AMRO deemed necessary to attract purchasers for all of the
shares offered in this offering. The valuation analysis was based upon a
combination of valuation methods including discounted cash flow analysis, an
analysis of comparable publicly traded companies and an analysis of comparable
converison transactions. The valuation analysis is intended to be an estimate of
the market value of Holdings and is not a recommendation as to the advisability
of purchasing the common stock. The valuation analysis did not address the
fairness of the April 7, 1997 transaction with Professionals, for which MEEMIC
obtained a separate fairness opinion from another investment banking firm.
MEEMIC, after consultation with ABN AMRO, established a valuation range at
$54,000,000 to $66,000,000. This estimated valuation range extends 10% below and
10% above the estimated pro forma market value of Holdings. The estimated
valuation range is intended to establish a range within which the conversion
will be completed, so long as Holdings raises capital equal to the minimum
amount through a combination of this offering and conversion of the surplus
note.
THE SUBSCRIPTION OFFERING RANGE. The estimated valuation range is from
$54,000,000 to $66,000,000. Under the plan of conversion, the minimum and
maximum number of shares being offered to eligible policyholders, officers and
directors was determined based on the following formula:
<TABLE>
<S> <C><C> <C> <C> <C> <C>
(a) Divide the minimum and maximum estimated values by $10.00 per share $54,000,000
---------- = 5,400,000
10
$66,000,000
---------- = 6,600,000
10
then (b) Subtract the 2,302,209 shares to be issued 5,400,000 - 2,302,209 = 3,097,791 shares
to Professionals in exchange for its 1997 investment 6,600,000 - 2,302,209 = 4,297,791 shares
in MEEMIC
</TABLE>
Accordingly, the number of shares sold in this offering will range from
3,097,791 to 4,297,791 shares.
THE STANDBY PURCHASE AND OPTION AGREEMENT
The standby purchase and option agreement between Holdings and Professionals
has two principal provisions affecting the offering. First, if policyholders,
officers and directors do not purchase the minimum 3,097,791 shares in the
offering, Professionals is required to purchase the remaining shares up to
3,097,791 shares at $10.00 per share. The effect of this provision is to
guarantee that at least 3,097,791 shares will be sold in this offering. Second,
if policyholders, officers and directors do not purchase the maximum 4,297,791
shares in the offering, Professionals has the right to purchase the remaining
shares at $10.00 per share. Professionals is not required to guarantee the sale
of the maximum number of shares.
In addition, the standby purchase and option agreement gives Professionals
an option to purchase on one occasion, beginning on the effective date of the
conversion and continuing for a one year period, up to the number of shares of
common stock necessary to cause Professionals to own 51% of the outstanding
shares of common stock. The calculation to determine the number of option shares
assumes that all of the 300,000 shares reserved under the stock compensation
plan are outstanding.
The exercise price of the option will be based on the market value of the
common stock when the option is exercised and will be at least $14.00 per share.
If the option is exercised by Professionals within the first 90 days immediately
following the conversion, Professionals will purchase each share at
12
<PAGE>
$14.00. Then, 120 calendar days after the effective date of the conversion, the
price per share purchased pursuant to the option will be adjusted if the fair
market value is higher than $14.00 per share and Professionals will pay the
difference at that time.
EXCHANGE OF THE SURPLUS NOTE
The plan of conversion provides that, upon completion of the conversion,
Professionals will also receive 2,302,209 shares of common stock in exchange for
the $21.5 million surplus note and interest accrued through November 1, 1998.
The surplus note also obligates us to issue these shares. The number of shares
was determined by dividing the outstanding balance due on the note with accrued
interest by the $10.00 per share offering price. The interest accrued on the
surplus note after November 1, 1998 will be paid by MEEMIC in cash. The surplus
note and the transaction in which it was issued are described under The
Conversion--Background."
MANAGEMENT PURCHASES
The Insurance Code permits officers and directors to receive subscription
rights in the offering to buy as many as 23% of the shares being offered, even
if they are not policyholders. The plan of conversion, however, limits the total
number of shares that officers and directors may buy to 10% of the shares being
offered, or 429,779 shares. Individual officers and directors may buy from 100
shares to 107,444 shares at $10.00 per share. If officers and directors buy
fewer than 429,779 shares, the remaining shares will be available for
policyholders to purchase. See "Security Ownership" for a table describing
intended purchases by officers and directors.
13
<PAGE>
PLAN OF DISTRIBUTION
SUBSCRIPTION RIGHTS
The 4,297,791 shares of common stock in this offering are being offered
through subscription rights. We are distributing a total of 108,048 subscription
rights, or one subscription right to each holder of a MEEMIC insurance policy on
June 24, 1998 and to each officer and director of MEEMIC. Policyholders who
owned more than one policy on that date are receiving one subscription right for
each policy.
A subscription right is a right to purchase Holdings common stock. You are
prohibited by law from transferring your subscription right or agreeing to
transfer the common stock you intend to purchase if you decide to exercise your
subscription right. If you violate this prohibition, your subscription right
will be terminated.
We are not paying any of our officers, directors or employees for selling
common stock in the offering, nor have we hired an underwriter, broker, dealer
or sales person in connection with the sale of common stock in the offering.
HOW TO PURCHASE COMMON STOCK
To buy common stock in the offering, sign and complete the enclosed stock
order form and send it to us with your payment in the envelope provided for
"Stock Reply" c/o ChaseMellon Shareholder Services, P.O. Box 3307, South
Hackensack, New Jersey 07606 no later than , 1999. Payment may be made by
check or money order payable to ChaseMellon Shareholder Services. Until the
conversion is completed, your payment will be held in a non-interest bearing
escrow account with Chase Manhattan Bank. If the conversion is completed, your
payment will be released to Holdings. If the conversion is terminated and not
completed, your payment will be returned to you promptly after the termination.
We will not honor your subscription if your stock order form
- is not delivered and is returned to you by the United States Postal
Service or we are unable to locate you,
- is not returned to us before 5:00 p.m. eastern time on , 1999,
- is not properly completed and signed, or
- is not accompanied by payment in full for the shares you intend to
purchase.
In addition, we reserve the right to reject any subscription received from
policyholders who live outside the State of Michigan. We will return any
rejected subscriptions. Alternatively, we may decide to waive any irregularity
relating to a stock order form or ask you to correct any errors in your
subscription by a specified date.
Once tendered, you cannot revoke your subscription without our consent. If
you want to revoke your subscription, you must submit to us, at the address set
forth above, a written request for a waiver that describes the circumstances
upon which your request is based.
MINIMUM AND MAXIMUM PURCHASES
If you decide to buy any shares, the minimum number of shares you may buy is
100 and the maximum number of shares you may buy is 10,744 for each policy you
held on June 24, 1998. Officers and directors may each buy up to 107,444,
subject to a maximum of 429,779 for all officers and directors as a group.
Fractional shares will not be sold. If you were not a MEEMIC policyholder on
June 24, 1998 or an officer or director, you are not entitled to purchase shares
in this offering.
14
<PAGE>
RULES FOR OVERSUBSCRIPTION
In the event of an oversubscription by either (1) eligible policyholders or
(2) officers and directors, common stock will be allocated among participants
within each of the two categories by reducing the subscriptions of those in the
oversubscribed category who subscribe for the largest number of shares. The
number of shares subscribed for by the participant with the largest subscription
will be reduced to the number of shares which have been subscribed for by the
participant with the second largest subscription in the oversubscribed category,
the second largest subscription will be reduced to the number of shares which
have been subscribed for by the participant with the third largest subscription
in the category and so on until there is no longer an oversubscription.
DELIVERY OF CERTIFICATES
We will deliver stock certificates to subscribers promptly after completion
of this offering. Until certificates for the common stock are available and
delivered to subscribers, subscribers may not be able to sell the shares of
common stock for which they have subscribed, even though trading of the common
stock will have commenced.
15
<PAGE>
USE OF PROCEEDS
The amount of proceeds available to Holdings from the sale of common stock
will depend upon the total number of shares of common stock actually sold in
this offering to subscribers and sold under the standby purchase and option
agreement to Professionals, as well as the actual expenses of the conversion.
See "The Conversion--The Standby Purchase and Option Agreement."
Holdings intends to donate $500,000 of the proceeds from this offering to
the MEEMIC Foundation. The board of directors of MEEMIC established the MEEMIC
Foundation as a tax-exempt charitable corporation in 1992. The purpose of the
MEEMIC Foundation is to support individuals and organizations dedicated to the
educational profession. The MEEMIC Foundation currently offers grants to
educational employees and educational institutions.
After payment of the contemplated donation to the MEEMIC Foundation,
Holdings intends to exchange all of the net proceeds from this offering except
approximately $3 million for all of the capital stock of MEEMIC to be issued in
the conversion. The net proceeds retained by Holdings will be available for a
variety of corporate purposes, including additional capital contributions,
future acquisitions and diversification of business.
The net proceeds paid to MEEMIC will become part of its capital, thereby
expanding underwriting capacity and permitting diversification of its business.
MEEMIC will use approximately $15 million of these proceeds to repay debt to the
sellers of the agency which may be accelerated as a result of the conversion
under the terms of the purchase agreement described under "The
Conversion--Background." See also "Pro Forma Data."
Set forth below are the estimated net proceeds to Holdings, assuming the
sale of common stock at the minimum, midpoint and maximum of the subscription
offering range, and the expected uses of proceeds by Holdings and MEEMIC. The
following information includes estimated expenses of $700,000. Actual expenses
may vary.
<TABLE>
<CAPTION>
MINIMUM OF MIDPOINT OF MAXIMUM OF
3,097,791 3,697,791 4,297,791
SHARES AT SHARES AT SHARES AT
$10.00 PER $10.00 PER $10.00 PER
SHARE SHARE SHARE
--------------- --------------- ---------------
<S> <C> <C> <C>
Gross proceeds of offering.................................... $ 30,977,910 $ 36,977,910 $ 42,977,910
Less offering expenses...................................... 700,000 700,000 700,000
Less donation to MEEMIC Foundation.......................... 500,000 500,000 500,000
--------------- --------------- ---------------
Net proceeds to Holdings...................................... $ 29,777,910 $ 35,777,910 $ 41,777,910
--------------- --------------- ---------------
--------------- --------------- ---------------
Use of proceeds by Holdings
Working capital of Holdings................................. $ 3,000,000 $ 3,000,000 $ 3,000,000
Capital contribution to MEEMIC
in exchange for MEEMIC stock.............................. 26,777,910 32,777,910 38,777,910
--------------- --------------- ---------------
--------------- --------------- ---------------
$ 29,777,910 $ 35,777,910 $ 41,777,910
--------------- --------------- ---------------
--------------- --------------- ---------------
Use of proceeds by MEEMIC
Estimated payment to agency shareholders.................... $ 15,000,000 $ 15,000,000 $ 15,000,000
Available working capital................................... 11,777,910 17,777,910 23,777,910
--------------- --------------- ---------------
$ 26,777,910 $ 32,777,910 $ 38,777,910
--------------- --------------- ---------------
--------------- --------------- ---------------
</TABLE>
We expect that the net proceeds from the sale of the minimum number of
shares of common stock in the offering will be sufficient to satisfy our working
capital needs for at least 60 months.
16
<PAGE>
CAPITALIZATION
The following table sets forth information regarding the historical
capitalization of MEEMIC at December 31, 1998 and the pro forma consolidated
capitalization of Holdings giving effect to the sale of common stock at the
minimum, midpoint and maximum of the offering range based upon the assumptions
set forth under "Use of Proceeds." The surplus note will be exchanged for
2,302,209 shares of common stock upon completion of the conversion. This table
does not reflect additional shares of common stock which could be purchased by
Professionals after the conversion pursuant to the standby purchase and option
agreement. The pro forma retained earnings reflect the estimated extraordinary
gain on early retirement of debt related to the agency acquisition. For
additional financial information, see the consolidated financial statements and
related notes appearing elsewhere in this document and the information under
"Pro Forma Data."
<TABLE>
<CAPTION>
PRO FORMA CONSOLIDATED CAPITALIZATION OF
HOLDINGS (IN THOUSANDS)
BASED ON THE SALE OF
HISTORICAL -------------------------------------------------
CONSOLIDATED 3,097,791 3,697,791 4,297,791
CAPITALIZATION OF SHARES AT SHARES AT SHARES AT
MEEMIC AT DECEMBER $10.00 PER $10.00 PER $10.00 PER
31, 1998 SHARE SHARE SHARE
------------------ --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Surplus note............................. $ 21,500 -- -- --
Shareholders' equity:
Common stock, no par value per share:
authorized--10,000,000 shares; shares
to be outstanding--as shown.......... -- $ 52,800 $ 58,800 $ 64,800
Retained earnings--unrestricted........ 50,376 52,498 52,498 52,498
Accumulated other comprehensive
income............................... 1,848 1,848 1,848 1,848
------- --------------- --------------- ---------------
Total shareholders' equity....... $ 52,224 $ 107,146 $ 113,146 $ 119,146
------- --------------- --------------- ---------------
------- --------------- --------------- ---------------
</TABLE>
17
<PAGE>
PRO FORMA DATA
On the effective date of the conversion, MEEMIC will become a wholly-owned
subsidiary of Holdings. Since Holdings is not currently an active entity and
will be the parent of MEEMIC, the following pro forma data is also
representative of Holdings.
The following pro forma consolidated balance sheet as of December 31, 1998,
gives effect to the conversion as if it had occurred as of December 31, 1998 and
assumes that the minimum 3,097,791 shares of common stock are sold in this
offering. The following pro forma consolidated statement of income for the year
ended December 31, 1998 presents consolidated operating results for MEEMIC as if
the conversion had occurred as of January 1, 1998.
When the conversion becomes effective, the following events will happen
simultaneously:
- MEEMIC will become a stock insurance company,
- the sale of Holdings common stock through this offering will be completed,
the shares will be issued and the proceeds will be received by Holdings,
- MEEMIC will issue all of the shares of its capital stock to Holdings and
will receive a portion of the proceeds from the offering, and
- Holdings will issue 2,302,209 shares of its common stock to Professionals
and the surplus note will be canceled.
The conversion will be accounted for as a simultaneous reorganization,
recapitalization and share offering which will not change the historical
accounting basis of MEEMIC financial statements. According to the plan of
conversion, the shares not purchased by policyholders, officers and directors in
this offering will be purchased by Professionals pursuant to a standby purchase
and option agreement up to 3,097,791 shares. Professionals may purchase any
shares not purchased by policyholders, officers and directors up to 4,297,791
shares.
Although it is possible that Professionals could own 100% of the common
stock after the conversion if none of the policyholders, directors or officers
purchase shares in the offering, officers and directors have indicated their
intention to purchase 282,250 shares, or 5.2% of the minimum number of shares
being offered. We therefore believe that the probability that Professionals will
own more than 95% of the common stock immediately after the conversion is
remote. As a result, the pro forma information does not present the effects of
"push-down" accounting.
The unaudited pro forma information does not necessarily represent what the
financial position or results of operations would have been had the conversion
occurred on the date indicated, or project the financial position or results of
operations for any future date or period. The pro forma adjustments are based on
available information and assumptions that we believe are reasonable. The
unaudited pro forma consolidated financial information should be read in
conjunction with the accompanying notes and the other financial information
pertaining to MEEMIC included elsewhere in this document.
The pro forma adjustments and pro forma consolidated amounts are provided
for informational purposes only. The financial statements of Holdings and MEEMIC
will reflect the effects of the conversion only from the date the conversion
actually occurs.
18
<PAGE>
MEEMIC HOLDINGS, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA COMPANY
HISTORICAL ADJUSTMENTS ADJUSTED FOR
MEEMIC FOR OFFERING OFFERING
------------ ------------- ------------
<S> <C> <C> <C>
ASSETS
Investments:
Fixed maturities available for sale, at fair
value......................................... $122,996,615 $122,996,615
Short-term investments, at cost, which
approximates fair value....................... 1,906,496 1,906,496
------------ ------------
Total investments........................... 124,903,111 124,903,111
Cash.............................................. 3,977,602 $ 29,777,910(a) 18,755,512
(15,000,000(c)
Premiums due from policyholders................... 3,840,764 3,840,764
Amounts recoverable from reinsurers............... 43,066,086 43,066,086
Amounts recoverable from reinsurers, related
party........................................... 16,193,962 16,193,962
Accrued investment income......................... 1,604,457 1,604,457
Deferred federal income taxes..................... 3,338,251 (1,093,198)(c) 2,245,053
Property and equipment, at cost, net of
accumulated depreciation........................ 2,148,550 2,148,550
Deferred policy acquisition costs................. 278,067 278,067
Intangible assets, net of amortization............ 39,268,400 39,268,400
Other assets...................................... 710,369 710,369
------------ ------------- ------------
Total assets.................................. $239,329,619 $ 13,684,712 $253,014,331
------------ ------------- ------------
------------ ------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Loss and loss adjustment expense reserves....... $ 92,297,908 $ 92,297,908
Unearned premiums............................... 31,585,769 31,585,769
Surplus note.................................... 21,500,000 $ (21,500,000)(b)
Payable related to acquisition.................. 18,215,289 (18,215,289)(c)
Accrued expenses and other liabilities.......... 8,386,744 8,386,744
Accrued expenses and other liabilities, related
party......................................... 2,356,815 (1,522,090)(b) 834,725
Premiums ceded payable.......................... 4,464,952 4,464,952
Premiums ceded payable, related party........... 7,552,920 7,552,920
Federal income taxes payable.................... 744,801 744,801
------------ ------------- ------------
Total liabilities............................. 187,105,198 (41,237,379) 145,867,819
------------ ------------- ------------
Shareholders' equity:
Common stock.................................... 29,777,910(a) 52,800,000
23,022,090(b)
Retained earnings............................... 50,375,927 2,122,091(c) 52,498,018
Accumulated other comprehensive income:
Net unrealized appreciation on investments,
net of deferred federal income taxes of
$952,254.................................... 1,848,494 1,848,494
------------ ------------- ------------
Total shareholders' equity...................... 52,224,421 54,922,091 107,146,512
------------ ------------- ------------
Total liabilities and shareholders' equity...... $239,329,619 $ 13,684,712 $253,014,331
------------ ------------- ------------
------------ ------------- ------------
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma financial
statements.
19
<PAGE>
MEEMIC HOLDINGS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA COMPANY
HISTORICAL ADJUSTMENTS FOR ADJUSTED FOR
MEEMIC OFFERING OFFERING
----------- ------------------ ------------
<S> <C> <C> <C>
Revenues and other income:
Net premiums earned.................................. $64,040,476 $ 64,040,476
Net investment income................................ 6,958,429 6,958,429
Net realized investment gains on fixed maturities.... 31,012 31,012
Other income......................................... 2,110,545 2,110,545
----------- ------------
Total revenues and other income.................... 73,140,462 73,140,462
----------- ------------
Expenses:
Losses and loss adjustment expenses, net............. 43,451,786 43,451,786
Policy acquisition and other underwriting expenses:
Other policy acquisition and underwriting
expenses......................................... 23,579,800 $ 634,114(a) 24,213,914
Ceding commissions, related party.................. (12,994,651) (12,994,651)
Management fees, related party..................... 2,073,425 (2,073,425)(a)
----------- ------------------ ------------
12,658,574 (1,439,311) 11,219,263
Interest expense, related party...................... 1,827,500 (1,827,500)(b)
Amortization expense................................. 2,940,914 2,940,914
Other expense........................................ 30,695 30,695
----------- ------------------ ------------
Total expenses..................................... 60,909,469 (3,266,811) 57,642,658
----------- ------------------ ------------
Income from operations before federal income
taxes............................................ 12,230,993 3,266,811 15,497,804
Federal income taxes................................... 3,561,466 1,110,716(c) 4,672,182
----------- ------------------ ------------
Income before extraordinary items.................. $ 8,669,527 $ 2,156,095 $ 10,825,622
----------- ------------------ ------------
----------- ------------------ ------------
Earnings per share data (d):
At shares to be issued from converted surplus note:
Income before extraordinary items per share of
common stock..................................... $ 4.70
------------
------------
Weighted average number of shares of common stock
outstanding...................................... 2,302,209
------------
------------
At minimum shares to be issued as adjusted for
offering:
Income before extraordinary items per share of
common stock..................................... $ 2.00
------------
------------
Weighted average number of shares of common stock
outstanding...................................... 5,400,000
------------
------------
At maximum shares to be issued as adjusted for
offering:
Income before extraordinary items per share of
common stock..................................... $ 1.64
------------
------------
Weighted average number of shares of common stock
outstanding...................................... 6,600,000
------------
------------
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma financial
statements.
20
<PAGE>
MEEMIC HOLDINGS, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
1. BALANCE SHEET:
The accompanying unaudited pro forma balance sheet as of December 31, 1998
has been prepared as if the following transactions had been consummated as of
December 31, 1998:
(a) Sale of 3,097,791 (minimum) shares of common stock in the offering at $10
per share:
<TABLE>
<S> <C>
Proceeds from the offering...................................................... $30,977,910
Less, estimated offering expenses............................................... (700,000)
Less, donation to MEEMIC Foundation............................................. (500,000)
-----------
Net proceeds $29,777,910
-----------
-----------
</TABLE>
In accordance with the plan of conversion, $500,000 of the proceeds will be
donated to the MEEMIC Foundation. The donation will be charged to operations
in the period the contribution is made to the Foundation. As this donation
will not have a continuing impact on the results of operations of MEEMIC it
is not included in the unaudited pro forma statement of income.
(b) Conversion of $21,500,000 surplus note plus accrued interest of $1,522,090
from January 1, 1998 to November 1, 1998 into 2,302,209 shares of common
stock at $10 per share.
<TABLE>
<S> <C>
Surplus note.................................................................... $21,500,000
Accrued interest through November 1, 1998....................................... 1,522,090
-----------
-----------
$23,022,090
-----------
-----------
</TABLE>
(c) Use of a portion of net proceeds to retire the payable related to
acquisition to former agency shareholders. The former agency shareholders
may elect to exercise an accelerated payment option on the payable related
to acquisition. The accelerated payment option will result in an additional
$2 million bonus payable, before applying a 7% discount to the entire unpaid
purchase price at time of option. The discount for early extinguishment of
debt will result in extraordinary income of $3,215,289 before federal income
taxes of $1,093,198, or $2,122,091 extraordinary income after federal taxes.
<TABLE>
<S> <C>
Balance of payable related to acquisition....................................... $18,215,289
Discount, net of bonus, related to option exercised............................. 3,215,289
-----------
Proceeds utilized for accelerated retirement.................................... $15,000,000
-----------
-----------
</TABLE>
(d) The pro forma balance sheet does not reflect the issuance of up to 300,000
share awards that would be available under the stock compensation plan. The
stock compensation plan will replace the existing incentive plan. Expenses
incurred under the stock compensation plan are expected to be comparable to
the current incentive plan.
(e) The unaudited pro forma consolidated balance sheet, as prepared, gives
effect to the sale of common stock at the minimum of the offering range
based upon the assumptions set forth under
21
<PAGE>
MEEMIC HOLDINGS, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
1. BALANCE SHEET: (CONTINUED)
"Use of Proceeds." The following table provides a comparison between the
sale of common stock at the minimum and maximum of the offering range.
<TABLE>
<CAPTION>
MINIMUM MAXIMUM
------------- -------------
<S> <C> <C>
Net proceeds from offering..................................... $ 29,777,910 $ 41,777,910
Conversion of surplus note..................................... $ 23,022,090 $ 23,022,090
</TABLE>
2. STATEMENT OF INCOME:
The accompanying unaudited pro forma statement of income for the year ended
December 31, 1998 presents results as if the transaction described in Note 1 of
the Notes to Unaudited Pro Forma Financial Statements had been consummated on
January 1, 1998. On September 22, 1997, MEEMIC's wholly owned subsidiary, MEEMIC
Insurance Services Corporation, purchased the assets of the personal lines and
life divisions of Michigan Educators Insurance Agency, Inc., including all
rights to distribute MEEMIC insurance products. In addition to purchasing the
rights to distribute MEEMIC insurance products, MEEMIC Insurance Services
Corporation purchased agency contracts to sell insurance for companies other
than MEEMIC. Management intends to continue selling individual life and personal
lines insurance products for other companies as the business complements MEEMIC
business. These companies offer products which are not available from MEEMIC or
write classes of business not acceptable to MEEMIC. Management will discontinue
writing commercial and group health insurance for other companies as these
products do not complement MEEMIC's core business and represented only 0.5%, or
approximately $75,000, of the agency's revenues.
(a) Reflect the termination of the management services agreement upon
conversion:
<TABLE>
<CAPTION>
YEAR
ENDED
12/31/98
-------------
<S> <C>
Eliminate management fees...................................................... $ 2,073,425
Expenses for replacement of management services................................ 634,114
-------------
$ 1,439,311
-------------
-------------
</TABLE>
(b) Eliminate interest expense on the surplus note exchanged for shares of
common stock.
(c) Increase income taxes to reflect the impact of items (a) and (b) above at
the statutory rate of 34%.
(d) Pro forma earnings per share is computed by dividing pro forma net income by
the weighted average number of shares of common stock that would have been
outstanding during the period. The pro forma weighted average common stock
outstanding is presented at both the minimum and maximum number of shares to
be issued in the conversion and consists of the following, as if they had
been outstanding since January 1, 1998:
<TABLE>
<CAPTION>
MINIMUM MAXIMUM
---------- ----------
<S> <C> <C>
Shares sold in the offering......................................... 3,097,791 4,297,791
Shares converted for surplus note................................... 2,302,209 2,302,209
---------- ----------
Weighted average common stock outstanding........................... 5,400,000 6,600,000
---------- ----------
---------- ----------
</TABLE>
22
<PAGE>
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
The following table sets forth selected consolidated financial data for
MEEMIC prior to the conversion at and for the periods indicated and should be
read in conjunction with the consolidated financial statements, and accompanying
notes and other financial information included elsewhere in this document as
well as "Management's Discussion and Analysis Of Financial Condition and Results
Of Operations." Statutory financial statistics are presented to provide
potential investors with information that can be readily compared to statistics
of other companies in the property and casualty insurance industry to evaluate
MEEMIC's performance. These statistics should be evaluated along with the
generally accepted accounting principles, or GAAP, information presented herein.
See Note 15 in "Notes to 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, as prescribed or
permitted by the Michigan Insurance Bureau. For a presentation of the pro forma
effect of this offering and related transactions on MEEMIC, see "Pro Forma
Data."
23
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
REVENUE DATA:
Direct premiums written....................................... $ 113,258 $ 106,350 $ 104,993 $ 98,917 $ 91,147
Net premiums written.......................................... 66,190 75,000 64,286 56,919 52,478
Net premiums earned........................................... 64,040 67,830 62,497 55,981 53,389
Net investment income......................................... 6,958 6,677 5,150 4,488 3,875
Net realized investment gains................................. 31 32 37 28 3
Other income.................................................. 2,111 841 588 587 488
--------- --------- --------- --------- ---------
Total revenues............................................ 73,140 75,380 68,272 61,084 57,755
LOSSES AND EXPENSES:
Losses and loss adjustment expenses......................... 43,452 47,302 44,872 38,815 41,300
Policy acquisition and other underwriting expenses.......... 12,659 16,690 16,074 16,248 16,769
Interest expense............................................ 1,827 1,342
Amortization expense........................................ 2,941 714
Other expense............................................... 31 31 11 9 29
--------- --------- --------- --------- ---------
Total expenses............................................ 60,910 66,079 60,957 55,072 58,098
Income from operations before federal income taxes............ 12,230 9,301 7,315 6,012 (343)
Federal income taxes.......................................... 3,561 2,672 2,064 1,558 (675)
--------- --------- --------- --------- ---------
Income before extraordinary items............................. 8,669 6,629 5,251 4,454 332
Extraordinary items........................................... (303)
--------- --------- --------- --------- ---------
Net income.................................................... $ 8,366 $ 6,629 $ 5,251 $ 4,454 $ 332
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
SELECTED BALANCE SHEET DATA:
Total investments........................................... $ 124,903 $ 111,543 $ 90,896 $ 73,371 $ 64,358
Total assets................................................ 239,330 214,858 155,775 134,843 121,949
Total liabilities........................................... 187,106 171,576 119,773 103,671 97,603
Total policyholders' surplus................................ 52,224 43,282 36,002 31,172 24,346
GAAP RATIOS:
Loss and loss adjustment expenses ratio(1).................. 67.8% 69.7% 71.8% 69.3% 77.4%
Policy acquisition and other underwriting expense
ratio(2).................................................. 19.8% 24.6% 25.7% 29.0% 31.4%
Combined ratio(3)........................................... 87.6% 94.3% 97.5% 98.3% 108.8%
STATUTORY DATA (AT PERIOD END):
Combined ratio(4)........................................... 92.9% 95.3% 97.5% 97.6% 108.0%
Industry combined ratio(5).................................. 100.3% 104.3% 105.2% 109.5%
Statutory surplus(6)........................................ $ 40,373 $ 34,513 $ 29,141 $ 24,407 $ 20,145
Ratio of statutory net written premiums to statutory
surplus................................................... 1.64 2.17 2.21 2.33 2.61
PRO FORMA DATA(7):
Income before extraordinary items........................... $ 10,826
Earnings per share data:
At shares to be issued from converted surplus note
Income before extraordinary items per share of common
stock................................................. $ 4.70
Weighted average number of shares of common stock
outstanding........................................... 2,302,209
At minimum shares to be issued as adjusted for offering:
Income before extraordinary items per share of common
stock................................................. $ 2.00
Weighted average number of shares of common stock
outstanding........................................... 5,400,000
At maximum shares to be issued as adjusted for offering:
Income before extraordinary items per share of common
stock................................................. $ 1.64
Weighted average number of shares of common stock
outstanding........................................... 6,600,000
</TABLE>
- ------------------------
(1) Calculated by dividing losses and loss adjustment expenses by net premiums
earned.
(2) Calculated by dividing other underwriting expenses by net premiums earned.
(3) The sum of the GAAP loss and loss adjustment expense ratio and the total
underwriting expense ratio.
(4) The sum of the statutory loss and loss adjustment expense ratio and the
total underwriting expense ratio.
(5) As reported by A.M. Best, an independent insurance rating organization,
Best's Aggregate & Averages--Property--Casualty (Priv. Pass. Automobile and
Homeowners Quantitative Analysis Report). Data unavailable for the year
ended December 31, 1998.
(6) Statutory surplus at December 31, 1998 and 1997 includes the $21.5 million
surplus note. The statutory surplus at December 31, 1998 and 1997 excludes
MEEMIC's $22.5 million investment in subsidiary, MEEMIC Insurance Services
Corporation that was acquired on September 22, 1997 and is a non-admitted
asset for statutory reporting purposes.
(7) Information excerpted from unaudited pro forma consolidated statement of
income for the year ended December 31, 1998, which gives effect to the
conversion as if it had occurred on January 1, 1998. The weighted average
number of shares outstanding is assumed to be unchanged during the period
and is presented at both the minimum and maximum number of shares to be
issued in the offering. See "Pro Forma Data."
24
<PAGE>
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 related discussion should be read in conjunction with the
consolidated financial statements of MEEMIC and related notes, which appear
elsewhere in the prospectus.
OVERVIEW
MEEMIC provides private passenger automobile and homeowners insurance
primarily to educational employees and their immediate families in the State of
Michigan. On September 22, 1997, MEEMIC purchased the operations of its
exclusive sales agency, including the exclusive rights to sell and market MEEMIC
products. 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 December 31, 1998, we had over 112,000
policies in force, representing 155,211 insured vehicles and 29,699 homeowner
units.
FINANCIAL CONDITION
Our total assets increased to $239.3 million at December 31, 1998 as
compared to $214.9 million at December 31, 1997. The substantial increase in
1997 is the result of the $21,500,000 capital infusion from Professionals which
was used to purchase selected assets of the agency (including all rights to
distribute MEEMIC insurance products) for a purchase price equal to 3.75% of all
premiums written through the agency through July 14, 2004, subject to a
guaranteed minimum payment of $43 million. In addition to purchasing the rights
to distribute MEEMIC insurance products, MEEMIC Insurance Services Corporation
purchased agency contracts to sell insurance for companies other than MEEMIC. We
will continue selling individual life and personal lines insurance products for
other companies as the business complements MEEMIC business. These companies
offer products which are not available from MEEMIC or write classes of business
not acceptable to MEEMIC. We will discontinue writing commercial and group
health insurance for other companies as these products do not complement our
core business and represented only 0.5%, or approximately $75,000, of the
agency's revenues.
The majority of our assets consist of bonds, some preferred stocks, cash and
short-term investments, that in total were $128,880,713 at December 31, 1998 and
$113,747,580 at December 31, 1997. 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. As of
December 31, 1998 and 1997 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
$2,870,316 and $69,568, respectively, at December 31, 1998 and $1,995,059 and
$67,669, respectively, at December 31, 1997. 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.
We are continuing to improve our rate adequacy review and loss estimation
process by implementing new actuarial system software to interface with our new
policy and claims system. These revisions along with the restructuring of
territories for rating purposes will enable us to price products more
competitively for the risks we insure. Our recorded estimates of loss and loss
adjustment expense reserves totaled $92.3 million at December 31, 1998, compared
to $84.9 million at December 31, 1997.
25
<PAGE>
The $7.4 million increase in reserves for 1998 and the $4.6 million increase in
reserves for 1997 are attributable to general allowances for growth in the
number of insured vehicles and homeowner policies in force. Reserves for losses
incurred prior to 1998 were reduced by $3.62 million during 1998 as a result of
favorable development in estimates of prior years' reserves on auto liability.
Reserves for losses incurred prior to 1997 were reduced by $6.75 million during
1997. This was caused by the unanticipated reduction in the frequency of claims.
Management believes 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. As additional data subsequent to the tort reform
emerges, we anticipate greater stability and accuracy 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, 1998 and 1997 have been certified by an independent
actuarial firm and are believed to be a reasonable provision for all unpaid loss
and loss expense obligations of MEEMIC under the terms of its policies and
agreements.
At December 31, 1998 and 1997 unearned premiums were $31.6 million and $29.4
million, respectively. The increase in unearned premiums at December 31, 1998
compared to December 31, 1997 of 7.5% is comparable to the growth in premiums
written.
Other liabilities at December 31, 1998 were $63.2 million and at the end of
1997 were $57.2 million. The increase in 1998 is due to the timing of our
payments for state association assessments, payroll and retirement plan
contributions. Additionally, the liabilities at December 31, 1998 and December
31, 1997 include $1,827,500 and $1,341,835, respectively, for interest on the
$21.5 million surplus note and management fees of $529,315 and $504,109,
respectively, due to Professionals.
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--YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED
DECEMBER 31, 1997
Net income for 1998 was $8,366,432 compared to $6,629,161 for 1997. MEEMIC's
surplus increased by over 20% to $52,224,421 at December 31, 1998. In 1997
MEEMIC's policyholder surplus also increased by over 20% to $43,281,572 at
December 31, 1997. Expenses relating to interest on the surplus note and
management fees to Professionals amounted to $3.9 million in 1998 compared to
$2.3 million in 1997.
Our combined ratio improved for the fourth consecutive year and was 87.6%
for 1998 compared to 94.3% for 1997. Our income from operations was $12,230,993
for 1998 compared to $9,301,400 for
26
<PAGE>
1997, and the after-tax return on equity was 19.3% in 1998 compared to 18.4% in
1997. Overall, our loss ratio for 1998 was 56.6% compared to 58.7% for 1997. The
auto liability loss ratio for 1998 improved to 47.5% from 52.4% for 1997, and
the auto physical damage loss ratio for 1998 improved to 58.5% from 59.8% for
1997. The homeowner loss ratio for 1998 also improved to 79.1% from 83.7% for
1997. These positive results are despite two severe Michigan storms occurring on
May 31 and July 21, 1998 that resulted in $1,700,000 in direct losses,
$1,000,000 in net losses after reinsurance and 2,020 reported claims. The
favorable combined ratio in 1998 is attributable to: (i) continued overall
favorable claims experience with reductions in claim frequency that more than
offset increases in claim severity for 1998 compared to 1997, and (ii) reduced
reinsurance rates from the 1998 contracts. Our underwriting gain for 1997 is
primarily the result of more favorable claims experience and reduced rates from
the 1997 reinsurance contracts.
We continued to reduce expenses and improve operational efficiencies in
1998. For the seventh consecutive year, our other underwriting expenses ratio
has declined, and was 19.8% in 1998 compared to 24.6% in 1997. The significant
decrease in 1998 was primarily due to the reduction in commission expense as a
result of our acquisition of the agency.
Net investment income before interest expense was $6,958,429 for 1998
compared to $6,676,783 for 1997. Interest expense on the surplus note was
$1,827,500 for 1998 and $1,341,835 for 1997. Gross realized gains and losses
were $40,885 and $9,873 for 1998, and were $33,026 and $812 for 1997,
respectively. 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 6.74% for 1998 and was 6.89% for 1997.
Our direct written premiums have increased 6.5% in 1998 due to policyholder
growth and a 7.6% homeowner rate increase that went into effect October 1, 1998.
Total direct premiums written increased to $113,257,949 in 1998 from
$106,349,578 in 1997. With the continued growth in our homeowners business, our
product mix in terms of exposures by line is now 16% homeowners and 84% personal
automobile. Net premiums written in 1998 decreased to $66,190,153, or 11.7% from
1997. The decrease in net premiums written for 1998 was due to the change in
quota share reinsurance contracts whereby we ceded more premiums in 1998 than in
1997. Net premiums earned for 1998 were $64,040,476 compared to $67,830,283 for
1997. The 5.6% decrease in net premiums earned in 1998 is also as a result of
changes in the terms and timing of our reinsurance contracts which resulted in
more premiums being ceded in 1998 than in 1997.
Direct premiums written during 1998 for automobile coverage increased 5.1%
to $103,492,386 from $98,471,060 in 1997. The number of insured vehicles
increased 5.6% to 155,211 at December 31, 1998 from 146,994 at December 31,
1997.
Our homeowners business also continued to increase. Direct premiums written
during 1998 for homeowners increased 24% to $9,765,563 from $7,878,519 in 1997.
The number of homeowner policies in force increased 18.3% to 29,699 at December
31, 1998 from 25,114 at December 31, 1997.
RESULTS OF OPERATIONS--YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED
DECEMBER 31, 1996
Net income for 1997 was $6,629,161 compared to $5,250,901 for 1996. MEEMIC's
surplus increased by over 20% to $43,281,572 at December 31, 1997. In 1996
MEEMIC's policyholder surplus increased by over 15% to $36,001,514 at December
31, 1996. MEEMIC's profitability for 1997 was primarily the result of more
favorable claims experience and reduced rates from the 1997 reinsurance
contracts.
Our combined ratio improved for the third consecutive year and was 94.3% for
1997 compared to 97.5% for 1996. Our income from operations was $9,301,400 for
1997 compared to $7,315,206 for 1996, and the after tax return on equity was
18.4% in 1997 compared to 16.8% in 1996. Overall, our loss
27
<PAGE>
ratio for 1997 was 58.7% compared to 62.5% for 1996. The 1997 auto liability
loss ratio improved to 52.4% from 59.0% in 1996 due to decreases in both claim
frequency and severity. The 1997 auto physical damage loss ratio also improved,
to 59.8% from 64.8% in 1996, and is due to: (i) a reduction in claim frequency
that offset an increase in claim severity for 1997 compared to 1996 and (ii) the
effects on physical damage premium rate adjustments. The homeowner loss ratio
increased to 83.7% in 1997 from 67.6% in 1996. The increase in loss ratio was
due to a severe storm in Michigan that occurred in July 1997.
We continued to reduce expenses and improve operational efficiencies in
1997. For the sixth consecutive year, our other underwriting expenses ratio has
declined, and was 24.6% in 1997 compared to 25.7% in 1996. This decline in 1997
occurred despite various additional expenses related to the agency acquisition,
management fees paid to Professionals and new computer systems that aggregated
$2 million.
Net investment income before interest expense was $6,676,783 for 1997
compared to $5,150,035 for 1996. Gross realized gains and losses were $33,026
and $812 for 1997 and were $37,085 and $370 for 1996, respectively. The increase
in net investment income was due principally to increases in invested assets
because of positive cash flows from operations. During 1997, we had interest
expense of $1,341,835 from the $21,500,000 surplus note that was issued to
ProNational at an annual rate of 8.5%. This note, dated April 7, 1997, allowed
us to obtain capital needed to purchase assets of the agency, including all
rights to distribute MEEMIC insurance products. 1996 did not have any interest
expense. The annualized total rate of return, which includes both income and
changes in market value of securities, was 6.89% for 1997 and 4.75% for 1996.
Our premium growth for 1997 was steady. Total direct premiums written
increased to $106,349,578 in 1997 from $104,992,855 in 1996. The 1.3% increase
in 1997 direct premiums written was distorted by the inclusion of the Michigan
Catastrophic Claims Association assessments, which decreased by 79.4% during
1997. Written premiums excluding the MCCA assessments increased 9.9% over 1996,
and was due primarily to an increase of 3.4% in the number of insured vehicles,
a rate increase in auto physical damage premiums, a 14% increase in homeowner
policies in force, and a 4.5% homeowner rate increase that went into effect
January 1, 1997. With the continued growth in our homeowners, our product mix in
terms of premiums written by line was 7.4% homeowners and 92.6% personal
automobile as of December 31, 1997. Net premiums written in 1997 increased to
$75,000,233 or 16.7% from 1996. Our net premiums written increased substantially
more in 1997 than the direct premiums written as a result of the reduction in
the MCCA statutory assessment and more favorable reinsurance rates in 1997. Net
premiums earned increased 8.5% in 1997 to $67,830,283 and lagged increases in
net premiums written due to the business growth and differences in when
revisions for quota share reinsurance and rate adjustments became effective,
versus when they were earned for accounting purposes.
Direct premiums written during 1997 for automobile coverage were $98,471,060
compared to 1996 direct premiums written of $98,425,097. This apparent lack of
change in auto direct premiums written was actually comprised of an increase in
the number of insured vehicles from 141,130 to 146,994, which was offset by a
decrease in the MCCA premium assessments.
Our homeowner business continued to steadily grow since it was first
introduced in 1992. Direct premiums written during 1997 for homeowners increased
20% to $7,878,519, and the number of homeowner policies in force at December 31,
1997, increased 14% to 25,114.
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.
28
<PAGE>
On April 7, 1997, MEEMIC issued the surplus note for $21.5 million, with
interest payable annually at a 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. On May 26, 1998, we paid accrued interest for 1997 of $1,341,835
following the receipt of approval from the Bureau and our board. The surplus
note will be exchanged for Holdings common stock as part of the conversion.
On September 22, 1997, MEEMIC completed its acquisition of the agency. The
$21.5 million proceeds of the surplus note purchased by ProNational, an
additional $1 million in MEEMIC cash, plus any amounts to be paid on an
earned-out basis from current commission levels were used for the acquisition.
MEEMIC is currently pursuing the conversion 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 the $500,000 donation to the MEEMIC Foundation. The increased capital
resources from the conversion will also allow MEEMIC to retire liabilities under
the terms of the agency purchase agreement and improve operational flexibility
and financial capabilities for business and regulatory purposes. 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
$2.1 million for a 12 month contract period in 1998 compared to $1.0 million for
a nine month contract period in 1997. On September 22, 1997, the annualized
management fee increased from $1 million per year to $2 million per year as a
result of the purchase of the agency. Upon conversion, the management services
agreement will be terminated and these two officers will become MEEMIC
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.
Under the terms of the quota share reinsurance contract with ProNational,
the conversion will permit MEEMIC to terminate the contract. MEEMIC will review
the need for the quota share reinsurance contract on a periodic basis. MEEMIC
does not anticipate any changes in the pricing of premiums, in reinsurance or
other arrangements upon consummation of the conversion.
Cash provided by operations for the year 1998 was $17,141,959 compared to
$21,644,969 in 1997. The $4.5 million difference in cash provided by operations
for the year 1998 compared to 1997 is primarily due to returned reinsurance
premiums in 1997 from a cancelled contract, and increased 1998 ceded premiums
paid for which ceded losses are not recovered until the losses are paid. The
$3.6 million increase in 1997 is due to the increase in net premiums written,
which was partially reduced by additional federal income taxes of approximately
$2 million required to be paid in 1997, and approximately $1 million from
operations of the new insurance agency subsidiary. Additionally, in the third
quarter of 1997 approximately $4.5 million was received in returned reinsurance
premiums as a result of terminating the auto physical damage quota share on June
30, 1997.
Cash provided by operations and deemed available for investment was employed
in full compliance with MEEMIC's investment policy. Likewise, proceeds,
substantially from matured and called investments of $13,881,163 for the year
1998 and $15,355,796 for 1997, were reinvested in similar high quality
investments. During 1998, 1997 and 1996, we did not have any significant
voluntary sales of our long-term fixed maturity securities.
EFFECTS OF INFLATION
The effects of inflation on MEEMIC 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
29
<PAGE>
MEEMIC's results of operations cannot be accurately known until the ultimate
settlement of claims. However, based upon the actual results reported to date,
it is management's opinion that MEEMIC'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
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, 1999. 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.
The American Institute of Certified Public Accountants has issued Statement
of Position, or SOP, 97-3 "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments" which is effective for financial statements for
fiscal years beginning after December 15, 1998. SOP 97-3 requires that insurance
entities and other enterprises subject to assessments should recognize
liabilities for insurance-related assessments when applicable conditions are
met. While assessments to date have not been significant, we are unable to
predict if future assessments as recorded under SOP 97-3 would have a material
effect on our financial position.
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.
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 MEEMIC, 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.
30
<PAGE>
We are vulnerable to interest rate risk because, like other insurance
companies, we invest primarily in fixed maturity securities, which are
interest-sensitive assets. Mortgage-backed securities, which make up
approximately 20% of our investment portfolio, are particularly susceptible to
interest rate changes. We invest primarily in classes of mortgage-backed
securities that are less subject to prepayment risk and, as a result, somewhat
less susceptible to interest rate risk than other mortgage-backed securities.
Our investment portfolio was valued at $123 million at December 31, 1998 and
had a duration of 2.7. The following table shows the effects of a change in
interest rate on the fair value and duration of our portfolio. We have assumed
an immediate increase or decrease of 1% or 2% in interest rate. You should not
consider this assumption or the values shown in the table to be a prediction of
actual future results.
<TABLE>
<CAPTION>
PORTFOLIO CHANGE MODIFIED
CHANGE IN RATES VALUE IN VALUE DURATION
- ------------------------------------------------------ ---------- --------- -----------
<S> <C> <C> <C>
(DOLLARS IN
THOUSANDS)
+2%............................................... $ 115,585 $ (7,412) 3.26
+1%............................................... $ 119,324 $ (3,673) 3.15
0................................................ $ 122,997 2.7
-1%............................................... $ 126,100 $ 3,103 2.43
-2%............................................... $ 129,050 $ 6,053 2.50
</TABLE>
The other financial instruments, which include cash, premiums due from
reinsurers and accrued investment income, do not produce a significant
difference in fair value when included in the market risk analysis due to their
short-term nature. The surplus note is not affected by market risk as it will be
exchanged for common stock during the conversion, nor is the payable related to
acquisition significantly affected by market risk as the discount rate for early
extinguishment is fixed.
MARKET FOR THE COMMON STOCK
Holdings has never issued any capital stock. Consequently, there is no
established market for the common stock. Holdings has applied to have the common
stock approved for quotation on the Nasdaq National Market under the symbol
"MEMH" upon completion of the conversion. Approval of the application to list
the shares is subject to the satisfaction of various conditions, including a
minimum number of public shareholders and a minimum number and value of shares
held by persons other than Professionals and officers and directors of Holdings
and its subsidiaries. If the conditions to listing on the Nasdaq National Market
are not satisfied, Holdings may seek to have its common stock listed on the
Nasdaq SmallCap Market or on a regional stock exchange with less stringent
requirements than the Nasdaq National Market. Failure to qualify for listing on
the Nasdaq National Market may have an adverse effect on the marketability of
the common stock after the conversion.
Three firms (including ABN AMRO) have indicated their willingness to act as
market makers for the common stock upon completion of the conversion, subject to
market conditions and compliance with applicable laws and regulatory
requirements. The development of a public market having the desirable
characteristics of depth, liquidity and orderliness, however, depends upon the
presence in the marketplace of a sufficient number of willing buyers and sellers
at any given time, over which neither Holdings nor any market maker has any
control. Accordingly, there can be no assurance that an established and liquid
market for the common stock will develop, or if one develops, that it will
continue. Furthermore, there can be no assurance that purchasers will be able to
resell their shares of common stock at or above the purchase price after the
conversion or that the market makers will continue for any specified time to act
as such.
DIVIDEND POLICY
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 Insurance Code.
See "Business of MEEMIC--Insurance Regulatory Matters." Holdings does not intend
to pay any cash dividends in the foreseeable future.
31
<PAGE>
BUSINESS OF MEEMIC
GENERAL
MEEMIC was incorporated in Michigan on August 10, 1949 and began business
April 7, 1950. MEEMIC offers personal lines insurance primarily to educational
employees and their immediate families in the State of Michigan. Full coverage
private passenger automobile is the dominant line of business representing
approximately 90% of all business written. In 1992, MEEMIC entered Michigan's
homeowners market which currently represents the remainder of its direct
writings. All business is produced through MEEMIC's exclusive sales agency. Most
of the approximately 90 sales representatives of the sales agency are members of
the educational community and therefore are engaged in peer selling. As of
December 31, 1998, MEEMIC had in excess of 112,000 policies in force and had
total consolidated assets of $239 million.
HOLDINGS
Holdings was incorporated in Michigan in October 1998 to be the holding
company for MEEMIC after the conversion. Before the conversion, Holdings will
not engage in any significant operations. After the conversion, MEEMIC will
become a wholly-owned subsidiary of Holdings. The primary assets of Holdings
will be the outstanding capital stock of MEEMIC and a portion of the net
proceeds of the offering.
STRATEGY
MEEMIC's principal future strategies are to
- respond to the needs of its policyholders by increasing its product line;
- increase its presence in under-served areas of the state of Michigan;
- diversify geographically by entering other states, either through
licensing of MEEMIC in other jurisdictions or acquisition; and
- reduce the expense ratio and maintain a high level of customer service
through continued enhancement of MEEMIC's information and processing
systems.
We have started implementing these strategies and we view the conversion as
a critical component of our strategic plan. The additional capital generated by
the conversion will permit us to accelerate putting these strategies into place.
To implement these strategies, we need funding to research and develop new
products, appoint and train additional sales representatives and invest in new
technology. The net proceeds from this offering will supply the additional funds
necessary to support additional costs needed to implement these strategies for
the next five years and provide additional funds necessary to support increased
premium volume. In addition, the conversion and holding company structure will
provide access to a broader range of financing sources by allowing us to sell
equity and debt securities to the general public and to institutional investors
who might not be able to invest in a privately held company. It will also allow
us to use our stock instead of cash to acquire other companies if we determine
that course to be prudent.
EXPAND PRODUCT OFFERINGS. We recognize that the educational community has
insurance needs beyond personal automobile and homeowners. Our vision is to
become the company of choice to the educational community for insurance
services. We expect to increase premium volume and retention through the
addition of products providing coverage for such lines as recreational vehicles
and personal umbrellas.
32
<PAGE>
We recently formed a product development department and hired a product
manager to assess the risks associated with new lines, determine the best price
for new products and help us coordinate the sale of new products with the sales
force. By meeting the policyholders' need for a variety of products, we believe
we can increase premium volume on current product lines as well as through sales
of new products.
INCREASED PRESENCE IN UNDER-SERVED AREAS OF MICHIGAN. With the our
acquisition of the sales agency in 1997, we have positioned ourselves to better
control the sales and marketing of our products. We have started programs to
better equip our sales force with the tools they need to service current
policyholders and attract new policyholders.
Even though our sales agency has approximately 90 sales representatives
throughout the state, there are still many school districts without MEEMIC
representation. We have started an aggressive campaign to appoint new producers
and sub-producers to improve penetration of our products. A field marketing
employee and a marketing trainer were added at the end of 1997 to give support
to current sales representatives and help in making new sales representatives
productive as quickly as possible.
GEOGRAPHIC EXPANSION. Our goal is to achieve geographic diversification of
risk outside of the State of Michigan in states which have different exposure to
loss and regulatory environments that do not present undue regulatory
interference. MEEMIC intends to achieve this goal through internal growth but it
will examine opportunities for acquisition. These expansion efforts are not
expected to begin for at least two years.
EXPANDED SERVICE CAPABILITIES. We have historically been successful at
retaining policyholders. Approximately 95% of policyholders continue after the
first term, 87% continue after five years and some policyholders that started
with MEEMIC in our first year of business are still on the books after 48 years.
However, we know that we cannot continue with these retention rates in today's
environment without enhancing our strong commitment to customer service. In
1998, we implemented a customer service department designed to receive and
quickly resolve inquiries from policyholders. In addition, it will provide us
access to policyholder feedback on how we can better serve our customers in the
future.
We also recognized several years ago that we could not expand without
upgrading our information and processing system. To date, we have replaced the
policy processing and claims systems and added a document management system.
Currently underway are upgrades to the financial information systems, an agency
system that provides a single entry, multiple company interface for the sales
representatives and the telephone systems to make our customer service center
more efficient.
Goals of these new systems center on faster service to policyholders through
reduced turnaround time on all transactions, expanded billing options, reduced
paper handling and improved internal reporting. Streamlining operations through
the use of technology will also help in improving on MEEMIC's expense ratio.
These are ongoing projects and capital raised through the conversion will be
used to continue improving operations and service to policyholders.
33
<PAGE>
PRODUCTS
MEEMIC offers full coverage private passenger automobile and homeowners
insurance primarily for educational employees and their immediate families in
Michigan. Full coverage private passenger automobile is the dominant line,
representing approximately 90% of direct premiums written, with homeowners
coverages representing the balance. The following table sets forth the direct
premiums written, net premiums earned, net loss ratios, expense ratios and
combined ratios by product line for the periods indicated. The ratios are
explained in "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
% OF % OF % OF
1998 TOTAL 1997 TOTAL 1996 TOTAL
----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Direct premiums written:
Homeowner................................................ $ 9,765,563 8.6% $ 7,878,519 7.4% $ 6,567,757 6.3%
Personal automobile...................................... 103,492,386 91.4% 98,471,060 92.6% 98,425,097 93.7%
----------- --------- ----------- --------- ----------- ---------
Total.................................................. $113,257,949 100.0% $106,349,579 100.0% $104,992,854 100.0%
----------- --------- ----------- --------- ----------- ---------
----------- --------- ----------- --------- ----------- ---------
Net premiums earned:
Homeowner................................................ $ 4,743,946 7.4% $ 5,129,706 7.6% $ 5,366,784 8.6%
Personal automobile...................................... 59,296,530 92.6% 62,700,577 92.4% 57,130,103 91.4%
----------- --------- ----------- --------- ----------- ---------
Total.................................................. $64,040,476 100.0% $67,830,283 100.0% $62,496,887 100.0%
----------- --------- ----------- --------- ----------- ---------
----------- --------- ----------- --------- ----------- ---------
Loss and loss adjustment expenses ratios:
Homeowner................................................ 93.0% 92.9% 78.3%
Personal automobile...................................... 65.8% 62.7% 71.2%
Total.................................................. 67.8% 69.7% 71.8%
Underwriting expense ratios:
Homeowner................................................ 29.6% 36.8% 33.6%
Personal automobile...................................... 19.1% 23.7% 24.9%
Total.................................................. 19.8% 24.6% 25.7%
Combined ratios:
Homeowner................................................ 122.6% 129.7% 111.9%
Personal automobile...................................... 84.9% 86.4% 96.1%
Total.................................................. 87.6% 94.3% 97.5%
</TABLE>
HOMEOWNERS. MEEMIC entered the homeowners market in Michigan in 1992 with a
multi-peril policy for homeowners, condominium owners and renters. The
homeowners policy, in addition to insuring the policyholder's primary residence,
provides optional coverage for seasonal homes, dwellings under construction and
some forms of watercraft. As of December 31, 1998, MEEMIC had 29,699 homeowner
policies in force.
PERSONAL AUTOMOBILE. MEEMIC's personal automobile policy provides
policyholders with protection against claims resulting from bodily injury and
property liability and automobile physical damage. When sold in conjunction with
a homeowners policy, MEEMIC provides a multi-policy discount. As of December 31,
1998, MEEMIC had 82,963 personal automobile policies in force.
MARKETING
MEEMIC markets its products through over 90 sales representatives associated
with our sales 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 engage in peer selling.
34
<PAGE>
Although we underwrite approximately 90% of the business produced by our
sales agency, the agency represents and receives sales commissions from other
insurance carriers which 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 use in the future.
The agency conducts quarterly meetings with its sales representatives,
establishes benchmarks and goals, conducts technical training and sponsors
continuing education programs. The agency 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. The agency
recruits and trains new sales representatives to work in underserviced areas of
the state. MEEMIC pays a fixed commission to the agency, which in turn pays its
sales representatives a fixed base commission with some opportunity for a
contingent bonus, based upon the agent's production.
As of December 31, 1998, one sales representative accounted for over 5.5% of
direct premiums written by MEEMIC. No other sales representative accounted for
more than 5% of direct premiums written. The top 10 representatives accounted
for 35% of direct premiums written.
MEEMIC provides personal computer software that allows sales representatives
to quote rates for 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. Information contained on MEEMIC's home page is not part of this
prospectus, and the offering is being made only on the basis of information
contained in this prospectus.
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 and
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 22 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 64 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
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.
35
<PAGE>
Audits of liability claim files are conducted regularly by claims department
managers and reinsurers. Less than 1% of all claims result in litigation. The
majority of litigation is handled by MEEMIC's in-house legal counsel and
monitored by the claims department.
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."
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, 1998
and 1997, MEEMIC ceded to reinsurers $47.1 million and $37.9 million of earned
premiums, respectively.
MEEMIC's reinsurance arrangements are generally renegotiated annually.
Coverages described herein are in place for 1999.
MEEMIC's largest net insured amount on any risk is $150,000. Individual
property risks in excess of $150,000 are covered on an excess of loss basis up
to $1,000,000 per risk. Casualty risks that are in excess of $150,000 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.
Catastrophic reinsurance protects the ceding insurer 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 and homeowners property damage in four layers up to $13,500,000
in excess of $500,000 with each layer subject to a retention of 5%.
We have a quota share reinsurance arrangement with ProNational under which
we retain 60% and cede 40% of our liability remaining after the effects of our
other reinsurance contracts. This arrangement protects us from high frequency
and low severity type losses. We pay ProNational a reinsurance premium equal to
40% of premiums collected net of other reinsurance costs. Reinsurance premiums
due ProNational are reduced by an amount equal to our actual expenses, or
approximately 30% of the reinsurance premium. Although quota share reinsurance
reduces our risk of loss, it also reduces our potential underwriting profits.
The quota share reinsurance arrangement with ProNational has had, and will have,
a material effect on our financial condition and results of operations.
The following table identifies our principal reinsurers, their percentage
participation in our aggregate reinsured risk based upon premiums paid by MEEMIC
during 1998 and their respective A. M. Best ratings as of December 31, 1998.
A.M. Best classifies "A" and "A-" ratings as "Excellent" and
36
<PAGE>
"A++" ratings as "Superior". No other single reinsurer's percentage
participation in 1998 exceeded 3% of total ceded reinsurance premiums:
<TABLE>
<CAPTION>
AMOUNTS
RECOVERABLE % OF
A.M. BEST FROM 1998 TOTAL CEDED 1998 TOTAL CEDED
RATING REINSURERS PREMIUMS WRITTEN PREMIUMS WRITTEN
--------- ----------- ---------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
MCCA................................ -- $ 33,634 $ 853 1.8%
ProNational......................... A- 8,641 42,694 90.7
American Re......................... A++ 3,141 1,815 3.9
CNA................................. A 1,379 864 1.8
Dorinco Re.......................... A 212 315 0.7
Other............................... 235 527 1.1
----------- ------- --------
$ 47,242 $ 47,068 100.0%
----------- ------- --------
----------- ------- --------
</TABLE>
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, 1998 and
1997, we concluded that there was no material risk of not being paid by our
reinsurers. We have not experienced any material difficulties 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.
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 review the
actuarial projections provided by the MCCA to monitor our solvency. It is
estimated that the MCCA currently has in excess of a $1 billion surplus.
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
37
<PAGE>
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.
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. Our reserves are also
considered annually by our independent auditors in connection with their audit
of our financial statements. However, because 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, 1998, 1997 and 1996, as prepared in accordance with generally
accepted accounting principles.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Balance, beginning of year...................... $ 84,920,578 $ 80,352,682 $ 71,114,057
Less reinsurance balance recoverable.......... 46,905,000 44,657,000 41,544,000
------------- ------------- -------------
Net balance, beginning of year.......... 38,015,578 35,695,682 29,570,057
Incurred related to:
Current year.................................. 47,073,649 54,053,427 47,600,725
Prior years................................... (3,621,863) (6,751,563) (2,728,718)
------------- ------------- -------------
Total incurred.......................... 43,451,786 47,301,864 44,872,007
Paid related to:
Current year.................................. 31,009,016 30,176,142 25,981,678
Prior years................................... 11,493,680 14,805,826 12,764,704
------------- ------------- -------------
Total paid.............................. 42,502,696 44,981,968 38,746,382
------------- ------------- -------------
Net balance, end of year........................ 38,964,668 38,015,578 35,695,682
Plus reinsurance balances recoverable........... 53,333,240 46,905,000 44,657,000
------------- ------------- -------------
Balance, end of year.................... $ 92,297,908 $ 84,920,578 $ 80,352,682
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
38
<PAGE>
The following table shows the development of the net liability for unpaid
losses and loss adjustment expenses from 1989 through 1998 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.
Management has reduced reserves for prior accident years at December 31,
1998, 1997 and 1996 by $3,621,863, $6,751,562 and $2,728,718, respectively. In
1994, the State of Michigan enacted legislative tort reform effective in 1996.
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 have stabilized and management has reduced reserves related to prior
accident years accordingly.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996
--------- --------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Liability for unpaid losses and loss
adjustment expenses net of reinsurance
recoverable.............................. $ 12,656 $ 15,049 $ 14,820 $ 16,337 $ 19,144 $ 26,102 $ 29,570 $ 35,696
Cumulative net paid as of:
End of year................................ 6,139 8,078 9,510 6,881 11,811 13,705 12,765 14,806
Two years later............................ 9,428 12,460 11,333 13,184 17,814 19,047 19,012 19,747
Three years later.......................... 10,986 14,116 15,315 15,343 19,830 21,833 21,411
Four years later........................... 11,575 15,331 15,981 16,310 20,608 23,859
Five years later........................... 11,991 15,462 16,295 16,721 20,972
Six years later............................ 12,145 15,624 16,486 17,003
Seven years later.......................... 12,253 15,764 16,694
Eight years later.......................... 12,363 15,796
Nine years later........................... 12,382
Re-estimated net liability as of:
End of year................................ 12,738 14,889 17,745 15,220 22,785 26,700 26,843 28,944
Two years later............................ 12,117 16,759 14,750 17,996 23,138 25,353 25,166 28,845
Three years later.......................... 12,626 15,563 17,131 18,548 22,180 24,547 25,175
Four years later........................... 12,161 16,101 18,258 17,602 21,837 24,568
Five years later........................... 12,454 17,076 17,057 17,561 21,880
Six years later............................ 13,432 16,099 17,153 17,645
Seven years later.......................... 12,567 16,228 17,233
Eight years later.......................... 12,744 16,160
Nine years later........................... 12,688
Net cumulative (deficiency) redundancy..... (32) (1,111) (2,413) (1,308) (2,736) 1,534 4,395 6,851
Gross liability--end of year............... 58,802 69,007 71,114 80,353
Reinsurance recoverables................... 39,658 42,905 41,544 44,657
--------- --------- --------- ---------
Net liability--end of year................. 19,144 26,102 29,570 35,696
--------- --------- --------- ---------
--------- --------- --------- ---------
Gross reestimated liability--latest........ 54,593 59,006 62,562 68,043
Reestimated reinsurance
recoverables--latest..................... 32,713 34,438 37,387 39,198
--------- --------- --------- ---------
Net reestimated liability--latest.......... 21,880 24,568 25,175 28,845
--------- --------- --------- ---------
--------- --------- --------- ---------
Gross Cumulative (deficiency) redundancy... 4,209 10,001 8,552 12,310
--------- --------- --------- ---------
--------- --------- --------- ---------
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Liability for unpaid losses and loss
adjustment expenses net of reinsurance
recoverable.............................. $ 38,016 $ 38,965
Cumulative net paid as of:
End of year................................ 11,492
Two years later............................
Three years later..........................
Four years later...........................
Five years later...........................
Six years later............................
Seven years later..........................
Eight years later..........................
Nine years later...........................
Re-estimated net liability as of:
End of year................................ 34,392
Two years later............................
Three years later..........................
Four years later...........................
Five years later...........................
Six years later............................
Seven years later..........................
Eight years later..........................
Nine years later...........................
Net cumulative (deficiency) redundancy..... 3,624
Gross liability--end of year............... 84,921 92,298
Reinsurance recoverables................... 46,905 53,333
--------- ---------
Net liability--end of year................. 38,016 38,965
--------- ---------
--------- ---------
Gross reestimated liability--latest........ 78,684
Reestimated reinsurance
recoverables--latest..................... 44,292
---------
Net reestimated liability--latest.......... 34,392
---------
---------
Gross Cumulative (deficiency) redundancy... 6,237
---------
---------
</TABLE>
39
<PAGE>
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 established at year end
1994 through 1997 developed positively, or lower than expected. In 1990 to 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. The
change in reserving philosophy was necessary as the reserves established at the
low end of the range for 1990 through 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.
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, 1998, 100% of our investment portfolio consisted
of investment grade fixed income securities and short-term investments.
Approximately 67.4% of our fixed income portfolio was rated AAA by Standard &
Poor's as of December 31, 1998, and the portfolio had an 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.
<TABLE>
<CAPTION>
COST FAIR VALUE COST FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
AT DECEMBER 31, 1998 AT DECEMBER 31, 1997
---------------------- ----------------------
(IN THOUSANDS)
Fixed income securities
United States government and government agencies and
authorities................................................ $ 18,708 $ 18,982 $ 18,067 $ 18,158
Obligations of states, municipalities and political
subdivisions............................................... 47,520 48,908 42,441 43,623
Corporate obligations........................................ 19,233 19,713 16,127 16,448
Collateralized mortgage obligations.......................... 23,917 24,299 20,261 20,524
Asset backed securities...................................... 8,995 9,185 8,997 9,027
---------- ---------- ---------- ----------
Total fixed income securities:............................. 118,373 121,087 105,893 107,780
Preferred stock.................................................. 1,823 1,909 1,827 1,869
---------- ---------- ---------- ----------
Total.......................................................... $ 120,196 $ 122,996 $ 107,720 $ 109,649
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
40
<PAGE>
The table below sets forth the maturity profile of our combined fixed
maturity investments as of December 31, 1998, 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. These 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.
<TABLE>
<CAPTION>
AMORTIZED PORTION OF
COST FAIR VALUE FAIR VALUE
---------- ---------- -----------
<S> <C> <C> <C>
(IN THOUSANDS)
1 year or less................................................................ $ 8,217 $ 8,295 6.7%
More than 1 year through 5 years.............................................. 42,401 43,488 35.4
More than 5 years through 10 years............................................ 28,336 29,198 23.7
More than 10 years............................................................ 6,507 6,621 5.4
Collateralized and asset backed securities.................................... 32,912 33,485 27.2
Redeemable preferred stocks................................................... 1,823 1,909 1.6
---------- ---------- -----
$ 120,196 $ 122,996 100.0%
---------- ---------- -----
---------- ---------- -----
</TABLE>
The average duration of our fixed maturity investments, including
collateralized and asset backed securities which are subject to paydown, as of
December 31, 1998, was approximately 2.7 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 and the annualized total rate of return which
includes both income and changes in the market value of securities, for the
three years ended December 31, 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net investment income................................................... $ 6,958,429 $ 6,676,783 $ 5,150,035
Annualized total rate of return......................................... 6.74% 6.89% 4.75%
</TABLE>
A. M. BEST RATING
A. M. Best Company, which rates insurance companies based on factors of
concern to policyholders, currently assigns an "A-" (Excellent) rating (its
fourth highest rating category out of 15 categories) to MEEMIC. A. M. Best
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. 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 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. No assurance can be given that A. M. Best 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
41
<PAGE>
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 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 and other
ratings, and regulatory conditions.
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 Michigan Insurance Bureau. The authority of the Bureau
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 Bureau also requires the filing of annual and other reports relating to
the financial condition of insurance companies doing business in Michigan.
Examinations are regularly conducted by the Bureau every three to five
years. The Bureau'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 Bureau 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 the 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 Bureau.
42
<PAGE>
The following table highlights the ramifications of the various ranges of
non-compliance. The ratios represent the relationship of a company's total
adjusted capital to its risk-based capital base level.
<TABLE>
<CAPTION>
RATIO AND CATEGORY ACTION
- --------------------------------------- ------------------------------------------------------------------------
<S> <C>
2.0 or more None--in compliance
1.5--1.99: Company Action Company must submit a comprehensive plan to the regulatory authority
discussing proposed corrective actions to improve the capital position
1.0--1.49: Regulatory Action Regulatory authority will perform a special examination of the company
and issue an order specifying corrective actions that must be taken
0.7--0.99: Authorized Control Regulatory authority may take any action it deems necessary, including
placing the company under regulatory control
Less than 0.7: Mandatory Control Regulatory authority is required to place the company under regulatory
control
</TABLE>
MEEMIC's ratio has always exceeded 2.0 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, 1998, MEEMIC's risk-based capital base level was
$4,865,225 and its total adjusted capital was $40,372,903, yielding a ratio of
8.3.
IRIS REQUIREMENTS. The NAIC has also developed a set of financial ratios,
referred to as the Insurance Regulatory Information System, or IRIS, for use by
state insurance regulators in monitoring the financial condition of insurance
companies. The NAIC has established an acceptable range of values for each of
the IRIS financial ratios. Generally, an insurance company will become the
subject of increased scrutiny when four or more of its IRIS ratio results fall
outside the range deemed acceptable by the NAIC. The nature of increased
regulatory scrutiny resulting from IRIS ratio results outside the acceptable
range is subject to the judgment of the applicable state insurance department,
but generally will result in accelerated review of annual and quarterly filings.
Depending on the nature and severity of the underlying cause of the IRIS ratio
results being outside the acceptable range, increased regulatory scrutiny could
range from increased but informal regulatory oversight to placing a company
under regulatory control.
43
<PAGE>
For 1997 and 1996, all of our results were within the acceptable range for
any IRIS tests. For 1998, MEEMIC's investment yield was marginally outside the
acceptable range. Under statutory accounting, interest expense on the surplus
note is treated as a reduction in investment income, causing the low value. For
1998, our IRIS ratios were as follows:
<TABLE>
<CAPTION>
NAIC UNUSUAL VALUES
MEEMIC
-------------------- RESULTS FOR
IRIS RATIOS OVER UNDER 1998
- ------------------------------------------------------------------------------------------- --------- --------- -----------
<C> <S> <C> <C> <C>
1 Gross Premiums to Surplus....................................................... 900 280.5
1A Net Premium to Surplus.......................................................... 300 163.9
2 Change in Net Writings.......................................................... 33 -33 -11.7
3 Surplus Aid to Surplus.......................................................... 15 N/A
4 Two-Year Overall Operating Ratio................................................ 100 84.3
5 Investment Yield................................................................ 10 4.5 4.4
6 Change in Surplus............................................................... 50 -10 14.5
7 Liabilities to Liquid Assets.................................................... 105 71.9
8 Agents' Balances to Surplus..................................................... 40 N/A
9 One-Year Reserve Development to Surplus......................................... 20 -6.1
10 Two-Year Reserve Development to Surplus......................................... 20 -20.5
11 Estimated Current Reserve Deficiency to Surplus................................. 25 -17.2
</TABLE>
GUARANTY FUND. We participate in the Property and Casualty Guaranty
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.
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 Bureau 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 Professionals and to require prior approval of
transactions, such as extraordinary dividends from MEEMIC to Holdings. All
transactions within the holding company system between MEEMIC, Holdings,
Professionals 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 approval of the Bureau is the
greater of 10% of MEEMIC's statutory surplus as reported on the most recent
annual statement filed with the Bureau, and the net income of MEEMIC for the
period covered by such annual statement. As of December 31, 1998, amounts
available for payment of dividends without the prior approval of the Bureau
would have been approximately $6 million.
CHANGE IN CONTROL. The Insurance Code requires that the Insurance
Commissioner receive prior notice of and approve a change of control for either
MEEMIC or Holdings. The Insurance Code contains a complete definition of
"control." In simplified terms, a person, corporation, or other entity
44
<PAGE>
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, 10% or more of the voting securities of
either company. To obtain approval for a change of control, the proposed
acquiror must file an application with the Insurance Commissioner containing
detailed information such as the identity and background of the acquiror and its
affiliates, the sources of and amount of funds to be used to effect the
acquisition, and financial information regarding the proposed acquiror. The
Insurance Commissioner has approved Professionals' acquisition of control over
MEEMIC and Holdings.
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 body 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 Michigan Catastrophic Claims
Association 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 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.
LITIGATION
Holdings is not currently subject to any material litigation. 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.
EMPLOYEES
As of December 31, 1998, we had 207 employees. None of the employees are
covered by a collective bargaining unit and we believe that employee relations
are good.
45
<PAGE>
PROFESSIONALS
Upon completion of the conversion, Professionals or a subsidiary of
Professionals will hold a minimum of 2,302,209 shares of common stock, and may
own more than a majority of the common stock. In addition, the current board of
directors of MEEMIC is comprised of nominees of Professionals as a result of the
1997 transaction. See "The Conversion--Background." Consequently, information
about Professionals may be important to you.
Professionals was incorporated in Michigan in 1996 for the purpose of
serving as the holding company for ProNational and other subsidiaries.
Professionals had consolidated assets of $889 million and $848 million at
December 31, 1998 and 1997, respectively. Its principal executive offices are
located at 2600 Professionals Drive, Okemos, Michigan 48864, and its telephone
number is (517) 349-6500.
Professionals is subject to the informational requirements of the Securities
Exchange Act of 1934. In accordance with the requirements of the Exchange Act,
Professionals files proxy statements and annual, quarterly and current reports
with the Commission. This information can be read and copied at the Commission's
Public Reference Room at 450 Fifth Street, N. W., Washington, D. C. 20549.
Information about the operation of the Public Reference Room can be obtained by
calling the Commission at 1-800-SEC-0330. You may also obtain copies of the
proxy statements and reports filed at the Commission at the Commission's website
at http://www.sec.gov. Professionals is traded on Nasdaq under the symbol
"PICM."
PRONATIONAL
In addition to being the principal operating subsidiary of Professionals,
ProNational reinsures a substantial portion of MEEMIC's insurance risk under the
quota share reinsurance agreement. Consequently, information about ProNational
may be important to you.
ProNational is a wholly-owned subsidiary of Professionals and a stock
insurance company incorporated under the Insurance Code in 1980. ProNational
began operations on June 27, 1980 as Physicians Insurance Company of Michigan by
assuming the assets and liabilities of the Brown-McNeely Insurance Fund. The
Brown-McNeely Insurance Fund was created by the State of Michigan in 1975 to
provide doctors with an effective and reliable source of medical malpractice
insurance. The name of Physicians Insurance Company of Michigan was changed on
August 18, 1994 to PICOM Insurance Company and on July 1, 1998 to ProNational.
ProNational actively sells medical professional liability insurance in Michigan,
Florida, Illinois, Indiana, Ohio and Pennsylvania and is licensed in six
additional states. ProNational began insuring physicians and physician clinics
upon its organization in 1980 and began insuring dentists in 1983. Coverages for
hospitals and other health care institutions were added in 1993 and coverages
for professional liability to lawyers and law firms were added in 1994.
ProNational has also grown through acquisition and merger. In 1995,
ProNational acquired the rights to renew the Illinois book of business of a
physician controlled insurer in that state. In 1996, ProNational acquired the
attorney-in-fact of an Indiana reciprocal that specialized in medical
malpractice insurance and renewed the business through ProNational. On July 1,
1998, Physicians Protective Trust Fund of Coral Gables, Florida merged into
ProNational, thus providing ProNational with regional diversification and a
larger insured base. For the year ended December 31, 1998, ProNational had net
earned premiums of $153.4 million, including assumed earned reinsurance premiums
of $47.8 million, and is rated A-(Excellent) by A.M. Best.
46
<PAGE>
MANAGEMENT
DIRECTORS
According to the bylaws of Holdings, directors will be elected at each
annual meeting of the shareholders. Each director will hold office until the
next annual meeting of shareholders and until a successor is elected and
qualified, or until he resigns or is removed. The board of directors of Holdings
serves without compensation, but may be reimbursed for actual reasonable
expenses incurred in connection with their duties. The directors may receive
awards pursuant to Holdings' stock compensation plan and did receive awards
under MEEMIC's incentive plan during 1998. See "Management--Management
Remuneration."
Set forth below is information about the directors of Holdings, each of whom
has served on the board since October 1998.
VICTOR T. ADAMO, ESQ., 51, has been a director and Chairman of the Board of
Directors of MEEMIC since May 1997 and Chairman of the Board of Holdings since
October 1998. Mr. Adamo is the Chief Executive Officer and a director of
Professionals, positions he has held 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. Mr. Adamo
is a graduate of The University of Michigan and New York University School of
Law and is a Chartered Property Casualty Underwriter.
R. KEVIN CLINTON, FCAS, MAAA, 44, has been the President and a director of
MEEMIC since May 1997. Mr. Clinton has been a Vice President and Chief Financial
Officer of Professionals since 1996 and a director of Professionals since
September 1997. Mr. Clinton served as a Vice President, Treasurer and Actuary of
ProNational from 1990 through June 1997. Prior to becoming an officer of
ProNational, Mr. Clinton was ProNational's consulting actuary from 1986 to 1990.
He formerly served as the Actuary for the Michigan Insurance Bureau and in the
actuarial department of Michigan Mutual Insurance Company. Mr. Clinton is a
Fellow of the Casualty Actuarial Society and a Member of the American Academy of
Actuaries. Mr. Clinton is a graduate of The University of Michigan where he
received a bachelor's degree in business administration and a master's degree in
actuarial science.
ANNETTE E. FLOOD, ESQ., R.N., 40, has been a director of MEEMIC since May
1997. She has been the Secretary of Professionals since 1996. Ms. Flood is Vice
President, Corporate Secretary and Legal Counsel of ProNational. Prior to
joining ProNational in 1992, Ms. Flood was employed by Lansing General Hospital,
Lansing, Michigan, from 1986 to 1992, most recently in the capacity of Vice
President, Legal Services and Quality Management. Prior to joining the Lansing
General Hospital Staff, Ms. Flood was an attorney in the litigation section of
the law firm of Dykema Gossett PLLC, Lansing, Michigan. Ms. Flood has a B.A.
degree in nursing from The University of Michigan and a law degree from Wayne
State University Law School.
THOMAS E. HOEG, ESQ., 45, has been a Director of MEEMIC since May 1997. Mr.
Hoeg is the Executive Vice President and Chief Operating Officer of Amerisure
Companies. Prior to joining Amerisure, he was a partner in the Lansing law firm
of Foster, Swift, Collins & Smith and was President of the Michigan Insurance
Federation and a Board member of the Michigan Automobile Insurance Placement
Facility. Mr. Hoeg is a graduate of Northwestern University and the University
of Illinois College of Law.
LYNN M. KALINOWSKI, 47, has been a director of MEEMIC since May 1997 and is
the Executive Vice President for MEEMIC. 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.
JAMES O. WOOD, FCAS, MAAA, 56, has been a director of MEEMIC since October
1998, when he was elected by the board of directors to complete the term of
former director W. Peter McCabe, M.D.
47
<PAGE>
Mr. Wood became an independent consulting actuary on April 1, 1997, when he
retired from Tillinghast-Towers Perrin. He has continued to work with several
Tillinghast clients as an independent contractor for Tillinghast. From 1979 to
1997, Mr. Wood was a Principal and Consulting Actuary of Tillinghast-Towers
Perrin whereby he served as one of four managing principals for fifteen of his
twenty-one plus years with Tillinghast. He provided ratemaking, reserving and
financial planning advice to a majority of the medical malpractice insurers
formed during the 1970s. Mr. Wood was chairman of the American Academy of
Actuaries Task Force on Self-Insured Trusts and published the Task Force's
professional guidelines for actuaries involved in self-insurance assignments.
Prior to joining Tillingast, Mr. Wood was with the Aetna Life & Casualty Company
as the actuarial officer in charge of commercial lines rates. Mr. Wood is a
Fellow of the Casualty Actuarial Society and a Member of the American Academy of
Actuaries. Mr. Wood is a graduate of Memphis State University and holds a
Bachelor of Science in mathematics and a Master of Science in mathematical
statistics.
EXECUTIVE OFFICERS
Set forth below is information about the executive officers of Holdings and
MEEMIC.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH HOLDINGS POSITION WITH MEEMIC
- ----------------------- --- ------------------------ ------------------------
<S> <C> <C> <C>
R. Kevin Clinton....... 44 President and Chief President and Chief
Executive Officer Executive Officer
Harold F. Eppley....... 51 -- Vice President--Claims
Annette E. Flood....... 40 Secretary Secretary
Lynn M. Kalinowski..... 47 -- Executive Vice President
M. Kay Rickenbaugh..... 54 -- Senior Vice President,
Chief Operating Officer
and Assistant
Secretary
William P. Sabados..... 49 -- Vice President and Chief
Information Officer
Christine C. Schmitt... 42 Treasurer and Chief Senior Vice President,
Financial Officer Treasurer and Chief
Financial Officer
Judith P. Walczak...... 60 -- Vice
President--Underwriting
</TABLE>
The executive officers of Holdings and MEEMIC serve at the pleasure of the
board and are elected or appointed by the respective board of directors at each
of its annual meetings following the annual meeting of shareholders.
For information with respect to Messrs. Clinton and Kalinowski and Ms.
Flood, see "Management--Directors" above.
HAROLD F. EPPLEY is Vice President of Claims of MEEMIC. Mr. Eppley has been
an officer of the Company since 1994. Mr. Eppley was previously a Branch Claims
Manager of Citizens Insurance Company of America for five years and was in
various positions within the Claims Department at Amerisure Company for 18
years.
M. KAY RICKENBAUGH is Senior Vice President and Chief Operating Officer of
MEEMIC, joining the Company in 1995. Prior to joining MEEMIC, Ms. Rickenbaugh
was Executive Vice President of Tennessee Insurance Company, Vice President of
Permanent General Companies and an officer of Progressive Casualty Insurance
Company. Ms. Rickenbaugh is a graduate of Case Western Reserve University and is
a Certified Public Accountant and a Certified Employee Benefit Specialist.
WILLIAM P. SABADOS is Vice President and Chief Information Officer of
MEEMIC, joining the Company as an officer in 1997. Mr. Sabados is also Chief
Information Officer of Professionals and ProNational. From 1987 to 1997, he was
Vice President of Information Systems for the Investor Insurance Group and has
been active in the insurance field for over 20 years.
48
<PAGE>
CHRISTINE C. SCHMITT is Senior Vice President and Chief Financial Officer of
MEEMIC, 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 L.L.P. She is a graduate of Wayne
State University with a B.S. degree in accounting.
JUDITH P. WALCZAK joined MEEMIC in 1966 as an automobile insurance
underwriter. She has served as Vice President of Underwriting since 1988 and
oversees both the automobile and homeowners underwriting departments.
MANAGEMENT REMUNERATION
The executive officers of Holdings have received no compensation from
Holdings since its formation. The following table sets forth information
regarding the compensation of MEEMIC's chief executive officer and the four most
highly compensated executive officers of MEEMIC for the last three completed
fiscal years whose salary and bonus exceeded $100,000 in 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
------------------------------------------------
AWARDS(2) PAYOUTS
--------------------- ---------
ANNUAL COMPENSATION RESTRICTED INCENTIVE
----------------------- STOCK OPTIONS/ PLAN ALL OTHER
SALARY BONUS AWARDS SARS PAYOUT COMPENSATION(3)
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($) ($) ($)
- -------------------------------- ---- -------- ------- ---------- -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
R. Kevin Clinton(1) ............ 1998 279,011 150,000 -- -- -- $188,374
President and Chief Executive 1997 222,021 150,000 -- 40,000 -- $174,848
Officer 1996 217,861 18,906 57,820 -- -- $29,368
Lynn M. Kalinowski ............. 1998 $167,218 52,966 -- -- -- $90,327
Executive Vice President 1997 $167,218 $37,500 -- -- -- $86,221
1996 $160,248 $50,000 -- -- $47,098 $21,868
M. Kay Rickenbaugh ............. 1998 $145,365 $41,160 -- -- -- $88,968
Senior Vice President and 1997 $139,256 $45,693 -- -- -- $80,780
Chief Operating Officer 1996 $133,900 $40,000 -- -- $47,098 $17,452
Christine C. Schmitt ........... 1998 $110,000 $43,746 -- -- -- $83,117
Senior Vice President, 1997 $101,228 $32,640 -- -- -- $76,947
Treasurer and Chief Financial 1996 $ 97,335 $40,000 -- -- $47,098 $11,710
Officer
William P. Sabados(1) .......... 1998 113,996 36,000 -- -- -- $80,793
Vice President and Chief 1997 90,791 30,000 -- -- -- $82,055
Information Officer 1996 -- -- -- -- -- $ 0
</TABLE>
- ------------------------------
(1) Messrs. Clinton's and Sabados' compensation as officers of MEEMIC is paid by
ProNational pursuant to the management services agreement with
Professionals. As such, compensation and participation in incentive plans
are pursuant to compensation decisions and incentive plans of ProNational
and not of MEEMIC or Holdings. Under the management services agreement,
Messrs. Clinton and Sabados currently spend 95% and 80% of their time,
respectively, working at MEEMIC. As noted below, in connection with the
conversion the management services agreement will be terminated and Messrs.
Clinton and Sabados will become employees of MEEMIC.
(2) Restricted stock awards and options awarded to Mr. Clinton were issued
pursuant to the compensation plans of Professionals and/or ProNational and
are for shares of, or options for shares of, the stock of Professionals and
not of MEEMIC or Holdings.
(3) Amounts shown for 1998 consist of contributions under the MEEMIC Retirement
and Savings Plan and the MEEMIC Supplemental Retirement Plan for the benefit
of Mr. Kalinowski, Ms. Rickenbaugh and Ms. Schmitt. Amounts included in 1998
for Mr. Sabados consist of a matching contribution to purchases of
Professionals common stock under the Professionals stock purchase plan of
$4,063 and contributions under the ProNational pension plans for the benefit
of Mr. Sabados of $10,730. Amounts included for Mr. Clinton consist of a
matching contribution to purchases of Professionals common stock under the
Professionals stock purchase plan of $7,500 and contributions under the
ProNational pension plans for the benefit of Mr. Clinton of $22,874.
Additionally, amounts in this column include awards made to each of the
officers pursuant to MEEMIC's incentive plan for 1998. The amount of each
incentive plan award is set forth under "Management--Incentive Plan." Awards
made in 1998 pursuant to the incentive plan do not vest until December 31,
2002.
49
<PAGE>
INCENTIVE PLAN. MEEMIC's incentive plan was adopted to create incentives
for management and directors of MEEMIC by permitting incentive plan awards which
could grow in value based upon increases in the surplus of MEEMIC. The incentive
plan provides for incentive awards to be granted to managers and officers in the
discretion of the board of directors based on individual and company
performance. Incentive awards granted vest five years after being awarded, with
exceptions for death, disability and other limited circumstances. The maximum
amount of an incentive plan award by MEEMIC cannot exceed $200,000 per
participant per year. The valuation of incentive payout is based on growth in
MEEMIC's surplus assets over a five year vesting period and then valued at one
of five different award levels as determined for each participant by the board
of directors. No awards will be made under the incentive plan after the
conversion.
The following table sets forth the incentive plan awards made by MEEMIC to
its chief executive officer and the four most highly compensated officers during
1998.
<TABLE>
<CAPTION>
INCENTIVE PLAN--AWARDS IN LAST FISCAL YEAR
----------------------------------------------------
PERFORMANCE OR ESTIMATED FUTURE
UNIT VALUATION OTHER PERIOD PAYOUTS UNDER
AWARD LEVEL UNTIL MATURATION NON-STOCK
NAME GRANTED OR PAYOUT PRICE-BASED PLAN
- --------------------------- -------------- ----------------- ----------------
<S> <C> <C> <C>
R. Kevin Clinton........... $ 300 December 31, 2002 $ 158,000
Lynn M. Kalinowski......... $ 125 December 31, 2002 $ 66,000
M. Kay Rickenbaugh......... $ 125 December 31, 2002 $ 66,000
Christine C. Schmitt....... $ 125 December 31, 2002 $ 66,000
William P. Sabados......... $ 125 December 31, 2002 $ 66,000
</TABLE>
In addition, for service as a MEEMIC director, each of the non-officer directors
of Holdings except Mr. Wood was granted an award during 1998 under the incentive
plan with an estimated future payout upon vesting of approximately $66,000.
MEEMIC's board of directors has made a determination under the incentive
plan to allow participants to use plan awards to purchase shares in this
offering. Such shares would be held by a trust established by MEEMIC for this
purpose under the terms of the incentive plan until vested and paid out under
the terms of the plan.
EMPLOYEE CONTRACTS. Holdings does not currently have any employment
contracts, termination agreements or change in control agreements with any
executive officers. MEEMIC, however, has a severance agreement with Mr.
Kalinowski providing generally for a severance payment in the event of
termination of employment or in the event of a change of control of MEEMIC. Mr.
Kalinowski's agreement provides for a severance payment primarily consisting of
a lump sum payment equal to a maximum amount of 24 times his average monthly
income for the previous year. Mr. Kalinowski's agreement is effective for so
long as he is employed by MEEMIC. The current value of Mr. Kalinowski's
severance package is approximately $400,000.
THE STOCK COMPENSATION PLAN. 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 are being
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 vested in full, the shares of
common stock subject to such awards would, unless the stock compensation plan
shall have been terminated, be available for the grant of additional awards
under the stock compensation plan.
50
<PAGE>
The stock compensation plan may be administered by either the board of
directors of Holdings or a committee of at least two directors of Holdings who
are designated by the board of directors and who are "non-employee directors"
within the meaning of the federal securities laws. It is contemplated that the
board of directors of Holdings will initially administer the stock compensation
plan. On the effective date of the conversion, it is contemplated that options
to purchase up to 175,000 shares of common stock at $10.00 per share may be
awarded to the executive officers, and options to purchase up to 175,000 shares
of Common Stock at $10.00 per share may be awarded to the other eligible
directors and managers of Holdings (not to exceed 300,000 shares in the
aggregate). The amount of individual awards within these classes has not yet
been determined.
Options granted under the stock compensation plan may constitute either
options that afford favorable tax treatment to recipients or options that do not
qualify for favorable tax treatment. The exercise price for options granted
under the stock compensation plan may be paid in cash or common stock. Options
granted at the time of the implementation of the stock compensation plan are
expected to vest and become exercisable in equal installments over a five year
period after the date the options are granted.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Neither MEEMIC nor Holdings has a compensation committee. Rather, decisions
pertaining to the compensation of executive officers are made solely by each
company's respective board of directors after receiving input regarding
individual performance from various sources within the company, and reviewing
salary survey information for the insurance industry.
INDEMNIFICATION AND LIMITATION OF LIABILITY MATTERS
The bylaws of Holdings require it to reimburse its directors and officers to
the fullest extent permitted by law for expenses, judgments, penalties, fines
and settlements in connection with legal proceedings to which the director or
officer is a party due to their service in any capacity at Holdings' request. If
the legal proceeding is brought by Holdings or on its behalf, Holdings'
reimbursement obligation is limited to expenses and settlements. In either case,
the director or officer must be found to have acted in good faith and in a
manner they believed to be in Holdings' and its shareholders' best interest or
not opposed to Holdings' or its shareholders' best interest. If the proceeding
is a criminal proceeding, Holdings must reimburse the director or officer only
if they had no reasonable cause to believe their conduct was unlawful.
As permitted by law, the articles of incorporation of Holdings generally
limit the personal liability of its directors to Holdings and its shareholders
for breach of their fiduciary duty. The articles of incorporation, however, do
not eliminate or limit the liability of a director for any of the following:
- the amount of a financial benefit received by a director to which he or
she is not entitled;
- intentional infliction of harm on the corporation or its shareholders;
- a violation of Section 551 of the Michigan Business Corporation Act; or
- an intentional criminal act.
As a result of this provision, shareholders of Holdings may be unable to
recover damages against directors for actions taken by them which constitute
negligence or gross negligence or which are in violation of their fiduciary
duties, although it may be possible to obtain an injunction with respect to such
actions. Holdings has been advised that, in the opinion of the Securities and
Exchange Commission, indemnification for liabilities arising under the
Securities Act of 1933 is against public policy as expressed in the Securities
Act and is, therefore, unenforceable.
51
<PAGE>
SECURITY OWNERSHIP
Only one share of Holdings is currently outstanding. It was issued to
Holdings' chief executive officer for $10.00 in connection with the
incorporation of Holdings. The directors and executive officers have indicated
that they intend to purchase in the offering the number of shares set forth in
the following table. A portion of these shares will be purchased using funds
held in MEEMIC's incentive plan on their behalf and will be subject to the
vesting terms remaining on the incentive plan awards used to purchase the
shares. See "Management--Management Remuneration--Incentive Plan."
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ---------------------------------------------------------------------------------- -----------
<S> <C>
Victor Adamo...................................................................... 22,500
Kevin Clinton..................................................................... 90,000
Annette Flood..................................................................... 22,500
Thomas Hoeg....................................................................... 60,000
James Wood........................................................................ 20,000
Harold Eppley..................................................................... 5,250
Lynn Kalinowski................................................................... 18,500
Kay Rickenbaugh................................................................... 10,000
William Sabados................................................................... 13,000
Christine Schmitt................................................................. 15,000
Judith Walczak.................................................................... 5,500
-----------
282,250
</TABLE>
The table below shows the minimum and maximum number of shares and
corresponding percentages that could be owned by policyholders, directors and
officers and Professionals.
<TABLE>
<CAPTION>
MINIMUM MAXIMUM
---------------------- ---------------------
NUMBER % NUMBER %
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Policyholders....................................................... 0 0 4,297,791 65.1
Individual director or officer...................................... 0 0 107,444 1.6
Directors and officers
as a group........................................................ 0 0 429,779 6.5
Professionals....................................................... 2,302,209 34.9 6,600,000 100
</TABLE>
RELATED PARTY TRANSACTIONS
SURPLUS NOTE
In April 1997, MEEMIC executed the surplus note in favor of Professionals.
The surplus note and interest accrued through November 1, 1998 will be exchanged
for 2,302,209 shares of common stock on the effective date of the conversion.
Mr. Adamo, Mr. Clinton and Ms. Flood are executive officers of Professionals or
its subsidiary, ProNational. The surplus note and the transaction in which it
was issued are described under "The Conversion--Background."
MANAGEMENT SERVICES AGREEMENT
In April 1997, MEEMIC entered into the management services agreement with
Professionals. Total management fees paid for 1998 and 1997 amounted to
$2,073,425 and $1,005,480, respectively. We intend to terminate the management
services agreement following the conversion. The management services agreement
and the transaction in which it was entered into are described under "The
Conversion--Background."
52
<PAGE>
REINSURANCE
MEEMIC has a reinsurance agreement with ProNational, a subsidiary of
Professionals, which became effective July 1, 1997. MEEMIC ceded $42,693,652 and
$20,115,000 in earned premium to ProNational for 1998 and 1997, respectively.
During the same time frame, MEEMIC ceded $25,298,914 and $12,578,000 in ceded
incurred losses and loss adjustment expenses and received ceding commissions of
$12,994,651 and $6,577,424 for 1998 and 1997, respectively. MEEMIC does not
intend to terminate the quota share reinsurance agreement in connection with the
conversion. The reinsurance agreement and the transaction in which it was
entered into are described under "The Conversion-- Background."
TRANSACTIONS WITH FORMER DIRECTORS
Former directors of MEEMIC who resigned as part of the April 1997
transactions with Professionals received compensation or deferred compensation
for services rendered to MEEMIC and, among other things, an agreement not to
compete. The compensation awarded by MEEMIC to former directors is set forth in
the following table:
<TABLE>
<CAPTION>
COMPENSATION PAID OR DEFERRED
NAME OF FORMER DIRECTOR TO FORMER DIRECTOR
- ------------------------------------------------- -----------------------------
<S> <C>
Wallace Culton................................... $116,626
Douglas Goulait.................................. $112,963
Carol Sue Hurand-Tulor........................... $112,500
George Orleman................................... $115,350
Donald B. Weatherspoon........................... $115,000
Richard Herbel................................... $112,500
</TABLE>
DESCRIPTION OF COMMON STOCK
GENERAL
Holdings is authorized to issue 10 million shares of common stock. As a
shareholder, you would be entitled to receive a proportionate share of any
dividends declared by the board of directors, and to one vote per share on all
matters submitted to a vote of the shareholders of Holdings.
In an election of directors, you would not have the right to accumulate all
of your votes and vote them for one director. Rather, the holders of a majority
of the outstanding shares will have the power to elect all of the directors and
the remaining holders will not have the power to elect any directors. In
addition, Holdings would not be required to offer any additional shares to you
for sale before selling shares to the public or any other shareholder. Your
shares would not give you any right to convert them into any other security or
to require Holdings to repurchase them from you. If Holdings is liquidated or
dissolved, you would be entitled to receive your proportionate share of the net
assets of Holdings after the payment of all of its creditors and all holders of
its securities which have rights to receive payment before holders of common
stock. When the shares are paid for in full as required in the stock order form
and issued to you upon completion of the conversion, you will not be required to
pay additional money to Holdings solely by virtue of your ownership of common
stock.
ChaseMellon Shareholder Services, L.L.C. will act as transfer agent and
registrar for the common stock after the conversion.
LIMITATION ON RESALES
The common stock issued in the conversion to policyholders will be freely
transferable under the Securities Act. Shares issued to officers and directors
may not be transferred for a period of one year
53
<PAGE>
from the effective date of the conversion pursuant to the provisions of the
Insurance Code. Share certificates issued to officers and directors will bear a
legend giving appropriate notice of these restrictions and we will give
instructions to the transfer agent for the common stock with respect to these
transfer restrictions. Any shares issued to officers and directors as a stock
dividend, stock split or otherwise during the one year period with respect to
these shares will be subject to the same restriction.
RESTRICTIONS ON ACQUISITION OF AND BUSINESS
COMBINATIONS BY HOLDINGS
GENERAL
Michigan law contains provisions that may, in conjunction with the articles
of incorporation of Holdings, have the effect of impeding a change of control of
Holdings. With respect to transactions with Professionals, minority shareholder
protection provisions are included in the articles of incorporation of Holdings.
These provisions may have the effect of discouraging a future takeover attempt
which individual shareholders may deem to be in their best interests or in which
shareholders may receive a substantial premium for their shares over the then
current market price. As a result, shareholders who desire to participate in
such a transaction may not have an opportunity to do so. The following is a
summary of the provisions of Michigan law and the articles of incorporation of
Holdings relating to these restrictions. See "Business of MEEMIC--Insurance
Regulatory Matters" for a description of restrictions on the acquisition of a
controlling interest in Holdings contained in the Insurance Code.
BUSINESS COMBINATIONS
Chapter 7A of the Michigan Business Corporation Act contains provisions
which generally require that business combinations between a corporation which
is subject to Chapter 7A and an owner of 10% or more of the voting power of the
corporation be approved by a very high percentage of the shareholders. The vote
required is the affirmative vote of at least 90% of the votes of each class of
stock entitled to be cast and not less than 2/3 of the votes of each class of
stock entitled to be cast, other than voting shares owned by the 10% owner. The
high vote requirements will not apply if (i) the corporation's board of
directors approves the transaction prior to the time the 10% owner becomes such
or (ii) the transaction satisfies the specified fairness standards, various
other conditions are met and the 10% owner has been such for at least five
years.
Although Chapter 7A will apply to Holdings, the Holdings board has adopted a
resolution exempting from Chapter 7A (i) all of the transactions contemplated by
the plan of conversion and the standby purchase and option agreement and (ii)
any business combination transaction with Professionals or any of its
subsidiaries.
CONTROL SHARE ACQUISITIONS
Chapter 7B of the Michigan Business Corporation Act provides that "control
shares" acquired in a "control share acquisition" have no voting rights except
as granted by the shareholders of the company. "Control shares" are outstanding
shares that, when added to shares previously owned by a shareholder, increase
such shareholder's ownership of voting stock to 20% or more, 33 1/3% or more or
a majority of the outstanding voting power of the company. A "control share
acquisition" generally must be approved by a majority of the votes cast by
shareholders entitled to vote, excluding shares owned by the acquiror and
officers and employee-directors of the company.
The articles of incorporation of Holdings provide that Chapter 7B does not
apply to control share acquisitions of the common stock.
54
<PAGE>
PROTECTION OF MINORITY SHAREHOLDERS
The articles of incorporation of Holdings include provisions designed to
protect minority shareholders until Holdings has ceased to be a reporting
company under the Exchange Act or twelve months after Professionals has ceased
to own a majority of the common stock. These provisions include the following
requirements:
- The board of directors must include at least two directors who are not
(i) officers or directors of MEEMIC or Professionals or officers of
Holdings,
(ii) engaged in any transaction with Holdings or MEEMIC that would have
to be disclosed in Holdings' Exchange Act reports, or
(iii) affiliated with any such officer, director or person engaged in
such a transaction.
- Any business combination transaction with Professionals to which Chapter
7A would otherwise have applied and which would cause Holdings to no
longer be a reporting company under the Exchange Act or cause Holdings'
common stock to no longer be listed on Nasdaq or a stock exchange must be:
(i) determined to be fair to and in the best interests of the
shareholders, other than Professionals and persons affiliated with
Professionals, by the independent members of the board of directors
based upon the advice of an investment banking firm of recognized
standing, and
(ii) approved by holders of a majority of the shares of common stock not
owned by Professionals or persons affiliated with Professionals.
This requirement does not apply to transactions contemplated by the
standby purchase and option agreement.
The sections of the articles of incorporation containing these protections
cannot be amended without the approval of holders of 75% of the shares of common
stock and the holders of a majority of the shares owned by persons other than
Professionals and persons affiliated with Professionals.
55
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following discussion is a summary of the material federal income tax
considerations relevant to the conversion, this offering and policyholders. It
is based on a tax opinion we received from PricewaterhouseCoopers LLP. The
summary does not discuss all the potential federal income tax effects, nor does
it discuss any other type of tax law ramifications. The analysis assumes that if
you buy common stock, you will own it as an investment, or "capital asset" as
the term is defined in the Internal Revenue Code.
The discussion is based upon current law and relevant interpretations, all
of which are subject to change at any time. In addition, the tax opinion notes
that the issues it discusses are not addressed by any direct authorities or
binding precedent. The IRS rulings on which the opinion is based are likewise
subject to change at any time. Any changes could be retroactively applied in a
manner that could adversely affect policyholders, holders of common stock or
Holdings.
YOU ARE URGED TO CONSULT YOUR TAX ADVISOR CONCERNING THE FEDERAL INCOME TAX
CONSEQUENCES OF RECEIVING AND EXERCISING SUBSCRIPTION RIGHTS AND HOLDING COMMON
STOCK, AND CONCERNING ANY TAX CONSEQUENCES TO YOU OF THE CONVERSION OTHER THAN
FEDERAL INCOME TAX CONSEQUENCES.
SUBSCRIPTION RIGHTS
Generally, the federal income tax consequences of the receipt, exercise and
lapse of subscription rights are uncertain. They present novel issues of tax law
which are not addressed by any direct authorities. The tax opinion provides that
(i) the eligible policyholders should be treated as transferring their
voting rights and rights to share in any assets of MEEMIC to Holdings in
exchange for the subscription rights, and that therefore, an eligible
policyholder should recognize gain or loss to the extent that the fair
market value of the subscription rights received, if any, differs from
the basis of such eligible policyholder in the rights surrendered
therefor,
(ii) an eligible policyholder who acquires common stock by exercising a
subscription right should have a basis in such common stock equal to
the amount of cash paid therefor plus the basis in the subscription
right, if any, and
(iii) that the applicable holding period should commence on the day the
subscription right is exercised.
In the opinion of ABN AMRO, the subscription rights have no fair market
value, inasmuch as such rights are nontransferable, personal rights of short
duration that are provided to eligible policyholders and other participants in
this offering without charge, and afford the holder only the right to purchase
shares of common stock in this offering at a price equal to its estimated fair
market value.
MATERIAL TAX EFFECTS TO HOLDINGS
The tax opinion also states, among other things, that the conversion should
constitute a reorganization within the meaning of Section 368(a)(1)(E) of the
Internal Revenue Code. As a result, no gain or loss should be recognized by
MEEMIC as a result of the conversion. The tax opinion further states that
(i) Holdings should recognize no gain or loss on its granting of
subscription rights to eligible policyholders and should recognize no
gain or loss on the lapse of a subscription right,
(ii) no gain or loss should be recognized by Holdings on the receipt of cash
or other property in exchange for its stock,
56
<PAGE>
(iii) Holdings should have a basis in the stock of MEEMIC equal to the amount
paid for it,
(iv) MEEMIC should recognize no gain or loss on receipt of property in
exchange for its stock, and
(v) that MEEMIC should recognize discharge of indebtedness income on the
exchange of the surplus note for shares of common stock to the extent
that the fair market value of such common stock is less than the
adjusted issue price of the surplus note.
LEGAL MATTERS
Legal matters with respect to the common stock being offered by this
prospectus will be passed on for Holdings by Dykema Gossett PLLC, Detroit,
Michigan. Donald S. Young, a member of Dykema Gossett PLLC, sits on the board of
directors of Professionals.
EXPERTS
The consolidated balance sheets of MEEMIC as of December 31, 1998 and 1997,
and the consolidated statements of income, policyholders' surplus and
comprehensive income and cash flows for each of the years in the three year
period ended December 31, 1998 and the financial statements of the personal
lines and life divisions of the agency as of December 31, 1996, and the
statement of earnings, divisional deficit and cash flows for the year then
ended, have been included in this prospectus in reliance upon the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that firm as experts in accounting and auditing. PricewaterhouseCoopers LLP has
further consented to the publication in this prospectus of the summary of its
tax opinion under the caption "Federal Income Tax Consequences" and to the use
of its name and statements with respect to it appearing in this prospectus.
ABN AMRO has reviewed and approved the statements in this prospectus as to
the valuation analysis letter, the estimated pro forma market value of Holdings
and the value of the subscription rights to purchase common stock, and consents
to the use of its name and statements with respect to it appearing in this
prospectus.
AVAILABLE INFORMATION
After the conversion, we intend to furnish our shareholders each year with
an annual report containing audited financial information and to make available
a quarterly report containing unaudited financial information following each of
the first three quarters of each year.
We have filed a registration statement on Form S-1 with the Commission to
register the shares of common stock being offered in the offering under the
Securities Act. As permitted by Commission rules, we have included some of the
information relating to the offering, such as the exhibits, in the registration
statement rather than this prospectus. The registration statement can be read
and copied at the Commission's Public Reference Room at 450 Fifth Street, N. W.,
Washington, D. C. 20549. Information about the operation of the Public Reference
Room can be obtained by calling the Commission at 1-800-SEC-0330. You may also
obtain a copy of the registration statement by accessing the Commission's
website at http://www.sec.gov. We urge you to review the exhibits which are
attached to the registration statement, since our discussion of these documents
in the prospectus is often brief and may not include every provision of the
exhibit.
57
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE COMPANY AND SUBSIDIARY
REPORT OF INDEPENDENT ACCOUNTANTS.......................................................................... F-2
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(December 31, 1998 and 1997)........................................................................... F-3
CONSOLIDATED STATEMENTS OF INCOME
(For the years ended December 31, 1998, 1997 and 1996)................................................. F-4
CONSOLIDATED STATEMENTS OF POLICYHOLDERS' SURPLUS AND COMPREHENSIVE INCOME
(For the years ended December 31, 1998, 1997 and 1996)................................................. F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
(For the years ended December 31, 1998, 1997 and 1996)................................................. F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................................................... F-7
PERSONAL LINES AND LIFE DIVISIONS OF MICHIGAN EDUCATORS INSURANCE AGENCY, INC.
REPORT OF INDEPENDENT ACCOUNTANTS.......................................................................... F-21
FINANCIAL STATEMENTS
BALANCE SHEET
(December 31, 1996).................................................................................... F-22
STATEMENT OF EARNINGS
(For the year ended December 31, 1996)................................................................. F-23
STATEMENT OF DIVISIONAL DEFICIT
(For the year ended December 31, 1996)................................................................. F-24
STATEMENT OF CASH FLOWS
(For the year ended December 31, 1996)................................................................. F-25
NOTES TO FINANCIAL STATEMENTS............................................................................ F-26
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Michigan Educational Employees Mutual
Insurance Company:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and policyholders' surplus and comprehensive
income and of cash flows present fairly, in all material respects, the financial
position of Michigan Educational Employees Mutual Insurance Company and
Subsidiary (the "Company") at December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
Grand Rapids, Michigan
March 12, 1999
F-2
<PAGE>
MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE
COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
ASSETS
Investments (Note 4):
Fixed maturities available for sale, at fair value............................. $ 122,996,615 $ 109,648,780
Short-term investments, at cost, which approximates fair value................. 1,906,496 1,894,475
-------------- --------------
Total investments............................................................ 124,903,111 111,543,255
Cash............................................................................. 3,977,602 2,204,325
Premiums due from policyholders.................................................. 3,840,764 3,599,622
Amounts recoverable from reinsurers (Note 7)..................................... 43,066,086 42,027,449
Amounts recoverable from reinsurers, related party (Note 7)...................... 16,193,962 5,307,000
Accrued investment income........................................................ 1,604,457 1,486,324
Deferred federal income taxes (Note 8)........................................... 3,338,251 2,737,658
Property and equipment, at cost, net of accumulated
depreciation (Note 9).......................................................... 2,148,550 1,834,697
Deferred policy acquisition costs (Note 10)...................................... 278,067 1,604,449
Intangible assets, net of amortization........................................... 39,268,400 42,149,314
Other assets..................................................................... 710,369 364,080
-------------- --------------
Total assets................................................................. $ 239,329,619 $ 214,858,173
-------------- --------------
-------------- --------------
LIABILITIES AND POLICYHOLDERS' SURPLUS
Liabilities:
Loss and loss adjustment expense reserves (Note 11)............................ $ 92,297,908 $ 84,920,578
Unearned premiums.............................................................. 31,585,769 29,436,092
Surplus note (Note 12)......................................................... 21,500,000 21,500,000
Payable related to acquisition (Note 6)........................................ 18,215,289 20,500,000
Accrued expenses and other liabilities......................................... 8,386,744 6,242,384
Accrued expenses and other liabilities, related party.......................... 2,356,815 1,845,944
Premiums ceded payable (Note 7)................................................ 4,464,952 4,836,000
Premiums ceded payable, related party (Note 7)................................. 7,552,920 2,003,000
Federal income taxes payable................................................... 744,801 292,603
-------------- --------------
Total liabilities............................................................ 187,105,198 171,576,601
-------------- --------------
-------------- --------------
Policyholders' surplus (Note 15):
Unassigned surplus............................................................. 50,375,927 42,009,495
Accumulated other comprehensive income: Net unrealized appreciation on
investments, net of deferred federal income taxes of $952,254 and $655,313 in
1998 and 1997, respectively.................................................. 1,848,494 1,272,077
-------------- --------------
Total policyholders' surplus................................................. 52,224,421 43,281,572
-------------- --------------
Total liabilities and policyholders' surplus................................. $ 239,329,619 $ 214,858,173
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE
COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues and other income:
Premiums written.............................................. $ 113,257,949 $ 106,349,578 $ 104,992,855
Premiums ceded, related party................................. (42,693,652) (20,115,000) --
Premiums ceded, other......................................... (4,374,144) (11,234,345) (40,707,302)
-------------- -------------- --------------
Net premiums written (Note 7)............................... 66,190,153 75,000,233 64,285,553
Increase in unearned premiums, net of prepaid reinsurance
premiums.................................................... (2,149,677) (7,169,950) (1,788,666)
-------------- -------------- --------------
Net premiums earned......................................... 64,040,476 67,830,283 62,496,887
Net investment income (Note 4)................................ 6,958,429 6,676,783 5,150,035
Net realized investment gains on fixed maturities............. 31,012 32,214 36,715
Other income.................................................. 2,110,545 840,725 588,729
-------------- -------------- --------------
Total revenues and other income............................. 73,140,462 75,380,005 68,272,366
-------------- -------------- --------------
Expenses:
Losses and loss adjustment expenses, net (including
$25,299,000 and $12,578,000 ceded to related party in 1998
and 1997, respectively) (Note 11)........................... 43,451,786 47,301,864 44,872,007
Policy acquisition and other underwriting expenses:
Other policy acquisition and underwriting expenses.......... 23,579,800 13,158,221 3,606,118
Policy acquisition expense, related party................... -- 9,103,817 12,468,244
Ceding commissions, related party........................... (12,994,651) (6,577,424) --
Management fees, related party.............................. 2,073,425 1,005,480 --
-------------- -------------- --------------
12,658,574 16,690,094 16,074,362
Interest expense, related party............................... 1,827,500 1,341,835 --
Amortization expense.......................................... 2,940,914 714,395 --
Other expense................................................. 30,695 30,417 10,791
-------------- -------------- --------------
Total expenses.............................................. 60,909,469 66,078,605 60,957,160
-------------- -------------- --------------
Income from operations before federal income taxes and
extraordinary items....................................... 12,230,993 9,301,400 7,315,206
Federal income taxes (Note 8)................................... 3,561,466 2,672,239 2,064,305
-------------- -------------- --------------
Income before extraordinary items (Note 15)................. 8,669,527 6,629,161 5,250,901
Extraordinary items:
Conversion costs, net of federal income taxes of $266,321..... (516,977) -- --
Gain on early extinguishment of debt, net of federal income
taxes of $110,181........................................... 213,882 -- --
-------------- -------------- --------------
Net income.................................................. $ 8,366,432 $ 6,629,161 $ 5,250,901
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE
COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF POLICYHOLDERS' SURPLUS
AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
UNASSIGNED COMPREHENSIVE POLICYHOLDERS'
SURPLUS INCOME SURPLUS
------------- -------------- -------------
<S> <C> <C> <C>
Balances, January 1, 1996.......................................... $ 30,129,433 $ 1,042,736 $ 31,172,169
Net income......................................................... 5,250,901 5,250,901
Net depreciation on investment securities.......................... (421,556) (421,556)
------------- -------------- -------------
Balances, December 31, 1996........................................ 35,380,334 621,180 36,001,514
Net income......................................................... 6,629,161 6,629,161
Net appreciation on investment securities.......................... 650,897 650,897
------------- -------------- -------------
Balances, December 31, 1997........................................ 42,009,495 1,272,077 43,281,572
Net income......................................................... 8,366,432 8,366,432
Net appreciation on investment securities.......................... 576,417 576,417
------------- -------------- -------------
Balances, December 31, 1998........................................ $ 50,375,927 $ 1,848,494 $ 52,224,421
------------- -------------- -------------
------------- -------------- -------------
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996
------------ -------------- -------------
<S> <C> <C> <C>
Comprehensive income: (Note 3)
Net income......................................................... $ 8,366,432 $ 6,629,161 $ 5,250,901
Net unrealized appreciation (depreciation) on investments, net of
reclassification adjustment and net of deferred federal income
taxes of $296,942 in 1998, $335,311 in 1997, and $(217,165) in
1996............................................................. 576,417 650,897 (421,556)
------------ -------------- -------------
Comprehensive income............................................. $ 8,942,849 $ 7,280,058 $ 4,829,345
------------ -------------- -------------
------------ -------------- -------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE
COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................................ $8,366,432 $6,629,161 $5,250,901
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization........................................... 3,483,469 1,359,541 540,268
Realized gains on investments........................................... (31,012) (32,214) (36,715)
Net accretion of discount on investments................................ 36,140 99,191 96,833
Deferred federal income taxes........................................... (897,534) (327,761) (435,695)
Extraordinary gain on early extinguishment of debt...................... (324,063) -- --
Changes in assets and liabilities:
Premiums due from policyholders....................................... (241,142) (421,280) (337,959)
Amounts due from reinsurers........................................... (6,746,727) (452,396) 223,119
Accrued investment income............................................. (118,133) (148,879) (281,099)
Prepaid reinsurance premiums.......................................... 6,591,000 (627,000)
Deferred policy acquisition costs..................................... 1,326,382 376,805 16,109
Other assets.......................................................... (346,289) (64,453) (59,764)
Loss and loss adjustment expense reserves............................. 7,377,330 4,567,896 9,238,625
Unearned premiums..................................................... 2,149,677 578,950 2,415,666
Accrued expenses and other liabilities................................ 2,655,231 3,489,408 855,059
Federal income taxes payable.......................................... 452,198 (600,000) 1,179,137
---------- ---------- ----------
Net cash provided by operating activities............................... 17,141,959 21,644,969 18,037,485
---------- ---------- ----------
Cash flows from investing activities:
Purchases of short-term investments....................................... (1,906,496) (1,894,475) (1,892,731)
Proceeds from sale or maturity of short-term investments.................. 1,894,475 1,892,731 1,895,852
Proceeds from maturity of securities available for sale................... 13,881,163 15,355,796 8,934,651
Purchases of securities available for sale................................ (26,360,768) (35,081,754) (27,161,758)
Proceeds from sales of property and equipment............................. 41,871 107,532 --
Purchases of property and equipment....................................... (958,279) (1,135,100) (965,841)
Cash paid for acquired company, net....................................... -- (22,363,709) --
---------- ---------- ----------
Net cash used in investing activities................................... (13,408,034) (43,118,979) (19,189,827)
---------- ---------- ----------
Cash flows from financing activities:
Issuance of surplus note.................................................. -- 21,500,000 --
Payment on payable related to acquisition................................. (1,960,648) -- --
---------- ---------- ----------
Net cash (used in) provided by financing activities..................... (1,960,648) 21,500,000 --
---------- ---------- ----------
Net increase (decrease) in cash............................................. 1,773,277 25,990 (1,152,342)
Cash, beginning of year..................................................... 2,204,325 2,178,335 3,330,677
---------- ---------- ----------
Cash, end of year........................................................... $3,977,602 $2,204,325 $2,178,335
---------- ---------- ----------
---------- ---------- ----------
Supplemental disclosures of cash flow information:
Federal income taxes paid............................................... $3,850,000 $3,200,000 $1,320,863
---------- ---------- ----------
---------- ---------- ----------
Interest paid........................................................... $1,341,835 -- --
---------- ---------- ----------
---------- ---------- ----------
Supplemental disclosure of noncash transaction:
In connection with the acquisition entered into during 1997, the Company
recorded a liability for the deferred portion of the purchase price
equal
to $20,500,000 as described in Note 6.
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE
COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS:
Michigan Educational Employees Mutual Insurance Company and Subsidiary (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. In September
1997, the Company began selling 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. Prior to that, the
Company's products were sold by Michigan Educators Insurance Agency, Inc. (see
Note 6).
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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
a. 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"), 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.
b. INVESTMENTS: At December 31, 1998 and 1997, 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 policyholders' surplus.
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 1998 or
1997 were deemed to be temporary.
Short-term investments, which consist principally of 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
F-7
<PAGE>
MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE
COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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.
c. 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.
d. 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 $985,000 and $985,000 at
December 31, 1998 and 1997, respectively. The reserve is stated gross of
reinsurance ceded.
e. 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.
f. 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.
g. 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.
h. 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 $3,655,309 and $714,395 at December 31, 1998 and
1997, respectively.
F-8
<PAGE>
MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE
COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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.
i. SURPLUS DISTRIBUTIONS: Policyholder dividends, if any, are subject to
the limitations contained in the Michigan Insurance Code.
3. COMPREHENSIVE INCOME:
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income." This standard
establishes new rules for the reporting and display of comprehensive income and
its components; however, the adoption of SFAS No. 130 had no impact on the
Company's results of operations or policyholders' equity. SFAS No. 130 requires
unrealized gains or losses on the Company's available-for-sale securities, which
prior to adoption were reported separately in policyholders' equity, to be
included in other comprehensive income. Realized investment gains on securities
held as of the beginning of the year totaling $31,012, $32,214, and $36,715 in
1998, 1997, and 1996, respectively, had unrealized appreciation of $56,570,
$43,949, and $68,312 at the beginning of 1998, 1997 and 1996, respectively.
Prior period financial statements have been reclassified to conform to the
requirements of SFAS No. 130.
4. INVESTMENTS:
A summary of amortized cost, gross unrealized gains and losses and estimated
fair value of investments in securities as of December 31, 1998 and 1997,
follows:
<TABLE>
<CAPTION>
1998
---------------------------------------------------------
<S> <C> <C> <C> <C>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
-------------- ------------ ----------- --------------
Fixed maturities available for sale:
U. S. Treasury securities and obligations of
U. S. government corporations and
agencies.......................................... $ 18,708,252 $ 288,012 $ 14,757 $ 18,981,507
Debt securities issued by states of the United
States and political subdivisions of the states... 47,519,969 1,430,055 42,470 48,907,554
Corporate debt securities........................... 19,232,634 488,748 7,940 19,713,442
Mortgage-backed securities:
Government........................................ 23,917,168 384,847 2,649 24,299,366
Other............................................. 4,011,498 133,902 -- 4,145,400
Other asset-backed securities....................... 4,983,312 56,738 -- 5,040,050
Redeemable preferred stocks......................... 1,823,034 88,014 1,752 1,909,296
-------------- ------------ ----------- --------------
Total........................................... $ 120,195,867 $ 2,870,316 $ 69,568 $ 122,996,615
-------------- ------------ ----------- --------------
-------------- ------------ ----------- --------------
</TABLE>
F-9
<PAGE>
MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE
COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS: (CONTINUED)
<TABLE>
<CAPTION>
1997
---------------------------------------------------------
<S> <C> <C> <C> <C>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
-------------- ------------ ----------- --------------
Fixed maturities available for sale:
U. S. Treasury securities and obligations of
U. S. government corporations and agencies........ $ 18,067,473 $ 104,699 $ 14,412 $ 18,157,760
Debt securities issued by states of the United
States and political subdivisions of the states... 42,440,721 1,205,075 22,952 43,622,844
Corporate debt securities........................... 16,127,289 328,035 7,279 16,448,045
Mortgage-backed securities:
Government........................................ 20,261,324 281,976 18,990 20,524,310
Other............................................. 4,024,503 13,097 -- 4,037,600
Other asset-backed securities....................... 4,972,723 16,837 -- 4,989,560
Redeemable preferred stocks......................... 1,827,357 45,340 4,036 1,868,661
-------------- ------------ ----------- --------------
Total............................................. $ 107,721,390 $ 1,995,059 $ 67,669 $ 109,648,780
-------------- ------------ ----------- --------------
-------------- ------------ ----------- --------------
</TABLE>
The amortized cost and estimated fair value of fixed maturities at December
31, 1998, 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.
<TABLE>
<CAPTION>
ESTIMATED
COST FAIR VALUE
-------------- --------------
<S> <C> <C>
Due in one year or less.......................................................... $ 8,216,771 $ 8,294,809
Due after one year through five years............................................ 42,400,968 43,488,100
Due after five years through ten years........................................... 28,335,892 29,198,546
Due after ten years.............................................................. 6,507,224 6,621,048
-------------- --------------
85,460,855 87,602,503
Mortgage-backed securities:
Government................................................................... 23,917,368 24,299,366
Other........................................................................ 4,011,298 4,145,400
Other asset-backed securities.................................................... 4,983,312 5,040,050
Redeemable preferred stocks...................................................... 1,823,034 1,909,296
-------------- --------------
Total...................................................................... $ 120,195,867 $ 122,996,615
-------------- --------------
-------------- --------------
</TABLE>
F-10
<PAGE>
MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE
COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS: (CONTINUED)
In 1998, 1997 and 1996, the Company did not have any significant voluntary
sales of fixed maturity securities. A summary of the sources of net investment
income follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
<S> <C> <C> <C>
1998 1997 1996
------------ ------------ ------------
Fixed maturities........................................................ $ 6,622,158 $ 5,794,546 $ 4,852,615
Short-term investments and cash......................................... 581,695 976,416 440,345
Other investment assets................................................. 126,986 195,245 58,536
------------ ------------ ------------
Total investment income............................................. 7,330,839 6,966,207 5,351,496
Less investment expenses............................................ 372,410 289,424 201,461
------------ ------------ ------------
Net investment income............................................... $ 6,958,429 $ 6,676,783 $ 5,150,035
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Increases (decreases) in net unrealized gains of fixed maturities were
$873,359, $986,208 and ($638,721) at December 31, 1998, 1997 and 1996,
respectively.
At December 31, 1998, U. S. Treasury notes and certificates of deposit with
a carrying value of $520,000 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.
<TABLE>
<CAPTION>
1998 1997
------------------------------ ------------------------------
<S> <C> <C> <C> <C>
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------------- -------------- -------------- --------------
Investments.................................... $ 124,903,111 $ 124,903,111 $ 111,543,225 $ 111,543,225
Cash........................................... 3,977,602 3,977,602 2,204,325 2,204,325
Premiums due from policyholders................ 3,840,764 3,840,764 3,599,622 3,599,622
Amounts due from reinsurers.................... 43,066,086 43,066,086 42,047,449 42,047,449
Accrued investment income...................... 1,604,457 1,604,457 1,486,324 1,486,324
Surplus note................................... (21,500,000) (21,500,000) (21,500,000) (21,500,000)
Payable related to acquisition................. (18,215,289) (15,000,000) (20,500,000) (17,000,000)
</TABLE>
The difference between the carrying value and fair value of payable to
related to acquisition is due to the accelerated payment option available to the
Company (see Note 6). Because the interest rate on the surplus note approximates
current rates, and because of the short-term nature of the premiums due from
policyholders, amounts due from reinsurers and accrued interest income, the fair
value of these items approximate their carrying value.
F-11
<PAGE>
MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE
COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. RELATED PARTY TRANSACTIONS:
Effective April 7, 1997, Professionals Insurance Company Management Group
("Professionals Group"), which is the parent of ProNational Insurance Company
("ProNational") signed a definitive agreement with the Company whereby:
- Nominees of Professionals Group were elected to all six positions on the
MEEMIC Board of Directors;
- ProNational purchased a $21.5 million surplus note from MEEMIC (Note 12);
- Effective July 1, 1997 ProNational began reinsuring 40 percent of MEEMIC's
net retained premiums on a quota share basis (Note 7).
Professionals Group also provided MEEMIC with information system services
and certain consulting services under a Management Services Agreement. Fees for
such services were $2,073,425 for 1998 and $1,005,480 for 1997 and were included
in other underwriting expenses.
On September 22, 1997, the Company's wholly owned subsidiary MEIA Insurance
Agency purchased the assets of the Personal Lines and Life Divisions of Michigan
Educators Insurance Agency, Inc. (including all rights to distribute MEEMIC
insurance products) for a purchase price equal to 3.75 percent of all premiums
written through MEIA Insurance Agency through July 14, 2004, payable annually,
subject to a guaranteed minimum payment of $43 million. The initial payment of
$22.5 million was paid at closing. In the event MEIA is unable to meet this
commitment, MEEMIC has guaranteed payment of the next $3 million and
Professionals Group has guaranteed payment of the final $17.5 million. Any
amounts paid in excess of the guaranteed minimum payment would be recorded as
goodwill. The goodwill of $42,363,709 recorded from this acquisition is being
amortized over 15 years. In the event that MEEMIC completes a conversion, the
guaranteed minimum payment may be accelerated at the individual option of the
former Agency shareholders. The accelerated payment amount would be equal to the
total of the remaining scheduled minimum payments plus $2 million, all
discounted at 7 percent at the time of the option exercise. If the accelerated
payment option is exercised, the impact would be recorded as an extraordinary
event related to the early extinguishment of debt.
During 1998, at the request of certain former Agency shareholders,
management approved an acceleration of individual amounts due to them related to
the above acquisition. The settlement of this early extinguishment of debt
resulted in an extraordinary gain of $213,882, net of $110,181 of federal income
taxes.
The following table sets forth the unaudited pro forma results of operations
for the years ended December 31, 1997 and 1996 as if the acquisition had been
consummated as of January 1, 1996. The unaudited pro forma results of operations
data consists of the historical results of the Company and the Personal Lines
and Life Divisions of Michigan Educators Insurance Agency, Inc. as adjusted to
give effect to (1) amortization of intangible assets and (2) an increase in
interest expense attributable to financing of the acquisition. This pro forma
information does not purport to be indicative of what results would have been
had the acquisition been made as of that date or of results which may occur in
the future.
F-12
<PAGE>
MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE
COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. RELATED PARTY TRANSACTIONS: (CONTINUED)
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Revenues and other income:
Net premiums earned............................................................ $ 67,830,283 $ 62,496,887
Net investment income.......................................................... 6,676,783 5,150,035
Net realized investment gains on fixed maturities.............................. 32,214 36,715
Other income................................................................... 2,057,547 1,847,596
------------- -------------
Total revenues and other income.............................................. 76,596,827 69,531,233
------------- -------------
Expenses:
Losses and loss adjustment expenses, net....................................... 47,301,864 44,872,007
Policy acquisition and other underwriting expenses............................. 15,927,802 13,650,853
Interest expense............................................................... 1,827,500 1,886,036
Amortization expense........................................................... 2,924,247 2,924,247
Other expense.................................................................. 30,417 10,905
------------- -------------
Total expenses............................................................... 68,011,830 63,344,048
------------- -------------
Income from operations before federal income taxes........................... 8,584,997 6,187,185
Federal income taxes............................................................... 2,428,662 1,680,778
------------- -------------
Net income..................................................................... $ 6,156,335 $ 4,506,407
------------- -------------
------------- -------------
</TABLE>
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, 1998, MEEMIC's maximum current net retention,
subject to certain adjustments of risk on any single coverage per claim after
reinsurance is $150,000.
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.
F-13
<PAGE>
MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE
COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. REINSURANCE: (CONTINUED)
At December 31, 1998, amounts due from reinsurers were as follows:
<TABLE>
<CAPTION>
AMOUNTS
DUE FROM
REINSURERS
-------------
<S> <C>
Michigan Catastrophic Claims Association....................................... $ 33,677,052
American Reinsurance Company................................................... 6,298,442
Continental Casualty Company................................................... 2,678,582
Other.......................................................................... 412,010
-------------
43,066,086
ProNational Insurance Company, related party................................... 16,193,962
-------------
$ 59,260,048
-------------
-------------
</TABLE>
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:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
<S> <C> <C>
1998 1997
------------- -------------
Paid losses and loss adjustment expenses....................... $ 5,926,808 $ 429,449
Unpaid losses and loss adjustment expenses..................... 53,333,240 46,905,000
------------- -------------
Amounts recoverable from reinsurers.......................... 59,260,048 47,334,449
Premiums ceded payable......................................... (4,464,952) (4,836,000)
Premiums ceded payable, related party.......................... (7,552,920) (2,003,000)
------------- -------------
$ 47,242,176 $ 40,495,449
------------- -------------
------------- -------------
</TABLE>
Premiums earned and losses and loss adjustment expenses are net of the
following reinsurance ceded amounts:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
<S> <C> <C> <C>
1998 1997 1996
------------- ------------- -------------
Premiums earned............................ $ 47,067,796 $ 37,939,925 $ 40,080,646
Losses and loss adjustment expenses
incurred................................. 30,277,700 22,741,000 23,227,000
</TABLE>
F-14
<PAGE>
MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE
COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. REINSURANCE: (CONTINUED)
Effective July 1, 1997, the Company entered into a coinsurance treaty with
ProNational to cede 40 percent of its net retained premiums on a quota share
basis. Ceding commissions were $12,994,651 in 1998 and $6,577,424 in 1997. A
summary of reinsurance amounts, which are included above, that were ceded to
ProNational follows:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Premiums earned................................................ $ 42,693,652 $ 20,115,000
Losses and loss adjustment expenses incurred................... 25,299,000 12,578,000
</TABLE>
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. A valuation allowance is then
required to be established to reduce a deferred tax asset if it is "more likely
than not" that the related tax benefits will not be realized.
The provision for federal income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 ,
----------------------------------------
<S> <C> <C> <C>
1998 1997 1996
------------ ------------ ------------
Current........................................ $ 4,459,000 $ 3,000,000 $ 2,500,000
Deferred....................................... (897,534) (327,761) (435,695)
------------ ------------ ------------
$ 3,561,466 $ 2,672,239 $ 2,064,305
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Actual federal income taxes vary from amounts computed by applying the
current federal income tax rate of 34 percent to income or loss before federal
income taxes. For the years ended December 31, 1998, 1997 and 1996, the reasons
for these differences, and the tax effects thereof, are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
<S> <C> <C> <C>
1998 1997 1996
------------ ------------ ------------
Expected tax expense........................... $ 4,158,537 $ 3,162,476 $ 2,487,170
Dividends received deduction................... (30,245) (34,566) (23,222)
Tax-exempt interest............................ (688,130) (596,986) (485,978)
Other, net..................................... 121,304 141,315 86,335
------------ ------------ ------------
Actual tax expense............................. $ 3,561,466 $ 2,672,239 $ 2,064,305
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-15
<PAGE>
MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE
COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. FEDERAL INCOME TAXES: (CONTINUED)
The tax effects of temporary differences that give rise to deferred income tax
assets and deferred federal income tax liabilities follow:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------------
<S> <C> <C>
1998 1997
------------ ------------
Deferred federal income tax assets arising from:
Loss and loss adjustment expense reserves.................. $ 1,358,289 $ 1,326,019
Unearned premium reserves.................................. 2,147,832 2,001,654
Accruals for fringe benefits............................... 712,836 456,481
Advanced premiums.......................................... 113,572 105,654
Other, net................................................. 112,209 108,398
------------ ------------
Total deferred federal income tax assets................. 4,444,738 3,998,206
------------ ------------
Deferred federal income tax liabilities arising from:
Deferred policy acquisition costs.......................... 94,543 545,513
Unrealized gains on investments............................ 952,254 655,313
Salvage and subrogation recoverable........................ 25,118 25,118
Other...................................................... 34,572 34,604
------------ ------------
Total deferred federal income tax liabilities............ 1,106,487 1,260,548
------------ ------------
Net deferred federal income taxes........................ $ 3,338,251 $ 2,737,658
------------ ------------
------------ ------------
</TABLE>
In assessing the reliability of deferred federal income tax assets,
management considers whether it is more likely than not that some portion of the
deferred federal income tax assets will not be realized. Because of the
carryforward provisions of the Internal Revenue Code, the expectation that
temporary differences will reverse during periods in which taxable income is
generated, and the Company's operating results for 1998, 1997 and 1996,
management believes it is more likely than not that the Company will fully
realize the net deferred federal income tax assets. Accordingly, no valuation
allowance has been established.
9. PROPERTY AND EQUIPMENT:
At December 31, 1998 and 1997, property and equipment consisted of the
following:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------------
<S> <C> <C>
1998 1997
------------ ------------
Data processing equipment, including software..................... $ 2,432,930 $ 2,734,598
Furniture, fixtures and equipment................................. 2,340,855 2,086,340
------------ ------------
4,773,785 4,820,938
Accumulated depreciation.......................................... 2,625,235 2,986,241
------------ ------------
Total property and equipment.................................. $ 2,148,550 $ 1,834,697
------------ ------------
------------ ------------
</TABLE>
F-16
<PAGE>
MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE
COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. DEFERRED POLICY ACQUISITION COSTS:
Changes in deferred policy acquisition costs are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
<S> <C> <C> <C>
1998 1997 1996
------------ ------------ ------------
Net asset balance, beginning of year........... $ 1,604,449 $ 1,981,254 $ 1,997,363
------------ ------------ ------------
Amounts deferred:
Commissions to agents........................ 13,610,598 12,702,913 12,468,244
Ceding commission income..................... 13,027,889 8,614,936 6,748,078
------------ ------------ ------------
Net amounts deferred....................... 582,709 4,087,977 5,720,166
Net amortization............................... 1,909,091 4,464,782 5,736,275
------------ ------------ ------------
Net asset balance, end of year................. $ 278,067 $ 1,604,449 $ 1,981,254
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
11. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES:
Activity in loss and loss adjustment expense reserves is summarized as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
<S> <C> <C> <C>
1998 1997 1996
------------- ------------- -------------
Balance, beginning of year................. $ 84,920,578 $ 80,352,682 $ 71,114,057
Less reinsurance balance recoverable..... 46,905,000 44,657,000 41,544,000
------------- ------------- -------------
Net balance, beginning of year......... 38,015,578 35,695,682 29,570,057
Incurred related to:
Current year............................. 47,073,649 54,053,427 47,600,725
Prior years.............................. (3,621,863) (6,751,563) (2,728,718)
------------- ------------- -------------
Total incurred......................... 43,451,786 47,301,864 44,872,007
Paid related to:
Current year............................. 31,009,016 30,176,142 25,981,678
Prior years.............................. 11,493,680 14,805,826 12,764,704
------------- ------------- -------------
Total paid............................. 42,502,696 44,981,968 38,746,382
------------- ------------- -------------
Net balance, end of year................... 38,964,668 38,015,578 35,695,682
Plus reinsurance balances recoverable...... 53,333,240 46,905,000 44,657,000
------------- ------------- -------------
Balance, end of year................... $ 92,297,908 $ 84,920,578 $ 80,352,682
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
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 1998, 1997 and 1996 decreased by $3,621,863, $6,751,563
and $2,728,718, 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 1998 and 1997. The 1994
legislation became effective in 1996 and the effects were uncertain at that
time. As time has passed, the data and effects of the tort reform have
stabilized and management has reduced reserves related to prior accident years
accordingly.
F-17
<PAGE>
MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE
COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SURPLUS NOTE:
On April 7, 1997, ProNational Insurance Company purchased a $21,500,000
surplus note from the Company. Interest is payable annually at a rate of 8.5
percent. The entire principal and any accrued unpaid interest is due on April 7,
2009. However, repayment of any principal or interest is subject to written
authorization by the Commissioner of Insurance of the State of Michigan and
approval by the Company's Board of Directors. At December 31, 1998, this note
had an outstanding balance of $21,500,000 with accrued interest of $1,827,500.
On May 26, 1998, the accrued interest for 1997 of $1,341,835 was paid to
ProNational following the State and Board's approval.
In conjunction with the Company's plan of conversion, as more fully
described in Note 17, ProNational has elected to exchange the $21.5 million
surplus note and accrued but unpaid interest of $1,522,090 as of November 1,
1998, for shares of common stock of MEEMIC Holdings, Inc. to be issued upon
completion of the Company's conversion.
13. EMPLOYEE BENEFIT PLANS:
The Company has a qualified defined contribution 401(k) plan which covers
substantially all of its employees. The Company matches 50 percent of employees'
contributions up to a maximum rate of 2.5 percent 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 $505,024, $477,068 and $282,578 for 1998,
1997 and 1996, 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 $171,886 in
1998, $169,964 in 1997 and $120,611 in 1996.
Effective January 1, 1997, the Company established 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 and
individual goals and are calculated as a percentage of base compensation. The
charge to income under this plan was approximately $500,000 in both 1998 and
1997.
14. LEASE AGREEMENTS:
The Company is obligated under an operating lease for office space.
At December 31, 1998, future minimum lease payments are as follows:
<TABLE>
<S> <C>
1999............................................................ $ 778,000
2000............................................................ 778,000
2001............................................................ 778,000
2002............................................................ 778,000
2003 and thereafter............................................. 3,002,000
---------
$6,114,000
---------
---------
</TABLE>
F-18
<PAGE>
MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE
COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. LEASE AGREEMENTS: (CONTINUED)
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 $1,146,019, $981,159 and $974,880 in 1998, 1997 and 1996,
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
Michigan Insurance Bureau. 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, 1998 and 1997, and statutory net income for the years
ended December 31, 1998, 1997 and 1996, as filed with the Michigan Insurance
Bureau, to the amounts shown in the accompanying financial statements follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
<S> <C> <C>
1998 1997
-------------- --------------
Statutory capital and surplus..................................................... $ 40,372,903 $ 34,512,849
Net unrealized appreciation on securities available for sale...................... 2,800,748 1,927,390
Deferred policy acquisition costs capitalized for GAAP............................ 278,067 1,604,449
Deferred federal income taxes recorded for GAAP................................... 3,338,251 2,737,658
Assets nonadmitted for SAP........................................................ 26,934,452 23,999,226
Surplus note...................................................................... (21,500,000) (21,500,000)
-------------- --------------
Total policyholders' surplus per accompanying consolidated balance sheets..... $ 52,224,421 $ 43,281,572
-------------- --------------
-------------- --------------
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
<S> <C> <C> <C>
1998 1997 1996
------------- ------------ -------------
Statutory net income.................................................. $ 6,066,977 $ 6,315,333 $ 4,816,465
Deferred federal income tax expense recorded for GAAP................. 897,534 327,761 435,695
Deferred policy acquisition costs capitalized for GAAP................ (1,326,383) (376,805) (16,109)
Equity in net income of subsidiary unconsolidated for statutory
reporting........................................................... 2,728,304 361,622
Other................................................................. -- 1,250 14,850
------------- ------------ -------------
Net income per accompanying consolidated statements of income..... $ 8,366,432 $ 6,629,161 $ 5,250,901
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
Certain regulations that affect MEEMIC and the insurance industry are
promulgated by the National Association of Insurance Commissioners ("NAIC"),
which is an association of state insurance commissioners, regulators and support
staff that acts as a coordinating body for the state insurance regulatory
process. The NAIC has established risk-based capital ("RBC") requirements to
assist regulators in monitoring the financial strength and stability of property
and casualty insurers. Under the
F-19
<PAGE>
MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE
COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. STATUTORY INSURANCE ACCOUNTING PRACTICES: (CONTINUED)
NAIC requirements, each insurer must maintain its total capital and surplus
above a calculated minimum threshold or take corrective measures to achieve that
threshold. MEEMIC has calculated its RBC level based on these requirements and
has determined that it passed the RBC test and has capital and surplus in excess
of the minimum threshold.
16. CONTINGENCIES:
The Company participates in the Property and Casualty Guaranty 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. 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 a newly formed holding company, MEEMIC
Holdings, Inc.
MEEMIC Holdings, Inc. will in turn acquire all of the newly issued stock of
the Company upon conversion. Prior to the conversion, MEEMIC Holdings, Inc. will
not engage in any significant operations and will have no 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 January
20, 1999, the Company filed Amendment No. 1 to its registration statement with
the Securities and Exchange Commission ("SEC") for this offering. Pending
clearance of the Company's offering materials by the SEC, the plan must then be
approved by at least two-thirds of the votes cast by eligible policyholders in
order to become effective.
The Company has received a tax opinion regarding the tax treatment of the
conversion as a tax-free reorganization. In the event that the plan is executed,
the converted company will be subject to certain insurance laws and regulations
specific to stock insurance companies as well as regulations of the SEC.
Limitations on the payment of dividends and Insurance Holding Company
regulations are among the types of regulatory requirements with which MEEMIC
Holdings, Inc. will have to comply. In addition, the Management Services
Agreement with Professionals will be terminated upon completion of the
conversion.
In connection with the conversion, certain professional service costs have
been incurred that, due to their nature, have been recorded as extraordinary
costs in the accompanying 1998 consolidated statement of income.
F-20
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Michigan Educational Employees Mutual
Insurance Company:
In our opinion, the accompanying divisional balance sheet and the related
divisional statements of earnings and divisional deficit and of cash flows
present fairly, in all material respects, the financial position of the Personal
Lines and Life Divisions of Michigan Educators Insurance Agency, Inc. at
December 31, 1996, and the results of their operations and their cash flows for
the one-year period ended December 31, 1996, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
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 audit provides a
reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Grand Rapids, Michigan
July 2, 1998
F-21
<PAGE>
PERSONAL LINES AND LIFE DIVISIONS OF
MICHIGAN EDUCATORS INSURANCE AGENCY, INC.
BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash.......................................................................... $ 264
Receivables:
Commissions................................................................. 89,356
Other....................................................................... 3,758
Prepaid expenses.............................................................. 9,717
-----------
Total current assets........................................................ 103,095
Property and equipment:
Furniture and fixtures........................................................ 541,663
Computer equipment............................................................ 369,688
Software...................................................................... 94,776
Leasehold improvements........................................................ 334,892
-----------
1,341,019
Less accumulated depreciation................................................. 884,654
-----------
Property and equipment, net................................................. 456,365
Other assets.................................................................... 20,000
-----------
Total assets................................................................ $ 579,460
-----------
-----------
LIABILITIES AND DIVISIONAL DEFICIT
Current liabilities:
Commissions payable........................................................... $ 523,136
Accounts payable and accrued liabilities...................................... 972,633
-----------
Total current liabilities................................................... 1,495,769
Divisional deficit.............................................................. (916,309)
-----------
Total liabilities and divisional deficit.................................... $ 579,460
-----------
-----------
</TABLE>
The accompanying notes are an integral part of the divisional financial
statements.
F-22
<PAGE>
PERSONAL LINES AND LIFE DIVISIONS OF
MICHIGAN EDUCATORS INSURANCE AGENCY, INC.
STATEMENT OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
Commission revenue............................................................. $13,727,111
Operating expenses............................................................. 10,828,592
----------
Operating income........................................................... 2,898,519
Other expense:
Interest expense............................................................. 58,536
Loss on sales of property and equipment...................................... 114
----------
Total other expenses....................................................... 58,650
----------
Net income................................................................. $2,839,869
----------
----------
</TABLE>
The accompanying notes are an integral part of the divisional financial
statements.
F-23
<PAGE>
PERSONAL LINES AND LIFE DIVISIONS OF
MICHIGAN EDUCATORS INSURANCE AGENCY, INC.
STATEMENT OF DIVISIONAL DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
Balance, January 1, 1996....................................................... $ 74,588
Net income..................................................................... 2,839,869
Distributions of divisional equity............................................. (3,830,766)
-----------
Balance, December 31, 1996..................................................... $ (916,309)
-----------
-----------
</TABLE>
The accompanying notes are an integral part of the divisional financial
statements.
F-24
<PAGE>
PERSONAL LINES AND LIFE DIVISIONS OF
MICHIGAN EDUCATORS INSURANCE AGENCY, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Cash flows from operating activities:
<S> <C>
Net income.................................................................... $2,839,869
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................................... 120,956
Loss on sales of property and equipment..................................... 114
Changes in operating assets and liabilities which increase (decrease) cash
flows:
Receivables:
Commissions............................................................. (62,921)
Other................................................................... (5,228)
Prepaid expenses.......................................................... (9,717)
Commissions payable....................................................... 70,753
Accounts payable and accrued liabilities.................................. 928,027
-----------
Net cash provided by operating activities............................... 3,881,853
-----------
Cash flows from investing activities:
Purchases of property and equipment........................................... (66,486)
Proceeds from sales of property and equipment................................. 3,185
-----------
Net cash used in investing activities................................... (63,301)
-----------
Cash flows from financing activities:
Distributions of divisions' equity............................................ (3,830,766)
Payments of capital lease obligations......................................... (41,832)
-----------
Net cash used in financing activities................................... (3,872,598)
-----------
Net decrease in cash............................................................ (54,046)
Cash, beginning of year......................................................... 54,310
-----------
Cash, end of year............................................................... $ 264
-----------
-----------
Supplemental disclosure of cash flow information, interest paid................. $ 58,536
-----------
-----------
</TABLE>
The accompanying notes are an integral part of the divisional financial
statements.
F-25
<PAGE>
PERSONAL LINES AND LIFE DIVISIONS OF
MICHIGAN EDUCATORS INSURANCE AGENCY, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
a. BASIS OF PRESENTATION: On September 22, 1997, the Michigan Educators
Insurance Agency, Inc. (including Michigan Educators Life Insurance Agency,
Inc.) (the "Company") sold substantially all of its assets (including all rights
to distribute Michigan Educational Employee Mutual Insurance Company ("MEEMIC")
insurance products) to MEIA Insurance Agency, a wholly owned subsidiary of
MEEMIC for a purchase price equal to 3.75 percent of all premiums written
through MEIA Insurance Agency through July 14, 2004, subject to a guaranteed
minimum payment of $43 million. The initial payment of $22.5 million was paid at
closing. MEEMIC has guaranteed payment of the next $3 million and Professionals
Insurance Company Management Group has guaranteed payment of the final $17.5
million.
Accordingly, the accompanying financial statements represent the personal
lines and life divisions of the Company which were sold to MEEMIC. The
statements include all of the assets of the Personal Lines and Life Divisions of
the Company and all of the liabilities incurred to support those operations as
well as all of its cash flows. The Company is an independent insurance agency
selling primarily private automobile and homeowners insurance to members of the
Michigan educational community. The majority of sales are for and commission
revenue from one insurance company.
These financial statements include all costs of doing business of the
Company except those specifically identified by management as not relating to
the personal lines and life divisions. Management believes that these costs,
while reasonable, may not necessarily be indicative of costs that would have
been incurred had the divisions operated as a stand-alone entity.
b. PROPERTY AND EQUIPMENT: Property and equipment are recorded at cost.
The Company uses accelerated methods for depreciation of assets. Costs of
maintenance and repairs are charged to expense when incurred. Upon retirement or
disposal of properties, the cost and accumulated depreciation are removed from
the accounts, and any gain or loss is included in income.
c. REVENUE RECOGNITION: Commissions are recognized as policies become
effective.
d. INCOME TAXES: The Company has elected to be taxed under the provisions
of Subchapter S of the Internal Revenue Code. Under these provisions, the
Company pays no corporate federal income taxes. Instead, stockholders pay
individual federal income taxes on their allocated shares of the Company's
taxable income. Accordingly, there is no provision for income taxes included in
the division's accompanying statement of earnings.
e. USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of the assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statement, and the reported amounts of revenue and expenses during
the period. Actual results could differ from those estimates.
2. LEASES:
The Company's corporate offices are leased from a partnership in which
certain Company stockholders are partners. Under this operating lease, which
expires in 2006, the Company is responsible for
F-26
<PAGE>
PERSONAL LINES AND LIFE DIVISIONS OF
MICHIGAN EDUCATORS INSURANCE AGENCY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. LEASES: (CONTINUED)
insurance, utilities, maintenance, and real estate taxes. At December 31, 1996,
future minimum lease payments are as follows:
<TABLE>
<S> <C>
1997............................................................ $ 181,100
1998............................................................ 181,100
1999............................................................ 181,100
2000............................................................ 181,100
2001 and thereafter............................................. 1,026,200
---------
$1,750,600
---------
---------
</TABLE>
Expenses incurred related to this lease were approximately $170,000 for the
year ended December 31, 1996. These leases were assumed by MEEMIC in connection
with the sale of the assets as described in Note 1.
3. EMPLOYEE SAVINGS PLAN:
The Company has an employee savings plan 401(k) plan covering substantially
all employees. As defined by the plan, the Company may contribute a percentage
of employee compensation and/or match employee contributions. Employer
contributions begin to vest in the third year of service and are fully vested
after five years. The charge to income under this plan in 1996 was approximately
$90,000.
F-27
<PAGE>
GLOSSARY OF SELECTED INSURANCE TERMS
The following insurance terms, when used in this Prospectus, have the
meanings ascribed to them below.
A.M. BEST RATINGS. A.M. Best Ratings are divided into "Secure" and
"Vulnerable" rating groups as follows: Secure Ratings: A++, A+ (Superior); A, A-
(Excellent); and B++, B+ (Very Good). Vulnerable Ratings: B, B- (Adequate); C++,
C+ (Fair); C, C- (Marginal); D (Very Vulnerable); E (Under State Supervision);
and F (In Liquidation).
CEDE. To transfer to another insurer (the reinsurer) all or part of the
insurance risk underwritten by an insurer.
COMBINED RATIO. The sum of the expense ratio and the loss and LAE ratio. A
combined ratio under 100% generally indicates an underwriting profit and a
combined ratio over 100% generally indicates an underwriting loss.
DIRECT WRITTEN PREMIUMS. Total premiums written by an insurer other than
premiums for reinsurance assumed by an insurer.
EARNED PREMIUM. The prorated portion of an insurance premium which is no
longer considered prepaid as a result of the elapsed time the insurance policy
has been in force. For example, after three months, $6,000 of a prepaid $24,000
annual premium is considered earned premium.
EXCESS OF LOSS REINSURANCE. A form of reinsurance in which the insurer
cedes to a reinsurer, and such reinsurer assumes, all or a portion of losses in
excess of a specified retention level up to a predetermined limit.
EXPENSE RATIO. The ratio of underwriting expenses to net premiums earned.
INCURRED BUT NOT REPORTED (IBNR). The liability for future payments on
losses which have occurred but have not yet been reported.
LIQUIDITY. The ability to convert financial holdings into cash in a timely
manner without the loss of principal.
LOSS ADJUSTMENT EXPENSES (LAE). The expense of settling claims, including
legal and other fees.
LOSS AND LAE RATIO. The ratio of incurred losses and loss adjustment
expenses to premiums earned.
MICHIGAN CATASTROPHIC CLAIMS ASSOCIATION. A reinsurance association created
by the Michigan Legislature that has State-mandated participation for all
companies writing automobile insurance in Michigan.
NAIC. The National Association of Insurance Commissioners, an association
of the chief insurance supervisory official of each state, territory and insular
possession of the United States.
NET EARNED PREMIUMS. The portion of written premiums that is recognized for
accounting purposes as revenue during a period.
NET WRITTEN PREMIUMS. Premiums retained by an insurer after deducting
premiums on business ceded to others.
QUOTA SHARE REINSURANCE. A form of treaty or facultative reinsurance in
which the insurer cedes and reinsurer assumes an agreed-upon percentage of
risks. Also known as proportional reinsurance.
G-1
<PAGE>
REINSURANCE. A procedure whereby an insurer remits or cedes a portion of
the premium to a reinsurer as payment to the reinsurer for assuming a portion of
the risk or liability under the policy. Reinsurance can be effected by
"treaties" under which all risks of a defined category, amount and type for a
primary insurer are covered, or on a "facultative" basis under which risks are
covered on an individual, contract-by contract basis.
RESERVES. Liability established by an insurer to reflect the estimated cost
of claim payments and related expenses that the insurer will ultimately be
required to pay with respect to the insurance it has underwritten.
RESERVE REDUNDANCY. The amount by which the reserves currently established
by an insurer exceed the currently estimated cost of claim payments and related
expenses that the insurer will ultimately be required to pay.
STANDARD & POOR'S RATINGS. Standard & Poor's Claims-Paying Ability Ratings
are divided into "Secure Range" and "Vulnerable Range" groupings as follows.
Secure Range: AAA (Superior); AA (Excellent); A (Good); and BBB (Adequate).
Vulnerable Range: BB (May be Adequate); B (Vulnerable); CCC (Extremely
Vulnerable); and R (Regulatory Action).
STATUTORY ACCOUNTING PRACTICES. Those principles required by state law
which must be followed by insurers in submitting their financial statements to
state insurance departments.
STATUTORY SURPLUS. The amount remaining after all liabilities of an
insurance company are subtracted from all of its admitted assets, applying
statutory accounting principles.
SURPLUS. The amount by which a company's assets exceed its liabilities.
UNEARNED PREMIUM. The proration portion of an insurance premium considered
to be a prepayment. For example, after three months, $18,000 of a prepaid
$24,000 annual premium is still considered unearned premium.
G-2
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE SUBSCRIPTION OFFERING
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION WHICH IS NOT CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY HOLDINGS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY COMMON
STOCK HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE UNDER THIS PROSPECTUS SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED IN THIS
PROSPECTUS IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................ 2
Risk Factors...................... 6
Forward-looking Information....... 9
The Conversion.................... 9
Plan of Distribution.............. 14
Use of Proceeds................... 16
Capitalization.................... 17
Pro Forma Data.................... 18
Selected Historical Financial and
Operating Data.................. 23
Management's Discussion and
Analysis of Financial Condition
and Results of Operations....... 25
Market for the Common Stock....... 31
Dividend Policy................... 31
Business of MEEMIC................ 32
Management........................ 47
Security Ownership................ 52
Related Party Transactions........ 52
Description of Common Stock....... 53
Restrictions on Acquisition of and
Business Combinations by
Holdings........................ 54
Federal Income Tax Consequences... 56
Legal Matters..................... 57
Experts........................... 57
Available Information............. 57
Financial Statements.............. F-1
Glossary of Insurance Terms....... G-1
</TABLE>
UNTIL , 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OF HOLDINGS WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS.
UP TO 4,297,791 SHARES THROUGH
108,048 SUBSCRIPTION RIGHTS
[LOGO]
MEEMIC HOLDINGS, INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION REQUIRED IN THE REGISTRATION STATEMENT
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses and costs expected to be
incurred by Holdings in connection with the issuance and distribution of the
securities being registered under this registration statement. Except for the
Securities and Exchange Commission and Nasdaq fees, all expenses have been
estimated and are subject to future contingencies.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee............... $ 18,348
Nasdaq and Entry Listing Fee...................................... 66,875
Legal fees and expenses........................................... 160,000
Accounting fees and expenses...................................... 100,000
Blue Sky fees and expenses........................................ 15,000
Transfer agent and registrar fees and expenses.................... 310,000
Miscellaneous..................................................... 29,777
---------
Total......................................................... $ 700,000
---------
---------
</TABLE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
The following exhibits are filed with this Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ----------------------------------------------------------------------
<C> <S>
*2.1 Plan of Conversion dated June 24, 1998
2.2 Standby Purchase and Option Agreement dated November 13, 1998
*3.1 Articles of Incorporation--MEEMIC Holdings, Inc.
*3.2 Bylaws--MEEMIC Holdings, Inc.
*4.1 See Articles of Incorporation, filed as Exhibit 3.1
4.2 Specimen Stock Certificate representing the Common Stock
5.1. Opinion of Dykema Gossett PLLC regarding the validity of the
securities being registered
8.1 Opinion of PricewaterhouseCoopers LLP regarding tax matters
*10.1 Agreement between MEEMIC, Professionals Insurance Company Management
Group and PICOM Insurance Company dated February 7, 1997
*10.2 Surplus Note of MEEMIC dated April 7, 1997
*10.3 Management Services Agreement between MEEMIC, Professionals Insurance
Company Management Group dated April 7, 1997, along with First
Amendment to the Management Services Agreement dated October 15,
1997
*10.4 Quota Share Reinsurance Contract between MEEMIC and PICOM Insurance
Company effective July 1, 1997
*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
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ----------------------------------------------------------------------
<C> <S>
*10.6 Inter-Creditor Agreement between MEEMIC Insurance Services
Corporation, MEEMIC and Professionals Insurance Company Management
Group dated September 22, 1997
*10.7 Agreement of Guaranty between MEEMIC, Michigan Educators Insurance
Agency, Inc. and Michigan Educators Life Insurance Agency, Inc.
dated September 22, 1997
*10.8 Assignment of Lease from Michigan Educators Insurance Agency, Inc. to
MEEMIC dated September 22, 1997, along with the Lease Agreement
dated June 28, 1991, as amended by the Lease Agreement dated July 1,
1995 and as amended by the Addendum to Lease dated March 12, 1996
*10.9. MEEMIC Incentive Plan dated January 7, 1997
*10.10 MEEMIC Amended and Restated Incentive Plan dated as of December 31,
1997
*10.11 MEEMIC Holdings, Inc. Stock Compensation Plan dated October 21, 1998
*10.12 Severance/Benefits Agreement with Lynn M. Kalinowski dated August 10,
1993
**10.13 Escrow Agreement, by and among MEEMIC, MEEMIC Holdings, Inc.,
ChaseMellon Shareholder Services, L.L.C. and The Chase Manhattan
Bank, N.A., dated , 1999
*21.1 Subsidiaries of the Registrant
23.1 Consent of ABN AMRO Incorporated
23.2 Consent of PricewaterhouseCoopers LLP
*23.3 Consent of Dykema Gossett PLLC (contained in the opinion filed as
Exhibit 5)
*24.1 Powers of Attorney (included on page II-7 of initial registration
statement filing)
27.1 Financial Data Schedule
99.1 Stock Order Form and Form of Proxy
99.2 Question and Answer Brochure
99.3 Letter to Prospective Purchasers
99.4 Valuation Analysis Letter
</TABLE>
- ------------------------
* Previously filed
** To be filed by amendment
(b) Financial Statement Schedules: All financial statement schedules have
been omitted because they are not required or because the required information
is given in the consolidated financial statements or notes thereto.
ITEM 17. UNDERTAKINGS.
(a) Rule 415 Offering: The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement: (i) to include
any prospectus required by Section 10(a)(3) of the Securities Act; (ii) to
reflect in the prospectus any fact or events arising after the effective
date
II-2
<PAGE>
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental
change in the information set forth in the registration statement; and (iii)
to include any material information with respect to the plan of distribution
not previously disclosed in the registration statement or any material
change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) Request for acceleration of effective date: Insofar as indemnification
for liabilities arising under the Securities Act may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the provisions
described in Item 14 above, or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-3
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ----------------------------------------------------------------
<C> <S>
*2.1 Plan of Conversion dated June 24, 1998
2.2 Standby Purchase and Option Agreement dated November 13, 1998
*3.1 Articles of Incorporation--MEEMIC Holdings, Inc.
*3.2 Bylaws--MEEMIC Holdings, Inc.
*4.1 See Articles of Incorporation, filed as Exhibit 3.1
4.2 Specimen Stock Certificate representing the Common Stock
5.1. Opinion of Dykema Gossett PLLC regarding the validity of the
securities being registered
8.1 Opinion of PricewaterhouseCoopers LLP regarding tax matters
*10.1 Agreement between MEEMIC, Professionals Insurance Company
Management Group and PICOM Insurance Company dated February 7,
1997
*10.2 Surplus Note of MEEMIC dated April 7, 1997
*10.3 Management Services Agreement between MEEMIC, Professionals
Insurance Company Management Group dated April 7, 1997, along
with First Amendment to the Management Services Agreement
dated October 15, 1997
*10.4 Quota Share Reinsurance Contract between MEEMIC and PICOM
Insurance Company effective July 1, 1997
*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
*10.6 Inter-Creditor Agreement between MEEMIC Insurance Services
Corporation, MEEMIC and Professionals Insurance Company
Management Group dated September 22, 1997
*10.7 Agreement of Guaranty between MEEMIC, Michigan Educators
Insurance Agency, Inc. and Michigan Educators Life Insurance
Agency, Inc. dated September 22, 1997
*10.8 Assignment of Lease from Michigan Educators Insurance Agency,
Inc. to MEEMIC dated September 22, 1997, along with the Lease
Agreement dated June 28, 1991, as amended by the Lease
Agreement dated July 1, 1995 and as amended by the Addendum to
Lease dated March 12, 1996
*10.9. MEEMIC Incentive Plan dated January 7, 1997
*10.10 MEEMIC Amended and Restated Incentive Plan dated as of December
31, 1997
*10.11 MEEMIC Holdings, Inc. Stock Compensation Plan dated October 21,
1998
*10.12 Severance/Benefits Agreement with Lynn M. Kalinowski dated
August 10, 1993
**10.13 Escrow Agreement, by and among MEEMIC, MEEMIC Holdings Inc.,
ChaseMellon Shareholder Services, L.L.C. and The Chase
Manhattan Bank, N.A., dated , 1999
*21.1 Subsidiaries of the Registrant
23.1 Consent of ABN AMRO Incorporated
23.2 Consent of PricewaterhouseCoopers LLP
*23.3 Consent of Dykema Gossett PLLC (contained in the opinion filed
as Exhibit 5.1)
*24.1 Powers of Attorney (included on page II-7 of initial
registration statement filing)
27.1 Financial Data Schedule
99.1 Stock Order Form and Form of Proxy
99.2 Question and Answer Brochure
99.3 Letter to Prospective Purchasers
99.4 Valuation Analysis Letter
</TABLE>
- ------------------------
* Previously submitted.
** To be filed by amendment
<PAGE>
STANDBY PURCHASE AND OPTION AGREEMENT
This Standby Purchase and Option Agreement (the "Agreement") is entered
into as of November 13, 1998, by and between MEEMIC Holdings, Inc., a Michigan
corporation ("MEEMIC Holdings"), ProNational Insurance Company, a Michigan
domiciled stock insurance company ("ProNational") and Professionals Group, Inc.,
a Michigan corporation ("Professionals").
RECITALS
WHEREAS, on June 24, 1998, the Board of Directors of MEEMIC approved a
Plan of Conversion that contemplates the offering of stock in MEEMIC Holdings to
Eligible Policyholders of MEEMIC in accordance with the terms of the Plan of
Conversion;
WHEREAS, on June 24, 1998, MEEMIC filed the Plan of Conversion with the
Michigan Insurance Bureau for approval;
WHEREAS, before proceeding with the Offering contemplated by the Plan
of Conversion the parties desire to commit to writing the obligation of the
Purchaser to purchase Shares of MEEMIC Holdings in certain circumstances as set
forth in this Agreement; and
WHEREAS, pursuant to the Plan of Conversion and in connection with the
transactions contemplated by the Plan of Conversion, MEEMIC Holdings desires to
grant to the Purchaser, and the Purchaser desires to obtain from MEEMIC
Holdings, an option to purchase certain additional Shares of stock of MEEMIC
Holdings upon certain terms and conditions set forth in greater detail below.
NOW, THEREFORE, in consideration of the terms and conditions set forth
in this Agreement, the receipt and sufficiency of which is hereby acknowledged,
MEEMIC Holdings, PICOM and Professionals agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1 DEFINITIONS INCORPORATED BY REFERENCE. The terms set forth
in this Section 1.1 are defined in the Plan of Conversion for MEEMIC, as
approved by the Board of Directors of MEEMIC on June 24, 1998. The parties agree
that for purposes of this Agreement, the terms set forth below, whenever
initially capitalized, shall have the meaning set forth in such Plan of
Conversion. MEEMIC Holdings, PICOM and Professionals acknowledge receiving a
copy of such Plan of Conversion.
1
<PAGE>
EFFECTIVE DATE;
ELIGIBLE POLICYHOLDERS;
MEEMIC;
OFFERING;
OFFERING MAXIMUM;
OFFERING MINIMUM;
PURCHASE PRICE;
SHARES; and
SUBSCRIPTION OFFERING.
SECTION 1.2 ADDITIONAL DEFINED TERMS. In addition to the defined terms
set forth in Section 1.1, the terms set forth below, whenever initially
capitalized, shall have the meaning set forth in this Section:
"ADJUSTED PURCHASE PRICE" has the meaning set forth in Section 3.1 of
this Agreement.
"AGREEMENT" has the meaning set forth in the first paragraph of this
Agreement.
"CLOSING" has the meaning set forth in Section 4.1 of this Agreement.
"FAIR MARKET VALUE" means with respect to a Share on a given date: (a)
if the Shares are listed for trading on a national securities exchange
(including, for this purpose, the National Market System of the Nasdaq stock
market (the "National Market System") on such date, the daily closing price per
share of the Shares on such exchange (or, if there is more than one, the
principal such exchange); (b) if the Shares are not listed for trading on any
securities exchange (including the National Market System) on such date but are
reported by Nasdaq, and the market information concerning the Shares is
published on a regular basis in THE NEW YORK TIMES, THE WALL STREET JOURNAL, or
Detroit News, the average of the bid and asked price per share of the Shares as
so published; or (c) if (a) is inapplicable and market information concerning
the Shares is not regularly published as described in (b), the average of the
daily bid and asked price per share of the Shares in the over-the-counter market
as reported by Nasdaq (or, if Nasdaq does not report such prices for the Shares,
another generally accepted reporting service).
"INITIAL PRICE FOR THE OPTION SHARES" has the meaning set forth in
Section 3.1 of this Agreement.
2
<PAGE>
"ISSUANCE DATE FOR OPTION SHARES" has the meaning set forth in Section
3.2 of this Agreement.
"MEEMIC HOLDINGS" has the meaning set forth in the first paragraph of
this Agreement.
"NASDAQ" means the National Association of Securities Dealers Automated
Quotation System.
"OPTION SHARES" means the Shares of MEEMIC Holdings which the Purchaser
has the right to Purchase pursuant to Article III of this Agreement.
"PRONATIONAL" has the meaning set forth in the first paragraph of this
Agreement.
"PLAN OF CONVERSION" means the Plan of Conversion for MEEMIC, as
approved by the Board of Directors of MEEMIC on June 24, 1998.
"PROFESSIONALS" has the meaning set forth in the first paragraph of
this Agreement.
"PURCHASER" means ProNational and Professionals.
"SUBSCRIPTION AMOUNT" means the dollar amount equal to the number of
Shares purchased in the Subscription Offering times the Purchase Price.
SECTION 1.3 CAPTIONS. The captions and headings used in this Agreement
are for convenience only and shall not be used in construing the provisions of
this Agreement.
SECTION 1.4 NUMBER AND GENDER. The use of any gender in this Agreement
shall be deemed to be or include the other genders, including neuter, and the
use of the singular shall be deemed to include the plural (and vice versa)
wherever applicable.
ARTICLE II
REQUIREMENT TO PURCHASE STOCK AND
OPTION TO PURCHASE STOCK
SECTION 2.1 REQUIREMENT TO PURCHASE STOCK. Subject only to the
preconditions to Closing set forth in Article IV of this Agreement, the
Purchaser hereby unconditionally obligates itself to subscribe for, acquire and
purchase the number of Shares which, when multiplied by the Purchase Price,
equals:
The positive difference, if any, remaining after the
Subscription Amount is subtracted from the Offering Minimum.
3
<PAGE>
SECTION 2.2 RIGHT TO PURCHASE STOCK. Subject only to the preconditions
to Closing set forth in Article IV of this Agreement, MEEMIC Holdings hereby
grants to the Purchaser the right to subscribe for, acquire and purchase the
number of Shares which, when multiplied by the Purchase Price, equals:
The positive difference, if any, remaining after the greater
of (i) the Subscription Amount or (ii) the Offering Minimum is
subtracted from the Offering Maximum.
SECTION 2.3 DETERMINATION OF SUBSCRIPTION AMOUNT. (a) MEEMIC Holdings
agrees to provide written notice to the Purchaser of the Subscription Amount
within five (5) business days after the end of the period in which Participants
are allowed to purchase Shares in the Subscription Offering. In the event that
the Purchaser shall be required to purchase Shares pursuant to Section 2.1 of
this Agreement, the notice from MEEMIC Holdings to the Purchaser shall specify
the number of Shares that the Purchaser is required to purchase and the
calculations in support thereof. In the event that the Purchaser shall have the
right to purchase Shares pursuant to Section 2.2 of this Agreement, the notice
from MEEMIC Holdings to the Purchaser shall specify the number of Shares that
the Purchaser has the right to purchase pursuant to Section 2.2 and the
calculations in support thereof.
(b) The Purchaser shall have five (5) business days after it receives
the notice described in (a) above to notify MEEMIC Holdings of the number of
Shares, if any, it desires to purchase pursuant to Section 2.2 of this
Agreement. Any such notice from the Purchaser to MEEMIC Holdings shall be
irrevocable after it is delivered and after it is delivered MEEMIC Holdings
shall be obligated to deliver the Shares specified in such notice to the
Purchaser in accordance with the terms of this Agreement.
SECTION 2.4 TERMS OF PURCHASE PRICE. The price that the Purchaser shall
pay for any Shares purchased pursuant to Sections 2.1 or 2.2 of this Agreement
shall be the Purchase Price.
SECTION 2.5 FRACTIONAL SHARES. Sections 2.1 and 2.2 of this Agreement
shall not be construed as requiring or allowing the Purchaser to purchase any
fractional Shares. In the event that the calculations set forth in Sections 2.1
and 2.2 of this Agreement would otherwise provide for the purchase of fractional
Shares, then the number of Shares that the Purchaser would be required or
allowed to purchase shall be rounded up to the next whole number.
ARTICLE III
OPTION TO PURCHASE ADDITIONAL STOCK OF MEEMIC HOLDINGS
SECTION 3.1 BASIC TERMS. The Purchaser shall have the irrevocable
right, subject to the terms and conditions of this Article III, to purchase from
MEEMIC Holdings and MEEMIC
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Holdings agrees to sell to the Purchaser the number of Option Shares specified
below, at the price as established below.
Number of Option (i) .51 multiplied by the number of
Shares: outstanding Shares of MEEMIC Holdings as of
the date the Purchaser gives notice of its
intent to exercise its option to purchase
the Option Shares; plus (ii) 153,000; less
(iii) the number of Shares issued to
ProNational pursuant to Section 7.1 of the
Plan of Conversion; less (iv) the number of
Shares, if any, purchased pursuant to
Sections 2.1 and 2.2 of this Agreement; less
(v) any other Shares other than those
identified in (iii) and (iv) above and owned
by the Purchaser at the time the Purchaser
gives notice of its intent to exercise its
option to purchase the Option Shares.
the sum of (i) through (v) above shall then be
divided by .49.
Price for the (a) In the event that the Purchaser gives
Option Shares: MEEMIC Holdings notice within the first 90
calendar days on or after the Effective Date
of the Purchaser's intent to purchase the
Option Shares, then on the Issuance Date of
the Option Shares the Purchaser shall pay an
initial price (the "Initial Price for the
Option Shares") in an amount equal to (i)
the number of Option Shares, times (ii) 140%
of the Purchase Price. 120 calendar days
after the Effective Date MEEMIC Holdings
shall calculate an adjusted purchase price
for the Option Shares (the "Adjusted
Purchase Price") which shall be the amount
equal to (i) the number of Option Shares,
times (ii) the greater of (x) the average of
the Fair Market Value of the Shares for the
20 calendar day period commencing 71
calendar days after the Effective Date, or
(y) 140% of the Purchase Price. After MEEMIC
Holdings calculates the Adjusted Purchase
Price, MEEMIC Holdings shall provide the
Purchaser with notice of the Adjusted
Purchase Price, then the Purchser shall
immediately pay to MEEMIC Holdings the
difference between the Initial Price for the
Option Shares and the Adjusted Purchase
Price, if any.
(b) In the event that the Purchaser gives
MEEMIC Holdings notice after the first 90
calendar days on or after the Effective
Date, but prior to the expiration of the one
year period
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commencing on the Effective Date, of the
Purchaser's intent to purchase the Option
Shares, then on the Issuance Date of the Option
Shares the Purchaser shall pay an amount equal
to (i) the number of Option Shares, times (ii)
the greater of (x) the average of the Fair
Market Value of the Shares for the 20 calendar
day period immediately preceding the
Purchaser's notice to MEEMIC Holdings of its
intent to purchase the Option Shares, or (y)
140% of the Purchase Price.
SECTION 3.2. METHOD OF EXERCISE; FRACTIONAL SHARES. The right to
purchase the Option Shares pursuant to this Article is exercisable at the option
of the Purchaser only in whole and only during the one year period commencing on
the Effective Date. The right to purchase the Option Shares shall be exercisable
only after the Purchaser shall have satisfied its obligations under Section 2.1
of this Agreement. The Purchaser shall be required to provide MEEMIC Holdings
with written notice of its irrevocable election to purchase the Option Shares
pursuant to Section 3.1. After such notice is provided to MEEMIC Holdings, the
Purchaser and MEEMIC Holdings shall mutually agree upon a date, which date shall
be not later than twenty (20) calendar days after such notice is provided to
MEEMIC Holdings, for the issuance of the Option Shares to the Purchaser (the
"Issuance Date for Option Shares"). On the Issuance Date for Option Shares, the
Option Shares shall be issued to the Purchaser and the Purchaser shall pay for
the Option Shares as determined by Section 3.1 of this Agreement.
SECTION 3.3. ADJUSTMENT OF SHARES PURCHASABLE. The number of Shares
purchasable pursuant to Section 3.1 and the price for such Shares are subject to
adjustment from time to time as specified in Section 3.5 of this Agreement.
SECTION 3.4. LIMITED RIGHTS OF OWNER. The options conferred by Article
III of this Agreement do not entitle the Purchaser to any voting rights or other
rights as a stockholder of MEEMIC Holdings, or to any other rights whatsoever
except the rights herein expressed. No dividends are payable or will accrue on
the Shares purchasable under Section 3.1 of this Agreement until, and then only
to the extent that, any such Shares are deemed to have been issued to the
Purchaser pursuant to this Agreement. Upon the giving by the Purchaser to MEEMIC
Holdings of the written notice of exercise of the option set forth in Article
III of this Agreement and the tender of the applicable price for such Shares in
immediately available federal funds, the Purchaser shall be deemed to be the
holder of record of the Shares issuable upon such exercise, notwithstanding that
the stock transfer books of MEEMIC Holdings shall then be closed or that
certificates representing such Shares shall not then be actually delivered to
Purchaser.
SECTION 3.5. EFFECT OF STOCK SPLIT, ETC. If MEEMIC Holdings, by stock
dividend, split, reverse split, reclassification of shares, or otherwise,
changes the number or type of outstanding Shares, then the applicable price in
effect pursuant to this Article III, and the number of Shares purchasable under
this Article III, immediately prior to the date upon which the change becomes
6
<PAGE>
effective, shall be proportionately adjusted (the price to the nearest cent) in
such manner as shall fully preserve the economic benefits provided to Purchaser
under this Agreement.
SECTION 3.6. EFFECT OF MERGER, ETC. If MEEMIC Holdings consolidates
with or merges into another corporation or entity, the Purchaser shall
thereafter be entitled on exercise to purchase, with respect to each Share
purchasable hereunder immediately before the consolidation or merger becomes
effective, the securities or other consideration to which a holder of one Share
is entitled to in the consolidation or merger without any change in or payment
in addition to the price in effect immediately prior to the merger or
consolidation. MEEMIC Holdings shall not consolidate or merge unless, prior to
consummation, the successor company (if other than, MEEMIC Holdings) assumes the
obligations of this paragraph by written instrument executed and delivered to
the Purchaser. A sale or lease of all or substantially all the assets of MEEMIC
Holdings for a consideration (apart from the assumption of obligations)
consisting primarily of securities is a consolidation or merger for the
foregoing purposes.
SECTION 3.7. NOTICE OF ADJUSTMENT. On the happening of an event
requiring an adjustment of the price or the Shares purchasable pursuant to this
Article III, MEEMIC Holdings shall forthwith give written notice to the
Purchaser of such event.
SECTION 3.8. NOTICE AND EFFECT OF DISSOLUTION, ETC. In the case that a
voluntary or involuntary dissolution, liquidation, or winding up of MEEMIC
Holdings (other than in connection with a consolidation or merger covered by
Section 3.6 hereof) is at any time proposed, MEEMIC Holdings shall give at least
30 days' prior written notice to the Purchaser. Such notice shall contain: (a)
the date on which the transaction is to take place; (b) the record date (which
shall be no sooner than 45 days after the giving of the notice) as of which
holders of the Shares will be entitled to receive distributions as a result of
the transaction; (c) a brief description of the transaction; (d) a brief
description of the distributions to be made to holders of the Shares as a result
of the transaction; and (e) an estimate of the fair value of the distributions.
ARTICLE IV
CLOSING AND PRECONDITIONS TO CLOSING
SECTION 4.1 CLOSING. The issuance and purchase of the Shares pursuant
to Sections 2.1 and 2.2 of this Agreement and the execution and delivery of all
certificates and documents contemplated by this Agreement (the "Closing") shall
be consummated on the Effective Date, provided that all of the preconditions to
Closing set forth in this Agreement have been satisfied.
SECTION 4.2 PRECONDITIONS TO CLOSING. The issuance and purchase of the
Shares contemplated by Article II of this Agreement shall only be consummated on
the Effective Date if all of the following conditions have been satisfied:
7
<PAGE>
(i) The Michigan Insurance Bureau issues an Order approving
the Plan of Conversion and such Order has not been revoked;
(ii) The Plan of Conversion is approved by the affirmative
vote of at least two-thirds (2/3) of the votes cast at the special
meeting of Eligible Policyholders of MEEMIC and becomes effective in
accordance with its terms;
(iii) All consents, approvals, authorizations, licenses and
orders of any governmental authority necessary in connection with the
issuance of the Shares are received; and
(iv) The Subscription Offering contemplated by the Plan of
Conversion is completed.
SECTION 4.3 DELIVERIES AT CLOSING. At the Closing, the parties shall
deliver the following:
(i) The Purchaser shall deliver the applicable Purchase Price
per Share for the Shares to MEEMIC Holdings, in immediately available
federal funds; and
(ii) MEEMIC Holdings shall deliver to the Purchaser stock
certificates registered in the name of ProNational or Professionals, as
directed by the Purchaser, evidencing the Shares issued and purchased
pursuant to this Agreement and such Shares shall be fully paid and
non-assessable.
SECTION 4.4. CLOSING FOR PURCHASE OF SHARES PURCHASED PURSUANT TO
ARTICLE III. On the Issuance Date for Option Shares, the parties shall deliver
the following:
(i) The Purchaser shall deliver the applicable price for the
Option Shares to MEEMIC Holdings, in immediately available federal
funds; and
(ii) MEEMIC Holdings shall deliver to the Purchaser stock
certificates registered in the name of ProNational or Professionals, as
directed by the Purchaser, evidencing the Option Shares issued and
purchased pursuant to Article III hereof and such Option Shares shall
be fully paid and non-assessable.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
SECTION 5.1 REPRESENTATIONS AND WARRANTIES OF MEEMIC HOLDINGS. MEEMIC
Holdings hereby represents and warrants to Professionals and ProNational,
jointly and severally, as follows:
a. ORGANIZATION AND EXISTENCE. MEEMIC Holdings is a
Michigan corporation duly organized, validly existing and in good standing
under the laws of the State of Michigan with
8
<PAGE>
all requisite corporate power and corporate authority to carry on its
business as it is now being conducted.
b. AUTHORIZATION. MEEMIC Holdings has the requisite power and
authority to allow it to execute, deliver and perform this Agreement, and has
taken all necessary corporate action to issue, and shall reserve for issuance,
the maximum number of Shares issuable under Articles II and III of this
Agreement. The execution, delivery and performance of this Agreement have been
duly, validly and effectively authorized by all requisite action of MEEMIC
Holdings' Board of Directors, and no other proceedings on the part of MEEMIC
Holdings are necessary to authorize this Agreement or the consummation of the
transactions contemplated hereby.
c. EXECUTION AND DELIVERY; VALID AND BINDING. This Agreement
has been duly executed and delivered by MEEMIC Holdings and constitutes the
valid and binding obligations of MEEMIC Holdings, enforceable against it in
accordance with its terms.
d. NO DEFAULTS, VIOLATIONS OR CONFLICTS. MEEMIC Holdings is
not in violation of any term or provision of the Plan of Conversion, this
Agreement, its Articles of Incorporation or By-Laws which would prevent it from
fulfilling its obligations under this Agreement.
e. NO VIOLATIONS OF LAW. The execution, delivery and
performance of the terms of this Agreement and the Plan of Conversion by MEEMIC
Holdings (i) requires no action by or in respect of, or filing with, any
governmental body other than the Michigan Insurance Bureau, or agency or
official of the United States or any political subdivision thereof, except for
such notices, Registration Statements, or reports as may be required to be filed
with the Securities and Exchange Commission under the Securities Exchange Act of
1933, as amended, the Securities Exchange Act of 1934, as amended, the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and any
applicable State blue sky laws, and (ii) will not violate any statute or any
order, rule or regulation of any court or government agency or body in the
United States or any political subdivision thereof having jurisdiction over
MEEMIC Holdings, which violation could have a material adverse effect on the
financial condition of MEEMIC Holdings or the ability of MEEMIC Holdings to
perform its obligation under this Agreement or the Plan of Conversion.
f. DELIVERY OF THE SHARES. Delivery by MEEMIC Holdings of the
Shares to ProNational or Professionals, as set forth in this Agreement, will
transfer to ProNational or Professionals valid title to such Shares, free and
clear of all liens, encumbrances, restrictions and claims of any kind, and such
Shares are not subject to any preemptive rights. MEEMIC Holdings shall at all
times reserve and hold available sufficient Shares to satisfy all rights of the
Purchaser under this Agreement.
SECTION 5.2 REPRESENTATIONS AND WARRANTIES OF PRONATIONAL. ProNational
hereby represents and warrants to MEEMIC Holdings as follows:
a. ORGANIZATION AND EXISTENCE. ProNational is a Michigan
domiciled stock insurance company, duly organized, validly existing and with all
requisite power and authority to carry on its business as it is now being
conducted.
9
<PAGE>
b. AUTHORIZATION. ProNational has the requisite power and
authority to allow it to execute, deliver and perform this Agreement. The
execution, delivery and performance of this Agreement have been duly, validly
and effectively authorized by all requisite action of ProNational's Board of
Directors, and no other proceedings on the part of ProNational are necessary to
authorize this Agreement or the consummation of the transactions contemplated
hereby.
c. EXECUTION AND DELIVERY; VALID AND BINDING. This Agreement
has been duly executed and delivered by ProNational and constitutes the valid
and binding obligations of ProNational, enforceable against ProNational in
accordance with its terms.
d. NO DEFAULTS, VIOLATIONS OR CONFLICTS. ProNational is not in
violation of any term or provision of its Articles of Incorporation or By-Laws,
which would prevent it from fulfilling its obligations under this Agreement.
e. NO VIOLATIONS, ETC. The execution, delivery and performance
of the terms of this Agreement by ProNational (i) requires no action by or in
respect of, or filing with, any governmental body other than the Michigan
Insurance Bureau, or agency or official of the United States or any political
subdivision thereof, except for such notices, Registration Statements, or
reports as may be required to be filed with the Securities and Exchange
Commission under the Securities Exchange Act of 1933, as amended, the Securities
Exchange Act of 1934, as amended, the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended, and any applicable State blue sky laws, and (ii) will
not violate any statute or any order, rule or regulation of any court or
government agency or body in the United States or any political subdivision
thereof having jurisdiction over ProNational, which violation could have a
material adverse effect on the ability of ProNational to perform any obligations
under this Agreement.
f. SECURITIES LAW REPRESENTATIONS AND WARRANTIES.
(i) SOPHISTICATION AND BACKGROUND. ProNational is an "accredited
investor" as that term is defined by Rule 501(a) promulgated
by the Securities and Exchange Commission. ProNational has
such knowledge and experience in financial, tax and business
matters to enable it to utilize the information made available
to it to evaluate the merits and risks of the prospective
investment and to make an informed investment decision with
respect to the prospective investment.
(ii) AVAILABILITY OF INFORMATION. ProNational understands that
MEEMIC Holdings has agreed to make all documents, records and
books pertaining to the Shares and its business and affairs
available for inspection by it and/or ProNational's advisors.
(iii) RISK OF INVESTMENT. ProNational recognizes that the purchase
of stock in any corporation involves substantial risks, that
no assurance or guarantee has or can be given that a
shareholder in the MEEMIC Holdings will receive a return on
the investment or realize a profit on such investment, and
that it may not be able to sell the Shares.
10
<PAGE>
SECTION 5.3 REPRESENTATIONS AND WARRANTIES OF PROFESSIONALS.
Professionals hereby represents and warrants to MEEMIC Holdings as follows:
a. ORGANIZATION AND EXISTENCE. Professionals is a Michigan
corporation, duly organized, validly existing and in good standing under the
laws of the State of Michigan with all requisite power and authority to carry on
its business as it is now being conducted in good standing under the laws of the
State of Michigan.
b. AUTHORIZATION. Professionals has the requisite power and
authority to allow it to execute, deliver and perform this Agreement. The
execution, delivery and performance of this Agreement have been duly, validly
and effectively authorized by all requisite action of Professionals' Board of
Directors, and no other proceedings on the part of Professionals are necessary
to authorize this Agreement or the consummation of the transactions contemplated
hereby.
c. EXECUTION AND DELIVERY; VALID AND BINDING. This Agreement
has been duly executed and delivered by Professionals and constitutes the valid
and binding obligations of Professionals, enforceable against Professionals in
accordance with its terms.
d. NO DEFAULTS, VIOLATIONS OR CONFLICTS. Professionals is not
in violation of any term or provision of its Articles of Incorporation or
By-Laws which would prevent it from fulfilling its obligations under this
Agreement.
e. NO VIOLATIONS, ETC. The execution, delivery and performance
of the terms of this Agreement by Professionals (i) requires no action by or in
respect of, or filing with, any governmental body other than the Michigan
Insurance Bureau, or agency or official of the United States or any political
subdivision thereof, except for such notices, Registration Statements, or
reports as may be required to be filed with the Securities and Exchange
Commission under the Securities Exchange Act of 1933, as amended, the Securities
Exchange Act of 1934, as amended, the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended, and any applicable State blue sky laws, and (ii) will
not violate any statute or any order, rule or regulation of any court or
government agency or body in the United States or any political subdivision
thereof having jurisdiction over Professionals, which violation could have a
material adverse effect on the ability of Professionals to perform any
obligations under this Agreement.
f. SECURITIES LAW REPRESENTATIONS AND WARRANTIES.
(i) SOPHISTICATION AND BACKGROUND. Professionals is an "accredited
investor" as that term is defined by Rule 501(a) promulgated
by the Securities and Exchange Commission. Professionals has
such knowledge and experience in financial, tax and business
matters to enable it to utilize the information made available
to it to evaluate the merits and risks of the prospective
investment and to make an informed investment decision with
respect to the prospective investment.
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<PAGE>
(ii) AVAILABILITY OF INFORMATION. Professionals understands that
MEEMIC Holdings has agreed to make all documents, records and
books pertaining to the Shares and its business and affairs
available for inspection by it and/or Professionals's
advisors.
(iii) RISK OF INVESTMENT. Professionals recognizes that the purchase
of stock in any corporation involves substantial risks, that
no assurance or guarantee has or can be given that a
shareholder in the MEEMIC Holdings will receive a return on
the investment or realize a profit on such investment, and
that it may not be able to sell the Shares.
SECTION 5.4 LEGAL FEES, COSTS AND EXPENSES. Each party hereto shall
bear its own legal fees and expenses, and other costs and expenses incurred by
such party in connection with the transactions contemplated by this Agreement.
ARTICLE VI
REGISTRATION RIGHTS
SECTION 6.1 REGISTRATION RIGHTS. If MEEMIC Holdings is not permitted by
the Securities and Exchange Commission to include the Shares identified in
Sections 2.1, 2.2 and 3.1 of this Agreement in the Registration Statement
relating to the Plan of Conversion, then Purchaser shall have the right,
commencing on the date that MEEMIC Holdings is first eligible to use a
Registration Statement on Form S-3 for secondary offerings of securities by
selling shareholders, to demand (a "demand right") that MEEMIC Holdings register
such Shares as promptly as practicable, but in any event not less than 90 days
after the date of such demand. If, prior to making any such demand, MEEMIC
Holdings proposes to register a primary distribution of Shares to the public
under the Securities Act of 1933, as amended (other than pursuant to Form S-4 or
Form S-8), the Purchaser shall have the right (a "piggy back right") to include
the Shares identified in Sections 2.1, 2.2 and 3.1 of this Agreement in such
registration. MEEMIC Holdings and the Purchaser agree that the terms,
conditions, rights and obligations of the parties in the event of a demand or
piggy-back registration will be those customary in similar situations; that
MEEMIC Holdings shall bear all registration costs (other than the costs of
counsel for the Purchaser and any underwriting commissions or discounts relating
to the sale of the Note Shares); and that the Purchaser's piggy back right
shalll be subject to the discretion of the managing underwriter to determine the
number of Shares that may be included, if the registration statement relates to
an underwriten offering.
ARTICLE VII
TERMINATION
SECTION 7.1 TERMINATION. This Agreement and the obligations of the
parties hereto may be terminated at any time only (a) by mutual consent of the
parties hereto, (b) by ProNational if any material representation or warranty in
this Agreement by MEEMIC Holdings proves to be untrue at the time it was made or
becomes untrue and such untrue statement is unable to be remedied, (c) by
Professionals if any material representation or warranty in this Agreement by
MEEMIC Holdings
12
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proves to be untrue at the time it was made or becomes untrue and such untrue
statement is unable to be remedied, (d) by MEEMIC Holdings if any material
representation or warranty in this Agreement by either ProNational or
Professionals proves to be untrue at the time it was made or becomes untrue and
such untrue statement is unable to be remedied, or (e) by any party hereto if
required by law or if the preconditions to Closing established in this Agreement
fail to be satisfied.
ARTICLE VIII
GENERAL PROVISIONS
SECTION 8.1 JOINT AND SEVERAL OBLIGATIONS OF THE PURCHASER AND RIGHTS
OF THE PURCHASER. The obligations of the Purchaser under this Agreement shall be
the joint and several obligations of ProNational and Professionals. The rights
of the Purchaser to purchase Shares pursuant to this Agreement shall be a right
that may be exercised by either ProNational or Professionals, or alternatively
by both ProNational and Professionals in such proportions, not to exceed the
total number of Shares that may be purchased by Purchaser hereunder, as may be
specified in written instructions to MEEMIC Holdings from both ProNational and
Professionals.
SECTION 8.2 GOVERNING LAW. This Agreement shall be governed by the
laws of the State of Michigan.
SECTION 8.3 ENTIRE AGREEMENT/AMENDMENT. This Agreement constitutes the
entire agreement and understanding between the parties and cannot be amended,
waived or modified unless the parties so agree in writing.
SECTION 8.4 ASSIGNMENT. None of the parties may assign any rights or
obligations under this Agreement without first obtaining the written consent of
the other parties hereto.
SECTION 8.5 SUCCESSORS AND ASSIGNS. This Agreement shall inure to the
benefit of and be binding upon the parties hereto and their respective
successors and permitted assigns.
SECTION 8.6 NOTICES. All notices and statements to be given under this
Agreement shall be given in writing, delivered by hand, facsimile, overnight
express or similar service (fees prepaid), or first class United States
registered or certified mail with return receipt requested (postage prepaid), to
the following addresses (which may be changed by written notice):
ProNational: President
ProNational
2600 Professionals Drive
Box 150
Okemos, MI 48805-0150
Telephone No.: (800) 292-1036
Facsimile No.: (517) 347-6321
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<PAGE>
Professionals: President
Professionals
2600 Professionals Drive
Box 150
Okemos, MI 48805-0150
Telephone No.: (800) 292-1036
Facsimile No.: (517) 347-6321
Purchaser: President
ProNational
2600 Professionals Drive
Box 150
Okemos, MI 48805-0150
Telephone No.: (800) 292-1036
Facsimile No.: (517) 347-6321
-and-
President
Professionals
2600 Professionals Drive
Box 150
Okemos, MI 48805-0150
Telephone No.: (800) 292-1036
Facsimile No.: (517) 347-6321
MEEMIC Holdings: President
MEEMIC Holdings
691 N. Squirrel Road
Suite 200
P.O. Box 21709
Auburn Hills, MI 48321
Telephone No.: (248) 377-8500
Facsimile No.: (248) 377-8555
All written notices and statements shall be deemed given, delivered, received
and effective upon personal delivery, the same day of sending by facsimile, one
calendar day after sending by overnight express or similar service, or three
calendar days after mailing by first class United States mail.
SECTION 8.7 SEVERABILITY. If any provision of this Agreement shall be
or become in violation of any local, state or federal law, said provision shall
be considered null and void, and all other provisions shall remain in full force
and effect. Each of the parties expressly releases each of the other parties
from any liability in the event such party cannot fulfill any obligation under
this Agreement as a result of any provisions of local, state or federal law
governing such provisions.
SECTION 8.8 NO THIRD PARTY RIGHTS. This Agreement is made for the
sole benefit of the MEEMIC Holdings, Professionals and ProNational. Except
as otherwise expressly provided,
14
<PAGE>
nothing in this Agreement shall create or be deemed to create a relationship
between the parties hereto, or any of them, and any third person in the nature
of a third party beneficiary, equitable lien or fiduciary relationship.
SECTION 8.9 NO WAIVER. Failure on the part of any party to complain of
any action or non-action of another other party hereto shall not be deemed to be
a waiver of any rights under this Agreement. No waiver of any of the provisions
of this Agreement shall be deemed to be a waiver of any other provisions of this
Agreement, and a waiver at any time of any provisions of this Agreement shall
not be construed as a waiver at any subsequent time of the same provisions.
SECTION 8.10 INJUNCTIVE RELIEF. The parties acknowledge that damages
may be an inadequate remedy for a breach of this Agreement by any party hereto
and that the obligations of the parties hereto shall be enforceable by any other
party hereto through injunctive or other equitable relief in addition to any
other remedies to which such party may be entitled.
SECTION 8.11 COUNTERPARTS. This Agreement may be executed in any number
of counterparts. Each counterpart so executed shall be deemed an original, but
all such counterparts shall together constitute one and the same instrument.
SECTION 8.12 CONSTRUCTION. The parties each acknowledge that all the
terms and conditions in this Agreement have been the subject of active and
complete negotiation between the parties and represent the parties' agreement
based upon all relevant considerations. The parties agree that the terms and
conditions of this Agreement shall not be construed in favor of or against any
party by reason of the extent to which any party or its professional advisors
participated in the preparation hereof or thereof.
SECTION 8.13 FURTHER ASSURANCES. The parties agree to do such further
acts and things and to execute and deliver such additional documents,
assignments, agreements, certificates, powers and instruments as may be
reasonably required to carry into effect the purposes of this Agreement.
SECTION 8.14 FORBEARANCES. During the period from the date of this
Agreement to the earlier of (i) the Issuance Date of Option Shares or (ii) the
termination of this Agreement, except as expressly contemplated or permitted by
this Agreement or the Plan of Conversion, MEEMIC Holdings shall not, and MEEMIC
Holdings shall not permit MEEMIC or any subsidiary of MEEMIC Holdings or MEEMIC
to, without the prior written consent of the Purchaser:
(a) other than in the ordinary course of business consistent with past
practice, incur any indebtedness for borrowed money in excess of $5,000,000 or
assume, guarantee, endorse or otherwise become obligated for, any indebtedness
in excess of $5,000,000;
(b) adjust, split, combine, reclassify, any capital stock, or pay
dividends or distributions in excess of $5,000,000 with respect to the capital
stock;
(c) issue additional capital stock except as contemplated by the
Plan of Conversion;
15
<PAGE>
(d) enter into an agreement to consolidate with or merge into any
Person;
(e) sell or transfer all or substantially all of its assets to any
Person; or
(f) amend the Plan of Conversion or its Articles of Incorporation, or
its Bylaws, except as contemplated by this Agreement or the Plan of Conversion.
* * * * *
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized officers as of the date written on the first
page of this Agreement.
MEEMIC HOLDINGS, INC.
By: /s/ R. Kevin Clinton
----------------------------------------
R. Kevin Clinton
President
PRONATIONAL INSURANCE COMPANY
By: /s/ Annette E. Flood
----------------------------------------
Annette E. Flood
Vice President and Secretary
PROFESSIONALS GROUP, INC.
By: /s/ Victor T. Adamo
----------------------------------------
Victor T. Adamo
President and Chief Executive Officer
16
<PAGE>
NUMBER SHARES
XXX XXX
LOGO
MEEMIC HOLDINGS, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF MICHIGAN
COMMON STOCK COMMON STOCK
NO PAR VALUE NO PAR VALUE
THIS CERTIFIES THAT XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
is the owner of XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, NO PAR VALUE PER SHARE, OF
MEEMIC HOLDINGS, INC.
The shares represented by this certificate are transferable only on the
stock transfer books of the Corporation by the holder of record thereof, or
by his duly authorized attorney or legal representative, upon the surrender
of this certificate properly endorsed. This certificate and the shares
represented hereby are issued and shall be held subject to all the provisions
of the Articles of Incorporation of the Corporation and any amendments
thereto (copies of which are on file with the Transfer Agent), to all of
which provisions the holder by acceptance hereof, assents.
This certificate is not valid unless countersigned and registered by the
Transfer Agent and Registrar. The shares represented by this certificate are
not insured by the Federal Deposit Insurance Corporation or any government
agency.
In Witness Thereof, MEEMIC HOLDINGS, INC. has caused this certificate to
be executed by the facsimile signatures of its duly authorized officers and
has caused a facsimile of its corporation seal to be hereunto affixed.
Dated:
COUNTERSIGNED AND REGISTERED:
CHASEMELLON SHAREHOLDER SERVICES
TRANSFER AGENT AND REGISTRAR
By
- -------------------------- ------------- -----------------
AUTHORIZED OFFICER SECRETARY PRESIDENT AND CEO
<PAGE>
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws and regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT - _______Custodian ______
(Cust) (Minor)
TEN ENT - as tenants by the entireties under Uniform Gifts to Minors Act
JT TEN - as joint tenants with
right of survivorship ACT ________________________
and not as tenants in common (State)
Additional abbreviations may also be used though not in the above list.
For value received ________________________hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
(PLEASE PRINT OR TYPE NAME AND ADDRESS)
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_________________________________________________________________________Shares
of the Stock represented by this certificate, and do hereby irrevocably
constitutes and appoints
______________________________________________________________________ Attorney
to transfer this Certificate on the books of the Company with full power of
substitution in the premises.
Dated ___________________________ _______________________________________
SIGNATURE GUARANTEED:
________________________________________
THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN
UPON THE FACE OF THIS CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATSOEVER. THE SIGNATURE(S) SHOULD BE GUARANTEED
BY AN ELIGIBLE GUARANTOR INSTITUTION (Banks, Stockbrokers, Savings and Loan
Associations and Credit Unions) WITH MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM PURSUANT TO S.E.C. RULE 17Ad-15
<PAGE>
EXHIBIT 5.1
March 25, 1999
MEEMIC Holdings, Inc.
691 North Squirrel Road, Suite 200
Auburn Hills, MI 48326
Re: Registration Statement on Form S-1
Ladies and Gentlemen:
We have acted as counsel for MEEMIC Holdings, Inc., a Michigan
corporation (the "Company"), in connection with the preparation of the
Registration Statement on Form S-1 (the "Registration Statement") filed by
the Company with the Securities and Exchange Commission under the Securities
Act of 1933, as amended (the "Act"), registering for issuance in the manner
described in the Registration Statement up to 4,297,791 shares of the
Company's common stock (the "Common Stock").
We have examined and relied upon the originals, or copies certified or
otherwise identified to our satisfaction, of such corporate records,
documents, certificates and other instruments as in our judgment are
necessary or appropriate to enable us to render the opinions expressed below.
Based upon the foregoing, we are of the opinion that:
1. the Company has been duly incorporated and is in good standing
under the laws of the State of Michigan; and
2. the Common Stock, when issued in the manner specified in the
Registration Statement, will be legally issued, fully paid and non-assessable.
<PAGE>
MEEMIC Holdings, Inc.
March 25, 1999
Page 2
We consent to the filing of this opinion as an exhibit to the
Registration Statement. We further consent to the reference to our firm under
the heading "Legal Matters" in the Registration Statement. In giving such
consent, we do not concede that we are experts within the meaning of the Act
or the rules or regulations thereunder or that this consent is required by
Section 7 of the Act.
Very truly yours,
DYKEMA GOSSETT PLLC
/s/ Mark A. Metz
Mark A. Metz
<PAGE>
Exhibit 8.1
October 20, 1998
Michigan Educational Employees
Mutual Insurance Company
691 North Squirrel Road, Suite 200
P.O. Box 217019
Auburn Hills, Michigan 48321-7019
Ladies and Gentlemen:
Pursuant to your request, we are providing our opinion of certain U.S.
federal income tax consequences of: (i) the conversion of the Michigan
Educational Employees Mutual Insurance Company ("MEEMIC") to a stock property
and casualty insurance company under Michigan law (the "Conversion"); (ii) the
receipt by MEEMIC Eligible Policyholders of Subscription Rights to purchase
shares of MEEMIC Holdings, Inc., a Michigan business corporation, of which
MEEMIC shall become a wholly-owned subsidiary; and (iii) the issuance of
Subscription Rights or stock by MEEMIC Holdings for cash or in exchange for the
Surplus Note. The foregoing all are to occur pursuant to the Plan of Conversion,
as approved by the Michigan Bureau of Insurance on September 2, 1998.(1)
In rendering the opinion set forth below, we have relied upon (i) the
Plan; (ii) the prospectus included in the registration statement on Form S-1
(the "Registration Statement") filed by MEEMIC with the Securities and Exchange
Commission, (iii) the representations given by MEEMIC, which are annexed hereto;
and (iv) such other documents as we have deemed necessary or appropriate. If any
of the representations annexed hereto are incorrect in whole or in part, or if
the terms of the Plan are altered before consummation of the Conversion, such
inaccuracies or alterations may have a material effect upon our opinion
expressed in this letter.
Our opinion is based on the relevant provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), the regulations thereunder, and the
judicial and administrative interpretations thereof. There are no assurances
that the conclusions
- -------------------
(1) All capitalized terms (other than proper nouns) and acronyms not
defined herein shall have the meanings set forth in Article I of the Plan.
<PAGE>
reached herein will be accepted by the Internal Revenue Service or judicial
authorities if challenged. Any legislative, regulatory, administrative, or
judicial decisions subsequent to the date of this opinion may have an impact
on the validity of our conclusions.
Unless you specifically request otherwise, we will not update our
opinion for changes to the law, regulations, or the judicial and administrative
interpretations thereof. In addition, pursuant to your request, we have not
analyzed the impact this transaction may have to any foreign shareholders or
specific state or local income tax consequences associated with the transaction.
Based upon and subject to the foregoing, the following constitutes the
opinion of PricewaterhouseCoopers, L.L.P.
1. The Conversion should constitute a tax-free reorganization within the
meaning of Section 368(a)(1)(E) of the Code. As such, MEEMIC should
recognize no gain or loss as a result of the reorganization.
2. The Eligible Policyholders should be treated as transferring their
voting rights and rights to share in any liquidation surplus of MEEMIC
to MEEMIC Holdings in exchange for the Subscription Rights. An Eligible
Policyholder should recognize gain or loss to the extent that the fair
market value of the Subscription Rights received, if any, differs from
the basis of such Eligible Policyholder in the rights surrendered
therefor.
3. Officers who receive Subscription Rights should recognize income in an
amount equal to the fair market value of the Subscription Rights
received, if any.
4. MEEMIC Holdings should recognize no gain or loss on its granting of
Subscription Rights to Eligible Policyholders or Officers and should
recognize no gain or loss on the lapse of a Subscription Right.
5. An Eligible Policyholder or Officer who acquires a Share by exercising
a Subscription Right should have a basis in such Share equal to the
amount of cash paid therefor plus the basis in the Subscription Right,
if any. Such person's holding period in such Share should commence on
the day the Subscription Right is exercised.
6. No gain or loss should be recognized by MEEMIC Holdings on the receipt
of cash or other property in exchange for its stock.
7. MEEMIC Holdings should have a basis in the stock of MEEMIC equal to the
amount paid therefor.
8. MEEMIC should recognize no gain or loss on receipt of property in
exchange for its stock.
9. MEEMIC should recognize discharge of indebtedness income on MEEMIC
Holdings exchange of the Surplus Note for Shares to the extent that
the fair market value of such Shares is less than the adjusted issue
price of the Surplus Note.
2
<PAGE>
We hereby consent to the filing of this opinion as an exhibit to the
aforementioned Registration Statement and to the reference to this firm under
the caption "Federal Income Tax Consequences" in the Registration Statement.
The giving of this consent, however, does not constitute an admission that we
are within the category of persons whose consent is required by
Section 7 of the Securities Act of 1933, as amended.
Except as set forth above, this opinion is being furnished only to
you in connection with the events described in the Plan and solely for your
benefit in connection therewith and may not be used or relied upon for any
other purpose and may not be circulated, quoted or otherwise referred to for
any other purpose without our express written consent.
Very truly yours,
[signed PwC]
PricewaterhouseCoopers LLP
3
<PAGE>
MICHIGAN EDUCATIONAL EMPLOYEES
MUTUAL INSURANCE COMPANY
691 NORTH SQUIRREL ROAD, SUITE 200
P.O. BOX 217019
AUBURN HILLS, MICHIGAN 48321-7019
October 12, 1998
PricewaterhouseCoopers, L.L.P.
1900 K Street, N.W.
Washington, D.C. 20036
Dear Sirs:
In connection with the proposed conversion of the Michigan Educational
Employees Mutual Insurance Company ("MEEMIC") into a stock property and
casualty insurance company under Michigan law the ("Conversion") and certain
related transactions, you are rendering certain opinions.
In connection with such opinions, and recognizing that you will rely on
this letter in rendering said opinions, the undersigned, a duly authorized
officer of MEEMIC and acting as such, hereby certifies, that, to the best
knowledge of the management of MEEMIC, the facts relating to the Conversion
and related transactions are true, correct and complete in all material
respects and hereby certifies to the best knowledge of the management of
MEEMIC, to the following as of the date hereof. Insofar as such certification
pertains to any person other than MEEMIC and any of its subsidiaries, such
certification is only as to the knowledge of the undersigned without specific
inquiry. We understand that you will reaffirm your opinions at the time of
the Conversion and that, in connection with such reaffirmation, you will
require that we reaffirm this certification as of that time.
1. MEEMIC Holdings(1) will issue only voting stock to the Participants and as
otherwise contemplated by the Plan.
2. None of the stock of MEEMIC Holdings will be issued for services rendered to
or for the benefit of MEEMIC Holdings or for the benefit of MEEMIC, except for
the shares issued to the Stock Compensation Plan and to Officers.
3. None of the stock of MEEMIC Holdings will be issued for indebtedness of
MEEMIC
- ------------------------
(1) All capitalized terms (other than proper nouns) and acronyms not
defined herein shall have the meanings set forth in Article I of the Plan of
Conversion, as approved by the Michigan Bureau of Insurance on September 2,
1998.
4
<PAGE>
Holdings.
4. No fractional shares of MEEMIC Holdings will be issued pursuant to the
transactions contemplated by the Plan.
5. There will be no indebtedness between MEEMIC Holdings and the holders of the
Subscription Rights, and there will be no indebtedness created in favor of any
Subscription Rights holder as part of the Plan.
6. Eligible Policyholders will receive only Subscription Rights from MEEMIC
Holdings in exchange for their voting rights and rights to share in the
liquidation surplus of a mutual insurance company.
7. MEEMIC policyholders will not retain any rights to any direct ownership
interest in MEEMIC. After the conversion, all of the stock of MEEMIC will be
owned by MEEMIC Holdings.
8. Each person who exercises a Subscription Right will pay the same price for
MEEMIC Holdings common stock as is paid by the general public, in any private
placement, or in the first ninety days of the Stand-by Offering. Such person
will receive MEEMIC Holdings common stock having a fair market value
approximately equal to the amount of cash paid to MEEMIC Holdings in exchange
therefore.
9. The Plan will define all the rights of all parties to the Plan.
10. The conversion and all related transactions and exchanges will occur on, or
as of, approximately the same date.
11. MEEMIC Holdings will remain in existence on or after the effective date of
the Plan. It will retain the cash or other property transferred to it in
exchange for its common stock, except for its contributions to MEEMIC as
authorized or required by applicable law and except for transactions in the
normal course of business operations.
12. Each of the parties to the transactions will pay his, her, or its own
expenses, if any, incurred in connection with the proposed transactions.
13. MEEMIC Holdings will assume no liabilities in the conversions or in the
related transactions and exchanges.
14. At the time of the conversion, MEEMIC will not have outstanding any stock,
options, warrants, convertible securities, or any other right that is
convertible into any class of stock or securities of MEEMIC.
15. There is no present plan or intention on the part of MEEMIC Holdings to
redeem or otherwise reacquire any of its common stock to be issued under the
Plan.
5
<PAGE>
16. Following the conversion, MEEMIC will be treated under Michigan law as the
same corporation as its mutual company counterpart. There will be no transfer of
assets, actual or constructive, by or from a mutual insurance company to a stock
insurance company.
17. Following the conversion, MEEMIC will continue to conduct the insurance
business that its mutual insurance company counterpart conducted prior to the
conversion.
18. Neither MEEMIC nor MEEMIC Holdings will make any elections under Section 338
of the Internal Revenue Code with respect to the acquisition of MEEMIC stock by
MEEMIC Holdings.
19. The conversion of MEEMIC will be a single, isolated event and will not be
part of a plan to increase periodically the proportionate interest of any
stockholder of MEEMIC or MEEMIC Holdings in the assets or earnings and profits
of a mutual insurance company, a stock insurance company, or MEEMIC Holdings.
20. MEEMIC will not be under the jurisdiction of a court in a Title 11 or a
similar case within the meaning of Section 368(a)(3)(A) of the Internal Revenue
Code (the "Code").
This letter is being furnished to you solely for your benefit and for use in
rendering your opinions and is not to be used, circulated, quoted or otherwise
referred to for any other purpose (other than inclusion in your opinions)
without the express written consent of MEEMIC.
All of the foregoing certifications are true to the best knowledge of the
management of MEEMIC.
Very truly yours,
MICHIGAN EDUCATIONAL EMPLOYEES
MUTUAL INSURANCE COMPANY
By: [signed] Christine C. Schmitt
10/19/98
Title: Sr VP & CFO ____________
6
<PAGE>
Exhibit 23.1
CONSENT OF ABN AMRO INCORPORATED
We hereby consent to the use of our name and to the description of our
valuation analysis, which has been approved by us, under the caption "The
Conversion" and to the use of our name and description of our opinion
regarding the subscription rights under the caption "Federal Income Tax
Consequences" in MEEMIC Holdings, Inc.'s Registration Statement on Form S-1
(No. 333-66671). We also consent to the inclusion of our valuation analysis
letter as an exhibit to the registration statement. By giving such consent we
do not thereby admit that we are experts with respect to any part of such
Registration Statement within the meaning of the term "expert" as used in, or
that may come within the category of persons whose consent is required under
Section 7 of the Securities Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange Commission promulgated thereunder.
ABN AMRO INCORPORATED
By: /s/ Patrick T. DeLacey
-------------------------------
Patrick T. DeLacey
Managing Director
Chicago, Illinois
March 25, 1999
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 (File
No. 333-66671) of our report dated March 12, 1999 on our audits of the
financial statements of Michigan Educational Employees Mutual Insurance
Company and Subsidiary and our report dated July 2, 1998 on our audit of the
financial statements of the Personal Lines and Life Divisions of Michigan
Educators Insurance Agency, Inc. We also consent to the inclusion in this
registration statement of our tax opinion dated October 20, 1998 on the U.S.
federal income tax consequences of the conversion. In addition we consent to
the reference to our firm and to the description of our tax opinion under the
caption `Federal Income Tax Consequences' and to the reference to our firm
under the caption `Experts'.
/s/ PricewaterhouseCoopers LLP
Grand Rapids, Michigan
March 25, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL
INSURANCE COMPANY AS OF DECEMBER 31, 1998 AND 1997 AND FOR THE YEARS THEN
ENDED, RESPECTIVELY AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 DEC-31-1998
<DEBT-HELD-FOR-SALE> 109,648,780 122,996,615
<DEBT-CARRYING-VALUE> 0 0
<DEBT-MARKET-VALUE> 0 0
<EQUITIES> 0 0
<MORTGAGE> 0 0
<REAL-ESTATE> 0 0
<TOTAL-INVEST> 111,543,255 124,903,111
<CASH> 2,204,325 3,977,602
<RECOVER-REINSURE> 429,449 5,926,808
<DEFERRED-ACQUISITION> 1,604,449 278,067
<TOTAL-ASSETS> 214,858,173 239,329,619
<POLICY-LOSSES> 84,920,578 92,297,908
<UNEARNED-PREMIUMS> 29,436,092 31,585,769
<POLICY-OTHER> 0 0
<POLICY-HOLDER-FUNDS> 0 0
<NOTES-PAYABLE> 42,000,000 39,715,289
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 43,281,572 52,224,421
<TOTAL-LIABILITY-AND-EQUITY> 214,858,173 239,329,619
67,830,283 64,040,476
<INVESTMENT-INCOME> 6,676,783 6,958,429
<INVESTMENT-GAINS> 32,214 31,012
<OTHER-INCOME> 840,725 2,110,545
<BENEFITS> 47,301,864 43,451,786
<UNDERWRITING-AMORTIZATION> 0 0
<UNDERWRITING-OTHER> 18,776,741 17,457,683
<INCOME-PRETAX> 9,301,400 12,230,993
<INCOME-TAX> 2,672,239 3,561,466
<INCOME-CONTINUING> 6,629,161 8,669,527
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 (303,095)
<CHANGES> 0 0
<NET-INCOME> 6,629,161 8,366,432
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
<RESERVE-OPEN> 80,352,682 84,920,578
<PROVISION-CURRENT> 54,053,427 47,073,649
<PROVISION-PRIOR> (6,751,563) (3,621,863)
<PAYMENTS-CURRENT> 30,176,142 31,009,016
<PAYMENTS-PRIOR> 14,805,826 11,493,680
<RESERVE-CLOSE> 84,920,578 92,297,908
<CUMULATIVE-DEFICIENCY> 0 0
</TABLE>
<PAGE>
Please mark
your vote as
indicated in
this example X
MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE COMPANY
PROXY
The member hereby directs this proxy to be voted:
<TABLE>
<S><C> <C> <C> <C> <C>
/ / For / / Against Proposition Number 1 to approve the Plan of Conversion from a Michigan domiciled mutual property and
casualty insurance company to a Michigan domiciled stock property and casualty insurance company;
and
/ / For / / Against Proposition Number 2 to approve amended and restated Articles of Incorporation of the Company.
</TABLE>
THIS PROXY WILL BE VOTED AS DIRECTED. IF NO
CONTRARY DIRECTION IS
INDICATED, THIS PROXY WILL BE VOTED FOR THE
ABOVE PROPOSITIONS.
<TABLE>
<S> <C>
DATE
SIGNATURE
SIGNATURE
NOTE: Only one signature is
required in the case of a joint
policy.
PLEASE COMPLETE, DATE, SIGN AND
MAIL THIS PROXY
PROMPTLY IN THE ENCLOSED
ENVELOPE.
PLEASE SIGN YOUR NAME EXACTLY
AS IT
APPEARS ON THIS PROXY CARD.
</TABLE>
MEEMIC HOLDINGS, INC. STOCK ORDER FORM
GENERAL This form is to be completed and returned to MEEMIC, in the envelope
provided for "Stock Reply", by all eligible policyholders electing to subscribe
for shares of common stock of MEEMIC Holdings, Inc. This offering will expire at
p.m. Eastern Daylight Time, on . In order to subscribe for
shares, this completed stock order form and payment in full must be received by
MEEMIC by such time and such date.
BEFORE COMPLETING THIS STOCK ORDER FORM, YOU ARE URGED TO READ CAREFULLY THE
PROSPECTUS MAILED TO YOU WITH THIS FORM. IF YOU DO NOT COMPLETE AND SIGN THIS
STOCK ORDER FORM PROPERLY, YOUR ORDER MAY BE REJECTED.
(1) NUMBER OF SHARES
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Number of Shares Price per Share Total Amount Due FOR OFFICE USE ONLY
x $10.00 = $
(100 SHARE MINIMUM) Date Received Batch # Order #
(2) METHOD OF PAYMENT*
</TABLE>
/ / ENCLOSED IS A CHECK OR MONEY ORDER PAYABLE TO ChaseMellon Shareholder
Services for $____________________
- --------------------------------------------------------------------------------
(3) STOCK REGISTRATION (PLEASE PRINT CLEARLY -- THE REGISTRATION INFORMATION YOU
LIST BELOW WILL BE UTILIZED FOR SUBSEQUENT MAILINGS, INCLUDING THE
REGISTRATION OF STOCK CERTIFICATES. PLEASE MAKE SURE THE INFORMATION IS
COMPLETE AND LEGIBLE.)
<TABLE>
<S> <C>
(FIRST NAME, MIDDLE INITIAL, LAST NAME) SOCIAL SECURITY NO./TAX ID# (CERTIFICATE WILL SHOW
THIS NUMBER)
(FIRST NAME, MIDDLE INITIAL, LAST NAME) SOCIAL SECURITY NO./TAX ID#
(STREET ADDRESS) (DAYTIME PHONE NUMBER)
(CITY, STATE, ZIP CODE) (EVENING PHONE NUMBER)
</TABLE>
(4) FORM OF STOCK OWNERSHIP (CHECK ONE -- SEE REVERSE SIDE OF THIS FORM FOR
OWNERSHIP DEFINITIONS)
<TABLE>
<S> <C> <C> <C> <C>
/ / / / Joint / / Tenants in Common / / / / Uniform Transfers to
Individual Tenants Fiduciary Minors
</TABLE>
(5) NASD AFFILIATION (CHECK AND INITIAL ONLY IF APPLICABLE.)
/ / Check here and initial below if you are a member of the National
Association of Securities Dealers "NASD" or a person associated with an NASD
member or a member of the immediate family of any such person to whose support
such person contributes, directly or indirectly, or if you have an account in
which an NASD member, or person associated with an NASD member, has a
beneficial interest. By initializing below, you agree (i) not to sell,
transfer or hypothecate the stock for a period of 90 days following issuance;
and (ii) to report this subscription in writing to the applicable NASD member
with whom you are associated within one day of payment for the stock.
_____________ (Please initial)
(6) ACKNOWLEDGMENT AND SIGNATURE (VERY IMPORTANT)
I(we) acknowledge receipt of the Prospectus dated , and that
I(we) have been advised to read the Prospectus (including the section entitled
"Risk Factors"). I(we) understand that, after receipt by ChaseMellon
Shareholder Services, this order may not be modified or withdrawn without the
consent of MEEMIC Holdings, Inc. I(we) hereby certify that the shares which
are being subscribed for are for my(our) account only, and that I(we) have no
present agreement or understanding regarding any subsequent sale or transfer
of such shares and I(we) confirm that my(our) order does not conflict with the
purchase limitation and ownership limitation provisions in the plan of
conversion.
Under penalties of perjury, I(we) certify that (1) the social security
#(s) or tax ID#(s) given above is(are) correct; and (2) I(we) am(are) not
subject to backup withholding tax. (You must cross out #2 above if you have
been notified by the Internal Revenue Service that you are subject to backup
withholding because of underreporting interest or dividends on your tax
return).
Please sign and date this form. ONLY ONE SIGNATURE IS REQUIRED.
If signing as a custodian, please include your full title.
<TABLE>
<S> <C>
- -------------------------------------------------------------------- QUESTIONS? Please call
Signature Title (if applicable) Date 1-877-MEEMIC1
from 7:30 am to 5:00 pm,
- -------------------------------------------------------------------- Monday-Friday
Signature Title (if applicable) Date SUBSCRIPTION INFORMATION CENTER:
MEEMIC
P.O Box 3307
So. Hackensack, N.J 07606
THIS ORDER IS NOT VALID UNLESS SIGNED -- WE RECOMMEND RETAINING A COPY OF THIS FORM FOR YOUR RECORDS
</TABLE>
<PAGE>
REVOCABLE PROXY
The undersigned member of Michigan Educational Employees Mutual
Insurance Company hereby appoints Victor T. Adamo, R. Kevin Clinton, and
Annette E. Flood, or any one of them, with full power of substitution, to
act as proxies for and to vote the policy of the undersigned at a Special
Meeting of the Members of the Company to be held at
on ,1999 at , local time or any
adjournment thereof, for the purpose listed on this proxy and described
more fully in the Notice of Special Meeting of Members and Proxy Statement,
each dated , 1999.
-------
STOCK ORDER FORM INSTRUCTIONS
(1) NUMBER OF SHARES -- Indicate the number of shares of MEEMIC Holdings, Inc.
common stock that you wish to purchase and indicate the amount due. The minimum
purchase is 100 shares or $1,000 per policy. No person, together with associates
or persons acting in concert with such person, may purchase more than 10,744
shares of stock per policy in the Offering.
Please see the portion of the Prospectus entitled "Plan of Distribution--Rules
for Oversubscription" for an explanation of how shares will be allocated in the
event the offering is oversubscribed.
(2) METHOD OF PAYMENT -- Payment for shares may be made by check or money order
payable to ChaseMellon Shareholder Services. Funds received in this form of
payment will be cashed immediately and deposited into a separate account
established for the purposes of this offering.
(3) STOCK REGISTRATION -- Please CLEARLY PRINT the name(s) and address in which
you want the stock certificate registered and mailed.
NOTE: ONE STOCK CERTIFICATE WILL BE GENERATED PER ORDER FORM. A STOCK
CERTIFICATE WILL NOT BE ISSUED FOR LESS THAN 100 SHARES.
Enter the social security number or tax ID number of the registered owner(s).
The first number listed will be identified with the stock certificate for tax
purposes. Be sure to include at least one phone number, in the event you must be
contacted regarding this stock order form.
(4) FORM OF STOCK OWNERSHIP -- Please check the one type of ownership applicable
to your registration. An explanation of each follows:
GUIDELINES FOR REGISTERING STOCK
For reasons of clarity and standardization, the stock transfer industry has
developed uniform stockholder registrations which we will utilize in the
issuance of your MEEMIC Holdings, Inc. stock certificate(s). If you have any
questions, please contact your legal advisor.
Stock ownership must be registered in one of the following manners:
<TABLE>
<S> <C>
- ---------------------------------------
INDIVIDUAL: Avoid the use of two initials. Include the first given name, middle initial and last name of the
stockholder. Omit words of limitation that do not affect ownership rights such as "special account,"
"single man," "personal property," etc. If the stock is held individually upon the individual's death, the
stock will be owned by the individual's estate and distributed as indicated by the individual's will or
otherwise in accordance with law.
- ---------------------------------------
JOINT: Joint ownership of stock by two or more persons shall be inscribed on the certificate with one of the
following types of joint ownership. Names should be joined by "and"; do not connect with "or." Omit titles
such as "Mrs.," "Dr.," etc.
JOINT TENANTS -- Joint Tenancy with Right of Survivorship and not as Tenants in Common may be specified to
identify two or more owners where ownership is intended to pass automatically to the surviving tenant(s).
TENANTS IN COMMON -- Tenants in Common may be specified to identify two or more owners. When stock is held
as tenancy in common, upon the death of one co-tenant, ownership of the stock will be held by the
surviving co-tenant(s) and by the heirs of the deceased co-tenant. All parties must agree to the transfer
or sale of shares held in this form of ownership.
- ---------------------------------------
UNIFORM Stock may be held in the name of a custodian for a minor under the Uniform Transfer to Minors laws of the
TRANSFER TO individual states. There may be only one custodian and one minor designated on a stock certificate. The
MINORS: standard abbreviation of custodian is "CUST.", while the description "Uniform Transfers to Minors Act" is
abbreviated "UNIF TRAN MIN ACT," Standard U.S. Postal Service state abbreviations should be used to
described the appropriate state. For example, stock held by John P. Jones under the Uniform Transfers to
Minors Act will be abbreviated:
JOHN P. JONES CUST SUSAN A. JONES
UNIFORM TRAN MIN ACT MI
- ---------------------------------------
FIDUCIARIES: Stock held in a fiduciary capacity must contain the following:
1. The name(s) of the fiduciary(ies):
-- If an individual, list the first given name, middle initial and last name.
-- If a corporation, list the corporate title.
-- If an individual and a corporation, list the corporation's title before the individual.
2. The fiduciary capacity: Administrator, Conservator, Committee, Executor, Trustee, Personal
Representative, Custodian.
3. The type of document governing the fiduciary relationship. Generally, such relationships are either
under a form of living trust agreement or pursuant to a court order. Without a document establishing a
fiduciary relationship, your stock may not be registered in a fiduciary capacity.
4. The date of the document governing the relationship. The date of the document need not be used in the
description of a trust created by a will.
5. Either of the following:
The name of the maker, donor or testator OR
The name of the beneficiary
EXAMPLE OF FIDUCIARY OWNERSHIP:
JOHN D. SMITH, TRUSTEE FOR TOM A. SMITH
UNDER AGREEMENT DATED 6/9/74
</TABLE>
(5) NASD AFFILIATION -- Check the box and initial, if applicable.
(6) ACKNOWLEDGMENT AND SIGNATURE -- Stock order forms submitted without a
signature will not be accepted. Only one signature is required. If signing as a
custodian, trustee, corporate officer, etc., please include your title. If
exercising a Power of Attorney, you must submit a copy of the POA agreement with
this Form.
<PAGE>
QUESTIONS
&
ANSWERS
ABOUT
THE
CONVERSION
OF
MICHIGAN EDUCATIONAL EMPLOYEES
MUTUAL INSURANCE COMPANY
[LOGO]
<PAGE>
[LOGO]
QUESTIONS & ANSWERS
ABOUT THE CONVERSION OF
MICHIGAN EDUCATIONAL EMPLOYEES
MUTUAL INSURANCE COMPANY
THE BOARD OF DIRECTORS OF MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE
COMPANY (MEEMIC) HAS UNANIMOUSLY VOTED TO CONVERT MEEMIC FROM A MUTUAL INSURANCE
COMPANY TO A STOCK INSURANCE COMPANY, SUBJECT TO APPROVAL OF THE CONVERSION BY
THE POLICYHOLDERS. COMPLETE DETAILS ON THE CONVERSION, INCLUDING THE REASONS FOR
THE CONVERSION, ARE CONTAINED IN MEEMIC'S NOTICE OF SPECIAL MEETING AND PROXY
STATEMENT AND IN THE PROSPECTUS OF MEEMIC HOLDINGS INC. WE ASK YOU TO READ THESE
DOCUMENTS CAREFULLY.
THIS BROCHURE IS PROVIDED TO ANSWER BASIC QUESTIONS YOU MIGHT HAVE ABOUT THE
CONVERSION. REMEMBER THAT THE CONVERSION WILL NOT AFFECT THE RATES, TERMS OR
CONDITIONS OF YOUR POLICY OR POLICIES.
MUTUAL TO STOCK CONVERSON
<TABLE>
<C> <C> <S>
1. Q WHY DID I RECEIVE THIS PACKAGE IN THE
MAIL?
A Your insurance company, MEEMIC, is
undertaking a mutual-to-stock conversion,
which includes an offering of MEEMIC
Holdings common stock. As a policyholder
of MEEMIC, you have the right to vote upon
the conversion and if you wish, subscribe
for MEEMIC Holdings common stock.
2. Q WHAT IS A "CONVERSION"?
A Conversion is a change in the legal form
of organization. MEEMIC is currently
organized as a mutual insurance company
with no shareholders. Through the
conversion, MEEMIC will become a stock
insurance company, and all of the stock
will be owned by MEEMIC Holdings. MEEMIC
Holdings will in turn offer its shares to
policyholders and others who are eligible
to participate in the offering.
</TABLE>
<PAGE>
<TABLE>
<C> <C> <S>
3. Q WHY IS MEEMIC CONVERTING TO STOCK FORM?
A The conversion and sale of MEEMIC Holdings
stock will:
- Allow MEEMIC to keep rates competitive,
add new products, and improve customer
service through investments in technology;
- Raise new capital and thereby provide
additional financial security to
policyholders;
- Facilitate future access to the capital
markets;
- Give policyholders the opportunity to
become shareholders.
4. Q WILL THE CONVERSION HAVE ANY EFFECT ON MY
INSURANCE POLICY WITH THE COMPANY?
A No. The conversion will not change the
rates, terms or conditions of your policy.
After the conversion, however, you will
not have voting rights unless you become a
shareholder of MEEMIC Holdings, Inc.
5. Q DID THE BOARD OF DIRECTORS APPROVE THE
CONVERSION?
A Yes. The board of directors unanimously
adopted the plan of conversion and urges
that all policyholders vote "FOR" approval
of the plan of conversion.
6. Q HAS THE PLAN OF CONVERSION RECEIVED STATE
REGULATORY APPROVAL?
A Yes. The Michigan Insurance Bureau has
approved MEEMIC's plan of conversion as
required by Michigan law.
ABOUT VOTING "FOR" THE PLAN OF CONVERSION
7. Q WHAT VOTE IS NECESSARY TO APPROVE THE PLAN
OF CONVERSION?
A The conversion requires the affirmative
vote of at least two-thirds of the votes
cast in person or by proxy at the Special
Meeting of Eligible Policyholders of
MEEMIC.
8. Q WHAT HAPPENS IF MEEMIC DOES NOT OBTAIN
ENOUGH VOTES TO APPROVE THE PLAN OF
CONVERSION?
A MEEMIC's conversion would not take place
and MEEMIC would remain a mutual insurance
company.
9. Q IF I VOTE "FOR" THE CONVERSION, AM I
REQUIRED TO BUY STOCK?
A No. A vote "FOR" conversion will not
obligate you to buy any stock.
10. Q HOW MANY VOTES DO I HAVE?
A There is one vote for each policy.
</TABLE>
<PAGE>
<TABLE>
<C> <C> <S>
11. Q AM I REQUIRED TO VOTE?
A No. You are not required to vote. Failure
to vote will not constitute a vote for or
against the conversion. However, approval
of the conversion requires the affirmative
vote of at least two-thirds of votes cast
by the policyholders of MEEMIC. We
therefore ask that you cast your vote,
sign, date, and return your proxy card
today.
12. Q MAY I VOTE IN PERSON AT THE SPECIAL
MEETING?
A Yes. But we would still like you to sign
your proxy and mail it today. If you then
attend in person and wish to change your
vote, you will have the opportunity to
revoke your proxy and vote in person.
13. Q WHY DID I GET SEVERAL PROXY CARDS?
A If you have more than one policy with
MEEMIC, you may receive more than one
proxy, depending on the named insureds on
your policies. PLEASE VOTE AND SIGN ALL
PROXY CARDS!
14. Q IF A POLICY IS IN JOINT NAMES, MUST
SIGNATURES OF BOTH PARTIES BE ON THE PROXY
CARD?
A No. The signature of only one policyholder
is required.
ABOUT BECOMING A SHAREHOLDER
15. Q WHAT IS THE SUBSCRIPTION OFFERING?
A The subscription offering is an offering
of MEEMIC Holdings common stock. The right
to participate in this offering is limited
to eligible policyholders, officers and
directors and is non-transferable.
16. Q AM I ELIGIBLE TO PARTICIPATE IN THE
SUBSCRIPTION OFFERING?
A A person who was a named insured on June
24, 1998 under a policy of insurance
issued by MEEMIC is an eligible
policyholder. If the policy lists more
than one named insured, all persons
identified on the policy as a named
insured jointly constitute one eligible
policyholder. The company reserves the
right to limit the subscription offering
to Michigan residents only.
</TABLE>
<PAGE>
<TABLE>
<C> <C> <S>
17. Q WILL STOCK BE SOLD TO ANYONE OTHER THAN
POLICYHOLDERS, OFFICERS AND DIRECTORS?
A Yes. Professionals Group, Inc. will
receive shares of MEEMIC Holdings in
exchange for an outstanding note and by
exercising its rights under the Standby
Purchase and Option Agreement. The $10
price per share paid by Professionals
Group, Inc. is identical to the price per
share being offered to policyholders,
officers and directors.
18. Q HOW DO I SUBSCRIBE FOR SHARES?
A (1) Complete and sign the enclosed stock
order form related to the subscription
offering.
(2) Mail the form with a check (personal,
certified or bank) or money order for
the number of shares subscribed for in
the enclosed envelope. Cash and credit
card payments will NOT be accepted.
If you misplace the envelope, mail your
form and payment to:
MEEMIC
c/o ChaseMellon Shareholder
Services
PO Box 3307
South Hackensack, NJ 07606
Attn: Reorganization Dept.
If you wish to use express mail or
overnight courier, use the following
address:
MEEMIC
c/o ChaseMellon Shareholder
Services
85 Challenger Road, mail
Drop-Reorg
Ridgefield Park, NJ 07660
19. Q CAN I PURCHASE SHARES OF COMMON STOCK IN
THE SUBSCRIPTION OFFERING THROUGH MY
BROKER?
A No. Shares offered in the subscription
offering may be purchased only by
completing the stock order form. After the
offering is completed, MEEMIC's common
stock may be bought/sold through brokers
like any other common stock.
20. Q WHAT IS THE DEADLINE TO SUBMIT MY STOCK
ORDER FORM TO THE SUBSCRIPTION SERVICES
AGENT?
A The completed and signed stock order form
accompanied by check or money order for
good funds must be RECEIVED BY THE
SUBSCRIPTION SERVICES AGENT NO LATER THAN
5:00 P.M., EASTERN DAYLIGHT TIME, ON
, 1999, to be considered for acceptance
by MEEMIC Holdings.
</TABLE>
<PAGE>
<TABLE>
<C> <C> <S>
21. Q HOW MANY SHARES OF COMMON STOCK CAN I BUY
AND WHAT IS THE PRICE?
A The minimum number of shares you can buy
is 100. The maximum number of shares you
may buy is 10,744 for each eligible policy
issued by MEEMIC. The maximum applies per
policy, regardless of the number of named
insureds on the policy. The stock is being
offered at $10 per share, making the
minimum investment equal to $1,000 and the
maximum investment equal to $107,440 per
eligible policy.
22. Q WHAT IS THE STOCK ORDER FORM?
A The stock order form is the document that
you must complete, sign and return to the
subscription services agent in order to
purchase shares in the subscription
offering. The document requires certain
important information, such as your name,
address and social security number. The
stock order form also requires you to
confirm that you have received the
prospectus at least 48 hours prior to the
expiration date. A stock order form is
included in the subscription package.
23. Q WHO SHOULD BE THE PAYEE ON MY CHECK OR
MONEY ORDER?
A Your check (personal, certified or bank)
or money order should be made payable to
"ChaseMellon Shareholder Services". Please
make sure your name is on the check or
shown as the remitter on a money order.
24. Q WILL I BE CHARGED A COMMISSION ON THE
PURCHASE OF THE COMMON STOCK IN THE
SUBSCRIPTION OFFERING?
A No. You will not be charged a brokerage
commission to purchase common stock in the
subscription offering.
25. Q WILL I EARN INTEREST ON FUNDS SUBMITTED TO
PURCHASE SHARES IN THE SUBSCRIPTION
OFFERING?
A Funds you submit to purchase shares in the
subscription offering will not earn
interest; they will be held in escrow
until the subscription offering is
completed and policyholders have approved
the conversion.
26. Q MAY MY SUBSCRIPTION RIGHTS BE SOLD OR
ASSIGNED?
A No. Pursuant to state regulations,
subscription rights granted in the
conversion are not transferable. Further,
subscription rights cannot be used to
purchase stock pursuant to an agreement to
transfer stock to another person.
</TABLE>
<PAGE>
<TABLE>
<C> <C> <S>
27. Q HOW WILL I KNOW THAT MY ORDER HAS BEEN
RECEIVED?
A The subscription services agent will mail
an acknowledgment of receipt to you.
28. Q WHAT WILL HAPPEN TO MY ORDER IF ORDERS ARE
RECEIVED FOR MORE COMMON STOCK THAN IS
AVAILABLE?
A This is referred to as an over
subscription and shares will be allocated
on a formula basis as disclosed in the
prospectus. In the event of an over
subscription, you will receive a cash
refund for the shares you requested, but
did not receive.
29. Q CAN I CHANGE MY MIND AFTER PLACING MY
ORDER?
A No. You may not modify or withdraw your
order once it has been submitted.
30. Q WHEN CAN I EXPECT TO RECEIVE THE STOCK
CERTIFICATE FOR MY COMMON STOCK?
A It is expected that the subscription
offering will close shortly after the
Special Meeting of Eligible Policyholders
is held. A stock certificate for your
shares and any refund check, if
applicable, will be mailed to you within
10 business days thereafter. Please be
aware that you may not be able to sell
shares purchased until receipt of a common
stock certificate.
31. Q HOW MANY STOCK CERTIFICATES WILL I RECEIVE
FOR MY SHARES OF COMMON STOCK?
A You will receive one stock certificate
representing all shares of common stock
purchased by you in the subscription
offering. Unfortunately, you may not
request additional certificates for
smaller denominations of shares until
after the subscription offering is
completed. The transfer agent may require
a nominal fee from you for this service.
32. Q WHAT IF MY ADDRESS CHANGES EITHER DURING
THE SUBSCRIPTION OFFERING OR BEFORE I
RECEIVE MY STOCK CERTIFICATE?
A The stock certificate and any refund check
will be mailed to the address provided in
the stock order form. Therefore, it is
your responsibility to provide appropriate
forwarding instructions to your post
office, or, when completing your stock
order form, provide an address where you
will be sure your mail will be safely
received.
33. Q WILL DIVIDENDS BE PAID ON THE COMMON
STOCK?
A The board of directors does not currently
anticipate paying dividends. The board of
directors is responsible for determining
whether MEEMIC Holdings will pay dividends
on the stock in the future.
</TABLE>
<PAGE>
<TABLE>
<C> <C> <S>
34. Q I WAS FORMERLY A MEEMIC POLICYHOLDER, BUT
I NO LONGER AM. AM I ELIGIBLE TO SUBSCRIBE
FOR SHARES?
A If you were a policyholder on June 24,
1998, you may subscribe for shares. If you
cancelled your policy prior to this date,
you are not eligible to subscribe for
shares.
35. Q HOW WILL THE COMMON STOCK BE TRADED?
A MEEMIC Holdings Inc.'s common stock is
expected to be quoted on the Nasdaq
National Market{sm} under the symbol
"MEMH" upon completion of the conversion.
Listing on Nasdaq is subject to the
satisfaction of various conditions,
including the number of policyholders who
subscribe and the number of shares
purchased by policyholders. No assurance
can be given that an established and
liquid market for the common stock will
develop. The brokerage firms of First of
Michigan, Hoefer & Arnett and ABN AMRO
have indicated to MEEMIC Holdings that
they intend to act as market makers in the
stock following completion of the
conversion. Refer to "Market for the
Common Stock" in the prospectus for more
information
36. Q HOW CAN I GET FURTHER INFORMATION ABOUT
THE CONVERSION?
A Call the subscription services agent at
1-877-MEEMIC1
</TABLE>
THIS BROCHURE IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY
STOCK. THE OFFER WILL BE MADE ONLY BY THE PROSPECTUS.
- --------------------------, 1999
<PAGE>
[LOGO]
, 1999
Dear Policyholder:
We are pleased to announce that the board of directors of the Michigan
Educational Employees Mutual Insurance Company has unanimously adopted a plan of
conversion under which we will convert from a mutual insurance company to a
stock insurance company. As part of the conversion process, a new company,
MEEMIC Holdings, Inc., has been formed which will become the holding company of
MEEMIC. The enclosed material provides more information about the conversion.
PLEASE NOTE THAT THE CONVERSION WILL NOT CHANGE THE STATUS OF YOUR EXISTING
INSURANCE POLICY OR POLICIES WITH US.
We believe that the conversion will benefit all policyholders. It will raise
needed capital, allowing us to:
- continue providing you with competitive rates;
- improve our customer service and efficiency through continued enhancement
of our management information systems;
- provide for growth and expansion of the product lines we offer you;
- increase our financial strength to support current and future premium and
provide additional security to you;
- provide for capital to retire the $21.5 million surplus note and
management services agreement with Professionals Group, Inc., which we
estimate will result in an annual pre-tax savings of $3.3 million over the
remaining term of the agreements; and
- provide financial participation to the policyholders in the success of
MEEMIC.
Your participation in the conversion is very important. A proxy statement is
enclosed for your review, together with a proxy card, Question and Answer
brochure, prospectus and stock order form. We urge you to read all the materials
provided carefully. YOUR VOTE IS IMPORTANT TO THE SUCCESS OF THE PLAN. I URGE
YOU TO VOTE FOR THE PLAN BY COMPLETING, SIGNING, DATING AND RETURNING THE
ENCLOSED PROXY CARD IMMEDIATELY IN THE POSTAGE-PAID ENVELOPE PROVIDED, WHETHER
OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING OR SUBSCRIBE FOR STOCK. YOUR
VOTE OF APPROVAL OF THE PLAN IN NO WAY OBLIGATES YOU TO BUY STOCK. If you and/or
members of your family have multiple policies with MEEMIC, you may receive more
than one proxy card. IF YOU DO RECEIVE MORE THAN ONE PROXY CARD, PLEASE SIGN AND
RETURN EACH ONE. THE DEADLINE FOR RETURNING PROXY CARDS IS , 1999.
If you have any questions or would like additional information, please call
our Subscription Information Center toll free at (877) MEEMIC1. The Subscription
Information Center is open Monday through Friday from 7:30 a.m. to 5:00 p.m.
Sincerely,
R. Kevin Clinton
PRESIDENT
THIS LETTER IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY COMMON
STOCK OF MEEMIC HOLDINGS, INC. SUCH AN OFFER WILL BE MADE ONLY BY MEANS OF A
PROSPECTUS.
<PAGE>
Exhibit 99.4
June 19, 1998
Board of Directors
Michigan Educational Employees
Mutual Insurance Company
691 N. Squirrel Road
Suite 200
Auburn Hills, MI 48321-7019
Members of the Board:
We understand that pursuant to the Plan of Conversion dated June 19,
1998 (the "Plan") of Michigan Educational Employees Mutual Insurance Company),
("MEEMIC" or the "Company"), (i) MEEMIC shall be reorganized pursuant to Chapter
59 of the Michigan Insurance Code, MCL 500.5901, and will continue its existence
as MEEMIC Insurance Company, a stock insurance company; (ii) MEEMIC Holding,
Inc. ("MEEMIC Holdings") will be formed as a Michigan business corporation under
the laws of the State of Michigan to serve as a holding company for MEEMIC;
(iii) the articles of incorporation and bylaws of MEEMIC will be amended and
restated as the articles and bylaws of MEEMIC Insurance Company; (iv) the
Company will offer and sell shares of MEEMIC Holdings in the Subscription
Offering, and the Standby Offering; and (v) the Surplus Note will be converted
into Shares of MEEMIC Holdings. Except as defined herein all capitalized terms
shall have the meanings contained in the Plan.
The effectiveness of the Plan is conditional upon, among other things:
(1) approval by two-thirds of those eligible members of MEEMIC voting thereon;
(ii) approval by the Michigan Insurance Bureau (the "Bureau"); and (iii) receipt
by MEEMIC of an opinion letter from counsel or tax advisor that the Plan and
related transactions will not result in any material adverse effect with regard
to federal or state income tax matters to the Company and its policyholders.
At your request, we have prepared an independent estimate of the
consolidated, pro forma market value of MEEMIC Holdings upon conversion, as
discounted to attract full Subscription for the Subscription Shares (the "Pro
Forma Market Value"). In preparing our analysis, among other things, we have:
(i) reviewed the Plan, including all exhibits thereto;
(ii) reviewed the Asset Purchase Agreement of Michigan Educators
Insurance Agency by MEEMIC, and related materials and
exhibits;
<PAGE>
Board of Directors
June 19, 1998
Page 2
(iii) reviewed the Surplus Note Agreement issued by MEEMIC to PICOM
Insurance Company;
(iv) reviewed the amended and restated articles of incorporation
and bylaws of MEEMIC and MEEMIC Holdings;
(v) reviewed the annual statutory reports of MEEMIC for the years
ended December 31, 1996 and December 31, 1997, interim
financial statements through March 31, 1998. and draft 1997
GAAP historical statements prepared management;
(vi) reviewed certain internal financial analyses and forecasts for
the Company prepared by, their management;
(vii) discussed with senior management of MEEMIC the operations,
financial condition and future prospects of the Company as
well as the effect of the Plan and other matters we believe
relevant to our inquiry; and
(viii) performed such other studies, analyses, inquiries and
investigation as we deemed appropriate.
In our discussions with management of MEEMIC, we reviewed certain
consequences and benefits from the Plan on the future prospects of the
Company, including that the Plan would: (i) enable Eligible Policyholders to
obtain ownership in the Company; (ii) increase the Company's capital position
and retire the Surplus Note; (iii) provide the Company with greater strategic
flexibility and financial strength by creating an organizational structure
with access to external sources of capital; and (iv) provide the Company with
alternatives for motivating employees, officers and directors.
In preparing our analysis, we relied upon, without independent
verification, the accuracy and completeness of the financial and other
information provided to us by MEEMIC and their representatives. We have
neither made nor obtained any independent evaluation or appraisal of the
Company's assets or liabilities. We have been advised as to all legal matters
by legal counsel to the Company upon whom we have relied, including as to the
legality of the Plan and compliance with Michigan law. We have assumed that
the Company will receive regulatory approval in the manner contemplated by
the Plan, as well as an opinion that the consummation of the Plan will not
result in material adverse tax effects. In addition, we have assumed that the
final forms of all documents will not differ in any material respect from the
drafts of such documents reviewed by us as of the date of this letter. Our
analysis is further based upon our assessment as of the date of this letter
of general economic, financial and market conditions.
<PAGE>
Board of Directors
June 19, 1998
Page 3
ABN AMRO Incorporated, as part of its investment banking business, is
continually engaged in the valuation of businesses in connection with mergers
and acquisitions, as well as initial and secondary offerings of securities and
valuations for other purposes. We have acted as financial advisor to the Board
of Directors of the Company in connection with this transaction and will receive
a fee for our services, which is not contingent upon the consummation of the
Conversion.
Our analysis has been focused on providing an estimate of Pro Forma
Market Value as defined in the Plan. Our analysis does not constitute a
recommendation to any member as to how such member should vote with respect
to the Plan. It is understood that this letter is solely for the benefit and
use of the Company in its consideration of the Conversion and may not be
relied upon by any other person, or used for any other purpose, except as an
exhibit to the Company's filing with the Bureau or as otherwise required by
legal or regulatory process.
As more fully presented in our report to the Board, which is based on
the foregoing and in reliance thereon, our estimate of Pro Forma Market Value,
as defined in the Plan consists of a Value Range Minimum of $54 million and a
Value Range Maximum of $66 million.
Sincerely,
/s/ ABN AMRO Incorporated
ABN AMRO Incorporated
