<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 20, 1999
REGISTRATION NO. 333-66671
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 1
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 200
AUBURN HILLS, MICHIGAN 48321
(248) 377-8582
(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 200
AUBURN HILLS, MICHIGAN 48321
(248) 377-8582
(Name and address, including zip code, and telephone number,
including area code, of agent for service)
--------------------------
COPIES TO:
ANN D. FILLINGHAM, ESQ.
Dykema Gossett PLLC
800 Michigan National Tower
Lansing, Michigan 48933
(517) 374-9171
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...................... 108,057(1) $0.00 $0.00 $0.00
Common Stock, no par value............... 6,600,000(2) $10.00 $66,000,000 $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 "The Demutualization--Your Subscription
Rights."
(2) Includes an aggregate of 2,302,209 shares which Professionals Group, Inc.
will receive from the Company pursuant to conversion of an existing surplus
note. See "The Demutualization--Conversion of the Surplus Note."
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.
UP TO 4,297,791 SHARES OF COMMON STOCK
[LOGO]
--------------------------------
MINIMUM INDIVIDUAL SUBSCRIPTION--100 SHARES ($1,000.00)
MEEMIC Holdings, Inc. is a Michigan corporation with offices at 691 North
Squirrel Road, Suite 200, Auburn Hills, Michigan 48326, telephone (888)
4-MEEMIC. MEEMIC Holdings, Inc. is offering up to 4,297,791 shares of common
stock to eligible policyholders, officers and directors of Michigan Educational
Employees Mutual Insurance Company ("MEEMIC").
MEEMIC Holdings, Inc. has applied to have the common stock approved for
quotation on the NASDAQ National Market under the symbol "MEMH."
MEEMIC Holdings, Inc. and MEEMIC established a Stock Offering Information
Line to answer questions about this offering. To access this Stock Offering
Information Line, call .
MEEMIC Holdings, Inc. is offering these shares for sale without the
assistance of an underwriter. MEEMIC Holdings, Inc. is offering these shares for
sale as part of a plan to convert MEEMIC from a mutual insurance company (a
company owned exclusively by its policyholders) to a stock insurance company (a
company owned by its stockholders, who may or may not be policyholders). The
conversion is subject to approval of the policyholders of MEEMIC. MEEMIC has
scheduled a policyholder meeting for March 26, 1999. Because the policyholders
of MEEMIC have not yet approved the conversion, MEEMIC Holdings, Inc. will hold
all proceeds of this offering in trust in a noninterest-bearing escrow account
with Mellon Bank, N.A. If the policyholders of MEEMIC do not approve the
conversion, MEEMIC Holdings, Inc. will promptly refund the escrowed proceeds.
------------------------
THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
------------------------
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.
<TABLE>
<S> <C> <C>
- - Price Per Share: $10.00
- - Number of Shares in the Subscription Offering 3,097,791 to 4,297,791
(Minimum/Maximum):
- - Underwriting Discounts and Commissions: $0.00
- - Estimated Offering and Conversion Expenses: $1,500,000
- - Net Proceeds to MEEMIC Holdings, Inc. $29,477,910 to
$41,477,910
- - Net Proceeds to MEEMIC Holdings, Inc. per share $9.52 to $9.59
</TABLE>
FOR NORTH CAROLINA INVESTORS: THE COMMISSIONER OF INSURANCE OF THE STATE OF
NORTH CAROLINA HAS NOT APPROVED OR DISAPPROVED THIS OFFERING NOR HAS SUCH
COMMISSIONER RULED UPON THE ACCURACY OR THE ADEQUACY OF THE PROSPECTUS.
STATE INSURANCE HOLDING COMPANY LAWS AND REGULATIONS APPLICABLE TO MEEMIC IN
GENERAL PROVIDE THAT NO PERSON MAY ACQUIRE CONTROL OF MEEMIC HOLDINGS, INC., AND
THUS INDIRECT CONTROL OF MEEMIC, UNLESS SUCH PERSON HAS PROVIDED CERTAIN
REQUIRED INFORMATION TO, AND SUCH ACQUISITION IS APPROVED (OR NOT DISAPPROVED)
BY, THE MICHIGAN INSURANCE BUREAU. GENERALLY, ANY PERSON ACQUIRING BENEFICIAL
OWNERSHIP OF 10% OR MORE OF THE OUTSTANDING SHARES OF MEEMIC HOLDINGS, INC.
SHALL BE DETERMINED TO HAVE ACQUIRED CONTROL OF MEEMIC HOLDINGS, INC. UNLESS THE
MICHIGAN INSURANCE BUREAU DETERMINES OTHERWISE.
This offering will commence on February 15, 1999 and will continue until
April 1, 1999. You have no right to withdraw your investment. MEEMIC may reject
a subscription for any reason or for no reason and may terminate this offering
at any time.
THE DATE OF THIS PROSPECTUS IS FEBRUARY 15, 1999
<PAGE>
PROSPECTUS
MEEMIC HOLDINGS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY................ 1
The Offering.................... 1
General Provisions............ 1
Meemic Holdings, Inc. to
Escrow Proceeds............. 2
Your Subscription Rights...... 2
Non-transferability of
Subscription Rights......... 2
How to Purchase Common
Stock....................... 2
Minimum and Maximum Purchases
by Eligible Policyholders... 2
Termination of Offering....... 3
Purchase of Common Stock by
Management.................. 3
The Common Stock................ 3
Market for the Common Stock... 3
Dividends..................... 3
Risk Factors.................. 3
The Demutualization............. 4
Structure of the
Demutualization............. 4
Related Transactions.......... 4
The Standby Purchase and
Option Agreement............ 5
The Companies................. 6
MEEMIC...................... 6
MEEMIC Holdings, Inc........ 6
Professionals Group, Inc.
and ProNational Insurance
Company................... 6
RISK FACTORS...................... 7
Possible Adverse Impact of Broad
Valuation Range and Its Use to
Determine the Number of Shares
of Common Stock Sold.......... 7
Absence of Prior Public
Market........................ 7
Additional Authorized Shares
Could Be Issued............... 7
Dilutive Effect of Standby
Purchase and Option Agreement
and Stock Compensation Plan... 7
Change of Board of Directors of
MEEMIC........................ 8
Professionals as Majority
Shareholder................... 8
Property and Casualty Insurance
Business is Highly
Competitive................... 8
Regulation by the Michigan
Insurance Bureau and the
NAIC.......................... 8
<CAPTION>
PAGE
----
<S> <C>
Dependence of MEEMIC Holdings,
Inc. on Results and Operations
of MEEMIC..................... 9
Concentration of Earnings in
Personal Lines Insurance...... 9
Geographic Concentration in
Michigan...................... 9
Adequacy of Loss Reserves....... 9
Cyclicality of the Property and
Casualty Insurance Industry... 9
Availability Coverage Limits and
Credit Risk of Reinsurance.... 10
Possible Adverse Impact of
Change in A.M. Best Rating.... 10
Insurance Company Insolvency
Law........................... 10
Michigan No-Fault Automobile
Insurance Laws and the
Michigan Essential Insurance
Act........................... 10
CERTAIN FORWARD-LOOKING
INFORMATION..................... 11
THE DEMUTUALIZATION............... 11
Plan of Demutualization......... 11
MEEMIC Holdings, Inc. to Escrow
Proceeds...................... 11
Background...................... 12
Actions of the Independent
Committee and the Board of
Directors..................... 12
Interpretation and Amendment of
the Plan of Conversion........ 13
Subscription Rights............. 14
Stock Price and Number of Shares
to be Issued.................. 14
The Standby Purchase and Option
Agreement..................... 15
Conversion of the Surplus
Note.......................... 15
Management Purchases............ 15
THE COMPANIES..................... 16
MEEMIC.......................... 16
MEEMIC Holdings, Inc............ 16
Professionals Group, Inc........ 16
ProNational Insurance Company... 17
PLAN OF DISTRIBUTION.............. 17
Plan of Distribution............ 17
The Subscription Offering
Period........................ 17
Impoundment of Proceeds......... 17
How to Purchase Shares of Common
Stock......................... 18
Delivery of Certificates........ 18
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Minimum and Maximum Purchases
for Eligible Policyholders.... 18
Rules for Oversubscription...... 18
USE OF PROCEEDS................... 19
CAPITALIZATION.................... 20
PRO FORMA DATA.................... 21
SELECTED HISTORICAL FINANCIAL AND
OPERATING DATA.................. 28
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS....... 30
Overview........................ 30
Financial Condition............. 30
Reinsurance..................... 31
Results of Operations--Nine
Months Ended September 30,
1998 Compared to Nine Months
Ended September 30, 1997...... 32
Results of Operations--Year
Ended December 31, 1997
Compared to Year Ended
December 31, 1996............. 32
Results of Operations--Year
Ended December 31, 1996
Compared to Year Ended
December 31, 1995............. 33
Liquidity and Capital
Resources..................... 34
Effects of Inflation............ 36
Effects of New Accounting
Pronouncements................ 36
Year 2000 Compliance............ 36
MARKET FOR THE COMMON STOCK....... 37
DIVIDEND POLICY................... 37
INSURANCE REGULATORY MATTERS...... 37
General......................... 37
Insurance Company Dividends..... 38
Michigan No-Fault Automobile
Insurance..................... 38
Michigan Essential Insurance
Act........................... 38
BUSINESS OF MEEMIC................ 39
Strategy........................ 39
Products........................ 41
Homeowners Policy............... 42
Personal Automobile............. 42
Marketing....................... 42
Underwriting.................... 42
Claims.......................... 43
<CAPTION>
PAGE
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<S> <C>
Reinsurance Ceded............... 43
Loss and LAE Reserves........... 45
Investments..................... 48
A.M. Best Rating................ 49
Competition..................... 49
Regulation...................... 49
Litigation...................... 51
Employees....................... 51
MANAGEMENT........................ 52
Directors....................... 52
Executive Officers.............. 54
Management Remuneration......... 55
Incentive Plan.................. 55
Employee Contracts.............. 56
The Stock Compensation Plan..... 56
Compensation Committee
Interlocks and Insider
Participation................. 57
Indemnification and Limitation
of Liability Matters.......... 57
SECURITY OWNERSHIP OF MANAGEMENT
AND CERTAIN SECURITY-HOLDERS.... 58
Interest of Management and
Others in Certain
Transactions.................. 59
The Standby Purchase and Option
Agreement with
Professionals................. 59
Transactions with Former
Directors..................... 60
DESCRIPTION OF COMMON STOCK....... 60
General......................... 60
Limitation on Resales........... 60
CERTAIN RESTRICTIONS ON
ACQUISITION OF AND BUSINESS
COMBINATIONS BY MEEMIC HOLDINGS,
INC............................. 61
General......................... 61
Protection of Minority
Interests..................... 62
FEDERAL INCOME TAX
CONSIDERATIONS.................. 63
General......................... 63
Material Tax Effects to MEEMIC
Holdings, Inc................. 64
Subscription Rights............. 64
LEGAL MATTERS..................... 65
EXPERTS........................... 65
AVAILABLE INFORMATION............. 65
FINANCIAL STATEMENTS.............. F-1
GLOSSARY OF INSURANCE TERMS....... G-1
</TABLE>
ii
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED IN THIS
DOCUMENT, INCLUDING INFORMATION CONTAINED UNDER THE CAPTION "RISK FACTORS."
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, INCLUDING ITS APPENDICES.
THE OFFERING
<TABLE>
<S> <C>
GENERAL PROVISIONS
Common Stock Offered:........... 3,097,791 to 4,297,791 shares.
Voting Rights:.................. Each share of common stock will be entitled to one vote.
Subscription Minimum:........... The minimum purchase is 100 shares ($1,000.00). Fractional
shares will not be sold.
Subscription Maximum:........... The maximum purchase is 10,744 shares for each policy of
insurance issued by MEEMIC and in force on the close of
business on June 24, 1998. The maximum purchase is 107,444
shares for each eligible officer and director, up to
429,779 shares in total for officers and directors as a
group. Fractional shares will not be sold.
Use of Proceeds:................ Money collected by means of this offering will be used as
capital of MEEMIC for growth and operational purposes, to
pay certain debt of MEEMIC, and to fund an increase in
MEEMIC's surplus. See "Use of Proceeds."
Dividend Policy:................ MEEMIC has no present intention to pay dividends.
Proposed NASDAQ National Market
Symbol:....................... "MEMH"
Risk Factors:................... Investment in the common stock involves a high degree of
risk. See "Risk Factors."
</TABLE>
There will be at least 5,400,000 shares of common stock outstanding on the
date of the conversion of MEEMIC from a mutual company to a stock company
assuming that:
- 3,097,791 shares of common stock are sold through this offering or under
the terms of the standby purchase and option agreement.
- Professional Group, Inc. does not purchase any shares of common stock
which it has the option, but not the obligation, to purchase under the
terms of the standby purchase and option agreement. See "The
Demutualization--The Standby Purchase and Option Agreement."
- 2,302,209 shares of common stock are issued in connection with the
conversion of the surplus note. See "The Demutualization--Conversion of
the Surplus Note."
- No shares are issued on the date of the conversion pursuant to the
Company's Stock Compensation Plan. See "Management--The Stock Compensation
Plan."
The number of outstanding shares could increase to 6,600,000 assuming that
the policyholders or Professionals Group, Inc. purchase the offering maximum of
4,297,791 shares.
1
<PAGE>
MEEMIC HOLDINGS, INC. TO ESCROW PROCEEDS
The conversion of MEEMIC from a mutual company to a stock company is subject
to approval by the policyholders of MEEMIC. MEEMIC scheduled a policyholder
meeting for March 26, 1999. Until the policyholder meeting, MEEMIC Holdings,
Inc. will hold all proceeds of this offering in a noninterest-bearing escrow
account with Mellon Bank, N.A., a national banking association, under the terms
of an Escrow Agreement dated , 1999.
In the event the plan of conversion is approved by the eligible
policyholders of MEEMIC, all money in the escrow account will be released to
MEEMIC Holdings, Inc. In the event the plan of conversion is not approved by the
eligible policyholders of MEEMIC, MEEMIC Holdings, Inc. will promptly return to
you your subscription amount.
YOUR SUBSCRIPTION RIGHTS
MEEMIC Holdings, Inc. is making this offering to eligible policyholders,
officers and directors of MEEMIC by means of nontransferable subscription
rights. A subscription right is a right to purchase common stock of MEEMIC
Holdings, Inc. MEEMIC is providing subscription rights to all named insureds
under policies of insurance issued by MEEMIC and in force on the close of
business on June 24, 1998 and to the officers and directors of MEEMIC.
These subscription rights are being provided to eligible policyholders,
officers and directors of MEEMIC as part of a plan to convert MEEMIC from a
mutual insurance company (a company owned exclusively by its policyholders) to a
stock insurance company (a company owned by its stockholders who may or may not
be policyholders). If you exercise your subscription rights and purchase stock
in this offering, you will be a stockholder and owner of MEEMIC Holdings, Inc.
If you do not purchase stock in this offering, you will not have any ownership
interest in either MEEMIC or MEEMIC Holdings, Inc. on the date of the
conversion.
NON-TRANSFERABILITY OF SUBSCRIPTION RIGHTS
You may not transfer, or enter into any agreement to transfer, your
subscription rights. Any transfer of subscription rights is prohibited by law.
If you violate this prohibition, you will lose your right to purchase common
stock.
HOW TO PURCHASE COMMON STOCK
MEEMIC Holdings, Inc. and MEEMIC have established a Stock Offering
Information Line to answer questions about this offering. To access this Stock
Offering Information Line, call (888) 4-MEEMIC.
You may subscribe for common stock in this offering by delivering (by mail
or in person) a properly executed and completed Order Form, together with full
payment (in cash, check or money order payable to "Mellon Bank, N.A., as Escrow
Agent") for all shares ordered, to Chase Mellon Shareholder Services, L.L.C.,
450 West 33rd Street, 10th Floor, New York, NY 10001 no later than April 1,
1999. In the event of an oversubscription, certain orders may be reduced as
described in greater detail under "Plan of Distribution--Rules for
Oversubscription."
All subscription rights under the plan of conversion will expire on the
expiration date of this offering. Once tendered, orders to purchase shares
cannot be revoked absent exigent circumstances. For additional information, see
"The Demutualization--How to Purchase Stock."
MINIMUM AND MAXIMUM PURCHASES BY ELIGIBLE POLICYHOLDERS
The minimum number of shares you may buy is 100. If you are an eligible
policyholder, the maximum number of shares you may buy is 10,744 for each
qualifying policy you hold. Fractional shares will not be
2
<PAGE>
sold. Shares not sold in this offering, up to the offering minimum (3,097,791
shares), will be purchased by Professionals Group, Inc., or one of its
subsidiaries, and additional shares not purchased by policyholders up to the
offering maximum (4,297,791 shares) may be purchased by Professionals Group,
Inc. or one of its subsidiaries. See "The Demutualization--The Standby Purchase
and Option Agreement."
TERMINATION OF OFFERING
This offering will terminate at 5:00 p.m. on April 1, 1999.
PURCHASE OF COMMON STOCK BY MANAGEMENT
The directors and officers of MEEMIC, together with their associates, may
purchase, in the aggregate, approximately ten percent (10%) shares of the common
stock in this offering. This equals 7.2% of the shares of common stock issued in
the demutualization, assuming the sale of stock at the offering midpoint
(3,697,791 shares). See "The Demutualization--Management Purchases."
THE COMMON STOCK
MARKET FOR THE COMMON STOCK
MEEMIC Holdings, Inc. has applied to have the common stock quoted on the
NASDAQ NMS under the symbol "MEMH" upon completion of the demutualization.
MEEMIC Holdings, Inc. engaged three firms to act as market makers in the common
stock upon completion of the demutualization, subject to market conditions and
compliance with applicable laws and regulatory requirements. Prior to this
offering, there was no public market for the common stock and an active and
liquid market for the common stock may not develop in the foreseeable future.
Even if a market develops, shareholders may not be able to sell their shares at
or above $10.00 per share after completion of the demutualization. See "Market
for the Common Stock."
DIVIDENDS
MEEMIC Holdings, Inc. presently does not intend to pay dividends.
Declaration of dividends by the board of directors of MEEMIC Holdings, Inc. will
depend on a number of factors, including the requirements of applicable law and
the determination by the board of directors of MEEMIC Holdings, Inc. that the
net income, capital and financial condition of MEEMIC Holdings, Inc. and MEEMIC,
industry trends, general economic conditions and other factors justify the
payment of dividends. In addition, the payment of dividends from MEEMIC to
MEEMIC Holdings, Inc. and from MEEMIC Holdings, Inc. to the shareholders is
subject to a number of regulatory conditions. See "Dividend Policy" and
"Insurance Regulatory Matters."
RISK FACTORS
Before you decide to purchase common stock in this offering, you should read
the "Risk Factors" section on pages 7 to 10 of this document.
3
<PAGE>
THE DEMUTUALIZATION
STRUCTURE OF THE DEMUTUALIZATION
The board of directors of MEEMIC adopted its Plan of Conversion on June 24,
1998. Under the plan of conversion, MEEMIC will convert from a mutual company to
a stock company. The following transactions will occur simultaneously with this
conversion:
- MEEMIC will issue shares of its capital stock to MEEMIC Holdings, Inc. in
exchange for a portion of the net proceeds from this offering. See "Plan
of Distribution."
- MEEMIC Holdings, Inc. will issue the common stock sold in this offering to
investors. See "The Plan of Distribution."
- MEEMIC Holdings, Inc. may issue common stock to Professionals under the
terms of a standby purchase and option agreement. Under this agreement, if
not all of the shares in this offering are sold, Professionals will
purchase unsold shares up to the offering minimum (3,097,791 shares) and
may purchase unsold shares up to the offering maximum (4,297,791 shares).
See "The Demutualization--The Standby Purchase and Option Agreement."
- MEEMIC Holdings, Inc. will issue common stock to Professionals in exchange
for its interest in a certain surplus note. See "The
Demutualization--Conversion of the Surplus Note."
For accounting purposes, the demutualization will be treated as a
simultaneous reorganization, recapitalization and share offering which will not
change the historical accounting basis of MEEMIC's financial statements.
Upon completion of the demutualization, and without regard to shares which
could be issued to Professionals on or after the date of the demutualization
pursuant to the option contained in the standby purchase and option agreement,
the following persons will hold stock in the following ranges:
<TABLE>
<S> <C>
Eligible 0-4,297,791 shares
Policyholders:
Officers and 0- 429,779 shares
Directors:
Professionals: 2,302,209-6,600,000
shares
</TABLE>
4,297,791 shares will be held by eligible policyholders only if
subscriptions for this amount of stock are received from eligible policyholders
and no subscriptions for stock are received from officers and directors. 429,779
of the 4,297,791 shares in this offering are reserved for officers and directors
should they choose to subscribe.
Professionals will hold 2,302,209 shares based upon conversion of the
surplus note. The number of additional shares held by Professionals as a result
of its role as standby purchaser will depend upon the number of shares unsold in
this offering. It would be possible for under the standby purchase and option
agreement Professionals could acquire more than 6,600,000 shares if the number
of shares it acquired through conversion of the surplus note and as standby
purchaser did not equal 51% of the outstanding shares.
RELATED TRANSACTIONS
This offering is part of a series of related transactions, some of which
have already occurred and some of which are expected to occur in the future.
These related transactions are described in greater detail
4
<PAGE>
under "The Demutualization--Background and Related Transactions," but are
outlined in chronological order below:
<TABLE>
<CAPTION>
DATE RELATED TRANSACTION MAJOR COMPONENTS
- ----------- ------------------------------------ --------------------------------------------------------------
<S> <C> <C>
4/4/97 Transaction with Professionals - Professionals Group, Inc. and its subsidiary, ProNational
Group, Inc. Insurance Company, lends $21.5 million to MEEMIC in exchange
for a promissory note providing for repayment only under
certain conditions (a surplus note).
- Professionals Group, Inc. agrees to perform certain business
services for MEEMIC under the terms of a management services
contract.
- MEEMIC and ProNational Insurance Company agree to enter into
an agreement to transfer a certain portion of MEEMIC's
insurance risks to ProNational (an insurance company quota
share reinsurance agreement).
- Nominees of Professionals Group, Inc. are appointed to
replace the members of the board of directors of MEEMIC.
9/22/97 Acquisition of insurance agency. - A subsidiary of MEEMIC acquires certain operations of
MEEMIC's exclusive sales agency, including the exclusive
rights to sell and market MEEMIC products until 2004, for an
amount payable and determined over time.
- MEEMIC issues guaranty of certain of these payment
obligations.
- Professionals Group, Inc. issues guaranty of certain of
these payment obligations.
- Previous owners of MEEMIC's exclusive sales agencies enter
into noncompetition agreements.
6/24/98 MEEMIC adopts its plan of - See "The Demutualization--Plan of Demutualization" below.
conversion.
6/30/98 ABN AMRO completes valuation of - Value of MEEMIC Holdings, Inc. after the conversion is
MEEMIC Holdings, Inc. estimated at $54 to $66 million.
9/2/98 Michigan Insurance Bureau approves - Michigan Insurance Bureau concludes that MEEMIC's plan of
plan of conversion. conversion complies with applicable law.
2/15/99 to Offering period. - Stock of MEEMIC Holdings, Inc. is offered for sale to
4/1/99 eligible policyholders, officers and directors.
3/ /99 Policyholder meeting to approve plan - Plan of conversion to be approved by policyholders.
of conversion.
3/ /99 Anticipated effective date of - See "Structure of Demutualization" above for description of
demutualization. simultaneous transactions.
</TABLE>
THE STANDBY PURCHASE AND OPTION AGREEMENT
MEEMIC Holdings, Inc. has entered into an agreement with Professionals
Group, Inc., under which Professionals will purchase any shares of common stock
not sold in this offering, up to 3,097,791 shares,
5
<PAGE>
and has the option, but not the obligation to purchase shares of common stock
not sold in this offering, up to 4,297,791 shares, all at $10.00 per share.
In addition, under this agreement, Professionals also has the right, but not
the obligation, to purchase up to the number of shares of common stock necessary
to assure that, upon exercise of such option, Professionals will own 51% of the
outstanding shares of common stock of MEEMIC Holdings, Inc.
The Standby Purchase and Option Agreement was negotiated as part of the
overall plan of conversion. It allows MEEMIC to convert without the expense and
uncertainty of engaging a registered broker-dealer to attempt to sell any shares
unsold in this offering in a subsequent offering of stock to the public at
large.
THE COMPANIES
MEEMIC
Michigan Educational Employees Mutual Insurance Company ("MEEMIC") offers
personal lines insurance, including automobile and homeowners insurance. MEEMIC
offers 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. As of September 30, 1998, MEEMIC had in excess of 110,000 policies in
force. MEEMIC had total consolidated assets of $215 million and $156 million as
of December 31, 1997 and 1996, respectively.
The principal executive offices of MEEMIC are located at 691 North Squirrel
Road, Suite 200, Auburn Hills, Michigan 48326, telephone (888) 4-MEEMIC. For
additional information on MEEMIC, see "The Companies--MEEMIC."
MEEMIC HOLDINGS, INC.
MEEMIC Holdings, Inc. was formed in October, 1998 to be the holding company
for MEEMIC after the demutualization. Before the demutualization, MEEMIC
Holdings, Inc. will not engage in any significant operations. After the
demutualization, MEEMIC Holdings, Inc. will be the parent company of MEEMIC,
owning all of its stock. The primary assets of MEEMIC Holdings, Inc. will be the
outstanding capital stock of MEEMIC and a portion of the net proceeds of this
offering.
The principal executive offices of MEEMIC Holdings, Inc. are located at 691
North Squirrel Road, Suite 200, Auburn Hills, Michigan 48326, telephone (888)
4-MEEMIC.
PROFESSIONALS GROUP, INC. AND PRONATIONAL INSURANCE COMPANY
Professionals Group, Inc. (NASDAQ symbol "PICM"), along with its
wholly-owned subsidiary, ProNational Insurance Company (collectively,
"Professionals") will own a significant portion of the shares of common stock of
MEEMIC Holdings, Inc. after the demutualization, arising from conversion of an
existing surplus note and a standby purchase agreement. Professionals will also
have the option to purchase additional shares in the future. See "The
Demutualization--The Standby Purchase and Option Agreement" and "The
Demutualization--Conversion of the Surplus Note."
On April 7, 1997, nominees of Professionals Group, Inc. replaced the prior
directors of MEEMIC. Professionals Group, Inc. is currently deemed to be a
controlling person of MEEMIC under Michigan insurance law. Furthermore,
Professionals may be a majority shareholder in MEEMIC Holdings, Inc.
Consequently, information regarding Professionals may be of interest to you.
For additional information on Professionals Group, Inc., and ProNational
Insurance Company, see "The Companies--Professionals Group, Inc." and "The
Companies--ProNational Insurance Company."
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RISK FACTORS
Before you invest in the common stock of MEEMIC Holdings, Inc., you should
carefully consider the following risk factors, together with the other
information in this document.
POSSIBLE ADVERSE IMPACT OF BROAD VALUATION RANGE AND ITS USE TO DETERMINE THE
NUMBER OF SHARES OF COMMON STOCK SOLD
Under the plan of conversion and the valuation of MEEMIC Holdings, Inc.
which was obtained by MEEMIC, the demutualization can be completed if MEEMIC
Holdings, Inc. sells between 3,097,791 and 4,297,791 shares of common stock in
this offering. There is a difference of approximately $12,000,000 between the
value of the offering minimum and the offering maximum. As a result, the
percentage interest in MEEMIC Holdings, Inc. that a subscriber for a fixed
number of shares of common stock will have is approximately 18% smaller if
4,297,791 shares are sold than if 3,097,791 shares are sold.
ABSENCE OF PRIOR PUBLIC MARKET
MEEMIC Holdings, Inc. has never issued capital stock so there is no
established market for the common stock. An active or liquid trading market for
the common stock may not develop or continue after this offering. The initial
purchase price of $10.00 per share has been determined by MEEMIC and may not be
indicative of the market price for the common stock after this offering. If you
purchase common stock, you may not be able to sell the stock at or above $10.00
per share after the offering.
ADDITIONAL AUTHORIZED SHARES COULD BE ISSUED
MEEMIC Holdings, Inc. is authorized to issue 10 million shares of Common
stock. On the Effective Date of Demutualization, MEEMIC Holdings, Inc. will have
up to 6.6 million shares of Common Stock issued and outstanding. Uncommitted
authorized but unissued shares of Common Stock may be issued from time to time.
See "Description of the Common Stock." You will not have preemptive rights to
subscribe for newly issued shares. You may or may not be given the opportunity
to vote on this issuance, depending on the nature of such transactions,
applicable law, the rules and policies of any stock exchange upon which the
Common Stock is listed, and the judgment of MEEMIC Holdings, Inc.'s Board of
Directors. If a substantial amount of authorized but unissued common stock is
issued, your ownership percentage would be reduced. In addition, the prevailing
market price for the stock could decline.
DILUTIVE EFFECT OF STANDBY PURCHASE AND OPTION AGREEMENT AND STOCK COMPENSATION
PLAN
In addition to this offering, MEEMIC Holdings, Inc. has reserved 2,483,247
shares of common stock for issuance under the standby purchase and option
agreement with Professionals Group, Inc. See "Security Ownership of Management
and Certain Security-Holders--Standby Purchase and Option Agreement with
Professionals" and 300,000 shares of Common Stock for issuance under MEEMIC
Holdings, Inc.'s stock compensation plan. See "Management--The Stock
Compensation Plan." To date, MEEMIC Holdings, Inc. has not issued any options to
purchase common stock under the stock compensation plan, but it plans to issue
options on the effective date of the demutualization. MEEMIC Holdings, Inc.
intends to file a registration statement on Form S-8 with the Securities and
Exchange Commission following the completion of the demutualization to register
the shares of common stock that may be issued under the stock compensation plan.
If a substantial amount of additional common stock is issued under these
arrangements from authorized but unissued stock, your ownership percentage would
be diluted. In addition, the prevailing market price for the stock could
decline. This could impair MEEMIC Holdings, Inc.'s ability to obtain capital
through a future offering of equity securities.
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CHANGE OF BOARD OF DIRECTORS OF MEEMIC
MEEMIC has recently undergone a significant change in the makeup of its
Board of Directors. As a result of the April 7, 1997 transaction, Messrs. Adamo,
Clinton, Hoeg, Kalinowski, McCabe and Ms. Flood were placed on the Board of
Directors of MEEMIC. Mr. McCabe passed away in September 1998. On October 7,
1998, the Board of Directors of MEEMIC appointed James O. Wood to fill the
vacant Board seat. As noted below under "Security Ownership of Management and
Certain Security-Holders," as a result of the surplus note transaction,
Professionals Group, Inc. is currently deemed to be a controlling person of
MEEMIC under Michigan insurance law.
PROFESSIONALS AS MAJORITY SHAREHOLDER
Professionals may be a majority shareholder in MEEMIC Holdings, Inc. As a
majority shareholder, Professionals will have significant control of the future
actions of MEEMIC Holdings, Inc. and MEEMIC. As a shareholder, you will have a
vote on certain affairs of MEEMIC Holdings, Inc. but may not, in most cases,
have the ability to control the action of MEEMIC Holdings, Inc. by such vote.
See "Certain Restrictions on Acquisition of and Business Combinations by MEEMIC
Holdings, Inc."
PROPERTY AND CASUALTY INSURANCE BUSINESS IS HIGHLY COMPETITIVE
The industry in which MEEMIC is involved is highly competitive. MEEMIC has
numerous Michigan based competitors, and competitors from other states for its
insurance products, including major property and casualty insurance companies.
Some of these competitors may have substantially greater financial, technical
and operating resources than MEEMIC. MEEMIC's competitors may develop products
or marketing techniques that are more effective than any which have been or are
being developed by MEEMIC. While it is anticipated that MEEMIC's product lines
will be successful, the rates or products offered by competitors may render
MEEMIC uncompetitive or MEEMIC may not be successful in establishing or
maintaining its market competitiveness.
REGULATION BY THE MICHIGAN INSURANCE BUREAU AND THE NAIC
THE MICHIGAN INSURANCE BUREAU. Insurance companies operating in Michigan
are subject to supervision and regulation by the Michigan Insurance Bureau. Such
supervision and regulation relates to numerous aspects of its business and
financial condition. These include establishment of premium rates, establishment
of standards of solvency, licensing of MEEMIC and its agents, regulation of the
nature and amount of MEEMIC's investments, regulation of the provisions which
MEEMIC must make for current losses and future liabilities, and approval of
MEEMIC's policy forms. Failure to comply with the rules and regulations of the
Michigan Insurance Bureau would have an adverse impact on MEEMIC Holdings, Inc.
and MEEMIC. Furthermore, these regulations are primarily intended to protect
policyholders, not stockholders.
RISK-BASED CAPITAL REQUIREMENTS. In addition to state-imposed insurance
laws and regulations, MEEMIC is subject to statutory accounting principles and
the reporting format of the National Association of Insurance Commissioners (the
"NAIC"). The NAIC has adopted a risk-based capital formula to establish minimum
capital and surplus requirements for property and casualty insurance companies.
The risk-based capital formula is based principally on underwriting risk (loss
and loss adjustment expense ("LAE") reserve risk and premium risk), asset risk
and reinsurance credit risk. At December 31, 1997, the statutory surplus of
MEEMIC exceeded the minimum capital and surplus requirements established under
NAIC's current property and casualty risk-based capital formula. See "Insurance
Regulatory Matters."
NAIC-IRIS RATIOS. The NAIC's Insurance Regulatory Information System
("IRIS") was developed by a committee of state insurance regulators and is
primarily intended to assist state insurance departments in executing their
statutory mandates to oversee the financial condition of insurers operating in
their respective states. IRIS identifies 11 industry ratios and specifies "usual
values" for each ratio. Departure
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from the usual values on four or more ratios generally leads to inquiries from
individual state insurance commissioners. In 1997, 1996 and 1995, MEEMIC did not
have any ratios which varied from the "usual value" range.
DEPENDENCE OF MEEMIC HOLDINGS, INC. ON RESULTS AND OPERATIONS OF MEEMIC
MEEMIC Holdings, Inc. is a legal entity separate and distinct from MEEMIC.
As a holding company with no significant operations of its own, the principal
sources of its funds are dividends and other distributions from MEEMIC,
borrowings and sales of equity. The right of MEEMIC Holdings, Inc., and
consequently its stockholders, to participate in any distribution of assets of
MEEMIC is subject to prior claims of policyholders, creditors and preferred
stockholders, if any, of MEEMIC (except to the extent claims of MEEMIC Holdings,
Inc. in its capacity as a creditor are recognized) and to certain regulatory
restrictions. Consequently, MEEMIC Holdings, Inc.'s ability to fund its
operations and to pay debts, expenses and cash dividends to its stockholders may
be limited. See "Insurance Regulatory Matters."
CONCENTRATION OF EARNINGS IN PERSONAL LINES INSURANCE
One hundred percent of MEEMIC's business is currently in personal lines
insurance. Accordingly, MEEMIC's earnings could be adversely affected by
regulatory or competitive changes affecting rates or other aspects of the
personal lines insurance business.
GEOGRAPHIC CONCENTRATION IN MICHIGAN
MEEMIC currently operates only in the State of Michigan. Because MEEMIC
conducts business only in the State of Michigan, its revenues and profitability
are subject to prevailing economic, regulatory, demographic and other conditions
in Michigan, as well as the impact of catastrophe and natural peril losses in
Michigan.
ADEQUACY OF LOSS RESERVES
MEEMIC has maintained and intends to maintain capital and surplus as
required by the Michigan Insurance Bureau. MEEMIC maintains reserves to cover
its estimated ultimate liability losses and loss adjustment expenses for both
reported and unreported claims incurred and believes these reserves are
adequate. Nevertheless, establishment of appropriate reserves is an inherently
uncertain process and there can be no assurance that ultimate losses will not
exceed loss reserves. In addition, a risk of loss of current period income
exists if adjustments in aggregate reserves are made, as such adjustments are
reflected in the operating results of the period during which such adjustments
are made.
CYCLICALITY OF THE PROPERTY AND CASUALTY INSURANCE INDUSTRY
The property and casualty insurance industry is highly cyclical. The
industry's profitability, and the profitability of MEEMIC Holdings, Inc. and
MEEMIC, 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.
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AVAILABILITY, COVERAGE LIMITS AND CREDIT RISK OF REINSURANCE
MEEMIC's 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 continue to be available to MEEMIC in the future at
commercially reasonable rates.
In addition, while MEEMIC seeks to obtain reinsurance with coverage limits
it believes are appropriate for the risk exposures assumed, the losses
experienced by MEEMIC may not be within applicable coverage limits.
MEEMIC is also subject to credit risk with respect to its reinsurers because
the ceding of risk to reinsurers does not relieve MEEMIC of its liability to
insureds. The insolvency or inability of any reinsurer to meet its obligations
may have a material adverse effect on the business and results of operations of
MEEMIC. See "Business of Meemic--Reinsurance Ceded" for additional information
on MEEMIC's reinsurance practices.
POSSIBLE ADVERSE IMPACT OF CHANGE IN A.M. BEST RATING
Ratings assigned by A.M. Best Company, Inc. ("A.M. Best") are an important
factor influencing the competitive position of insurance companies. MEEMIC
currently has an A.M. Best rating of A- (Excellent). See "Business of
Meemic--A.M. Best Rating." This rating could change. An adverse change in
MEEMIC's A.M. Best rating could have an adverse impact on MEEMIC Holdings, Inc.
and MEEMIC.
A.M. Best ratings are based upon factors of concern to policyholders and are
not directed toward the protection of investors. As such, MEEMIC's A.M. Best
rating should not be relied upon as a basis for an investment decision to
purchase common stock.
INSURANCE COMPANY INSOLVENCY LAWS
In the event of a default on MEEMIC's debt or the insolvency, liquidation or
other reorganization of MEEMIC, the creditors and stockholders of MEEMIC
Holdings, Inc. will have no right to proceed against the assets of MEEMIC or to
cause its liquidation under federal or state bankruptcy laws. See "Insurance
Regulatory Matters--General." Under the Michigan Insurance Code, all creditors
of MEEMIC, including policyholders, would be entitled to payment in full from
such assets before the shareholders of MEEMIC Holdings, Inc. would be entitled
to receive any distribution from MEEMIC.
MICHIGAN NO-FAULT AUTOMOBILE INSURANCE LAWS AND THE MICHIGAN ESSENTIAL INSURANCE
ACT
Michigan's no-fault law and the Michigan Essential Insurance Act have been
and continue to be the subject of review and proposals for modification by the
Michigan Insurance Bureau, state legislators and insurers. MEEMIC Holdings, Inc.
and MEEMIC cannot predict whether any such modifications will occur and what
effect such modifications would have on MEEMIC's business, but such effect could
be materially adverse.
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CERTAIN FORWARD-LOOKING INFORMATION
This document contains forward-looking statements which involve risks and
uncertainties. MEEMIC Holdings, Inc. and MEEMIC have identified certain
important factors in addition to those discussed 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 the control of MEEMIC Holdings, Inc. and MEEMIC. These important
factors may include:
- future economic conditions in the regional and national markets in which
the companies compete;
- financial market conditions, including, but not limited to, changes in
interest rates;
- inflation;
- estimates of loss reserves and trends in losses and loss adjustment
expenses;
- 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.
THE DEMUTUALIZATION
PLAN OF DEMUTUALIZATION
MEEMIC proposes to convert from a Michigan domiciled mutual property and
casualty insurance company to a Michigan domiciled stock property and casualty
insurance company (the "Company") pursuant to Chapter 59 of the Michigan
Insurance Code, MCL 500.5901, ET SEQ. (the "Act"), and MEEMIC's Plan of
Conversion (this conversion being referred to herein as the "Demutualization").
The Demutualization is subject to provisions of the Act and the policies of the
Michigan Insurance Bureau. Prior to the commencement of this offering the plan
of conversion has been approved:
(a) unanimously by the members of the board of directors of MEEMIC; and
(b) in writing by the Michigan Insurance Bureau.
IN ORDER TO BECOME EFFECTIVE, THE PLAN OF CONVERSION MUST ALSO BE APPROVED
BY THE AFFIRMATIVE VOTE OF AT LEAST TWO-THIRDS (2/3) OF THE VOTES CAST AT A
MEETING OF NAMED INSUREDS UNDER POLICIES OF INSURANCE ISSUED BY MEEMIC AND IN
FORCE ON THE CLOSE OF BUSINESS ON JUNE 24, 1998 ("ELIGIBLE POLICYHOLDERS"). A
POLICYHOLDER MEETING IS EXPECTED TO BE HELD AND THIS ISSUE VOTED UPON ON MARCH
26, 1999 (THE "SPECIAL MEETING").
The Demutualization will be completed following the completion of this
offering, when the amended and restated articles of incorporation of the Company
are filed with the Michigan Insurance Bureau (the "Effective Date").
MEEMIC HOLDINGS, INC. TO ESCROW PROCEEDS
Until approval of the plan of conversion by the Eligible Policyholders,
proceeds of this offering will be held in a noninterest-bearing escrow account
with Mellon Bank, N.A., a national banking association, under the terms of an
Escrow Agreement dated , 1999 (the "Escrow Agreement") between MEEMIC
Holdings, Inc., MEEMIC, and Mellon Bank, N.A. If the plan of conversion is
approved by the Eligible Policyholders, the proceeds of this offering will be
released to MEEMIC Holdings, Inc. If the plan
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of conversion is not approved by the Eligible Policyholders, the proceeds of
this offering will be promptly returned to the investors.
BACKGROUND
On February 7, 1997, an agreement was entered into between MEEMIC,
Professionals Insurance Company Management Group, now known as Professionals
Group, Inc., and its wholly-owned subsidiary, PICOM Insurance Company, now known
as ProNational Insurance Company ("ProNational"). Professionals Group, Inc. and
ProNational are collectively referred to as "Professionals". The purpose of the
agreement was to arrange for a capital infusion into MEEMIC in order to allow
MEEMIC to expand its insurance capacity and business operations, including the
acquisition of certain assets of its exclusive sales agencies, Michigan
Educators Insurance Agency, Inc. and Michigan Educators Life Insurance Agency,
Inc. (collectively, the "Agency"). As part of the agreement, Professionals
arranged for a $21.5 million capital infusion into MEEMIC, and agreed to assist
MEEMIC to increase its insurance capacity and provide strategic consulting and
information system services pursuant to (i) a Surplus Note in the original
principal amount of $21.5 million issued by MEEMIC to ProNational, (ii) a
Management Services Agreement under which Professionals Group, Inc. agreed to
perform certain business services for MEEMIC, and (iii) MEEMIC's and
ProNational's agreement to enter into a Quota Share Reinsurance Agreement. As
part of the transaction, nominees of Professionals Group, Inc. were appointed to
replace the members of the board of directors of MEEMIC. This transaction was
approved by the Michigan Insurance Bureau on April 4, 1997 and consummated on
April 7, 1997.
MEEMIC considered the purchase of its exclusive sales agency to be
instrumental in the long-term business plan of MEEMIC. Consequently, on
September 22, 1997, Professionals Group, Inc., MEEMIC, and its wholly owned
subsidiary, MEEMIC Insurance Services Corporation, now d/b/a the Michigan
Educators Insurance Agency ("MEIA"), entered into an asset purchase agreement
with the Agency, pursuant to which MEEMIC acquired certain operations of the
Agency (the "Personal Lines and Life Divisions" of the Agency), including the
exclusive rights to sell and market MEEMIC products until the year 2004, for the
purpose of consolidating the marketing operations and sales functions for
insurance issued by MEEMIC. Professionals Group, Inc. facilitated the
acquisition of the Personal Lines and Life Divisions of the Agency by providing
certain capital through the Surplus Note, and guarantees of payment obligations
of MEIA. This transaction was approved by the Michigan Insurance Bureau in a
Supplemental Order on September 19, 1997 and consummated on September 22, 1997.
ACTIONS OF THE INDEPENDENT COMMITTEE AND THE BOARD OF DIRECTORS
Following consummation of the September 22, 1997 transaction, MEEMIC began
considering a demutualization of MEEMIC for the reasons set forth above under
"Prospectus Summary--The Demutualization." In connection with MEEMIC's
consideration of a potential demutualization and in recognition of (i) the
fiduciary obligations of each director and (ii) the dual roles of Messrs. Adamo,
Clinton and McCabe and Ms. Flood as directors or officers of both MEEMIC and
Professionals Group, Inc., the directors established a committee of
disinterested directors composed of Messrs. Hoeg and Kalinowski to (a) review
whether a demutualization of MEEMIC would be fair and equitable to the
policyholders of MEEMIC from a financial point of view and whether such a
demutualization would achieve the business objectives of MEEMIC; (b) determine
the appropriate form for a demutualization, and the specifics of a
demutualization plan; (c) review documents prepared in connection with a
proposed demutualization and other materials deemed appropriate; (d) consult
with counsel as deemed appropriate; (e) interview, select and retain, on behalf
of MEEMIC, an independent third party to provide financial advice and develop a
valuation of the pro forma market value of the converted company as required by
the Act; and (f) make a recommendation or recommendations to the board of
directors with respect to a conversion plan.
In connection with the proposed conversion, ABN AMRO, an independent
investment banking firm knowledgeable of the insurance industry and experienced
in mutual insurance company conversions, was
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retained to serve as a financial advisor to MEEMIC and the committee and to
determine an estimated pro forma market value of the converted company. With the
assistance of ABN AMRO, the committee reviewed strategic and financial
alternatives to determine whether MEEMIC should demutualize and, if it should,
the form of the demutualization. After discussions with the financial advisor,
the committee concluded, and advised the board of directors, that a stock
holding company, MEEMIC Holdings, Inc. should be established, for the purpose of
holding the stock of MEEMIC, and that a subscription rights offering should be
undertaken which would offer stock of MEEMIC Holdings, Inc. to eligible
policyholders and officers and directors pursuant to a conversion plan drafted
in compliance with the Act.
ABN AMRO provided the committee and the board of directors with its estimate
of the pro forma market value of MEEMIC Holdings, Inc., as the parent company of
the wholly owned converted insurance company, establishing a valuation range of
$54,000,000 to $66,000,000, with a mid-point valuation of $60,000,000.
Based on discussions with the financial advisor, management, and legal
counsel, the committee worked with legal counsel and prepared a proposed plan of
conversion, as well as related documents. The committee, together with legal
counsel, were responsible for the negotiation of the documents as they related
to Professionals.
Based upon its review of the valuation analysis, proposed demutualization
documents prepared and submitted to the committee, information available to the
committee regarding MEEMIC and the insurance industry, and other information
available to the committee, the committee advised the board of directors that
the committee believed that the valuation analysis provides a valuation which is
fair and equitable to the policyholders of MEEMIC from a financial point of
view, that the plan of conversion complies with the Act, that it allocates
subscription rights among eligible members in a manner which is fair and
equitable to the policyholders of MEEMIC, that it will not prejudice the
interests of the policyholders, and that a substantial reason for and the effect
of the plan of conversion is to benefit the policyholders and raise additional
capital to implement future business plans of MEEMIC.
The board of directors also received a recommendation from the management of
MEEMIC (M. Kay Rickenbaugh and Christine C. Schmitt) in favor of the
Demutualization. The board of directors reviewed the committee recommendation,
the valuation analysis prepared by ABN AMRO and the conversion documents,
discussed and evaluated those documents, reviewed those documents with the
financial advisor and counsel, and on June 24, 1998 approved the plan of
conversion and the transactions contemplated by such documents, and approved the
Amended and Restated Articles of Incorporation of the Company.
The plan of conversion and related documents were filed with the Michigan
Insurance Bureau on June 30, 1998. The plan of conversion was approved by the
Michigan Insurance Bureau on September 2, 1998, and is subject to the approval
of Eligible Policyholders at the Special Meeting.
INTERPRETATION AND AMENDMENT OF THE PLAN OF CONVERSION
To the extent permitted by law, the board of directors of MEEMIC shall have
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. Under the plan of
conversion, any such interpretation, application or determination made in good
faith and on the basis of such information and assistance as was then reasonably
available for such purpose, shall be final, conclusive and binding, upon all
persons, and MEEMIC (or its directors, officers, employees or agents) shall not
be liable to any person, in connection with any such interpretation, application
or determination.
The plan of conversion may only be amended by the affirmative vote of not
less than two-thirds ( 2/3) of the directors of MEEMIC then in office AND
approval of such amendment by the Michigan Insurance Bureau. The plan of
conversion may only be withdrawn or terminated by the affirmative vote of not
less
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than two-thirds ( 2/3) of the directors of MEEMIC then in office AND approval of
the Michigan Insurance Bureau.
SUBSCRIPTION RIGHTS
Pursuant to the plan of conversion, nontransferable subscription rights will
be provided by MEEMIC Holdings, Inc. to Eligible Policyholders, and officers and
directors. Shares of common stock of MEEMIC Holdings, Inc. ("Common Stock") are
being offered pursuant to the exercise of these subscription rights. The plan of
conversion provides that no person shall transfer or enter into any agreement or
understanding to transfer the legal or beneficial ownership of subscription
rights issued under the plan of conversion or, prior to exercise of the
subscription rights, the Common Stock to be issued upon their exercise. Persons
violating such prohibition will lose their right to purchase Common Stock.
STOCK PRICE AND NUMBER OF SHARES TO BE ISSUED
THE ESTIMATED VALUATION RANGE. The Act requires that the subscription
offering range be consistent with an independent appraisal of the estimated pro
forma market value of MEEMIC Holdings, Inc. following the demutualization of
MEEMIC. Under the Act, 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, through its board of directors, obtained such an appraisal.
The valuation analysis was conducted by ABN AMRO, an independent investment
banking firm knowledgeable of the insurance industry and experienced in mutual
insurance company conversions. The valuation analysis estimated the pro forma
market value of MEEMIC Holdings, Inc. following the Demutualization to be
$60,000,000. The appraisal assumed consummation of the transactions contemplated
by the plan of conversion. The valuation analysis was discounted, as permitted
by the Act, by an amount ABN AMRO deemed necessary to attract full subscription
for this offering under the provisions of the plan of conversion. 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 demutualization transactions. The valuation analysis is
intended to be an estimate of the pro forma market value of MEEMIC Holdings,
Inc. It is not a recommendation of any kind as to the advisability of purchasing
the Common Stock and you must not interpret it as a recommendation of any kind
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 a
separate investment banking firm.
A valuation range was established by MEEMIC after consultation with ABN AMRO
at $54,000,000 to $66,000,000. This estimated valuation range extends ten
percent (10%) below and ten percent (10%) above the estimated pro forma market
value of MEEMIC Holdings, Inc. The estimated valuation range is intended to
establish a range within which the Demutualization will be consummated, so long
as MEEMIC Holdings, Inc. raises capital equal to such 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 is equal to (a) the estimated valuation range minimum and maximum
amount divided by the purchase price of $10.00 per share (5,400,000 to
6,600,000) less (b) the number of shares to be issued to Professionals in
exchange for its interest in its surplus note (2,302,209 shares). See "The
Demutualization--Conversion of the Surplus Note." Accordingly, the minimum to
maximum number of shares being offered to Eligible Policyholders, officers and
directors is equal to 3,097,791 to 4,297,791 shares. The actual number of shares
sold in this offering may be a number between 3,097,791 and 4,297,791 shares.
THE PURCHASE PRICE. MEEMIC Holdings, Inc. will offer the shares at the
public offering price of $10.00 per share.
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ISSUANCE OF ADDITIONAL SHARES. As described in greater detail under "The
Demutualization--The Standby Purchase and Option Agreement" and "Management--The
Stock Compensation Plan," additional shares of Common Stock may be issued by
MEEMIC Holdings, Inc. following the Demutualization.
THE STANDBY PURCHASE AND OPTION AGREEMENT
Pursuant to the plan of conversion and a Standby Purchase and Option
Agreement dated November 13, 1998 executed by and between MEEMIC Holdings, Inc.
and Professionals, Professionals will purchase any shares of Common Stock not
sold in this offering up to 3,097,791 shares at a purchase price of $10.00 per
share and has the option, but not the obligation, to purchase shares of Common
Stock not sold in this offering up to 4,297,791 shares at a purchase price of
$10.00 per share.
In addition, under the standby purchase and option agreement, Professionals
also has the right, but not the obligation to purchase up to the number of
shares of Common Stock necessary to assure that, upon exercise of such option,
Professionals will own 51% of the outstanding shares of Common Stock of MEEMIC
Holdings, Inc. For additional information regarding this option, including the
formula for calculation of the exercise price, see "Security Ownership of
Management, and Certain Security Holders-- The Standby Purchase and Option
Agreement with Professionals."
CONVERSION OF THE SURPLUS NOTE
Pursuant to the plan of conversion, Professionals will also receive the
number of shares of Common Stock necessary to convert the $21,500,000 surplus
note into Common Stock of MEEMIC Holdings, Inc. No new capital will be paid by
Professionals in connection with the conversion of the surplus note. The surplus
note will be convertible into 2,302,209 shares of Common Stock; the number of
shares equal to the outstanding balance (principal and accrued but unpaid
interest) of the surplus note as of November 1, 1998, divided by the public
offering price of $10.00, rounded upward to the nearest whole share. Any
difference will be paid in cash. The conversion of the surplus note will occur
on the Effective Date of the Demutualization.
MANAGEMENT PURCHASES
The Act permits officers and directors of demutualizing companies to receive
subscription rights from 15% to 25% of the shares offered in a subscription
offering, depending upon the amount of assets of the company. Although the Act
would permit MEEMIC to provide subscription rights to officers and directors
which would result in those individuals holding between 22.9% and 23.1% of the
total shares issued by MEEMIC Holdings, Inc. in connection with the
Demutualization, MEEMIC's Plan limits Officers and Directors to purchasing a
maximum of 10% of this offering in the aggregate.
429,779 shares of Common Stock contained in the Subscription Offering are
reserved for sale to eligible officers and directors of MEEMIC ("Officers" and
"Directors", respectively) at a purchase price of $10.00 per share. Under the
plan of conversion, an Officer or Director is not entitled to subscribe for
fewer than 100 shares, or greater than 107,444 shares. In the event that all of
the shares of Common Stock reserved for sale to Officers and Directors are not
subscribed for and sold, such shares shall be available for sale to Eligible
Policyholders.
15
<PAGE>
THE COMPANIES
MEEMIC
Michigan Educational Employees Mutual Insurance Company was incorporated
under the laws of 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 MEIA. Most of the approximately 90 sales
representatives of MEIA are members of the educational community and therefore
are engaged in peer selling. As of September 30, 1998, MEEMIC had in excess of
110,000 policies in force. MEEMIC had total consolidated assets of $215 million
and $156 million as of December 31, 1997 and 1996, respectively.
The principal executive offices of MEEMIC are located at 691 North Squirrel
Road, Suite 200, Auburn Hills, Michigan 48326, telephone (888) 4-MEEMIC.
MEEMIC HOLDINGS, INC.
MEEMIC Holdings, Inc. was formed as a Michigan business corporation in
October, 1998 to be the holding company for MEEMIC after the Demutualization.
Before the Demutualization, MEEMIC Holdings, Inc. will not engage in any
significant operations. After the Demutualization, MEEMIC will become a
wholly-owned subsidiary of MEEMIC Holdings, Inc. The primary assets of MEEMIC
Holdings, Inc. will be the outstanding capital stock of MEEMIC and a portion of
the net proceeds of the Offering. The principal executive offices of MEEMIC
Holdings, Inc. are located at 691 North Squirrel Road, Suite 200, Auburn Hills,
Michigan 48326, telephone (888) 4-MEEMIC.
PROFESSIONALS GROUP, INC.
Upon completion of the Demutualization, Professionals Group, Inc., or a
subsidiary of Professionals Group, Inc. will hold a minimum of 2,302,209 shares
of Common Stock, and has the right to purchase shares of Common Stock up to 51%
of all outstanding shares. In addition, the current board of directors of MEEMIC
is comprised of nominees of Professionals, as a result of the 1997 transaction.
See "The Demutualization--Background." Consequently, information about
Professionals Group, Inc. may be important to you.
Professionals Group, Inc., is a Michigan business corporation that was
incorporated under the laws of the State of Michigan on January 31, 1996 for the
purpose of serving as the holding company for ProNational and other
subsidiaries. Professionals, which conducts its activities through subsidiaries,
had consolidated assets of $848 million and $775 million at December 31, 1997
and 1996, respectively, after giving effect to its pooling of interest merger
with Physicians Protective Trust Fund. The principal executive offices for
Professionals are located at 2600 Professionals Drive, Okemos, Michigan 48864,
and its telephone number is (517) 349-6500.
The principal operating subsidiary of Professionals is ProNational Insurance
Company.
Professionals Group, Inc. is subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance with these requirements, files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information concerning Professionals Group, Inc. can be inspected and copied at
the Commission's Public Reference Room, Judiciary Plaza, 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549, and at the public reference facilities
maintained by the Commission at its regional offices located at Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World
Trade Center, Suite 1300, New York, New York 10048. Copies of such materials can
be obtained from the Commission at prescribed rates from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
16
<PAGE>
20549. The Commission maintains a website that contains all information filed
electronically by Professionals Group, Inc. The address of the Commission's
website is (http://www.sec.gov).
PRONATIONAL INSURANCE COMPANY
In addition to being the principal operating subsidiary of Professionals
Group, Inc., ProNational reinsures a portion of MEEMIC's insurance risk under
the quota share reinsurance agreement. Consequently, information about
ProNational may be important to you.
ProNational Insurance Company is a wholly-owned subsidiary of Professionals
Group, Inc. 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 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 in August 18, 1994 to PICOM Insurance Company and on July 1, 1998 to
ProNational Insurance Company. 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 became a quota share
reinsurer for MEEMIC effective July 1, 1997.
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. As of July 1, 1998, ProNational had an annualized earned
medical malpractice premiums of $119.5 million and annualized assumed earned
reinsurance premiums of $45.0 million and is rated A-(Excellent) by A.M. Best.
PLAN OF DISTRIBUTION
PLAN OF DISTRIBUTION
The 4,297,791 shares of Common Stock being offered in this offering are
being offered through MEEMIC Holdings, Inc. to Eligible Policyholders of MEEMIC
Holdings, Inc. and to Officers and Directors of MEEMIC. In addition, it is
anticipated that the Surplus Note will be converted by Professionals into
2,302,209 shares of Common Stock of MEEMIC Holdings, Inc. No compensation for
selling the Common Stock will be paid to any officer, director or employee of
MEEMIC Holdings, Inc. or MEEMIC for any sales of the Common Stock. This offering
is not underwritten, and no brokers, dealers, or sales persons have been
employed by MEEMIC Holdings, Inc. or MEEMIC in connection with the sale of
Common Stock contemplated by this prospectus.
THE SUBSCRIPTION OFFERING PERIOD
The subscription offering period commences February 15, 1999, and will
continue until April 1, 1999.
IMPOUNDMENT OF PROCEEDS
Proceeds of this offering will be held in escrow by Mellon Bank, N.A.
pending the vote of the Eligible Policyholders on the plan of conversion.
Pursuant to the escrow agreement, in the event the plan of conversion is
approved, proceeds of this offering will be released to MEEMIC Holdings, Inc. In
the event the plan of conversion is disapproved, the subscriptions of each
investor will be promptly returned to the investors.
17
<PAGE>
HOW TO PURCHASE SHARES OF COMMON STOCK
Any Eligible Policyholder, Officer or Director who desires to subscribe for
Shares in this offering may do so by delivering (by mail or in person) a
properly executed and completed Order Form, together with full payment (in cash,
check or money order payable to "ChaseMellon Shareholder Services, L.L.C., as
Escrow Agent") for all shares of Common Stock for which the subscription is
made, to ChaseMellon Shareholder Services, L.L.C., 450 West 33rd Street, 10th
Floor, New York, NY 10001. As described above, subscriptions will be held in a
separate escrow account pending the vote of Eligible Policyholders with respect
to the Demutualization.
In the event an Order Form (i) is not delivered and is returned to the
sender by the United States Postal Service or MEEMIC Holdings, Inc. is unable to
locate the addressee, (ii) is not returned or is received after the termination
date of this offering, (iii) is defectively completed or executed, or (iv) is
not accompanied by payment in full for the shares of Common Stock subscribed
for, the subscription rights of the Eligible Policyholder, Officer or Director
to whom such rights have been granted will not be honored. Alternatively, MEEMIC
Holdings, Inc. may (but will not be required to) waive any irregularity relating
to any Order Form or require the submission of a corrected Order Form or the
remittance of full payment for the shares of Common Stock subscribed for by such
date as MEEMIC Holdings, Inc. may specify.
ONCE TENDERED, ORDERS TO PURCHASE SHARES CANNOT BE REVOKED ABSENT EXIGENT
CIRCUMSTANCES. IF AN ELIGIBLE POLICYHOLDER BELIEVES SUCH EXIGENT CIRCUMSTANCES
EXIST, THE ELIGIBLE POLICYHOLDER MUST REQUEST A WAIVER FROM MEEMIC HOLDINGS,
INC. IN WRITING WHICH DESCRIBES THE CIRCUMSTANCES UPON WHICH THE REQUEST FOR THE
WAIVER IS BASED.
DELIVERY OF CERTIFICATES
Certificates representing shares of the Common Stock will be delivered 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.
MINIMUM AND MAXIMUM PURCHASES FOR ELIGIBLE POLICYHOLDERS
The minimum number of shares you may buy is 100. If you are an Eligible
Policyholder, the maximum number of shares you may buy is 10,744 for each
qualifying policy you hold. Fractional shares will not be sold.
RULES FOR OVERSUBSCRIPTION
In the event of an oversubscription by either Eligible Policyholders
(Subscription Category No. 1) or Officers and Directors (Subscription Category
No. 2), Common Stock will be allocated among participants within each category,
by reducing the subscriptions of certain participants according to the following
methodology:
(i) MEEMIC Holdings, Inc. will determine the number of shares of Common
Stock by which Subscription Category No. 1 and/or Subscription Category No.
2 is oversubscribed.
(ii) MEEMIC Holdings, Inc. will reduce the maximum subscription(s) in
each category on a pro-rata basis among the participants with the largest
subscriptions to the level at which an oversubscription no longer exists, as
rounded to the nearest whole share.
(iii) MEEMIC Holdings will repeat the methodology set forth in (ii)
above, for so many iterations as shall be necessary to eliminate
oversubscriptions within each subscription category.
18
<PAGE>
USE OF PROCEEDS
The amount of proceeds available to MEEMIC Holdings, Inc. from the sale of
Common Stock will depend upon the total number of shares of Common Stock
actually sold in this offering, sold under the standby purchase and option
agreement and issued pursuant to conversion of the surplus note, as well as the
actual expenses of the Demutualization. The exact number of shares of Common
Stock of MEEMIC Holdings, Inc. to be issued pursuant to the standby purchase and
option agreement will vary depending on the response to the Subscription
Offering. See "The Demutualization--The Standby Purchase and Option Agreement"
and "The Demutualization--Conversion of the Surplus Note."
After payment of the contemplated donation to the MEEMIC Foundation, MEEMIC
Holdings, Inc. 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 Demutualization. The net proceeds retained by MEEMIC Holdings,
Inc. will be available for a variety of corporate purposes, including additional
capital contributions, future acquisitions and diversification of business.
MEEMIC Holdings, Inc. intends to donate $0.5 million of the net proceeds
from this offering to the MEEMIC Foundation. The board of directors of MEEMIC
established the MEEMIC Foundation as a 501(c)(3) corporation on March 9, 1992.
The purpose of the MEEMIC Foundation is to support individuals and organizations
dedicated to the educational profession. The MEEMIC Foundation that currently
offers scholarships to children of educational employees.
The net proceeds used to effect the exchange of the stock of MEEMIC will
become part of its capital, thereby expanding underwriting capacity and
permitting diversification of its business. MEEMIC will use a portion of these
proceeds to complete the payments to Agency Shareholders which will become due
as a result of the Demutualization and under the terms of the Agency Purchase
Agreement as described under "The Demutualization." See also "Pro Forma Data."
Any payment of dividends to MEEMIC Holdings, Inc. will be limited by regulatory
restrictions on capital distributions by MEEMIC. See "Insurance Regulatory
Matters."
The net proceeds from the sale of Common Stock in this offering will depend
upon the total number of shares actually sold and the actual expenses of the
Demutualization, and cannot be determined until the Demutualization is
completed. Set forth below are the estimated net proceeds to MEEMIC Holdings,
Inc., assuming the sale of Common Stock at the minimum, midpoint and maximum of
the subscription offering range. The following information includes estimated
expenses of approximately $1.5 million. 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 Subscription Offering....................... $ 30,977,910 $ 36,977,910 $ 42,977,910
Less Underwriting Discounts and Commissions................. -- -- --
Less Offering and Conversion Expenses....................... 1,500,000 1,500,000 1,500,000
--------------- --------------- ---------------
Net Proceeds to MEEMIC Holdings, Inc.......................... $ 29,477,910 $ 35,477,910 $ 41,477,910
--------------- --------------- ---------------
Net Proceeds to MEEMIC Holdings, Inc. per share............... $ 9.52 $ 9.59 $ 9.65
</TABLE>
MEEMIC Holdings, Inc. expects that the net proceeds from the sale of shares
of Common Stock will be sufficient to satisfy the working capital of MEEMIC
Holdings, Inc. and MEEMIC for 60 months. If less than all of the Common Stock
offered is purchased pursuant to this offering, an amount of shares equal to the
Common Stock not subscribed for in this offering up to 3,097,791 shares will be
purchased by Professionals and an amount of shares equal to the Common Stock not
subscribed for in this offering up to 4,297,791 shares may be purchased by
Professionals pursuant to the standby purchase and option agreement (see "The
Demutualization--The Standby Purchase and Option Agreement").
19
<PAGE>
CAPITALIZATION
The following table sets forth information regarding the historical
capitalization of MEEMIC at September 30, 1998 and the pro forma consolidated
capitalization of MEEMIC Holdings, Inc. giving effect to the sale of Common
Stock at the minimum, midpoint and maximum of the subscription offering range
based upon the assumptions set forth under "Use of Proceeds." For additional
financial information, see the Consolidated Financial Statements and related
Notes appearing elsewhere in this document.
The surplus note is expected, as part of a series of transactions, to be
assigned to MEEMIC Holdings, Inc. in exchange for 2,302,209 shares of Common
Stock upon completion of the Demutualization. This table does not reflect
additional shares of Common Stock which could be purchased by Professionals
after the Effective Date of Demutualization pursuant to the standby purchase and
option agreement. See "The Demutualization--The Standby Purchase and Option
Agreement" and "Risk Factors--Dilutive Effect of Standby Purchase and Option
Agreement and Stock Compensation Plan." This table also does not reflect
additional shares of Common Stock that could be purchased pursuant to the Stock
Compensation Plan, under which directors, officers and other employees of MEEMIC
and MEEMIC Holdings, Inc. would be granted options to purchase an aggregate
amount of Common Stock equal to 300,000 shares at an exercise price equal to
$10.00 per share. See "Management--The Stock Compensation Plan" and "Risk
Factors--Dilutive Effect of Standby Purchase and Option Agreement and Stock
Compensation Plan."
<TABLE>
<CAPTION>
PRO FORMA CONSOLIDATED CAPITALIZATION OF
MEEMIC HOLDINGS, INC. (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 $10.00 PER $10.00 PER $10.00 PER
SEPTEMBER 30, 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.......... -- $ 52,500 $ 58,500 $ 64,500
Retained earnings--unrestricted........ 46,852 48,677 48,677 48,677
Unrealized gains....................... 2,519 2,519 2,519 2,519
------- --------------- --------------- ---------------
Total shareholders' equity....... $ 49,371 $ 103,696 $ 109,696 $ 115,696
------- --------------- --------------- ---------------
------- --------------- --------------- ---------------
</TABLE>
20
<PAGE>
PRO FORMA DATA
On the Effective Date of the Demutualization, MEEMIC will become a
wholly-owned subsidiary of MEEMIC Holdings, Inc. Since MEEMIC Holdings, Inc. is
not currently an active entity and will be the parent of MEEMIC, the following
pro forma data is also representative of MEEMIC Holdings, Inc.
The following pro forma consolidated balance sheets as of September 30,
1998, gives effect to the Demutualization as if it had occurred as of September
30, 1998 and assumes that 3,097,791 shares of Common Stock (the minimum number
of such shares required to be sold) are sold in this offering. The following pro
forma consolidated statements of income for the year ended December 31, 1997 and
the nine months ended September 30, 1998 present consolidated operating results
for MEEMIC as if the Demutualization and acquisition of the Personal Lines and
Life Divisions of the Agency had occurred as of January 1, 1997.
On September 22, 1997, MEEMIC acquired the assets of the Personal Lines and
Life Divisions of the Agency. This purchase was a significant acquisition that
requires pro forma disclosure as if it took place on January 1, 1997, to reflect
a full year of activity with this transaction.
Pursuant to the plan of conversion, (i) MEEMIC will convert from a Michigan
domiciled mutual insurance company to a Michigan domiciled stock insurance
company and simultaneously issue shares of its capital stock to MEEMIC Holdings,
Inc. in exchange for a portion of the net proceeds of this offering and (ii)
Common Stock of MEEMIC Holdings, Inc. will be sold in this offering and pursuant
to the conversion of the surplus note. The Demutualization 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 Eligible
Policyholders, Officers and Directors in this offering will be purchased by
Professionals pursuant to a standby purchase and option agreement to 3,097,791
shares and Professionals may purchase any such shares to 4,297,791 shares.
The unaudited pro forma information does not purport to represent what
financial position or results of operations actually would have been had the
Demutualization and acquisition occurred on the dates indicated, or to project
financial position or results of operations for any future date or period. The
pro forma adjustments are based on available information and certain assumptions
that MEEMIC and MEEMIC Holdings, Inc. believe are reasonable in the
circumstances. The unaudited pro forma consolidated financial information should
be read in conjunction with the accompanying notes thereto, 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 information purposes only. The financial statements of MEEMIC Holdings, Inc.
and MEEMIC will reflect the effects of the Demutualization and acquisition only
from the dates such events occur.
21
<PAGE>
MEEMIC HOLDINGS, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 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......................................... $118,889,522 $118,889,522
Short-term investments, at cost, which
approximates fair value....................... 1,896,943 1,896,943
------------ ------------
Total investments........................... 120,786,465 120,786,465
Cash.............................................. 4,789,681 $ 29,477,910(a) 17,767,591
(500,000)(a)
(16,000,000(c)
Premiums due from policyholders................... 4,480,811 4,480,811
Amounts recoverable from reinsurers............... 42,971,145 42,971,145
Amounts recoverable from reinsurers, related
party........................................... 10,508,300 10,508,300
Accrued investment income......................... 1,507,510 1,507,510
Deferred federal income taxes..................... 3,110,235 (1,190,000)(c) 1,920,235
Property and equipment, at cost, net of
accumulated depreciation........................ 1,989,080 1,989,080
Deferred policy acquisition....................... 158,772 158,772
Federal income taxes recoverable.................. 557,397 170,000(a) 727,397
Intangible assets, net of amortization............ 39,999,462 39,999,462
Other assets...................................... 523,492 523,492
------------ ------------- ------------
Total assets.................................. $231,382,350 $ 11,957,910 $243,340,260
------------ ------------- ------------
------------ ------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Loss and loss adjustment expense reserves....... $ 93,397,089 $ 93,397,089
Unearned premiums............................... 31,293,729 31,293,729
Surplus note.................................... 21,500,000 $ (21,500,000)(b)
Payable--related to acquisition................. 19,500,000 (19,500,000)(c)
Accrued expenses and other liabilities.......... 8,918,975 8,918,975
Accrued expenses and other liabilities, related
party......................................... 1,921,117 (1,366,870)(b) 554,247
Premiums ceded payable.......................... 3,490,413 3,490,413
Premiums ceded payable, related party........... 1,990,118 1,990,118
------------ ------------- ------------
Total liabilities............................. 182,011,441 (42,366,870) 139,644,571
------------ ------------- ------------
Shareholders' equity:
Common stock.................................... 29,477,910(a) 52,500,000
23,022,090(b)
Retained earnings............................... 46,852,172 (330,000)(a) 48,676,952
(155,220)(b)
2,310,000(c)
Net unrealized appreciation on investments, net
of deferred federal income tax expense of
$1,297,531.................................... 2,518,737 2,518,737
------------ ------------- ------------
Total shareholders' equity...................... 49,370,909 54,324,780 103,695,689
------------ ------------- ------------
Total liabilities and shareholders' equity...... $231,382,350 $ 11,957,910 $243,340,260
------------ ------------- ------------
------------ ------------- ------------
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma financial
statements.
22
<PAGE>
MEEMIC HOLDINGS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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.................................. $47,886,971 $ 47,886,971
Net investment income................................ 5,213,292 5,213,292
Net realized investment gains on fixed maturities.... 25,552 25,552
Other income......................................... 1,485,002 1,485,002
----------- ------------
Total revenues and other income.................... 54,610,817 54,610,817
----------- ------------
Expenses:
Losses and loss adjustment expenses, net............. 33,814,603 33,814,603
Policy acquisition and other underwriting expenses:
Other policy acquisition and underwriting
expenses......................................... 18,875,999 475,585(f) 19,351,584
Ceding commissions, related party.................. (9,491,276) 428,686(f) (9,062,590)
Management fees, related party..................... 1,547,300 (1,547,300)(f)
----------- ------------------ ------------
10,932,023 (643,029) 10,288,994
Interest expense, related party...................... 1,366,870 $ (1,366,870)(g)
Amortization expense................................. 2,209,852 2,209,852
Other expense........................................ 29,586 500,000(h) 529,586
----------- ------------------ ------------
Total expenses..................................... 48,352,934 (1,509,899) 46,843,035
----------- ------------------ ------------
Income from operations before federal income
taxes............................................ 6,257,883 1,509,899 7,767,782
Federal income taxes................................... 1,415,206 513,366(i) 1,928,572
----------- ------------------ ------------
Net income before extraordinary item............... $ 4,842,677 $ 996,533 $ 5,839,210
----------- ------------------ ------------
----------- ------------------ ------------
Earnings per share data (j):
At minimum shares to be issued in Demutualization:
Net income per share of common stock............... $ 1.08
------------
------------
Weighted average number of shares of common stock
outstanding...................................... 5,400,000
------------
------------
At maximum shares to be issued in Demutualization:
Net income per share of common stock............... $ 0.88
------------
------------
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.
23
<PAGE>
MEEMIC HOLDINGS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA COMPANY
PRO FORMA COMPANY PRO FORMA ADJUSTED FOR
HISTORICAL ADJUSTMENTS FOR ADJUSTED FOR ADJUSTMENTS FOR ACQUISITION
MEEMIC ACQUISITION ACQUISITION OFFERING AND OFFERING
----------- --------------- ------------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues and other income:
Net premiums earned........................ $67,830,283 $67,830,283 $ 67,830,283
Net investment income...................... 6,676,783 6,676,783 6,676,783
Net realized investment gains on fixed
maturities............................... 32,214 32,214 32,214
Other income............................... 840,725 $10,320,639(a) 2,057,547 2,057,547
(9,103,817)(b)
----------- --------------- ------------- ------------
Total revenues and other income.......... 75,380,005 1,216,822 76,596,827 76,596,827
----------- --------------- ------------- ------------
Expenses:
Losses and loss adjustment expenses, net... 47,301,864 47,301,864 47,301,864
Policy acquisition and other underwriting
expenses:
Other policy acquisition and underwriting
expenses............................... 13,158,221 8,341,525(a) 21,499,746 475,585(f) 21,975,331
Policy acquisition expense, related
party.................................. 9,103,817 (9,103,817)(b)
Ceding commissions, related party........ (6,577,424) (6,577,424) 211,958(f) (6,365,466)
Management fees, related party........... 1,005,480 1,005,480 (1,005,480)(f)
----------- --------------- ------------- ---------------- ------------
16,690,094 (762,292) 15,927,802 (317,937) 15,609,865
Interest expense, related party............ 1,341,835 485,665(c) 1,827,500 $ (1,827,500)(g)
Amortization expense....................... 714,395 2,209,852(d) 2,924,247 2,924,247
Other expense.............................. 30,417 30,417 500,000(h) 530,417
----------- --------------- ------------- ---------------- ------------
Total expenses........................... 66,078,605 1,933,225 68,011,830 (1,645,437) 66,366,393
----------- --------------- ------------- ---------------- ------------
Income from operations before federal
income taxes........................... 9,301,400 (716,403) 8,584,997 1,645,437 10,230,434
Federal income taxes......................... 2,672,239 (243,577)(e) 2,428,662 559,449(i) 2,988,111
----------- --------------- ------------- ---------------- ------------
Net income before extraordinary item..... $ 6,629,161 $ (472,826) $ 6,156,335 $ 1,085,988 $ 7,242,323
----------- --------------- ------------- ---------------- ------------
----------- --------------- ------------- ---------------- ------------
Earnings per share data (j):
At minimum shares to be issued in
Demutualization:
Net income per share of common stock..... $ 1.34
------------
------------
Weighted average number of shares of
common stock outstanding............... 5,400,000
------------
------------
At maximum shares to be issued in
Demutualization:
Net income per share of common stock..... $ 1.10
------------
------------
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.
24
<PAGE>
MEEMIC HOLDINGS, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
1. BALANCE SHEET:
The accompanying unaudited pro forma balance sheet as of September 30, 1998
has been prepared as if the following transactions had been consummated as of
September 30, 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 and Conversion expenses................................ (1,500,000)
-----------
Net proceeds $29,477,910
-----------
-----------
</TABLE>
In accordance with the plan of demutualization, $500,000 of the net proceeds
will be donated to MEEMIC Foundation. This contribution will result in
additional expenses of $330,000 after federal income taxes.
(b) Conversion of $21,500,000 ProNational 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. An adjustment of $155,220 has been made to
retained earnings for the interest to be accrued from October 1, 1998 to
November 1, 1998.
<TABLE>
<S> <C>
Surplus Note.................................................................... $21,500,000
Accrued interest through September 30, 1998..................................... 1,366,870
Interest to be accrued from October 1, 1998 to November 1, 1998................. 155,220
-----------
$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
will 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 percent discount to the entire
unpaid purchase price at time of option. The discount for early
extinguishment of debt will result in extraordinary income of $3,500,000
before federal income taxes of $1,190,000, or $2,310,000 additional income
after federal taxes.
<TABLE>
<S> <C>
Balance of Payable Related to Acquisition....................................... $19,500,000
Discount, net of bonus, related to option exercised............................. 3,500,000
-----------
Proceeds utilized for accelerated retirement.................................... $16,000,000
-----------
-----------
</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 Amended and Restated
Michigan Educational Employees Mutual Insurance Company 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 Use of
25
<PAGE>
MEEMIC HOLDINGS, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
1. BALANCE SHEET: (CONTINUED)
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 Conversion................................... $ 29,477,910 $ 41,477,910
Conversion of ProNational Surplus Note......................... 23,022,090 23,022,090
</TABLE>
2. STATEMENTS OF INCOME:
The accompanying unaudited pro forma statements of income for the nine
months ended September 30, 1998 and for the year ended December 31, 1997 present
results as if the acquisition of certain assets of the Agency, the issuance of
the Surplus Note and the transactions described in Note 1 of the Notes to
Unaudited Pro Forma Financial Statements had been consummated on January 1,
1997. 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) for a purchase price equal to 3.75 percent
of all premiums written through the Agency through July 14, 2004, subject to a
guaranteed minimum payment of $43 million. Under certain conditions, this
guaranteed minimum payment may be accelerated. The accelerated payment option
would result in an additional $2 million bonus payable before applying a 7
percent discount to the entire unpaid purchase price at time of option. The
initial payment of $22.5 million was paid at closing.
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.
(a) Reflect revenues and expenses from 1/1/97 to 9/21/97 of the Personal Lines
and Life Divisions of the Agency (the period prior to its acquisition by
MEEMIC).
(b) Eliminate intercompany revenues and expenses.
(c) Increase interest expense related to the Surplus Note, which was issued in
order to provide MEEMIC with the capital to acquire the Personal Lines and
Life Divisions of the Agency, at a rate of 8.5 percent annually from 1/1/97
to 4/7/97 (the period prior to the note issuance).
(d) Increase amortization expense for the period 1/1/97 to 9/21/97 to reflect a
full year of amortizing goodwill that resulted from MEEMIC's acquisition of
the Personal Lines and Life Divisions of the Agency on 9/22/97.
(e) Decrease income taxes to reflect the impact of items (a) through (d) above
at the statutory rate of 34 percent.
26
<PAGE>
MEEMIC HOLDINGS, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
2. STATEMENTS OF INCOME: (CONTINUED)
(f) Reflect the termination of the Management Services Agreement (dated April 7,
1997) with Pro National upon Demutualization:
<TABLE>
<CAPTION>
9 MONTHS YEAR
ENDED ENDED
9/30/98 12/31/97
------------ -------------
<S> <C> <C>
Eliminate management fees....................................... $1,547,300 $ 1,005,480
Expenses for replacement of management services................. 475,585 475,585
------------ -------------
1,071,715 529,895
Decrease in ceding commission from 40% Pro National quota
share......................................................... 428,686 211,958
</TABLE>
(g) Eliminate interest expense on the Surplus Note exchanged for shares of
Common Stock.
(h) Donation to MEEMIC Foundation of $500,000 before federal income taxes of
$170,000, or $330,000 additional expense after federal income taxes.
(i) Increase income taxes to reflect the impact of items (f) through (h) above
at the statutory rate of 34 percent.
(j) Pro forma earnings per share is computed by dividing pro forma net income by
the weighted average number of Common Stock shares 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
Demutualization and consists of the following, as if they had been
outstanding since January 1, 1997:
<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>
27
<PAGE>
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
The following table sets forth selected consolidated financial data for
MEEMIC prior to the Demutualization 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 so
that the relative performance of the Company can be evaluated. These statistics
should be evaluated along with the generally accepted accounting principles
("GAAP") information presented herein. See Note 13 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. The consolidated statement of income data for the nine months ended
September 30, 1998 and 1997 and the consolidated balance sheet data at September
30, 1998 are derived from the unaudited consolidated financial statements of
MEEMIC. MEEMIC believes that such unaudited financial data fairly reflect the
consolidated results of operations and the consolidated financial condition of
MEEMIC for such periods. For a presentation of the pro forma effect of this
offering and related transactions on MEEMIC, see "Pro Forma Data."
28
<PAGE>
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
(UNAUDITED) YEAR ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE DATA:
Direct premiums written..................... $ 84,280 $ 78,948 $ 106,350 $ 104,993 $ 98,917 $ 91,147 $ 80,387
Net premiums written........................ 49,745 59,043 75,000 64,286 56,919 52,478 57,265
Net premiums earned......................... 47,887 52,659 67,830 62,497 55,981 53,389 54,007
Net investment income....................... 5,213 5,018 6,677 5,150 4,488 3,875 3,408
Net realized investment gains............... 26 23 32 37 28 3 39
Other income................................ 1,485 514 841 588 587 488 512
--------- --------- --------- --------- --------- --------- ---------
Total revenues.......................... 54,611 58,214 75,380 68,272 61,084 57,755 57,966
LOSSES AND EXPENSES:
Losses and loss adjustment expenses....... 33,815 36,729 47,302 44,872 38,815 41,300 36,586
Policy acquisition and other underwriting
expenses................................ 10,932 13,609 16,690 16,074 16,248 16,769 16,298
Interest expense.......................... 1,367 881 1,342
Amortization expense...................... 2,210 714
Other expense............................. 29 8 31 11 9 29
--------- --------- --------- --------- --------- --------- ---------
Total expenses.......................... 48,353 51,227 66,079 60,957 55,072 58,098 52,884
Income from operations before federal income
taxes..................................... 6,258 6,987 9,301 7,315 6,012 (343) 5,082
Federal income taxes........................ 1,415 1,147 2,672 2,064 1,558 (675) 1,551
--------- --------- --------- --------- --------- --------- ---------
Net income.................................. $ 4,843 $ 5,840 $ 6,629 $ 5,251 $ 4,454 $ 332 $ 3,531
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
SELECTED BALANCE SHEET DATA:
Total investments......................... $ 120,786 $ 109,585 $ 111,543 $ 90,896 $ 73,371 $ 64,358 $ 60,360
Total assets.............................. 231,382 215,023 214,858 155,775 134,843 121,949 109,478
Total liabilities......................... 182,011 173,382 171,576 119,773 103,671 97,603 82,544
Total policyholders' surplus.............. 49,371 41,641 43,282 36,002 31,172 24,346 26,934
GAAP RATIOS:
Loss and loss adjustment expenses
ratio(1)................................ 70.6% 69.7% 69.7% 71.8% 69.3% 77.4% 67.7%
Policy acquisition and other underwriting
expense ratio(2)........................ 22.8% 25.8% 24.6% 25.7% 29.0% 31.4% 30.2%
Combined ratio(3)......................... 93.4% 95.5% 94.3% 97.5% 98.3% 108.8% 97.9%
STATUTORY DATA (AT PERIOD END):
Combined ratio(4)......................... 96.5% 96.4% 95.3% 97.5% 97.6% 108.0% 99.3%
Industry combined ratio(5)................ 100.3% 104.3% 105.2% 109.5% 104.2%
Statutory surplus(6)...................... $ 38,248 $ 33,145 $ 34,513 $ 29,141 $ 24,407 $ 20,145 $ 20,002
Ratio of statutory net written premiums to
statutory surplus(7).................... 1.73 2.38 2.17 2.21 2.33 2.61 2.86
PRO FORMA DATA(8):
Net income................................ $ 5,839 $ 7,242
Earnings per share data:
At minimum shares to be issued:
Net income per share of common
stock.............................. $ 1.08 $ 1.34
Weighted average number of shares of
common stock outstanding........... 5,400,000 5,400,000
At maximum shares to be issued:
Net income per share of common
stock.............................. $ 0.88 $ 1.10
Weighted average number of shares of
common stock outstanding........... 6,600,000 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 Company, Inc., an independent insurance rating
organization, Best's Aggregate & Averages-- Property--Casualty, (Priv. Pass.
Automobile and Homeowners Quantitative Analysis Report). Data unavailable
for the periods ended September 30, 1998 and 1997.
(6) Statutory surplus at September 30, 1998 and 1997 and at December 31, 1997
includes the $21.5 million Surplus Note issued on April 7, 1997. The
statutory surplus at September 30, 1998 and 1997 and December 31, 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) Annualized for the periods ended September 30, 1998 and 1997.
(8) Information excerpted from unauditied Pro Forma Consolidated Statements of
Income for the nine months ended September 30, 1998 and the year ended
December 31, 1997, which give effect to the Demutualization and the
acquisition of the Personal Lines and Life Divisions of the Agency as if
they had occurred on January 1, 1997. 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
Demutualization. See "PRO FORMA DATA."
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MEEMIC Holdings, Inc. was formed to be the holding company for MEEMIC after
the Demutualization. Before the Demutualization, MEEMIC Holdings, Inc. will not
engage in any significant operations and is therefore not in the following
discussion. On the Effective Date of the Demutualization, MEEMIC will become a
wholly-owned subsidiary of MEEMIC Holdings, Inc.
The following discussion provides additional information regarding MEEMIC's
consolidated financial condition and results of operations for the nine months
ended September 30, 1998 and September 30, 1997 and for the three years ended
December 31, 1997, 1996 and 1995. This discussion should be read in conjunction
with the consolidated financial statements of MEEMIC, and notes thereto, which
appear elsewhere in the prospectus.
OVERVIEW
MEEMIC, a company founded by teachers, writes full coverage private
passenger automobile and homeowners insurance primarily to educational employees
and their immediate families in the state of Michigan. On September 22, 1997,
MEEMIC Insurance Services Corporation, a wholly owned agency subsidiary,
purchased certain operations from the Agency, including the exclusive rights to
sell and market MEEMIC products until the year 2004. Management believes that
with control of its marketing and sales force, operating efficiencies can be
realized and the Company's market share will increase at a faster rate than
without control.
MEEMIC sells its insurance contracts through over 90 sales representatives
associated with MEEMIC Insurance Services Corporation, a wholly owned agency
subsidiary, which is the exclusive distributor of MEEMIC's products. As of
September 30, 1998, MEEMIC had over 110,000 policies in force, representing
155,651 insured vehicles and 28,435 homeowner units.
FINANCIAL CONDITION
MEEMIC's total assets increased to $231.4 million at September 30, 1998 as
compared to $214.9 million at December 31, 1997 and $155.8 million at December
31, 1996. The substantial increase in 1997 is the result of the $21,500,000
capital infusion from Professionals which was used to purchase certain assets of
the Agency (including all rights to distribute MEEMIC insurance products) for a
purchase price equal to 3.75 percent 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. 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.
The majority of MEEMIC's assets consist of bonds, some preferred stocks,
cash and short-term investments, that in total were $125,576,146 at September
30, 1998, $113,747,580 at December 31, 1997 and $93,074,657 at December 31,
1996. MEEMIC primarily invests in high quality bonds with the objective of
providing stable income while maintaining liquidity at appropriate levels for
MEEMIC's 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 September 30,
1998, and at December 31, 1997 and 1996 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. MEEMIC's
gross unrealized gains and gross unrealized losses in investments in securities
were $3,841,665 and $25,397 at September 30, 1998, respectively, were $1,995,059
and $67,669, respectively, at
30
<PAGE>
December 31, 1997, and were $1,245,740 and $304,558, respectively, at December
31, 1996. Such changes in MEEMIC's gross unrealized gains and losses are a
result of fluctuating bond market values due to volatility of interest rates in
the marketplace.
MEEMIC is continuing to improve its rate adequacy review and loss estimation
process by implementing new actuarial system software to interface with MEEMIC's
new policy and claims system. These revisions along with the restructuring of
territories for rating purposes will more precisely enable MEEMIC to more
competitively price products for the risks it insures. MEEMIC's recorded
estimates of loss and loss adjustment expenses reserves totaled $93.4 million at
September 30, 1998, compared to $84.9 million at December 31, 1997 and $80.3
million at December 31, 1996. The 10 percent ($8.5 million) increase in reserves
for nine months ended 1998, the 5.7 percent ($4.6 million) increase in reserves
for 1997, and the 12.9 percent ($9.2 million) increase in reserves for 1996 are
attributable to general allowances for growth in the number of insured vehicles
and homeowner policies in force. Reserves for losses incurred prior to 1997 were
reduced by $6.75 million during calendar year 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, the Company
anticipates 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, 1997 and 1996 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 September 30, 1998 unearned premiums were $31.3 million, compared to
$29.4 million at December 31, 1997 and compared to $28.8 million at December 31,
1996. The increase in unearned premiums at September 30, 1998 compared to
December 31, 1997 of 6.3 percent is comparable to the growth in premiums
written. However, the increase of 2.1 percent in unearned premiums for 1997 is
greater than the increase of 1.3 percent in premiums written for 1997, as a
result of ceding premium on the new quota share reinsurance contract with
ProNational on an earned basis as opposed to a written basis.
Other liabilities at September 30, 1998 were $57.3 million and at the end of
1997 and 1996 were $57.2 million and $10.6 million, respectively. While $42
million of the increase in 1997 is due to the Surplus Note and the outstanding
payable related to purchasing the Personal Lines and Life Divisions of the
Agency, changes in other liability account balances are primarily due to the
timing of Company payments for state association assessments, payroll and
retirement plan contributions. Additionally, the liabilities at September 30,
1998 and December 31, 1997, include $1,366,870 and $1,341,835, respectively, for
interest on MEEMIC's $21.5 million surplus note and management fees of $554,247
and $504,109, respectively, due to Professionals.
REINSURANCE
MEEMIC utilizes quota share and excess of loss reinsurance contracts to
reduce its exposure to loss. 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 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. Catastrophe reinsurance provides additional coverage for automobile
physical damage and homeowners property damage in four layers, with total
reinsurance protection of $13,500,000 in excess of the first $500,000 loss, and
each layer subject to a retention of 5 percent. MEEMIC also has a 40 percent
quota share reinsurance agreement in place for all net retained lines with
ProNational. The other principal reinsurers are American Re-Insurance Company,
Continental Casualty Company, Dorinco Reinsurance Company and Lloyd's
Syndicates. Additionally, the Michigan Catastrophic Claims Association provides
unlimited coverage in excess of $250,000 per occurrence for personal injury
losses.
31
<PAGE>
RESULTS OF OPERATIONS--NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 1997
Net income for the nine months ended September 30, 1998 was $4,842,677
compared to $5,839,897 for the nine months ended September 30, 1997. MEEMIC's
income from operations of $6,257,883 and combined ratio of 93.4 percent for the
first nine months ended September 30, 1998, were consistent with the income from
operations of $6,987,113 and combined ratio of 95.5 percent for the first nine
months ended 1997. (The combined ratio is the sum of the loss ratio and
underwriting expense ratio. A combined ratio under 100% generally indicates an
underwriting profit and a combined ratio over 100% generally indicates an
underwriting loss. The loss ratio represents the ratio of incurred losses to
earned premium. The underwriting expense ratio represents the ratio of
acquisition, adjusting, administrative, general and other expenses incurred to
written premium.)
These positive results are despite two severe Michigan storms occurring on
May 31, and July 21, 1998 that approximated $1,700,000 in direct losses,
$1,000,000 in net losses after reinsurance and 2,020 reported claims. The
favorable combined ratio 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.
Net investment income before interest expense was $5,213,292 and $5,018,459
for the first nine months ended September 30, 1998 and 1997, respectively. Gross
realized gains and losses were $35,425 and $9,873 for September 30, 1998 and
were $23,627 and $764 for September 30, 1997, respectively. The 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 8.37 percent
for nine months ended 1998 and was 6.56 percent for nine months ended 1997.
Overall premiums have increased due to policyholder growth. Direct auto
premiums increased 5.6 percent over third quarter 1997, and were $77,049,508 at
September 30, 1998 compared to $72,944,528 at September 30, 1997. Direct
homeowner premiums increased 20.4 percent over third quarter 1997, and were
$7,230,738 at September 30, 1998 compared to $6,003,632 at September 30, 1997.
At September 30, 1998, MEEMIC had 155,651 insured vehicles and 28,435 homeowner
policies in force. Net premiums earned for the nine months ended September 30,
1998 were $47,886,971 compared to $52,658,507 for the nine months ended
September 30, 1997. The decrease in net premiums earned was due to the change in
quota share reinsurance contracts whereby MEEMIC ceded more premiums in 1998
than the premiums ceded in 1997. The results for 1998 include a full nine months
of expenses related interest on a surplus note, management fees to Professionals
and inclusion of Agency personnel that are now employees of MEEMIC, compared to
1997 which began incurring such expenses on April 7, 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 percent to $43,281,572 at December 31, 1997. In
1996 MEEMIC's policyholder surplus increased by over 15 percent 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.
MEEMIC's combined ratio improved for the third consecutive year and was 94.3
percent for 1997 compared to 97.5 percent for 1996. MEEMIC's 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 percent in 1997 compared to 16.8 percent in
1996. Overall, MEEMIC's loss ratio for 1997 was 58.7 percent compared to 62.5
percent for 1996. (The loss ratio represents the ratio of incurred losses to
earned premium.) The 1997 auto liability loss ratio improved to 52.4 percent
from 59.0 percent in 1996 due to decreases in both claim frequency and severity.
The 1997 auto physical damage loss ratio also improved, to 59.8 percent from
64.8 percent in 1996, and is due to: (i) a reduction in claim frequency that
offset an increase in claim severity for 1997
32
<PAGE>
compared to 1996 and (ii) the effects on physical damage premium rate
adjustments. The homeowner loss ratio increased to 83.7 percent in 1997 from
67.6 percent in 1996. The increase in loss ratio was due to a severe storm in
Michigan that occurred in July 1997.
MEEMIC continued to reduce expenses and improve operational efficiencies in
1997. For the sixth consecutive year, MEEMIC's other underwriting expenses ratio
has declined, and was 24.6 percent in 1997 compared to 25.7 percent in 1996.
(The underwriting expenses ratio represents the ratio of acquisition, adjusting,
administrative, general and other expenses incurred to written premium.) This
decline in 1997 occurred despite various additional expenses related to the
Agency asset 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, MEEMIC 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 percent. This note, dated April 7, 1997,
allowed MEEMIC 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 percent for 1997
and 4.75 percent for 1996.
MEEMIC's 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 percent
increase in 1997 direct premiums written was distorted by the inclusion of the
Michigan Catastrophic Claims Association ("MCCA") assessments, which decreased
by 79.4 percent during 1997. Written premiums excluding the MCCA assessments
increased 9.9 percent over 1996, and was due primarily to an increase of 3.4
percent in the number of insured vehicles, a rate increase in auto physical
damage premiums, a 14 percent increase in homeowner policies in force, and a 4.5
percent homeowner rate increase that went into effect January 1, 1997. With the
continued growth in MEEMIC's homeowners, MEEMIC's product mix in terms of
premiums written by line was 7.4 percent homeowners and 92.6 percent personal
automobile as of December 31, 1997. Net premiums written in 1997 increased to
$75,000,233 or 16.7 percent from 1996. MEEMIC's 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 percent 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.
MEEMIC's homeowner business continued to steadily grow since it was first
introduced in 1992. Direct premiums written during 1997 for homeowners increased
20 percent to $7,878,519, and the number of homeowner policies in force at
December 31, 1997, increased 14 percent to 25,114.
RESULTS OF OPERATIONS--YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED
DECEMBER 31, 1995
Net income for 1996 was $5,250,901 compared to $4,454,177 for 1995. MEEMIC's
surplus increased by over 15 percent to $36,001,514 at December 31, 1996. In
1995 MEEMIC's policyholder surplus increased by over 28 percent to $31,172,169
at December 31, 1995.
With combined ratios of 97.5 percent in 1996 and 98.3 in percent in 1995,
MEEMIC's income from operations was $7,315,206 for 1996 compared to $6,012,116
for 1995. The after tax return on equity was 16.8 percent in 1996 and 18.3
percent in 1995. MEEMIC's profitability for both 1996 and 1995 was
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<PAGE>
attributable to the continued expenditure reductions and general economies of
scale in expenses relative to increased earned premiums. Favorable underwriting
results were also a result of improved product pricing methods in 1996. Although
general weather conditions in 1996 were more severe, MEEMIC's consistent
underwriting and claims practices resulted in stable claim frequency and
severity loss experience for both 1996 and 1995. Overall, MEEMIC's loss ratio
for 1996 was 62.45 percent compared to 59.19 percent for 1995. The auto
liability and physical damage loss ratios remained relatively unchanged at 58.96
percent and 64.84 percent respectively, compared to 57.25 percent and 63.35
percent, respectively for 1995. The 1996 homeowner loss ratio increased to 67.64
percent from 47.13 percent in 1995.
MEEMIC continued to improve operational efficiencies. For the fifth
consecutive year, MEEMIC's other underwriting expenses ratio declined, and was
25.7 percent in 1996, compared to 29.0 percent in 1995.
Net investment income was $5,150,035 for 1996 compared to $4,488,017 for
1995. Gross realized gains and losses were $37,085 and $370 for 1996 and were
$28,486 and $799 for 1995, respectively. The 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 4.75 percent for 1996 and
12.16 percent for 1995.
1996 was the first year in MEEMIC's history where premiums exceeded $100
million. Total direct premiums written increased 6.1 percent in 1996 to
$104,992,855, and increased 8.5 percent in 1995 to $98,917,063. Net premiums
written in 1996 increased to $64,285,553, or 12.9 percent from 1995, while the
direct premiums written increased 6.1 percent in 1996. MEEMIC's net premiums
written for 1996 increased twice as fast as the direct premiums written for 1996
due to the decrease in auto physical damage quota share reinsurance to 65
percent in 1996 from 70 percent in 1995, and more favorable reinsurance rates in
1996. Net premiums written in 1995 increased to $56,918,690, similar to the 8.5
percent increase in 1995 direct premiums written. Net premiums earned increased
11.6 percent in 1996 to $62,496,887 and increased 4.9 percent in 1995 to
$55,980,673. Net premiums earned have lagged increases in net premiums written
due to the general 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 1996 for automobile coverage increased 5.1
percent to $98,425,097. This 5.1 percent increase in direct premiums written was
attributable to an increase in the number of insured vehicles from 137,212 to
141,130 and from minor inflationary rate adjustments. Direct premiums written
during 1995 for automobile coverage increased 7.5 percent, from $87,064,526 to
$93,611,207. This 7.5 percent increase in direct premiums written was
attributable to (i) a 6.4 percent increase from 1995 and 1994 premium rate
adjustments; and (ii) a 1.1 percent increase in the number of insured vehicles
from 135,747 to 137,212.
Direct premiums written during 1996 for homeowners increased 23.8 percent to
$6,567,758, and the number of homeowner policies in force at December 31, 1996
increased 19.3 percent to 22,007. Direct premiums written during 1995 for
homeowners increased 30 percent, from $4,082,755 to $5,305,847, and the number
of homeowner policies in force at December 31, 1995, increased 23.6 percent,
from 14,925 to 18,447.
LIQUIDITY AND CAPITAL RESOURCES
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.
MEEMIC's 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.
On February 7, 1997, MEEMIC entered into an agreement with Professionals for
the purpose of arranging for a capital infusion into MEEMIC and to provide
MEEMIC with a means to expand its
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<PAGE>
insurance capacity and operations. On April 7, 1997, MEEMIC issued the surplus
note to ProNational 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, the accrued
interest for 1997 of 1,341,835 was paid to ProNational following the Michigan
Insurance Bureau and MEEMIC Board approval. MEEMIC considered the purchase of
its exclusive sales agency as a long-term beneficial opportunity to consolidate
marketing operations and sales functions for insurance issued by MEEMIC.
On September 22, 1997, MEEMIC completed its acquisition of certain
operations of the Agency through MEEMIC's newly formed wholly-owned subsidiary.
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.
ProNational has elected to exchange the $21.5 million surplus note and accrued
but unpaid interest as of November 1, 1998 for 2,302,209 shares of Common Stock
of MEEMIC Holdings, Inc. upon completion of the Demutualization of MEEMIC.
MEEMIC is currently pursuing demutualization 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 increased capital resources from
demutualization 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 Chief Information Officer of MEEMIC. These
officers currently spend 95% and 80% of their time, respectively, working at
MEEMIC. Upon demutualization, 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 $675,000 annually over the
remaining 8 years of the agreement.
Under the terms of the quota share reinsurance contract with ProNational,
the Demutualization 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 Demutualization.
Cash provided by operations for the nine months ended September 30, 1998 and
1997 was $11,600,284 and $18,856,458, respectively, and for the year 1997 was
$21,644,969 compared to $18,037,485 in 1996. The $7.3 million difference in cash
provided by operations for the nine months ended September 30, 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 MEIA 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 during 1996 increased $11.4 million from 1995 due to increases in net
premiums written and collected exceeding paid losses and expenses by
approximately $10 million, and the reduction in federal income taxes required to
be paid in 1996.
Cash provided by operations and deemed available for investment was employed
in full compliance with MEEMIC's written statement of investment policy.
Likewise, proceeds substantially from matured and called investments of
$11,737,052 for the first nine months of 1998, $15,355,796 for the year 1997 and
$8,934,651 for 1996 were reinvested in similar high quality investments. During
the first nine months of
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<PAGE>
1998 and 1997, and for the years 1997 and 1996, MEEMIC did not have any
significant voluntary sales of its 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 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 ("FASB") has issued Statement of
Financial Accounting Standards ("SFAS") No. 131 "Disclosures About Segments of
an Enterprise and Related Information," which is effective for fiscal year
beginning after December 15, 1997. This standard requires that an enterprise
report financial and descriptive information about its reportable operating
segments. Operating segments are components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. Generally, financial information is required to be
reported on the basis that it is used internally for evaluating segment
performance and deciding how to allocate resources to segments. MEEMIC is not
required to report pursuant to SFAS No. 131 until December 31, 1998 and has not
determined what effects the adoption of SFAS No. 131 will have on its
consolidated results of operations or financial condition.
The FASB has issued 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, the Management of MEEMIC does not anticipate
that the adoption of SFAS No. 133 will have an effect on the results of
operations or financial position of MEEMIC.
YEAR 2000 COMPLIANCE
MEEMIC has completed an assessment of its computer programs and personal
computer software and has determined that all significant systems are Year 2000
compliant. To date, MEEMIC has incurred approximately $2 million and purchased a
new computer system for business processing, enhanced its telephone system,
installed new forms processing software and equipment and upgraded its financial
reporting systems, that 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 determined Year 2000 compliance. MEEMIC is also in the process of
assessing Year 2000 readiness of the leased premise that MEEMIC occupies. In the
event that such premise is not Year 2000 compliant, MEEMIC will activate its
offsite disaster recovery location, which has been determined 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 for which MEEMIC engages business activity will be Year 2000
compliant.
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<PAGE>
MARKET FOR THE COMMON STOCK
MEEMIC Holdings, Inc. has never issued any capital stock. Consequently,
there is no established market for the Common Stock. MEEMIC Holdings, Inc. has
applied to have the Common Stock approved for quotation on the NASDAQ NMS under
the symbol "MEMH" upon completion of the Demutualization.
MEEMIC Holdings, Inc. has engaged three firms to act as market makers in the
Common Stock upon completion of the Demutualization, 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 MEEMIC Holdings, Inc. 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
Demutualization.
DIVIDEND POLICY
MEEMIC Holdings, Inc. may pay cash dividends on the Stock at times
determined by the Board of Directors and when legally allowed. Payment of
dividends by MEEMIC Holdings, Inc. may be contingent on the receipt of dividends
from MEEMIC. The payment of dividends by MEEMIC is subject to limitations
imposed by the Michigan Insurance Code (the "Insurance Code"). See "Insurance
Regulatory Matters--Dividends." It is not anticipated that MEEMIC Holdings, Inc.
will pay any cash dividends in the foreseeable future. See "Description of
Common Stock."
INSURANCE REGULATORY MATTERS
GENERAL
Michigan insurance companies are subject to supervision and regulation by
the Michigan Insurance Bureau. Such supervision and regulation relates to
numerous aspects of an insurance company's business and financial condition. The
primary purpose of such supervision and regulation is the protection of
policyholders rather than investors or shareholders of an insurer. The authority
of the Michigan Insurance Bureau includes the establishment of standards of
solvency which must be met and maintained by insurers, the licensing to do
business of insurers and agents, the nature of and limitations on investments by
insurers, reviewing certain premium rates for various lines of insurance, the
provisions which insurers must make for current losses and future liabilities
and the approval of policy forms. The Michigan Insurance Bureau also conducts
periodic examinations of the affairs of insurance companies and requires the
filing of annual and other reports relating to the financial condition of
insurance companies doing business in the State of Michigan.
The Insurance Code requires prior notice and approval of changes in control
of a domestic insurer or its holding company and of material intercorporate
transfers of assets within the holding company structure. Under the Insurance
Code, no person, corporation or other entity may acquire "control" of MEEMIC
Holdings, Inc., unless such person, corporation or entity has obtained prior
approval of the Michigan Insurance Commissioner for such acquisition or an
exemption from this requirement. A complete definition of "control" is contained
in the Insurance Code. This definition includes, but is not limited to, the
possession or the contingent or noncontingent right to acquire possession,
direct or indirect, or the power to direct any person acquiring, directly or
indirectly, 10% or more of the voting securities of a Michigan insurance company
or its parent company. To obtain approval of any such change in control, the
proposed acquiror must file an application with the Michigan Insurance
Commissioner containing certain information regarding the identity and
background of the acquiror and its affiliates, the sources and
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<PAGE>
amount of funds to be used to effect the acquisition and other matters.
Acquisition of "control" of MEEMIC and MEEMIC Holdings, Inc. by Professionals
has been approved by the Michigan Insurance Bureau.
INSURANCE COMPANY DIVIDENDS
The payment of dividends by MEEMIC to MEEMIC Holdings, Inc. is subject to
limitations imposed by the Insurance Code. Under the Insurance Code, cash
dividends may be paid by MEEMIC only from earnings and policyholders' surplus.
In addition, an insurer subject to the Michigan insurance holding company law
may not pay an "extraordinary dividend or distribution" to its stockholders
without the prior approval of the Michigan Insurance Commissioner. Currently, an
extraordinary dividend or distribution is defined as any dividend or
distribution of cash or other property, whose fair market value together with
that of other dividends or distributions made within the preceding 12 months,
exceeds the greater of 10% of the insurer's surplus as regards policyholders as
of December 31 of the preceding year, or the net income, not including realized
capital gains, for the 12 month period ending December 31 of the immediately
preceding year, but shall not include pro-rata distributions of any class of the
insurer's own securities. As of December 31, 1997, 10% of MEEMIC's surplus was
$3,451,284, and net income excluding realized capital gains was $6,283,121. The
amount of surplus and earnings that would have been available for payment as
dividends in the last fiscal year was $6,283,121.
MICHIGAN NO-FAULT AUTOMOBILE INSURANCE
Under a pure no-fault automobile insurance system, responsibility for an
automobile accident is not at issue. Each insured'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, permits
lawsuits over automobile accidents only under certain conditions. 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 shall not be assessed in favor of a party more than 50% at fault.
The law is not based on a monetary threshold.
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 (the "MCCA") was established to spread the costs of medical coverage
to all insureds. 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.
MICHIGAN ESSENTIAL INSURANCE ACT
The Michigan Legislature determined in the late 1970s that automobile and
homeowner insurance was "essential" for citizens of Michigan. Thus, the Michigan
Essential Insurance Act ("EIA"), which took full effect in 1981 was adopted.
The EIA requires an insurer to insure every applicant for automobile
insurance who meets certain minimum requirements and the insurer's underwriting
rules. The underwriting rules must be applied uniformly to all applicants and
insureds. Each insurer must file its underwriting rules with the Michigan
Insurance Commissioner. In addition, the EIA 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
38
<PAGE>
coverage in the insurance market and regulates certain other types of coverages
and informational requirements.
According to the provisions of the Michigan 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 EIA.
THE EIA HAS BEEN AND CONTINUES TO BE THE SUBJECT OF REVIEW AND PROPOSALS FOR
MODIFICATION BY THE MICHIGAN INSURANCE BUREAU, STATE LEGISLATORS AND INSURERS.
MEEMIC AND MEEMIC HOLDINGS, INC. CANNOT PREDICT WHETHER ANY SUCH MODIFICATIONS
WILL OCCUR AND WHAT EFFECT SUCH MODIFICATIONS WOULD HAVE ON MEEMIC'S BUSINESS.
MOREOVER, MEEMIC AND MEEMIC HOLDINGS, INC. CANNOT PREDICT WHETHER MEEMIC'S
EXEMPTION FROM THE EIA WILL BE CONTINUED.
BUSINESS OF MEEMIC
STRATEGY
MEEMIC's principal future strategies are to:
(i) Respond to the needs of its policyholders by increasing its product
line.
(ii) Increase its presence in under-served areas of the state of
Michigan.
(iii) Diversify geographically by entering other states, either through
licensing of MEEMIC in other jurisdictions or acquisition.
(iv) Lower the expense ratio and maintain a high level of customer
service through continued enhancement of MEEMIC's information and processing
systems.
Management has started the process of implementing these strategies and
views the Demutualization as a critical component of its strategic plan. The
additional capital generated by the Demutualization will permit MEEMIC to
accelerate putting these strategies into place.
Implementing these strategies will require capital for research and
development of new products, appointment and training of additional sales
representatives and continued investment in technology. The net proceeds from
this offering will supply the additional capital necessary to support additional
costs needed to implement these strategies for the next five years and provide
additional surplus necessary to support increased premium volume. In addition,
the Demutualization and holding company structure will provide access to future
capital needs and facilitate the use of capital stock for potential acquisition.
EXPAND PRODUCT OFFERINGS. MEEMIC recognizes that the educational community
has insurance needs beyond personal automobile and homeowners. The corporate
vision is to become the company of choice to the educational community for
insurance services. MEEMIC expects to increase premium volume and retention
through the addition of products providing coverage for such lines as
recreational vehicles and personal umbrellas.
MEEMIC has recently formed a Product Development Department and hired a
Product Manager to assess the risks associated with new lines, accurately price
new products to compensate for risk assumed and facilitate the implementation of
a new line within MEEMIC and with the sales force. MEEMIC believes that by
meeting the policyholders' need for a variety of products, the sales force will
be able to increase premium volume on the current product line as well as
through sales of new products.
INCREASED PRESENCE IN UNDER-SERVED AREAS OF MICHIGAN. With the acquisition
of the Agency, in 1997, MEEMIC has positioned itself to control the sales and
marketing of its products. It has started programs to better equip the sales
force with the tools they need to service current policyholders and attract new
policyholders to MEEMIC.
Even though MEIA has approximately 90 sales representatives throughout the
state, there are still many school districts without MEEMIC representation.
MEEMIC has started an aggressive campaign to
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<PAGE>
appoint new producers and sub producers to improve penetration of MEEMIC
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. MEEMIC's 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. Retention of MEEMIC policyholders has always
been strong. Approximately 95% of policyholders continue after the first term,
87% continue after five years and some policyholders that started with MEEMIC in
its first year of business are still on the books after 48 years. However,
MEEMIC knows that it cannot continue with these retention rates in today's
environment without enhancing its strong commitment to customer service. In 1998
it implemented a Customer Service Department that is designed to receive and
quickly resolve inquiries from policyholders. In addition, it will provide
MEEMIC access to policyholder feedback on how MEEMIC can better serve its
customers in the future.
MEEMIC also recognized several years ago that it could not expand without
upgrading its information and processing system. To date it has 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 upgrades to the telephone systems to bring greater
efficiencies to MEEMIC's Customer Service Center.
Goals of these new systems center on faster service to policyholders through
reduced turnaround time on all transactions, expanded billing options, reduction
in 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 insureds.
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PRODUCTS
MEEMIC offers full coverage private passenger automobile and homeowners
insurance primarily for educational employees and their immediate families in
the state of 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.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------------------------------- ----------------------------------------------------------
% OF % OF % OF % OF
1998 TOTAL 1997 TOTAL 1997 TOTAL 1996 TOTAL 1995
---------- --------- ---------- --------- ----------- --------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Direct Premiums
Written:
Homeowner......... $7,230,738 8.6% $6,003,632 7.6% $ 7,878,519 7.4% $ 6,567,757 6.3% $5,305,847
Personal
Automobile...... 77,049,508 91.4% 72,944,528 92.4% 98,471,060 92.6% 98,425,097 93.7% 93,611,216
---------- --------- ---------- --------- ----------- --------- ----------- --------- ----------
TOTAL........... $84,280,246 100.0% $78,948,160 100.0% $106,349,579 100.0% $104,992,854 100.0% $98,917,063
---------- --------- ---------- --------- ----------- --------- ----------- --------- ----------
---------- --------- ---------- --------- ----------- --------- ----------- --------- ----------
Net Premiums Earned:
Homeowner......... $3,419,215 7.1% $4,066,132 7.7% $ 5,129,706 7.6% $ 5,366,784 8.6% $4,148,209
Personal
Automobile...... 44,467,756 92.9% 48,592,375 92.3% 62,700,577 92.4% 57,130,103 91.4% 51,832,464
---------- --------- ---------- --------- ----------- --------- ----------- --------- ----------
TOTAL........... $47,886,971 100.0% $52,658,507 100.0% $67,830,283 100.0% $62,496,887 100.0% $55,980,673
---------- --------- ---------- --------- ----------- --------- ----------- --------- ----------
---------- --------- ---------- --------- ----------- --------- ----------- --------- ----------
Net Loss Ratios(1):
Homeowner......... 99.0% 107.1% 92.9% 78.3% 50.2%
Personal
Automobile...... 67.0% 66.6% 62.7% 71.2% 70.9%
TOTAL........... 70.6% 69.8% 69.7% 71.8% 69.3%
Expense Ratios(2):
Homeowner......... 34.1% 38.6% 36.8% 33.6% 34.8%
Personal
Automobile...... 22.0% 24.8% 23.7% 24.9% 28.5%
TOTAL........... 22.8% 25.8% 24.6% 25.7% 29.0%
Combined Ratios(3):
Homeowner......... 133.1% 145.7% 129.7% 111.9% 85.0%
Personal
Automobile...... 89.0% 91.4% 86.4% 96.1% 99.4%
TOTAL........... 93.4% 95.6% 94.3% 97.5% 98.3%
<CAPTION>
% OF
TOTAL
---------
<S> <C>
Direct Premiums
Written:
Homeowner......... 5.4%
Personal
Automobile...... 94.6%
---------
TOTAL........... 100.0%
---------
---------
Net Premiums Earned:
Homeowner......... 7.4%
Personal
Automobile...... 92.6%
---------
TOTAL........... 100.0%
---------
---------
Net Loss Ratios(1):
Homeowner.........
Personal
Automobile......
TOTAL...........
Expense Ratios(2):
Homeowner.........
Personal
Automobile......
TOTAL...........
Combined Ratios(3):
Homeowner.........
Personal
Automobile......
TOTAL...........
</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 Net Loss Ratio and the Expense Ratio.
41
<PAGE>
HOMEOWNERS POLICY
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 the insured's primary residence, provides optional coverage for
seasonal homes, dwellings under construction and some forms of watercraft. As of
September 30, 1998, MEEMIC had 28,435 homeowner policies in force.
PERSONAL AUTOMOBILE
MEEMIC's personal automobile policy provides insureds 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 September 30, 1998, MEEMIC had
82,041 personal automobile policies in force.
MARKETING
MEEMIC markets its products through over 90 captive sales representatives
associated with MEIA, a wholly-owned insurance agency, which is the exclusive
distributor of MEEMIC products. The representatives are unique in that most of
them also belong to the educational community and hence engage in peer selling.
Although approximately 90% of the business produced by MEIA is underwritten
by MEEMIC, MEIA represents, and receives sales commissions from other multiple
insurance carriers which write in the state of 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. It also provides MEEMIC with a base of
potential policyholders who currently may not meet the underwriting guidelines
of MEEMIC, but may do so in the future, or, have a need for products that MEEMIC
may offer in the future.
MEIA conducts quarterly meetings with its sales representatives, establishes
benchmarks and goals, conducts technical training and sponsors continuing
education programs. The agency representatives provide an important source of
information to MEEMIC about the marketplace and needs of its 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. The agency also eliminates agents whose production does not meet
minimum standards. MEEMIC pays a fixed commission to its wholly-owned agency,
MEIA, who 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 September 30, 1998, one sales representative accounted for over 5.5%
of direct premiums written by MEEMIC, with no other sales representative
accounting 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, MEEMIC
has established 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 Subscription Offering is being made only on the basis
of information contained in this Prospectus.
UNDERWRITING
MEEMIC relies on information provided by representatives of MEEMIC's
exclusive agency, MEIA, 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
42
<PAGE>
which results in "peer to peer" selling of MEEMIC's insurance products. This
enhances the representatives' ability to act as field underwriters and
pre-screen applicants.
MEEMIC evaluates and accepts risks based on consistently applied
underwriting guidelines. MEEMIC's processing system provides edits for some of
these guidelines and underwriting supervisors regularly audit the work of
individual underwriters to ensure adherence to standards. MEEMIC's 22
underwriters monitor insureds' deviations from the underwriting guidelines to
assist in decisions related to cancellation and non-renewal.
CLAIMS
The claims philosophy at MEEMIC emphasizes 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 insureds and claimants alike. 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 around Michigan. MEEMIC has
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 insured.
Assignment of claim files and claim settlement authority is established
based on level of experience. 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 insurance industry practice, MEEMIC reinsures a portion
of its exposure and pays to the reinsurers a portion of the premiums received on
all policies reinsured. Insurance is ceded principally to reduce net liability
on individual risks, to mitigate the effect of individual loss occurrences
(including catastrophic losses), to stabilize underwriting results and to
increase MEEMIC's underwriting capacity.
Reinsurance can be classified as quota share reinsurance or excess of loss
reinsurance. Under quota share reinsurance, the ceding company cedes a
percentage of its insurance liability to the reinsurer in exchange for a like
percentage of premiums less a ceding commission, and in turn will recover from
the reinsurer the reinsurer's share of all losses and loss adjustment expenses
incurred on those risks. Under excess of loss reinsurance, an insurer limits its
liability to all or a particular portion of the amount in excess of a
predetermined deductible or retention. Regardless of type, reinsurance does not
legally discharge the ceding insurer from primary liability for the full amount
due under the reinsured policies. However, the assuming reinsurer is obligated
to reimburse the ceding company to the extent of the coverage ceded.
MEEMIC determines the amount and scope of reinsurance coverage to purchase
each year based upon an evaluation of the risks accepted, consultations with
reinsurance brokers and a review of market conditions, including the
availability and pricing of reinsurance. For the year ended December 31, 1997,
MEEMIC ceded to reinsurers $37.9 million of earned premiums. For the nine months
ended September 30, 1998, MEEMIC ceded earned premiums of $34.5 million.
MEEMIC's reinsurance arrangements are generally renegotiated annually.
Coverages described herein are in place for the 1998 calendar year.
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
43
<PAGE>
$150,000 are covered on an excess of loss basis, up to $3,000,000 per
occurrence. Additionally, the MCCA provides unlimited 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. MEEMIC has 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%.
Effective July 1, 1997, MEEMIC and ProNational entered into a quota share
reinsurance treaty. Under the terms of the treaty, MEEMIC retains 60% and cedes
40% of its liability remaining after cessions of excess and catastrophic risks
through other reinsurance contracts. The result of the new quota share treaty is
a pro rata sharing of risk (60% of losses and loss adjustment expenses are borne
by MEEMIC and 40% by ProNational with both MEEMIC and ProNational benefiting
from other excess and catastrophe reinsurance). This treaty protects MEEMIC'S
surplus from high frequency and low severity type losses. MEEMIC pays
ProNational a reinsurance premium equal to 40% of premiums collected net of
other reinsurance costs. Reinsurance premiums due ProNational on the quota share
treaty are reduced by a ceding allowance equal to actual expenses of MEEMIC, or
approximately 30% of the reinsurance premium. This reinsurance treaty is
designed to stabilize underwriting results, and may not be canceled while the
surplus note is outstanding.
Quota share reinsurance may be used to moderate the adverse impact of
underwriting losses to the ceding company but also decreases underwriting
profits which would otherwise be retained by the ceding company. The quota share
reinsurance treaty entered into by MEEMIC with ProNational has had, and will
have, a material effect on the financial condition and results of operations of
MEEMIC during the term of the reinsurance treaty.
The insolvency or inability of any reinsurer to meet its obligations to
MEEMIC could have a material adverse effect on the results of operations or
financial condition of the Company.
The following table identifies MEEMIC's principal reinsurers, their
percentage participation in MEEMIC's aggregate reinsured risk based upon
premiums paid by MEEMIC during the first nine months of 1998 and their
respective A. M. Best ratings as of September 30, 1998. A.M. Best classifies "A"
and "A-" ratings as "Excellent" and "A++" ratings as "Superior". No other single
reinsurer's percentage participation in the first nine months of 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................................ -- $ 32,832 $ 204 0.6%
ProNational......................... A- 10,508 31,638 91.6
American Re......................... A++ 6,902 1,352 3.9
CNA................................. A 2,871 640 1.9
Dorinco Re.......................... A 97 260 0.8
Other............................... 269 442 1.2
----------- ------- --------
$ 53,479 $ 34,536 100.0%
----------- ------- --------
----------- ------- --------
</TABLE>
MEEMIC, through its reinsurance intermediary, annually reviews the financial
stability of all of its reinsurers. This review includes a ratings analysis of
each reinsurer participating in a reinsurance contract. On the basis of such
review, as of September 30, 1998, December 31, 1997 and 1996, MEEMIC concluded
that there was no material exposure to uncollectible reinsurance balances
payable to MEEMIC by its reinsurers. MEEMIC has not experienced any material
difficulties in collecting amounts due from reinsurers and believes (i) that its
reinsurance is maintained with financially stable reinsurers and (ii) that
44
<PAGE>
any reinsurance security maintained is adequate to protect its interests.
However, the inability of MEEMIC to collect on its aggregate reinsurance
recoverables, or the inability of MEEMIC's reinsurers to make payments under the
terms of reinsurance treaties (due to insolvency or otherwise), could have a
material adverse effect on MEEMIC's 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.
The statute 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. MEEMIC reviews the actuarial projections provided by
the MCCA to monitor it's solvency. It is estimated that the MCCA currently has
in excess of a $1 billion surplus.
LOSS AND LAE RESERVES
MEEMIC is required by applicable insurance laws and regulations to maintain
reserves for payment of losses and LAE for both reported claims and for claims
incurred but not reported ("IBNR"), arising from policies that have been issued.
These laws and regulations require that provision be made 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 MEEMIC expects 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 LAE is an inherently
uncertain process and does not represent an exact calculation of that liability.
MEEMIC's current reserve policy recognizes this uncertainty by maintaining
reserves at a level providing for the possibility of adverse development
relative to the estimation process. MEEMIC does not discount its 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.
MEEMIC maintains IBNR reserves to provide for future reporting of already
incurred claims and developments on reported claims. The IBNR reserve is
determined by estimating MEEMIC's ultimate liability for both reported and IBNR
claims and then subtracting the case reserves for reported claims.
Each quarter, MEEMIC computes its estimated liability using principles and
procedures applicable to the lines of business written. Such reserves are also
considered annually by MEEMIC's independent auditors in connection with their
audit of MEEMIC's combined financial statements. However, because the
establishment of loss reserves is an inherently uncertain process, there can be
no assurance that losses will not exceed MEEMIC's 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, MEEMIC receives a statement of opinion by its appointed actuary
concerning the adequacy of statutory reserves. The results of these actuarial
studies have consistently indicated that reserves are adequate.
45
<PAGE>
The following table provides a reconciliation of beginning and ending loss
and LAE reserve balances of MEEMIC for the years ended December 31, 1997, 1996
and 1995, as prepared in accordance with GAAP.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Balance, beginning of year...................... $ 80,352,682 $ 71,114,057 $ 69,006,939
Less reinsurance balance recoverable.......... 44,657,000 41,544,000 42,905,000
------------- ------------- -------------
Net balance, beginning of year.......... 35,695,682 29,570,057 26,101,939
Incurred related to:
Current year.................................. 54,053,427 47,600,725 38,217,150
Prior years................................... (6,751,563) (2,728,718) 597,756
------------- ------------- -------------
Total incurred.......................... 47,301,864 44,872,007 38,814,906
Paid related to:
Current year.................................. 30,176,142 25,981,678 21,642,166
Prior years................................... 14,805,826 12,764,704 13,704,622
------------- ------------- -------------
Total paid.............................. 44,981,968 38,746,382 35,346,788
------------- ------------- -------------
Net balance, end of year........................ 38,015,578 35,695,682 29,570,057
Plus reinsurance balances recoverable........... 46,905,000 44,657,000 41,544,000
------------- ------------- -------------
Balance, end of year.................... $ 84,920,578 $ 80,352,682 $ 71,114,057
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The following table shows the development of the net liability for unpaid
losses and LAE from 1988 through 1997 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.
46
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
1988 1989 1990 1991 1992 1993 1994 1995
--------- --------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Liability for unpaid losses and LAE net of
reinsurance recoverable.................. $ 13,618 $ 12,656 $ 15,049 $ 14,820 $ 16,337 $ 19,144 $ 26,102 $ 29,570
Cumulative net paid as of:
End of year................................ 4,980 6,139 8,078 9,510 6,881 11,811 13,705 12,765
Two years later............................ 7,628 9,428 12,460 11,333 13,184 17,814 19,047 19,012
Three years later.......................... 9,442 10,986 14,116 15,315 15,343 19,830 21,833
Four years later........................... 9,951 11,575 15,331 15,981 16,310 20,608
Five years later........................... 10,155 11,991 15,462 16,295 16,721
Six years later............................ 10,484 12,145 15,624 16,486
Seven years later.......................... 10,614 12,253 15,764
Eight years later.......................... 10,702 12,363
Nine years later........................... 10,764
Re-estimated net liability as of:
End of year................................ 11,190 12,738 14,889 17,745 15,220 22,785 26,700 26,843
Two years later............................ 11,160 12,117 16,759 14,750 17,996 23,138 25,353 25,166
Three years later.......................... 10,987 12,626 15,563 17,131 18,548 22,180 24,547
Four years later........................... 10,934 12,161 16,101 18,258 17,602 21,837
Five years later........................... 10,485 12,454 17,076 17,057 17,561
Six years later............................ 10,900 13,432 16,099 17,153
Seven years later.......................... 11,649 12,567 16,228
Eight years later.......................... 10,927 12,744
Nine years later........................... 11,008
Net cumulative (deficiency) redundancy..... 2,610 (88) (1,179) (2,333) (1,224) (2,693) 1,555 4,404
Gross liability--end of year............... 58,802 69,007 71,114
Reinsurance recoverables................... 39,658 42,905 41,544
--------- --------- ---------
Net liability--end of year................. 19,144 26,102 29,570
--------- --------- ---------
--------- --------- ---------
Gross reestimated liability--latest........ 55,712 60,077 62,954
Reestimated reinsurance
recoverables--latest..................... 33,875 35,530 37,788
--------- --------- ---------
Net reestimated liability--latest.......... 21,837 24,547 25,166
--------- --------- ---------
--------- --------- ---------
Gross Cumulative (deficiency) redundancy... 3,090 8,930 8,160
--------- --------- ---------
--------- --------- ---------
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Liability for unpaid losses and LAE net of
reinsurance recoverable.................. $ 35,696 $ 38,016
Cumulative net paid as of:
End of year................................ 14,806
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................................ 28,944
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..... 6,752
Gross liability--end of year............... 80,353 84,921
Reinsurance recoverables................... 44,657 46,905
--------- ---------
Net liability--end of year................. 35,696 38,016
--------- ---------
--------- ---------
Gross reestimated liability--latest........ 69,940
Reestimated reinsurance
recoverables--latest..................... 40,996
---------
Net reestimated liability--latest.......... 28,944
---------
---------
Gross Cumulative (deficiency) redundancy... 10,413
---------
---------
</TABLE>
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
1988 and 1994-1996 developed positively, or lower than expected. In calendar
years 1990-1993, MEEMIC reserved at the low end of the recommended actuarial
range of estimates. During calendar year 1994, MEEMIC 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 the 1990-1993 calendar
years 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.
47
<PAGE>
INVESTMENTS
All of MEEMIC's investment securities are classified as available for sale
in accordance with SFAS No. 115.
An important component of the operating results of MEEMIC has been the
return on invested assets. MEEMIC's investment objective is to maximize current
yield while maintaining safety of capital together with adequate liquidity for
its insurance operations. As of September 30, 1998, 100% of MEEMIC's investment
portfolio consisted of investment grade fixed income securities and short-term
investments. Approximately 66.8% of MEEMIC's fixed income portfolio were rated
AAA by Standard & Poor's as of September 30, 1998, and the portfolio had an
average credit quality rating of AA. MEEMIC's investments are managed by an
outside investment advisor.
The following table sets forth certain information concerning MEEMIC's
investments. All figures are shown in thousands.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1998 AT DEC. 31, 1997 AT DEC. 31, 1996
---------------------- ---------------------- --------------------
MARKET MARKET MARKET
COST(2) VALUE COST(2) VALUE COST(2) VALUE
---------- ---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Fixed income securities(1)
United States government and government
agencies and authorities................. $ 17,571 $ 17,955 $ 18,067 $ 18,158 $ 18,072 $ 18,111
Obligations of states, municipalities and
political subdivisions................... 47,234 48,885 42,441 43,623 36,680 37,468
Corporate obligations...................... 17,236 17,943 16,127 16,448 13,655 13,828
Collateralized mortgage obligations........ 22,213 22,865 20,261 20,524 13,296 13,191
Asset backed securities.................... 8,996 9,249 8,997 9,027 3,995 4,012
---------- ---------- ---------- ---------- --------- ---------
Total fixed income securities:........... 113,250 116,897 105,893 107,780 85,698 86,610
Preferred stock............................ 1,823 1,993 1,827 1,869 2,365 2,393
---------- ---------- ---------- ---------- --------- ---------
Total.................................... $ 115,073 $ 118,890 $ 107,720 $ 109,649 $ 88,063 $ 89,003
---------- ---------- ---------- ---------- --------- ---------
---------- ---------- ---------- ---------- --------- ---------
</TABLE>
- ------------------------
(1) In the financial statements of MEEMIC, investments are carried at fair value
as established by quoted market prices on secondary markets.
(2) Original cost of equity securities; original cost of fixed income securities
adjusted for amortization of premium and accretion of discount.
The table below sets forth the maturity profile of MEEMIC's combined fixed
maturity investments as of September 30, 1998 (substituting average life for
mortgage-backed securities). All figures are shown in thousands.
<TABLE>
<CAPTION>
AMORTIZED
COST MARKET VALUE(1) PERCENTAGES(2)
---------- --------------- ---------------
<S> <C> <C> <C>
1 year or less....................................................... $ 2,504 $ 2,510 2.1%
More than 1 year through 5 years..................................... 39,941 41,133 34.6
More than 5 years through 10 years................................... 32,842 34,280 28.8
More than 10 years................................................... 8,577 8,853 7.5
Collateralized and asset backed securities(3)........................ 31,209 32,114 27.0
---------- --------------- -----
$ 115,073 $ 118,890 100.0%
---------- --------------- -----
---------- --------------- -----
</TABLE>
- ------------------------
(1) Fixed maturities are carried at market value in the consolidated financial
statements of MEEMIC.
48
<PAGE>
(2) Represents percent of market value for classification as a percent of total
for each portfolio.
(3) 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 of high credit quality 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.
The average duration of MEEMIC's fixed maturity investments, including
collateralized and asset backed securities which are subject to paydown, as of
September 30, 1998, was approximately 2.673 years. As a result, the market value
of MEEMIC's investments may fluctuate significantly in response to changes in
interest rates. In addition, MEEMIC may experience investment losses to the
extent its liquidity needs require the disposition of fixed maturity securities
in unfavorable interest rate environments.
MEEMIC's net investment income and the annualized total rate of return which
includes both income and changes in the market value of securities, for the nine
months ended September 30, 1998 and 1997, and the three years ended December 31,
1997, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------------- ----------------------------------------
1998 1997 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net investment income...................... $ 5,213,292 $ 5,018,459 $ 6,676,783 $ 5,150,035 $ 4,488,017
Annualized total rate of return............ 8.37% 6.56% 6.89% 4.75% 12.16%
</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 a company's financial and operating performance, A. M. Best reviews
MEEMIC's profitability, leverage and liquidity, as well as MEEMIC's book of
business, the adequacy and soundness of it reinsurance, the quality and
estimated market value of its assets, the adequacy of its loss reserves, the
adequacy of its surplus, its capital structure, the experience and competency of
its management and its market presence. No assurance can be given that A. M.
Best will not reduce MEEMIC's current rating in the future. See "Investment
Considerations--A. M. Best Rating."
COMPETITION
The property and casualty insurance market is highly competitive. MEEMIC
competes with stock insurance companies, mutual companies, and other
underwriting organizations. Certain of these competitors have substantially
greater financial, technical and operating resources than MEEMIC. MEEMIC's
ability to compete successfully in their principal markets is dependent upon a
number of factors, many of which (including market and competitive conditions)
are outside MEEMIC's control. The lines of insurance written by MEEMIC are
subject to significant price competition. In addition to price, competition in
the lines of business written by MEEMIC is based on quality of the products,
quality and speed of service (including claims service), financial strength,
ratings, distribution systems and technical expertise.
REGULATION
Insurance companies are subject to supervision and regulation in the states
in which they transact business. Such supervision and regulation relates to
numerous aspects of an insurance company's business and financial condition. The
primary purpose of such supervision and regulation is the protection of
policyholders. The extent of such regulation varies, but generally derives from
state statutes which delegate
49
<PAGE>
regulatory, supervisory and administrative authority to state insurance
departments. Accordingly, the authority of the state insurance departments
includes the establishment of standards of solvency which must be met and
maintained by insurers, the licensing to do business of insurers and agents, the
nature of and limitations on investments, premium rates for property and
casualty insurance, the provisions which insurers must make for current losses
and future liabilities, the deposit of securities for the benefit of
policyholders, the approval of policy forms, notice requirements for the
cancellation of policies and the approval of certain changes in control. State
insurance departments also conduct periodic examinations of the affairs of
insurance companies and require the filing of annual and other reports relating
to the financial condition of insurance companies.
Examinations are regularly conducted by the Bureau every three to five
years. The Bureau's last examination of MEEMIC was as of December 31, 1993.
These examinations did not result in any adjustments to the financial position
of MEEMIC. In addition, there were no substantive qualitative matters indicated
in the examination reports that had a material adverse impact on the operations
of MEEMIC.
In addition to state-imposed insurance laws and regulations, the NAIC has
adopted risk-based capital ("RBC") requirements that require insurance companies
to calculate and report information under a risk-based formula that attempts to
measure statutory capital and surplus needs based on the risks in a company's
mix of products and investment portfolio. Under the formula, a company first
determines its Authorized Control Level risk-based capital ("ACL") by taking
into account (i) the risk with respect to the insurer's assets; (ii) the risk of
adverse insurance experience with respect to the insurer's liabilities and
obligations, (iii) the interest rate risk with respect to the insurer's
business; and (iv) all other business risks and such other relevant risks as are
set forth in the RBC instructions. A company's "Total Adjusted Capital" is the
sum of statutory capital and surplus and such other items as the RBC
instructions may provide. The formula is designed to allow state insurance
regulators to identify potential weakly capitalized companies.
The requirements provide for four different levels of regulatory attention.
The "Company Action Level" is triggered if a company's Total Adjusted Capital is
less than 2.0 times its ACL but greater than or equal to 1.5 times its ACL. At
the Company Action Level, a company must submit a comprehensive plan to the
regulatory authority which discusses proposed corrective actions to improve the
capital position. The "Regulatory Action Level" is triggered if a company's
Total Adjusted Capital is less than 1.5 times but greater than or equal to 1.0
times its ACL. At the Regulatory Action Level, the regulatory authority will
perform a special examination of a company and issue an order specifying
corrective actions that must be followed. The "Authorized Control Level" is
triggered if a company's Total Adjusted Capital is less than 1.0 times but
greater than or equal to 0.7 times its ACL, and the regulatory authority may
take action it deems necessary, including placing a company under regulatory
control. The "Mandatory Control Level" is triggered if a company's Total
Adjusted Capital is less than 0.7 times its ACL, and the regulatory authority is
mandated to place a company under its control. MEEMIC has never failed to exceed
the required levels of capital. There can be no assurance that the capital
requirements applicable to the business of MEEMIC will not increase in the
future. As of December 31, 1997, MEEMIC's ACL was $4,964,615, and the Total
Adjusted Capital was $34,512,849.
The NAIC has also developed a set of eleven financial ratios, referred to as
the Insurance Regulatory Information System (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 eleven 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.
50
<PAGE>
During the last three years, MEEMIC reported no results outside the
acceptable range for any IRIS tests. For year ended 1997, MEEMIC's IRIS ratios
were as follows:
<TABLE>
<CAPTION>
MEEMIC
RESULTS FOR
IRIS RATIOS 1997
- ------------------------------------------------------------------------------------------------------------ -----------
<C> <S> <C>
1 Gross Premiums to Surplus........................................................................ 308.1
1A Net Premium to Surplus........................................................................... 217.3
2 Change in Net Writings........................................................................... 16.7
3 Surplus Aid to Surplus...........................................................................
4 Two-Year Overall Operating Ratio................................................................. 86.0
5 Investment Yield................................................................................. 5.3
6 Change in Surplus................................................................................ 17.5
7 Liabilities to Liquid Assets..................................................................... 69.5
8 Agents' Balances to Surplus......................................................................
9 One-Year Reserve Development to Surplus.......................................................... (20.3)
10 Two-Year Reserve Development to Surplus.......................................................... (18.3)
11 Estimated Current Reserve Deficiency to Surplus.................................................. (19.3)
</TABLE>
The State of Michigan has a guaranty fund law under which insurers doing
business in Michigan can be assessed on the basis of premiums written by the
insurer in order to fund policyholder liabilities of insolvent insurance
companies. Under this law in general, an insurer is subject to assessment,
depending upon its market share of a given line of business, to assist in the
payment of policyholder claims against insolvent insurers. MEEMIC makes accruals
for its portion of assessments related to such insolvency when notified of
assessments by the guaranty associations.
Most states 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. Pursuant to these laws,
the respective insurance departments may examine MEEMIC, MEEMIC Holdings, Inc.
and their respective insurance subsidiaries at any time, require disclosure of
material transactions by MEEMIC and MEEMIC Holdings, Inc. and require prior
approval of certain transactions, such as "extraordinary dividends" from MEEMIC
to MEEMIC Holdings, Inc. Under Michigan law, the maximum dividend that may be
paid by MEEMIC to MEEMIC Holdings, Inc. during any twelve-month period after
notice to, but without prior approval of, the Bureau cannot exceed the greater
of 10% of MEEMIC's statutory surplus as reported on the most recent annual
statement filed with the Michigan Insurance Bureau, or the net income of MEEMIC
for the period covered by such annual statement. As of December 31, 1997,
amounts available for payment of dividends in 1998 without the prior approval of
the Bureau would have been approximately $6.3 million.
All transactions within the holding company system affecting MEEMIC, MEEMIC
Holding, Inc. and their respective subsidiaries must be fair and equitable.
Approval of the applicable insurance commissioner is required prior to
consummation of transactions affecting the control of an insurer. In some
states, including Michigan, the acquisition of 10% or more of the outstanding
capital stock of an insurer or its holding company is presumed to be a change in
control, and is subject to regulatory approval.
LITIGATION
MEEMIC Holdings, Inc. is not currently subject to any material litigation.
As a personal lines insurer, MEEMIC has many routine matters in current
litigation. It is not anticipated that these routine cases will have a material
adverse effect on the financial condition and results of operations of MEEMIC.
EMPLOYEES
As of September 30, 1998, the total number of employees of MEEMIC was 204.
None of the employees are covered by a collective bargaining unit and MEEMIC
believes that employee relations are good.
51
<PAGE>
MANAGEMENT
DIRECTORS
Set forth below is certain information about the directors of MEEMIC
Holdings, Inc. and MEEMIC.
<TABLE>
<CAPTION>
NAME AGE (AT 9/30/98) TERM ENDING*
- ------------------------------------------------ ---------------- ------------
<S> <C> <C>
Victor T. Adamo................................. 50 2000
R. Kevin Clinton................................ 43 2000
Annette E. Flood................................ 39 2001
Thomas E. Hoeg.................................. 44 1999
Lynn M. Kalinowski.............................. 46 2001
James O. Wood................................... 56 1999
</TABLE>
- ------------------------
* Each of these individuals except James Wood has been a director of MEEMIC
since 1997. Mr. Wood became a director of MEEMIC in October 1998. Each of
these individuals has been a director of MEEMIC Holdings, Inc. since October
21, 1998.
The initial board of directors of MEEMIC Holdings, Inc. was appointed.
According to the bylaws of MEEMIC Holdings, Inc., directors shall be elected at
each annual meeting of the shareholders, each to 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 MEEMIC Holdings,
Inc. serves without compensation, but may (i) be reimbursed for actual
reasonable expenses incurred in connection with their duties, and (ii) receive
awards pursuant to MEEMIC Holdings, Inc.'s stock compensation plan (see
"Management--The Stock Compensation Plan").
The members of the board of directors of MEEMIC before the Demutualization
will continue to serve as members of the board of directors of MEEMIC after the
Demutualization until the end of their respective terms. Under the Amended and
Restated Articles of Incorporation of MEEMIC, Directors shall be elected
annually by the sole shareholder of MEEMIC, MEEMIC Holdings, Inc. Directors
shall hold office for a period of one (1) year and shall continue to serve until
their successors are duly elected and qualified. No board fees are provided for
Directors employed by MEEMIC, Professionals, or its subsidiaries. All other
directors are paid an annual $10,000 retainer plus $1,000 per meeting and
out-of-pocket expenses.
Additionally, board of director members may receive (i) awards pursuant to
MEEMIC's stock compensation plan and (ii) incentive plan awards based upon
company performance (see "Management-- Incentive Plan"). For 1997, all board
members, except Mr. Wood (a newly appointed board member), were granted awards
under MEEMIC's incentive plan with individual estimated future payouts upon
vesting of approximately $48,000 (see "Management--The Stock Compensation Plan
and "Management--Incentive Plan").
VICTOR T. ADAMO, ESQ., has been a director of MEEMIC and Chairman of the
Board of Directors since May 1997. Mr. Adamo is the Chief Executive Officer and
a director of Professionals Group, Inc., 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 ("CPCU").
R. KEVIN CLINTON, FCAS, MAAA, 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 Group , Inc. since 1996 and a director of
Professionals, Group, Inc. 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
52
<PAGE>
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., 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, 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, has been a director of MEEMIC since May 1997 and is the
Executive Vice President for the Company. 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, 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. 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.
53
<PAGE>
EXECUTIVE OFFICERS
Set forth below is certain information about the executive officers of
MEEMIC Holdings, Inc. and MEEMIC.
<TABLE>
<CAPTION>
POSITION WITH
NAME AGE MEEMIC HOLDINGS, INC. POSITION WITH MEEMIC
- ----------------------- --- ------------------------ ------------------------
<S> <C> <C> <C>
R. Kevin Clinton....... 43 President and Chief President and Chief
Executive Officer Executive Officer
Harold F. Eppley....... 50 -- Vice President--Claims
Annette E. Flood....... 39 Secretary Secretary
Lynn M. Kalinowski..... 46 -- Executive Vice President
M. Kay Rickenbaugh..... 53 -- Senior Vice President,
Chief Operating Officer
and Assistant
Secretary
William P. Sabados..... 48 -- Vice President and Chief
Information Officer
Christine C. Schmitt... 41 Treasurer and Chief Senior Vice President,
Financial Officer Treasurer and Chief
Financial Officer
Judith P. Walczak...... 59 -- Vice
President--Underwriting
</TABLE>
The executive officers of MEEMIC Holdings, Inc. 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.
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.
54
<PAGE>
MANAGEMENT REMUNERATION
The executive officers of MEEMIC Holdings, Inc. have received no
compensation from MEEMIC Holdings, Inc. 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 $100,000
in 1997.
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
------------------------------------------------
AWARDS(2) PAYOUTS
ANNUAL COMPENSATION --------------------- ---------
------------------------------------- RESTRICTED INCENTIVE
OTHER ANNUAL STOCK OPTIONS/ PLAN ALL OTHER
SALARY BONUS COMPENSATION AWARDS SARS PAYOUT COMPENSATION(3)
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($) ($) ($) ($)
- -------------------------------- ---- -------- ------- ------------ ---------- -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
R. Kevin Clinton(1) ............ 1997 222,021 150,000 -- -- 40,000 -- $174,848
President and Chief Executive 1996 217,861 18,906 -- 57,820 -- -- $29,368
Officer 1995 209,080 18,229 -- 10,445 -- -- $21,116
Lynn M. Kalinowski ............. 1997 $167,218 $37,600 -- -- -- -- $86,221
Executive Vice President 1996 $160,248 $50,000 -- -- -- $47,098 $21,868
1995 $159,008 $30,000 -- -- -- -- $34,439
M. Kay Rickenbaugh ............. 1997 $136,256 $45,693 -- -- -- -- $80,780
Senior Vice President and 1996 $133,900 $40,000 -- -- -- $47,098 $17,452
Chief Operating Officer 1995 $121,934 $30,000 -- -- -- -- $64,493
Christine C. Schmitt ........... 1997 $101,228 $32,640 -- -- -- -- $76,947
Senior Vice President, 1996 $ 97,335 $40,000 -- -- -- $47,098 $11,710
Treasurer and Chief Financial 1995 $ 95,130 $30,000 -- -- -- -- $18,626
Officer
William P. Sabados(1) .......... 1997 90,791 30,000 -- -- -- -- $82,055
Vice President and Chief 1996 -- -- -- -- -- -- $ 0
Information Officer 1995 -- -- -- -- -- -- $ 0
</TABLE>
- ------------------------------
(1) Messrs. Clinton's and Sabados' compensation as officers of MEEMIC is paid by
ProNational, a wholly-owned subsidiary of Professionals Group, Inc.,
pursuant to the Management Services Agreement with Professionals Group, Inc.
As such, compensation and participation in incentive plans are pursuant to
compensation decisions and incentive plans of ProNational and not of MEEMIC
or the Company. 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 Demutualization 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 PICOM and are for
shares of, or options for shares of, the stock of Professionals Group, Inc.
and not of MEEMIC or the Company.
(3) Amounts shown for 1997, 1996 and 1995 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,
except that in 1995 relocation benefits of $45,247 were received by Ms.
Rickenbaugh and in 1997 relocation benefits of $22,055 were received by Mr.
Sabados. Amounts included for Mr. Clinton consist of the following:
1997--matching contribution to purchases of Professionals Group, Inc. common
stock under the Professionals Group Stock Purchase Plan of $7,500 and
contributions under the PICOM pension plans for the benefit of Mr. Clinton
of $23,348; 1996--matching contribution to purchases of Professionals Group,
Inc. common stock under the Professionals Group Stock Purchase Plan of
$7,500 and contributions under the PICOM pension plans for the benefit of
Mr. Clinton of $21,868; and 1995--matching contribution to purchases of
Professionals Group, Inc. common stock under the Professionals Group Stock
Purchase Plan of $2,500 and contributions under the PICOM pension plans for
the benefit of Mr. Clinton of $18,616. Additionally, amounts in this column
include awards made to each of the officers pursuant to MEEMIC's incentive
plan for fiscal year ending 1997. The amount of each incentive plan award is
set forth under "Management--Incentive Plan." Awards made pursuant to the
incentive plan do not vest until December 31, 2001.
INCENTIVE PLAN
The executive officers of MEEMIC Holdings, Inc. have not been and will not
be awarded any compensation pursuant to MEEMICS's Amended and Restated Incentive
Plan dated December 31, 1997).
55
<PAGE>
The incentive plan was intended 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. MEEMIC's incentive plan,
however, provides for incentive awards to be granted to certain 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 certain 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 other awards will be made under the
incentive plan after the Demutualization.
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
the 1997 fiscal year.
<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, 2001 $ 144,000
Lynn M. Kalinowski......... $ 125 December 31, 2001 $ 60,000
M. Kay Rickenbaugh......... $ 125 December 31, 2001 $ 60,000
Christine C. Schmitt....... $ 125 December 31, 2001 $ 60,000
William P. Sabados......... $ 125 December 31, 2001 $ 60,000
</TABLE>
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
Demutualization. Such shares would be held by MEEMIC under the terms of the
incentive plan until vested and paid out under the terms of the plan.
EMPLOYEE CONTRACTS
MEEMIC Holdings, Inc. does not currently have any employment contracts,
termination agreements or change in control agreements with any executive
officers. MEEMIC, however, has a severance/benefits 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, MEEMIC Holdings, Inc.'s Board of Directors adopted the
Stock Compensation Plan. In October 1998, the stock compensation plan was
approved on by the sole shareholder of MEEMIC Holdings, Inc.
The purpose of the stock compensation plan is to provide additional
incentive to officers, directors and employees of MEEMIC Holdings, Inc. and
MEEMIC by facilitating their purchase of stock in MEEMIC Holdings, Inc. Pursuant
to the stock compensation plan, 300,000 shares are being reserved for future
issuance by MEEMIC Holdings, Inc., in the form of newly-issued or treasury
shares, 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.
56
<PAGE>
The stock compensation plan may be administered by either (i) the board of
directors of MEEMIC Holdings, Inc. or (ii) a committee of at least two directors
of MEEMIC Holdings, Inc. who are designated by the board of directors and who
are "non-employee directors" within the meaning of the federal securities laws
(the "Compensation Committee"). It is contemplated that the board of directors
of MEEMIC Holdings, Inc. will initially administer the stock compensation plan.
On the Effective Date of the Demutualization, 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 officers identified in the table on page 53 as a class, 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 MEEMIC Holdings, Inc. (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 both
incentive stock options (options that afford favorable tax treatment to
recipients upon compliance with certain restrictions pursuant to Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code"), and that do not
result in tax deductions to MEEMIC Holdings, Inc. unless participants fail to
comply with Section 422 of the Code) ("ISOs")) and options that do not so
qualify ("Non-ISOs"). The exercise price for initial Options granted under the
stock compensation plan will be the price at which the Common Stock is sold in
this offering. Options granted at the time of the implementation of the stock
compensation plan are expected to vest and become exercisable over a five year
period after the date such options are granted, at the rate of twenty percent
per year.
MEEMIC Holdings, Inc. will receive no monetary consideration for the
granting of awards under the stock compensation plan, and will receive no
monetary consideration other than the option exercise price for each share
issued to optionees upon the exercise of options. The option exercise price may
be paid in cash or Common Stock. The exercise options will be subject to such
terms and conditions established by the Compensation Committee as are set forth
in a written agreement between the Compensation Committee and the optionee (to
be entered into at the time an award is granted).
Although directors and officers of MEEMIC Holdings, Inc. generally would be
prohibited under the federal securities laws from profiting from certain
purchases and sales of shares of Common Stock within any six-month period, they
generally will not be prohibited by such laws from exercising options and
immediately selling the shares they receive. As a result, MEEMIC Holdings,
Inc.'s directors and officers generally will be permitted to benefit in the
event the market price for the shares exceeds the exercise price of their
options, without being subject to loss in the event the market price falls below
the exercise prices.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Neither MEEMIC nor MEEMIC Holdings, Inc. has a compensation committee.
Rather, decisions pertaining to the compensation of executive officers are made
solely by each company's respective board of directors. Decisions regarding
compensation are made by the board of directors after receiving input regarding
individual performance from various sources within the company, and through
reviewing salary survey information for the insurance industry.
INDEMNIFICATION AND LIMITATION OF LIABILITY MATTERS
MEEMIC Holdings, Inc.'s bylaws require MEEMIC Holdings, Inc. to indemnify
its directors, officers, employees and agents to the fullest extent permitted by
law, for expenses, judgments, penalties, fines and amounts paid in settlement in
connection with any pending, threatened or completed action, suit or proceeding
(other than by or in the right of MEEMIC Holdings, Inc.), to which any such
person was made a party by reason of the fact that he or she was acting in such
capacity for MEEMIC Holdings, Inc. or was serving as such for another
corporation or enterprise at MEEMIC Holdings, Inc.'s request. Such
indemnification will be provided if such persons acted in good faith and in a
manner they reasonably believed to be in or not opposed to the best interests of
MEEMIC Holdings, Inc. or its shareholders, or in respect to a
57
<PAGE>
criminal proceeding, had no reasonable cause to believe such conduct was
unlawful. In actions by or in the right of MEEMIC Holdings, Inc.,
indemnification is limited to expenses, including attorney fees, and amounts
paid in settlement, if the officer or director acted in good faith and in a
manner he or she reasonably believed to be in or not opposed to the best
interests of MEEMIC Holdings, Inc., or its shareholders.
The Michigan Business Corporation Act permits Michigan corporations to limit
the personal liability of directors for a breach of their fiduciary duty. MEEMIC
Holdings, Inc.'s Articles of Incorporation limit liability to the maximum extent
permitted by law. MEEMIC Holdings, Inc.'s Articles of Incorporation provide that
a director of MEEMIC Holdings, Inc. shall not be personally liable to MEEMIC
Holdings, Inc. or its shareholders for monetary damages for breach of the
director's fiduciary duty. However, they do not eliminate or limit the liability
of a director for any of the following (i) the amount of a financial benefit
received by a director to which he or she is not entitled; (ii) intentional
infliction of harm on the corporation or its shareholders; (iii) a violation of
Section 551 of the Michigan Business Corporation Act; or (iv) an intentional
criminal act. As a result of the inclusion of such a provision, shareholders of
MEEMIC Holdings, Inc. may be unable to recover monetary 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 injunctive or other equitable relief with respect to such
actions. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
MEEMIC Holdings, Inc. pursuant to the foregoing provisions, or otherwise, MEEMIC
Holdings, Inc. has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
SECURITY OWNERSHIP OF MANAGEMENT
AND CERTAIN SECURITY-HOLDERS
In October 1998 MEEMIC Holdings, Inc. issued one share of Common Stock of
MEEMIC Holdings, Inc. to R. Kevin Clinton for $10.00. No stock of MEEMIC
Holdings, Inc. or MEEMIC is owned by any other officer or director as of the
date hereof. After the this offering, it is expected that Officers and Directors
will own shares of MEEMIC Holdings, Inc. pursuant to exercise of their
subscription rights (see "The Demutualization--Proposed Management Purchases")
and/or granted under the Stock Compensation Plan (see "Management--The Stock
Compensation Plan.")
In connection with this offering, the following officers and directors have
indicated that they intend to purchase the number of shares set forth below.
<TABLE>
<S> <C>
Victor T. Adamo.................................. 22,500
Thomas E. Hoeg................................... 60,000
James O. Wood.................................... 20,000
Annette E. Flood................................. 22,500
R. Kevin Clinton................................. 90,000
Lynn M. Kalinowski............................... 18,500
Christine C. Schmitt............................. 15,000
M. Kay Rickenbaugh............................... 22,500
William P. Sabados............................... 13,000
Judith P. Walczak................................ 5,500
Harold F. Eppley................................. 5,250
----------
294,750
----------
----------
</TABLE>
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<PAGE>
INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
As noted above, Professionals entered into a surplus note transaction with
MEEMIC on April 7, 1997. It is pursuant to this transaction that MEEMIC obtained
$21,500,000 in additional capital for which it issued the surplus note, and that
Messrs. Adamo, Clinton, Hoeg, Kalinowski, McCabe and Ms. Flood were placed on
the board of directors of MEEMIC at that time.
On April 7, 1997, MEEMIC and Professionals entered into the management
services agreement with Professionals to undertake the oversight and/or
performance of certain duties with respect to MEEMIC's insurance operations.
Under the management services agreement, Professionals provides information
system services for MEEMIC and also provides strategic consulting services and
advice as requested by the MEEMIC board of directors with respect to matters
pertaining to MEEMIC and its insurance operations.
Professionals is currently compensated for its services under the management
services agreement by a fee of $2.10 per month for each policy in force on the
first day of the month, up to a maximum of $2,100,000 per year, plus reasonable
out-of-pocket expenses. The total management fees for 1997 were $1,005,480 and
for the nine months ended September 30, 1998, were $1,547,300. The management
services agreement has a ten year term which expires on April 7, 2007, but may
be terminated on 120 days written notice if the surplus note is repaid.
Following the repayment of the surplus note upon the Demutualization, MEEMIC
intends to terminate the management services agreement.
MEEMIC also has a quota share reinsurance Agreement with ProNational,
effective as of July 1, 1997. Under the terms of the quota share reinsurance
agreement, MEEMIC cedes a 40 percent quota share of its net liability resulting
from losses occurring under policies written or renewed during the term of the
agreement to ProNational. By ceding its "net liability," MEEMIC cedes the 40
percent of its actual losses incurred under its policies after reducing such
losses by any other applicable reinsurance recoverables. As compensation for
accepting these losses, MEEMIC pays ProNational 40 percent of its net written
premiums on the policies ceded to ProNational less a ceding commission equal to
MEEMIC's actual underwriting expense ratio. MEEMIC ceded $20,115,000 and
$31,637,585 in earned premium to ProNational for 1997 and through September 30,
1998, respectively. During the same time frame, MEEMIC ceded $12,578,000 and
$12,341,908 in ceded losses and loss adjustment expenses and received ceding
commissions of $6,577,424 for 1997 and $9,491,276 for the first nine months of
1998. The quota share reinsurance agreement will remain continuously in force
until terminated by at least 45 days written notice, and may not be terminated
at any time before repayment of the surplus note. MEEMIC does not intend to
terminate the quota share reinsurance agreement in connection with the
Demutualization. For further information regarding MEEMIC's reinsurance, See
"Business of MEEMIC--Reinsurance Ceded."
THE STANDBY PURCHASE AND OPTION AGREEMENT WITH PROFESSIONALS
Under the terms of the standby purchase and option agreement, Professionals
has the right, but not the obligation, to purchase, commencing on the Effective
Date and continuing for a one year period, up to the number of shares of Common
Stock necessary to assure that, upon exercise of such option, Professionals owns
51% of the outstanding shares of Common Stock of MEEMIC Holdings, Inc.,
determined pursuant to the following formula: (i) .51 multiplied by the number
of outstanding shares of MEEMIC Holdings, Inc. as of the date Professionals
gives notice of the intent to exercise the option; plus (ii) 153,000; less (iii)
the number of shares issued in exchange for the surplus note; less (iv) the
number of shares (if any) purchased by Professionals pursuant to its obligation
to purchase shares not sold in this offering up to 3,097,791 shares less (v) any
other shares owned by Professionals (if any) at the time Professionals gives
notice of intent to exercise the option; (vi) all then divided by .49. Under the
terms of the standby purchase and option agreement, the price of the shares
purchased shall be determined as follows:
(a) If the option is exercised by Professionals within the first 90
calendar days immediately following the Effective Date of the
Demutualization, Professionals shall purchase each share at $14.00. 120
calendar days after the Effective Date, the price per share purchased
pursuant to the
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<PAGE>
option shall be adjusted to be the larger of (i) the average of the fair
market value per share over the 20 calendar day period commencing 70
calendar days after the Effective Date or (ii) $14.00.
(b) If the option is exercised by Professionals after the first 90
calendar days immediately following the Effective Date of the
Demutualization, Professionals shall purchase each share at a price equal to
the larger of (i) the average of the fair market value per share over the 20
calendar day period immediately preceding the exercise date, or (ii) $14.00.
TRANSACTIONS WITH FORMER DIRECTORS
Certain former board members of MEEMIC who resigned in connection with the
September 1997 series of transactions with Professionals, received compensation
or deferred compensation for certain services 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
In this offering MEEMIC Holdings, Inc. is offering for sale up to 4,297,791
shares of no par value Common Stock at a price per share of $10.00. MEEMIC
Holdings, Inc. has authorized 10 million shares of Common Stock. Owners of the
Common Stock are entitled to such dividends as may be declared by the board of
directors out of the assets legally available for that purpose, and are entitled
to one vote per share on all matters submitted to a vote of the shareholders of
MEEMIC Holdings, Inc. The holders of shares of Common Stock do not have
cumulative voting rights and therefore the holders of more than fifty (50%)
percent of the shares voting for the election of directors can elect all of the
Directors and the remaining holders will not be able to elect any directors. The
holders of MEEMIC Holdings, Inc.'s Common Stock have no preemptive rights or
other rights to subscribe for additional shares of Common Stock. There are no
conversion rights, redemption rights or sinking fund provisions with respect to
the Common Stock. On liquidation, dissolution or winding up of MEEMIC Holdings,
Inc., the holders of Common Stock are entitled to receive pro rata the net
assets of MEEMIC Holdings, Inc. remaining after the payment of all creditors and
the holders of any senior securities.
The Common Stock, upon issuance against full payment of the purchase price
therefor, will be fully paid and nonassessable. Chase Mellon Shareholder
Services, L.L.C. will act as Transfer Agent and Registrar for the Stock.
LIMITATION ON RESALES
The Common Stock issued in the Demutualization to Eligible Policyholders and
Officers and Directors will be freely transferable under the Securities Act of
1933, as amended (the "1933 Act"); provided, however, that shares issued to
Officers and Directors would be restricted as to transfer for a period of one
year from the Effective Date pursuant to the provisions of the Act. Shares of
Common Stock issued to Officers and Directors will bear a legend giving
appropriate notice of these restrictions and MEEMIC Holdings, Inc. 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 with respect to restricted stock shall be
subject to the same restriction.
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<PAGE>
CERTAIN RESTRICTIONS ON ACQUISITION OF AND BUSINESS
COMBINATIONS BY MEEMIC HOLDINGS, INC.
GENERAL
Michigan law contains certain provisions applicable to MEEMIC Holdings, Inc.
that may, in conjunction with certain provisions of the Articles of
Incorporation of MEEMIC Holdings, Inc., have the effect of impeding a change of
control of MEEMIC Holdings, Inc., other than certain permitted transactions with
Professionals. With respect to these transactions, minority shareholder
protection provisions are included in the Articles of Incorporation of MEEMIC
Holdings, Inc. 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 discussion includes a general summary of certain provisions of
the Articles of Incorporation of MEEMIC Holdings, Inc. relating to these
provisions. The following descriptions are necessarily general and reference
should be made to the Michigan Business Corporation Act and the Articles of
Incorporation of MEEMIC Holdings, Inc.
Chapter 7A of the Michigan Business Corporation Act, as amended ("Chapter
7A") contains provisions which generally require that business combinations (as
defined therein) between a Michigan corporation which is subject to Chapter 7A
and a beneficial owner of 10% or more of the voting power of such corporation
(an "Interested Shareholder") generally requires an advisory statement from the
board of directors and approval by the affirmative vote of both (i) not less
than 90% of the votes of each class of stock entitled to be cast by the
shareholders of the corporation and (ii) not less than 2/3 of the votes of each
class of stock entitled to be cast by the shareholders of the corporation other
than voting shares beneficially owned by the interested shareholder party to the
business combination. Such 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 certain fairness standards,
certain other conditions are met and the 10% owner has been such for at least
five years. MEEMIC Holdings, Inc. will be subject to the provisions of Chapter
7A subject to the exemptions described below.
Chapter 7B of the Michigan Business Corporation Act, as amended ("Chapter
7B") contains provisions which generally provide that shares of stock acquired
in control share acquisitions ("Contract Shares") are entitled to voting rights
only after such rights are granted by resolution approved by (i) a majority of
the votes cast by the holders of each class of stock entitled to be cast, and
(ii) a majority of the votes cast by the holders of each class of stock entitled
to be cast, excluding all interested shares (as defined in Chapter 7B). Control
Shares are 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. If a
company's articles of incorporation or bylaws so provide, Control Shares
acquired in a Control Share acquisition with respect to which no acquiring
person statement has been filed may be redeemed at "fair value" by the
corporation at any time during the period ending 60 days after the last Control
Share acquisition. In addition, if a company's articles of incorporation or
bylaws so provide, Control Shares may be redeemed at fair value after an
acquiring person statement has been filed and after the meeting at which the
voting rights of the Control Shares are submitted to shareholders if the Control
Shares are not accorded full voting rights. In the event Control Shares acquired
in a Control Share acquisition are accorded full voting rights and the acquiring
person has acquired a majority of all voting power of the corporation, the
shareholders of the corporation, other than the acquiring person, have
dissenters' rights. Fair value means a value not less than the highest price
paid per share by the acquiring person in the Control Share acquisition.
Both the plan of conversion and the standby purchase and option agreement
contemplate a number of transactions between MEEMIC Holdings, Inc. and
Professionals, which would otherwise be affected by the
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<PAGE>
provisions of Chapter 7A and Chapter 7B. Therefore, as required by the Articles
of Incorporation of MEEMIC Holdings, Inc., the board of directors of MEEMIC
Holdings, Inc. adopted an irrevocable resolution (the "Irrevocable Resolution")
providing (i) that Chapter 7A shall not apply to either (A) any of the
transactions contemplated by the plan of conversion and the standby purchase and
option agreement (all of such transactions being the "MEEMIC Transactions"), or
(B) any business combination (as defined in Chapter 7A) of MEEMIC Holdings,
Inc., or any subsidiary of MEEMIC Holdings, Inc., with Professionals or any
direct or indirect wholly-owned subsidiary of Professionals (any such business
combination being a "Professionals Group Combination"), and (ii) that the MEEMIC
Transactions and any and each Professionals Group Combination shall be exempt
from Chapter 7A.
The Articles of Incorporation of MEEMIC Holdings, Inc. provide that Chapter
7B shall not apply to any control share acquisitions of shares of the
corporation (including, without limitation, the MEEMIC Transactions and any and
each Professionals Group Combination).
PROTECTION OF MINORITY INTERESTS
Notwithstanding the foregoing, the Articles of Incorporation of MEEMIC
Holdings, Inc. provide specific protections of minority interests. The Articles
of Incorporation provide that after the Demutualization until the earlier of (a)
the date which is twelve months following the date on which Professionals ceases
to be the beneficial owner (as defined in Chapter 7A), directly or indirectly,
of 50% or more of the outstanding voting shares (as defined in Chapter 7A) of
MEEMIC Holdings, Inc.; or (b) the date on which MEEMIC Holdings, Inc. ceases to
have a class of equity securities subject to section 12 or section 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), the following
provisions of this Section 2 shall apply:
(i) Membership of the board of directors shall include at least two
persons ("Independent Directors"), each of whom meets the requirements of an
independent director under the rules of the NASDAQ Stock Market or of any
securities exchange on which its securities are traded, and who is not, and
during the three years prior to his or her election or appointment to the
board of directors has not been, any of the following:
(x) an officer or director of Professionals;
(y) engaged in any transaction or series of transactions that would
be or would have been required to be disclosed by MEEMIC Holdings, Inc in
a filing under the Securities Act of 1933, as amended, or the Exchange
Act pursuant to Item 404 of Securities and Exchange Commission Regulation
S-K; or
(z) an affiliate (as defined in Chapter 7A), executive officer,
director, general partner, person performing similar functions to an
executive officer, director or general partner or member of the immediate
family of any person that had the status or engaged in a transaction
described in subparagraphs (x) or (y).
(ii) Approval of a Professionals Group Combination which has either a
reasonable likelihood or a purpose of producing, either directly or
indirectly, any of the effects described in subparagraph (iii) below, shall
require, in addition to any requirement of law or of the Articles of
Incorporation, satisfaction of all of the following conditions:
(x) the Professionals Group Combination shall be on terms determined
by a majority of the Independent Directors (or, if there are fewer than
three Independent Directors, by all of the Independent Directors), after
hearing advice from an investment banking firm of recognized regional or
national standing, to be (1) fair to the shareholders of MEEMIC Holdings,
Inc. (other than Professionals, its affiliates or associates (as defined
in Chapter 7A) (the "Minority Shareholders"); and (2) otherwise in the
best interests of MEEMIC Holdings, Inc. and the Minority Shareholders;
and
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<PAGE>
(y) the Professionals Group Combination shall, in addition to any
vote required by law or the Articles of Incorporation, be approved by the
affirmative vote of not less than a majority of the outstanding shares of
each class of voting shares entitled to be cast by the Minority
Shareholders.
(iii) The effects referred to in subparagraph (ii) above are:
(x) causing any class of equity securities (as defined in Chapter
7A) of MEEMIC Holdings, Inc. which is subject to section 12(g) or section
15(d) of the Exchange Act to be held of record by fewer than 300 persons;
or
(y) causing any class of equity securities of MEEMIC Holdings, Inc.
which is either listed on a national securities exchange or authorized to
be quoted on an inter-dealer quotation system of a registered national
securities association to be neither listed on any national securities
exchange nor authorized to be quoted on an inter-dealer quotation system
of any registered national securities association.
(iv) The foregoing provisions do not apply to or prohibit any of the
MEEMIC Transactions or purchases of any equity securities of MEEMIC
Holdings, Inc. by Professionals, or any direct or indirect subsidiary (as
defined in Chapter 7A) of Professionals, that are effected on a national
securities exchange, or an inter-dealer quotation system of a registered
national securities association.
The foregoing provisions of the Articles of Incorporation of MEEMIC
Holdings, Inc. may not be amended or repealed except upon (x) the affirmative
vote of not less than three-quarters of the shares of capital stock of the
corporation issued and outstanding entitled to vote thereon and (y) the
affirmative vote of not less than a majority of the outstanding shares of the
capital stock of the corporation issued and outstanding of each class entitled
to be cast by the Minority Shareholders.
FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following discussion is a summary of federal income tax considerations
relevant to the Demutualization, this Offering and Eligible Policyholders. This
summary does not purport to be a complete analysis of all the potential tax
effects thereof. The discussion is based upon the Internal Revenue Code of 1986,
as amended (the "Code"), existing and proposed Treasury regulations, and
Internal Revenue Service ("IRS") rulings and judicial decisions now in effect,
all of which are subject to change at any time by legislative, judicial or
administrative action. Any such changes could be retroactively applied in a
manner that could adversely affect MEEMIC Holdings, Inc., the Eligible
Policyholder or a holder of the Common Stock. No information or discussion is
provided herein with respect to foreign, state or local tax laws or estate and
gift tax considerations, or non-income tax issues. This information is directed
only to investors who will hold the Common Stock as a "capital asset" within the
meaning of Section 1221 of the Code.
EACH PROSPECTIVE INVESTOR SHOULD CONSULT HIS OR HER OWN TAX ADVISOR
CONCERNING THE TAX CONSEQUENCES OF RECEIVING AND EXERCISING SUBSCRIPTION RIGHTS,
OF HOLDING COMMON STOCK AND ALSO AS TO ANY STATE, LOCAL, FOREIGN OR OTHER TAX
CONSEQUENCES ARISING OUT OF THE DEMUTUALIZATION.
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<PAGE>
MATERIAL TAX EFFECTS TO MEEMIC HOLDINGS, INC.
MEEMIC has obtained an opinion from PricewaterhouseCoopers LLP (the "Tax
Opinion") concerning the material tax effects of the Demutualization and this
offering to Eligible Policyholders, and certain other participants in this
offering. The Tax Opinion states, among other things, that the Demutualization
of MEEMIC from a mutual to stock form of corporation should constitute a
reorganization within the meaning of Section 368(a)(1)(E) of the Code, and as
such, no gain or loss should be recognized by MEEMIC as a result of the
Demutualization. The Tax Opinion further states that (i) MEEMIC Holdings, Inc.
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 MEEMIC
Holdings, Inc. on the receipt of cash or other property in exchange for its
stock, (iii) MEEMIC Holdings, Inc. should have a basis in the stock of MEEMIC
equal to the amount paid therefor, (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.
The Tax Opinion and the position of MEEMIC Holdings, Inc. is based upon
various published and unpublished rulings of the IRS involving the conversion of
certain mutual insurance and savings and loan companies to stock companies,
which rulings are not binding precedent and which are subject to change at any
time by legislative, judicial or administrative action. Any such changes could
be retroactively applied in a manner that could adversely affect MEEMIC
Holdings, Inc., the Eligible Policyholders, or a holder of Common Stock.
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 liquidation surplus of MEEMIC to MEEMIC
Holdings, Inc. 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.
The Tax Opinion and the position of MEEMIC Holdings, Inc. is based upon
various published and unpublished rulings of the IRS involving the conversion of
certain mutual insurance and savings and loan companies to stock companies,
which rulings are not binding precedent and which are subject to change at any
time by legislative, judicial or administrative action. Any such changes could
be retroactively applied in a manner that could adversely affect MEEMIC
Holdings, Inc., the Eligible Policyholders, or a holder of Common Stock.
In the opinion of ABN AMRO, the subscription rights do not have any 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. Nevertheless, Eligible Policyholders are
encouraged to consult with their tax advisors about the tax consequences of the
Demutualization and this offering.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE DOES NOT PURPORT TO
CONSIDER ALL ASPECTS OF FEDERAL INCOME TAXATION WHICH MAY BE RELEVANT TO EACH
ELIGIBLE POLICYHOLDER THAT MAY BE SUBJECT TO SPECIAL TREATMENT
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<PAGE>
UNDER THE CODE. DUE TO THE INDIVIDUAL NATURE OF TAX CONSEQUENCES, EACH ELIGIBLE
POLICYHOLDER, OFFICER AND DIRECTOR IS URGED TO CONSULT HIS OR HER TAX AND
FINANCIAL ADVISOR AS TO THE EFFECT OF SUCH FEDERAL INCOME TAX CONSEQUENCES ON
HIS OR HER OWN PARTICULAR FACTS AND CIRCUMSTANCES, INCLUDING THE RECEIPT AND
EXERCISE OF SUBSCRIPTION RIGHTS, AND ALSO AS TO ANY STATE, LOCAL, FOREIGN OR
OTHER TAX CONSEQUENCES ARISING OUT OF THE DEMUTUALIZATION.
LEGAL MATTERS
Certain legal matters with respect to the Common Stock being offered hereby
will be passed on for MEEMIC Holdings, Inc. by Dykema Gossett PLLC, Detroit and
Lansing, Michigan. Donald S. Young, a member of Dykema Gossett PLLC, sits on the
board of directors of Professionals Group, Inc.
EXPERTS
The consolidated financial statements of MEEMIC as of December 31, 1997,
1996 and 1995, and the consolidated statements of income, policyholders' surplus
and cash flows for each of the years in the three year period ended December 31,
1997 and the financial statements of the Personal Lines and Life Divisions of
Michigan Educators Insurance Agency, Inc. 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 reports 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 and to the use of its name and statements with respect to it
appearing in this Prospectus.
ABN AMRO has consented to the publication in this Prospectus as to the
Appraisal, the estimated proforma market value of MEEMIC Holdings, Inc., and the
value of the subscription rights to purchase Common Stock, and to the use of its
name and statements with respect to it appearing in this Prospectus.
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AVAILABLE INFORMATION
MEEMIC Holdings, Inc. intends to furnish its stockholders with annual
reports containing audited consolidated financial statements reported upon by
its independent auditors and quarterly reports containing unaudited consolidated
financial information for each of the first three quarters of each fiscal year.
MEEMIC Holdings, Inc. has filed with the Securities and Exchange Commission
(the "Commission") a Registration Statement (together with all amendments,
exhibits, schedules and supplements thereto, the "Registration Statement"), on
Form S-1 (Registration No. 333-66671) under the Securities Act of 1933, as
amended (the "Securities Act") with respect to the shares of Common Stock to be
issued in the Subscription Offering. As permitted by the rules and regulations
of the Commission, this Prospectus, which constitutes a part of the Registration
Statement, does not contain all information set forth in the Registration
Statement. For further information, please refer to the Registration Statement,
including the exhibits. The Registration Statement, including exhibits and
schedules thereto, can be inspected and copied at the Commission's Public
Reference Room, Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, and at the public reference facilities maintained by the Commission
at its regional offices located at Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, Suite 1300,
New York, New York 10048. Copies of such materials can be obtained from the
Commission at prescribed rates from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission
maintains a website that contains all information filed electronically by MEEMIC
Holdings, Inc. The address of the Commission's website is (http://www.sec.gov).
Statements contained in this Prospectus relating to the contents of any contract
or other document referred to herein are not necessarily complete and reference
is made to the copy of such contract or other document filed as an exhibit to
the Registration Statement or such other document, each such statement being
qualified by such reference.
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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, 1997, 1996 and 1995)..................................................................... F-3
CONSOLIDATED STATEMENTS OF INCOME
(For the years ended December 31, 1997, 1996 and 1995)................................................. F-4
CONSOLIDATED STATEMENTS OF POLICYHOLDERS' SURPLUS
(For the years ended December 31, 1997, 1996 and 1995)................................................. F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
(For the years ended December 31, 1997, 1996 and 1995)................................................. F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................................................... F-7
FINANCIAL STATEMENTS (Unaudited)
CONSOLIDATED BALANCE SHEET (Unaudited)
(September 30, 1998)................................................................................... F-21
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(For the nine months ended September 30, 1998 and 1997)................................................ F-22
CONSOLIDATED STATEMENT OF POLICYHOLDERS' SURPLUS (Unaudited)
(For the nine months ended September 30, 1998)......................................................... F-23
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(For the nine months ended September 30, 1998 and 1997)................................................ F-24
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)........................................... F-25
PERSONAL LINES AND LIFE DIVISIONS OF MICHIGAN EDUCATORS INSURANCE AGENCY, INC.
REPORT OF INDEPENDENT ACCOUNTANTS.......................................................................... F-26
FINANCIAL STATEMENTS
BALANCE SHEET
(December 31, 1996 and September 22, 1997 (date of acquisition)) (Unaudited)........................... F-27
STATEMENT OF EARNINGS
(For the year ended December 31, 1996 and the period from January 1, 1997 to September 22, 1997 (date
of acquisition)) (Unaudited)........................................................................... F-28
STATEMENT OF DIVISIONAL DEFICIT
(For the year ended December 31, 1996 and the period from January 1, 1997 to September 22, 1997 (date
of acquisition)) (Unaudited)........................................................................... F-29
STATEMENT OF CASH FLOWS
(For the year ended December 31, 1996 and the period from January 1, 1997 to September 22, 1997 (date
of acquisition)) (Unaudited)........................................................................... F-30
NOTES TO FINANCIAL STATEMENTS............................................................................ F-31
</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 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, 1997, 1996 and 1995, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1997, 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.
/s/ PRICEWATERHOUSECOOPERS LLP
Grand Rapids, Michigan
July 2, 1998
F-2
<PAGE>
MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE
COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
ASSETS
Investments (Note 3):
Fixed maturities available for sale, at fair value............ $ 109,648,780 $ 89,003,591 $ 71,475,323
Short-term investments, at cost, which approximates fair
value....................................................... 1,894,475 1,892,731 1,895,852
-------------- -------------- --------------
Total investments........................................... 111,543,255 90,896,322 73,371,175
Cash............................................................ 2,204,325 2,178,335 3,330,677
Premiums due from policyholders................................. 3,599,622 3,178,342 2,840,383
Amounts recoverable from reinsurers (Note 5).................... 42,027,449 45,115,053 42,637,172
Amounts recoverable from reinsurers, related party (Note 5)..... 5,307,000
Accrued investment income....................................... 1,486,324 1,337,445 1,056,346
Prepaid reinsurance premiums.................................... 6,591,000 5,964,000
Deferred federal income taxes (Note 6).......................... 2,737,658 2,745,208 2,092,348
Property and equipment, at cost, net of accumulated depreciation
(Note 7)...................................................... 1,834,697 1,452,275 1,026,702
Deferred policy acquisition costs (Note 8)...................... 1,604,449 1,981,254 1,997,363
Federal income taxes recoverable................................ 286,534
Intangible assets, net of amortization.......................... 42,149,314
Other assets.................................................... 364,080 299,627 239,863
-------------- -------------- --------------
$ 214,858,173 $ 155,774,861 $ 134,842,563
-------------- -------------- --------------
-------------- -------------- --------------
LIABILITIES AND POLICYHOLDERS' SURPLUS
Liabilities:
Loss and loss adjustment expense reserves (Note 9)............ $ 84,920,578 $ 80,352,682 $ 71,114,057
Unearned premiums............................................. 29,436,092 28,857,142 26,441,476
Surplus note (Note 10)........................................ 21,500,000
Payable related to acquisition (Note 4)....................... 20,500,000
Accrued expenses and other liabilities........................ 6,242,384 4,598,920 3,743,861
Accrued expenses and other liabilities, related party......... 1,845,944
Premiums ceded payable (Note 5)............................... 4,836,000 5,072,000 2,371,000
Premiums ceded payable, related party (Note 5)................ 2,003,000
Federal income taxes payable.................................. 292,603 892,603
-------------- -------------- --------------
Total liabilities............................................... 171,576,601 119,773,347 103,670,394
-------------- -------------- --------------
Policyholders' surplus (Note 13):
Unassigned surplus............................................ 42,009,495 35,380,334 30,129,433
Net unrealized appreciation on investments, net of deferred
federal income tax expense of $655,313, $320,002 and
$537,167 in 1997, 1996 and 1995, respectively............... 1,272,077 621,180 1,042,736
-------------- -------------- --------------
Total policyholders' surplus................................ 43,281,572 36,001,514 31,172,169
-------------- -------------- --------------
Total liabilities and policyholders' surplus................ $ 214,858,173 $ 155,774,861 $ 134,842,563
-------------- -------------- --------------
-------------- -------------- --------------
</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, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- -------------
<S> <C> <C> <C>
Revenues and other income:
Premiums written............................................... $ 106,349,578 $ 104,992,855 $ 98,917,063
Premiums ceded, related party.................................. (20,115,000)
Premiums ceded, other.......................................... (11,234,345) (40,707,302) (41,998,373)
-------------- -------------- -------------
Net premiums written (Note 5)................................ 75,000,233 64,285,553 56,918,690
Increase in unearned premiums, net of prepaid reinsurance
premiums..................................................... (7,169,950) (1,788,666) (938,017)
-------------- -------------- -------------
Net premiums earned.......................................... 67,830,283 62,496,887 55,980,673
Net investment income (Note 3)................................. 6,676,783 5,150,035 4,488,017
Net realized investment gains on fixed maturities.............. 32,214 36,715 27,687
Other income................................................... 840,725 588,729 587,693
-------------- -------------- -------------
Total revenues and other income.............................. 75,380,005 68,272,366 61,084,070
-------------- -------------- -------------
Expenses:
Losses and loss adjustment expenses, net
(including $12,578,000 ceded to related
party in 1997) (Note 9)...................................... 47,301,864 44,872,007 38,814,906
Policy acquisition and other underwriting expenses:
Other policy acquisition and underwriting expenses........... 13,158,221 3,606,118 4,553,986
Policy acquisition expense, related party.................... 9,103,817 12,468,244 11,693,812
Ceding commissions, related party............................ (6,577,424)
Management fees, related party............................... 1,005,480
-------------- -------------- -------------
16,690,094 16,074,362 16,247,798
Interest expense, related party................................ 1,341,835
Amortization expense........................................... 714,395
Other expense.................................................. 30,417 10,791 9,250
-------------- -------------- -------------
Total expenses............................................... 66,078,605 60,957,160 55,071,954
-------------- -------------- -------------
Income from operations before federal income taxes........... 9,301,400 7,315,206 6,012,116
Federal income taxes (Note 6).................................... 2,672,239 2,064,305 1,557,939
-------------- -------------- -------------
Net income (Note 13)......................................... $ 6,629,161 $ 5,250,901 $ 4,454,177
-------------- -------------- -------------
-------------- -------------- -------------
</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
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
NET UNREALIZED
APPRECIATION
(DEPRECIATION)
ON INVESTMENTS
NET OF
DEFERRED TOTAL
UNASSIGNED FEDERAL INCOME POLICYHOLDERS'
SURPLUS TAX EFFECT SURPLUS
------------- -------------- -------------
<S> <C> <C> <C>
Balances, January 1, 1995.......................................... $ 25,675,256 $ (1,329,357) $24,345,899
Net income......................................................... 4,454,177 4,454,177
Net appreciation on investment securities.......................... 2,372,093 2,372,093
------------- -------------- -------------
Balances, December 31, 1995........................................ 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
------------- -------------- -------------
------------- -------------- -------------
</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, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................................ $ 6,629,161 $ 5,250,901 $ 4,454,177
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................... 1,359,541 540,268 506,170
Realized gains on investments................................... (32,214) (36,715) (27,687)
Net accretion of discount on investments........................ 99,191 96,833 152,055
Deferred federal income taxes................................... (327,761) (435,695) (742,061)
Changes in assets and liabilities:
Premiums due from policyholders............................... (421,280) (337,959) (39,522)
Amounts due from reinsurers................................... (452,396) 223,119 (1,029,048)
Accrued investment income..................................... (148,879) (281,099) (121,389)
Prepaid reinsurance premiums.................................. 6,591,000 (627,000) (509,000)
Deferred policy acquisition costs............................. 376,805 16,109 414,106
Other assets.................................................. (64,453) (59,764) (23,257)
Loss and loss adjustment expense reserves..................... 4,567,896 9,238,625 2,107,118
Unearned premiums............................................. 578,950 2,415,666 1,447,017
Accrued expenses and other liabilities........................ 3,489,408 855,059 142,577
Federal income taxes payable.................................. (600,000) 1,179,137 (100,000)
------------- ------------- -------------
Net cash provided by operating activities................... 21,644,969 18,037,485 6,631,256
------------- ------------- -------------
Cash flows from investing activities:
Purchases of short-term investments............................... (1,894,475) (1,892,731) (1,895,852)
Proceeds from sale or maturity of short-term investments.......... 1,892,731 1,895,852 1,903,255
Proceeds from maturity of securities available for sale........... 15,355,796 8,934,651 6,661,231
Purchases of securities available for sale........................ (35,081,754) (27,161,758) (12,212,032)
Proceeds from sales of property and equipment..................... 107,532
Purchases of property and equipment............................... (1,135,100) (965,841) (319,772)
Cash paid for acquired company, net............................... (22,363,709)
------------- ------------- -------------
Net cash used in investing activities....................... (43,118,979) (19,189,827) (5,863,170)
------------- ------------- -------------
Cash flows from financing activities, issuance of surplus note...... 21,500,000
------------- ------------- -------------
Net increase (decrease) in cash..................................... 25,990 (1,152,342) 768,086
Cash, beginning of year............................................. 2,178,335 3,330,677 2,562,591
------------- ------------- -------------
Cash, end of year................................................... $ 2,204,325 $ 2,178,335 $ 3,330,677
------------- ------------- -------------
------------- ------------- -------------
Supplemental disclosure of cash flow information, federal income
taxes paid........................................................ $ 3,200,000 $ 1,320,863 $ 2,400,000
------------- ------------- -------------
------------- ------------- -------------
Supplemental disclosure of noncash transaction:
In connection with the acquisition entered into during 1997, the
Company assumed a liability for the deferred portion of the
purchase price equal to $20,500,000 as described in Note 4.
</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 writes 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 4).
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the dates of the balance sheets and revenues and expenses for
the periods then ended. Actual results may differ from those estimates.
The most significant estimates that are susceptible to significant change in
the near term relate to the determination of the loss 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 13
for the effect of such differences). All material intercompany balances and
transactions have been eliminated.
b. INVESTMENTS: At December 31, 1997, 1996 and 1995, 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 1997, 1996 or 1995 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 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.
F-7
<PAGE>
MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE
COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
c. REVENUE RECOGNITION: Insurance premium income is recognized on a daily
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. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES: Loss and loss adjustment
expense reserves represent the accumulation of individual case estimates for
reported losses and loss adjustment expenses 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 loss 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, $949,000 and $1,185,000 at December 31,
1997, 1996 and 1995, 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
$714,395 at December 31, 1997.
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.
F-8
<PAGE>
MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE
COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS:
A summary of amortized cost, gross unrealized gains and losses and estimated
fair value of investments in securities as of December 31, 1997, 1996 and 1995,
follows:
<TABLE>
<CAPTION>
1997
-----------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED FAIR
AMORTIZED COST GAINS LOSSES VALUE
-------------- ------------ ------------- --------------
<S> <C> <C> <C> <C>
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>
<TABLE>
<CAPTION>
1996
-----------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED FAIR
AMORTIZED COST GAINS LOSSES VALUE
-------------- ------------ ------------- --------------
<S> <C> <C> <C> <C>
Fixed maturities available for sale:
U. S. Treasury securities and obligations of
U. S. government corporations and agencies..... $ 18,071,633 $ 106,736 $ 67,734 $ 18,110,635
Debt securities issued by states of the United
States and political subdivisions of the
states......................................... 36,680,107 792,926 4,790 37,468,243
Corporate debt securities........................ 13,654,662 234,887 61,275 13,828,274
Mortgage-backed securities....................... 13,296,398 47,764 153,134 13,191,028
Other asset-backed securities.................... 3,995,039 17,381 4,012,420
Redeemable preferred stocks...................... 2,364,570 46,046 17,625 2,392,991
-------------- ------------ ------------- --------------
Total.......................................... $ 88,062,409 $ 1,245,740 $ 304,558 $ 89,003,591
-------------- ------------ ------------- --------------
-------------- ------------ ------------- --------------
</TABLE>
F-9
<PAGE>
MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE
COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS: (CONTINUED)
<TABLE>
<CAPTION>
1995
-----------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED FAIR
AMORTIZED COST GAINS LOSSES VALUE
-------------- ------------ ------------- --------------
<S> <C> <C> <C> <C>
Fixed maturities available for sale:
U. S. Treasury securities and obligations of
U. S. government corporations and agencies..... $ 17,093,792 $ 348,311 $ 2,103 $ 17,440,000
Debt securities issued by states of the United
States and political subdivisions of the
states......................................... 27,096,417 861,083 27,957,500
Corporate debt securities........................ 9,019,237 313,671 11,723 9,321,185
Mortgage-backed securities:...................... 12,243,009 12,243,009
Other asset-backed securities.................... 2,057,602 2,057,602
Redeemable preferred stocks...................... 2,385,363 89,414 18,750 2,456,027
-------------- ------------ ------------- --------------
Total.......................................... $ 69,895,420 $ 1,612,479 $ 32,576 $ 71,475,323
-------------- ------------ ------------- --------------
-------------- ------------ ------------- --------------
</TABLE>
The amortized cost and estimated fair value of fixed maturities at December
31, 1997, 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...................................... $ 7,606,616 $ 7,615,879
Due after one year through five years........................ 38,935,938 39,627,494
Due after five years through ten years....................... 25,490,684 26,233,510
Due after ten years.......................................... 4,602,245 4,751,766
-------------- --------------
76,635,483 78,228,649
Mortgage-backed securities:
Government................................................. 20,261,324 20,524,310
Other...................................................... 4,024,503 4,037,600
Other asset-backed securities................................ 4,972,723 4,989,560
Redeemable preferred stocks.................................. 1,827,357 1,868,661
-------------- --------------
Total.................................................... $ 107,721,390 $ 109,648,780
-------------- --------------
-------------- --------------
</TABLE>
F-10
<PAGE>
MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE
COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS: (CONTINUED)
In 1997, 1996 and 1995, the Company did not have any voluntary sales of
fixed maturity securities. A summary of the sources of net investment income
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Fixed maturities.................................... $ 5,794,546 $ 4,852,615 $ 4,324,439
Short-term investments and cash..................... 976,416 440,345 381,431
Other investment assets............................. 195,245 58,536
------------ ------------ ------------
Total investment income......................... 6,966,207 5,351,496 4,705,870
Less investment expenses............................ 289,424 201,461 217,853
------------ ------------ ------------
Net investment income........................... $ 6,676,783 $ 5,150,035 $ 4,488,017
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Increases (decreases) in net unrealized gains (losses) of fixed maturities
were $986,208, ($638,721) and $3,594,081 at December 31, 1997, 1996 and 1995,
respectively.
At December 31, 1997, 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.
4. RELATED PARTY TRANSACTIONS:
Effective April 7, 1997, Professionals Insurance Company Management Group
("Professionals Group"), which is the parent of PICOM Insurance Company
("PICOM") signed a definitive agreement with the Company whereby:
- Nominees of Professionals Group were elected to all six positions on the
MEEMIC Board of Directors;
- PICOM purchased a $21.5 million surplus note from MEEMIC (Note 10);
- Effective July 1, 1997 PICOM began reinsuring 40 percent of MEEMIC's net
retained premiums on a quota share basis (Note 5).
In 1997, Professionals Group also provided MEEMIC with information system
services and certain consulting services under a Management Services Agreement.
For 1997, fees for such services totaling $1,005,480 were included in other
underwriting expenses, $504,109 of which was payable at December 31, 1997.
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
permiums 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
F-11
<PAGE>
MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE
COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. RELATED PARTY TRANSACTIONS: (CONTINUED)
demutualization, the guaranteed minimum payment may be accelerated at the 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% at the time of the option exercise. If the acelerated payment
option is exercised, the impact would be recorded as an extraordinary item
related to the early extinguishment of debt.
The following table sets forth the unaudited pro forma results of operations
for the year ended December 31, 1997 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.
<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>
5. 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.
F-12
<PAGE>
MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE
COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. REINSURANCE: (CONTINUED)
The Company has various excess of loss and quota share reinsurance
agreements. As of December 31, 1997, 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.
At December 31, 1997, amounts recoverable from reinsurers were as follows:
<TABLE>
<CAPTION>
AMOUNTS
RECOVERABLE FROM
REINSURERS
----------------
<S> <C>
Michigan Catastrophic Claims Association.................................... $ 34,065,000
American Reinsurance Company................................................ 5,508,000
Continental Casualty Company................................................ 2,185,000
Other....................................................................... 269,449
----------------
42,027,449
PICOM Insurance Company, related party...................................... 5,307,000
----------------
$ 47,334,449
----------------
----------------
</TABLE>
Amounts due from reinsurers consisted of amounts related to:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Paid losses and loss adjustment expenses........ $ 429,449 $ 458,053 $ 1,093,172
Unpaid losses and loss adjustment expenses...... 46,905,000 44,657,000 41,544,000
------------- ------------- -------------
Amounts recoverable from reinsurers............. 47,334,449 45,115,053 42,637,172
Premiums ceded payable.......................... (4,836,000) (5,072,000) (2,371,000)
------------- ------------- -------------
Premiums ceded payable, related party (2,003,000)
$ 40,495,449 $ 40,043,053 $ 40,266,172
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
Premiums earned and losses and loss adjustment expenses are net of the
following reinsurance ceded amounts:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Premiums earned................................. $ 37,939,925 $ 40,080,646 $ 41,489,384
Losses and loss adjustment expenses............. 22,741,000 23,227,000 18,439,000
</TABLE>
F-13
<PAGE>
MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE
COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. REINSURANCE: (CONTINUED)
Effective July 1, 1997, the Company entered into a coinsurance treaty with
PICOM to cede 40 percent of its net retained premiums on a quota share basis.
Ceding commissions were $6,577,000 in 1997. A summary of reinsurance amounts,
which are included above, that were ceded to PICOM for 1997 follows:
<TABLE>
<S> <C>
Premiums earned................................................ $20,115,000
Losses and loss adjustment expenses............................ 12,578,000
</TABLE>
6. 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,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Current............................................. $ 3,000,000 $ 2,500,000 $ 2,300,000
Deferred............................................ (327,761) (435,695) (742,061)
------------ ------------ ------------
$ 2,672,239 $ 2,064,305 $ 1,557,939
------------ ------------ ------------
------------ ------------ ------------
</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, 1997, 1996 and 1995, the reasons
for these differences, and the tax effects thereof, are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Expected tax expense................................ $ 3,162,476 $ 2,487,170 $ 2,044,119
Dividends received deduction........................ (34,566) (23,222) (17,855)
Tax-exempt interest................................. (596,986) (485,978) (435,687)
Other, net.......................................... 141,315 86,335 (32,638)
------------ ------------ ------------
Actual tax expense.................................. $ 2,672,239 $ 2,064,305 $ 1,557,939
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-14
<PAGE>
MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE
COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. 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,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Deferred federal income tax assets arising from:
Loss and loss adjustment expense reserves......... $ 1,326,019 $ 1,832,807 $ 1,602,530
Unearned premium reserves......................... 2,001,654 1,514,099 1,392,468
Accruals for fringe benefits...................... 456,481 248,157 234,891
Advanced premiums................................. 105,654 91,376 82,845
Other, net........................................ 108,398 80,183 30,680
------------ ------------ ------------
Total deferred federal income tax assets........ 3,998,206 3,766,622 3,343,414
------------ ------------ ------------
Deferred federal income tax liabilities arising
from:
Deferred policy acquisition costs................. 545,513 673,626 679,103
Unrealized gains on investments................... 655,313 320,002 537,167
Salvage and subrogation recoverable............... 25,118 24,199 30,222
Other............................................. 34,604 3,587 4,574
------------ ------------ ------------
Total deferred federal income tax liabilities... 1,260,548 1,021,414 1,251,066
------------ ------------ ------------
Net deferred federal income taxes............... $ 2,737,658 $ 2,745,208 $ 2,092,348
------------ ------------ ------------
------------ ------------ ------------
</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 1997, 1996 and 1995,
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.
7. PROPERTY AND EQUIPMENT:
At December 31, 1997, 1996 and 1995, property and equipment consisted of the
following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Data processing equipment, including software....... $ 2,734,598 $ 2,029,844 $ 1,166,184
Furniture, fixtures and equipment................... 2,086,340 1,940,189 2,115,052
------------ ------------ ------------
4,820,938 3,970,033 3,281,236
Accumulated depreciation............................ 2,986,241 2,517,758 2,254,534
------------ ------------ ------------
Total property and equipment.................... $ 1,834,697 $ 1,452,275 $ 1,026,702
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-15
<PAGE>
MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE
COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. DEFERRED POLICY ACQUISITION COSTS:
Changes in deferred policy acquisition costs are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Net asset balance, beginning of year............ $ 1,981,254 $ 1,997,363 $ 2,411,469
------------- ------------- -------------
Amounts deferred:
Commissions to agents......................... $ 12,702,913 $ 12,468,244 $ 11,693,812
Ceding commission income...................... 8,614,936 6,748,078 6,141,990
------------- ------------- -------------
Net amounts deferred........................ 4,087,977 5,720,166 5,551,822
Net amortization................................ 4,464,782 5,736,275 5,965,928
------------- ------------- -------------
Net asset balance, end of year.................. $ 1,604,449 $ 1,981,254 $ 1,997,363
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
9. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES:
Activity in loss and loss adjustment expense reserves is summarized as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Balance, beginning of year...................... $ 80,352,682 $ 71,114,057 $ 69,006,939
Less reinsurance balance recoverable.......... 44,657,000 41,544,000 42,905,000
------------- ------------- -------------
Net balance, beginning of year.............. 35,695,682 29,570,057 26,101,939
Incurred related to:
Current year.................................. 54,053,427 47,600,725 38,217,150
Prior years................................... (6,751,563) (2,728,718) 597,756
------------- ------------- -------------
Total incurred.............................. 47,301,864 44,872,007 38,814,906
Paid related to:
Current year.................................. 30,176,142 25,981,678 21,642,166
Prior years................................... 14,805,826 12,764,704 13,704,622
------------- ------------- -------------
Total paid.................................. 44,981,968 38,746,382 35,346,788
------------- ------------- -------------
Net balance, end of year........................ 38,015,578 35,695,682 29,570,057
Plus reinsurance balances recoverable........... 46,905,000 44,657,000 41,544,000
------------- ------------- -------------
Balance, end of year........................ $ 84,920,578 $ 80,352,682 $ 71,114,057
------------- ------------- -------------
------------- ------------- -------------
</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 1997 and 1996 decreased by $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. The provision for losses and loss
adjustment expenses in 1995 increased by $597,756 due to adversities experienced
in earlier accident year reportings.
F-16
<PAGE>
MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE
COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SURPLUS NOTE:
On April 7, 1997, PICOM 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, 1997, this note
had an outstanding balance of $21,500,000 with accrued interest of $1,341,835.
On May 26, 1998, the accrued interest for 1997 of $1,341,835 was paid to PICOM
following the State and Board's approval.
11. 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 $477,068, $282,578 and $311,966 for 1997,
1996 and 1995, 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 $169,964 in
1997, $120,611 in 1996 and $124,644 in 1995.
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 for 1997 was approximately $500,000.
12. LEASE AGREEMENTS:
The Company is obligated under an operating lease for office space.
At December 31, 1997, future minimum lease payments are as follows:
<TABLE>
<S> <C>
1998............................................................ $ 778,000
1999............................................................ 778,000
2000............................................................ 778,000
2001............................................................ 778,000
2002 and thereafter............................................. 3,780,000
---------
$6,892,000
---------
---------
</TABLE>
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 $981,159, $974,880 and $960,822 in 1997, 1996 and 1995,
respectively.
F-17
<PAGE>
MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE
COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. 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, 1997, 1996 and 1995, and statutory net income for the
years ended December 31, 1997, 1996 and 1995, as filed with the Michigan
Insurance Bureau, to the amounts shown in the accompanying financial statements
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Statutory capital and surplus................... $ 34,512,849 $ 29,141,218 $ 24,406,931
Net unrealized appreciation on securities
available for sale............................ 1,927,390 941,182 1,579,903
Deferred policy acquisition costs capitalized
for GAAP...................................... 1,604,449 1,981,254 1,997,363
Deferred federal income taxes recorded for
GAAP.......................................... 2,737,658 2,745,208 2,092,348
Assets nonadmitted for SAP...................... 23,999,226 1,192,652 1,095,624
Surplus note.................................... (21,500,000)
------------- ------------- -------------
Total policyholders' surplus per
accompanying balance sheets............... $ 43,281,572 $ 36,001,514 $ 31,172,169
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Statutory net income................................ $ 6,315,333 $ 4,816,465 $ 4,125,938
Deferred federal income tax expense recorded for
GAAP.............................................. 327,761 435,695 742,061
Deferred policy acquisition costs capitalized for
GAAP.............................................. (376,805) (16,109) (414,106)
Equity in net income of subsidiary unconsolidated
for statutory reporting........................... 361,622
Other............................................... 1,250 14,850 284
------------ ------------ ------------
Net income per accompanying consolidated
statements of income.......................... $ 6,629,161 $ 5,250,901 $ 4,454,177
------------ ------------ ------------
------------ ------------ ------------
</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 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
F-18
<PAGE>
MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE
COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. STATUTORY INSURANCE ACCOUNTING PRACTICES: (CONTINUED)
and has determined that it passed the RBC test and has capital and surplus in
excess of the minimum threshold.
14. CONTINGENCIES:
The Company participates in the guarantee association of the State of
Michigan. 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.
15. 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>
1997 1996 1995
---------------------------- -------------------------- --------------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
------------- ------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Investments......................... $ 111,543,225 $ 111,543,225 $ 90,896,322 $ 90,896,322 $ 73,371,175 $ 73,371,175
Cash................................ 2,204,325 2,204,325 2,178,335 2,178,335 3,330,677 3,330,677
Premiums due from policyholders..... 3,599,622 3,599,622 3,178,342 3,178,342 2,840,383 2,840,383
Amounts due from reinsurers......... 40,495,449 40,495,449 40,043,053 40,043,053 40,266,172 40,266,172
Accrued investment income........... 1,486,324 1,486,324 1,337,445 1,337,445 1,056,346 1,056,346
Surplus note........................ 21,500,000 21,500,000
Payable related to acquisition...... 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 4). 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.
16. SUBSEQUENT EVENT--DEMUTUALIZATION:
On June 25, 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 (demutualization). Under the plan, eligible policyholders and other
targeted groups 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.
The demutualization plan is subject to approval from the Michigan Insurance
Bureau and ultimately receipt of sufficient stock subscriptions to effect the
transaction. The
F-19
<PAGE>
MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE
COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. SUBSEQUENT EVENT--DEMUTUALIZATION: (CONTINUED)
Company has received a tax opinion regarding the tax treatment of the
demutualization 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
Securities and Exchange Commission. 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 Demutualization.
F-20
<PAGE>
MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE
COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998 (UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Investments:
Fixed maturities available for sale, at fair value........ $118,889,522
Short-term investments, at cost, which approximates fair
value................................................... 1,896,943
------------
Total investments....................................... 120,786,465
Cash........................................................ 4,789,681
Premiums due from policyholders............................. 4,480,811
Amounts recoverable from reinsurers......................... 42,971,145
Amounts recoverable from reinsurer, related party........... 10,508,300
Accrued investment income................................... 1,507,510
Deferred federal income taxes............................... 3,110,235
Property and equipment, at cost, net of accumulated
depreciation.............................................. 1,989,080
Deferred policy acquisition................................. 158,772
Federal income taxes recoverable............................ 557,397
Intangible assets, net of amortization...................... 39,999,462
Other assets................................................ 523,492
------------
Total assets............................................ $231,382,350
------------
------------
LIABILITIES AND POLICYHOLDERS' SURPLUS
Liabilities:
Loss and loss adjustment expense reserves................. $ 93,397,089
Unearned premiums......................................... 31,293,729
Surplus note.............................................. 21,500,000
Payable related to acquisition............................ 19,500,000
Accrued expenses and other liabilities.................... 8,918,975
Accrued expenses and other liabilities, related party..... 1,921,117
Premiums ceded payable.................................... 3,490,413
Premiums ceded payable, related party..................... 1,990,118
------------
Total liabilities....................................... 182,011,441
Policyholders' surplus
Unassigned surplus........................................ 46,852,172
Accumulated other comprehensive income, net of deferred
federal income tax expense of $1,297,531................ 2,518,737
------------
Total policyholders' surplus............................ 49,370,909
------------
Total liabilities and policyholders' surplus............ $231,382,350
------------
------------
</TABLE>
The accompanying notes are an integral part of the unaudited consolidated
financial statements.
F-21
<PAGE>
MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE
COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Revenues and other income:
Premiums written................................................................. $ 84,280,246 $ 78,948,160
Premiums ceded, related party.................................................... 31,637,585 10,023,285
Premiums ceded, other............................................................ 2,898,053 9,881,781
------------- -------------
Net premiums written........................................................... 49,744,608 59,043,094
Increase in unearned premiums, net of prepaid reinsurance premiums............... 1,857,637 6,384,587
------------- -------------
Net premiums earned............................................................ 47,886,971 52,658,507
Net investment income............................................................ 5,213,292 5,018,459
Net realized investment gains on fixed maturities................................ 25,552 22,863
Other income..................................................................... 1,485,002 513,884
------------- -------------
Total revenues and other income................................................ 54,610,817 58,213,713
------------- -------------
Expenses:
Losses and loss adjustment expenses, net (including $12,341,908 in 1998 and
$6,020,987 in 1997 ceded to related party)..................................... 33,814,603 36,728,681
Policy acquisition and other underwriting expenses:
Other policy acquisition and underwriting expenses............................. 18,875,999 7,010,548
Policy acquisition expense, related party...................................... -- 9,103,817
Ceding commissions, related party.............................................. (9,491,276) (3,006,985)
Management fees, related party................................................. 1,547,300 501,371
------------- -------------
10,932,023 13,608,751
Interest expense, related party.................................................. 1,366,870 881,205
Amortization expense............................................................. 2,209,852 --
Other expense.................................................................... 29,586 7,963
------------- -------------
Total expenses................................................................. 48,352,934 51,226,600
------------- -------------
Income from operations before federal income taxes............................. 6,257,883 6,987,113
Federal income taxes............................................................... 1,415,206 1,147,216
------------- -------------
Net income..................................................................... $ 4,842,677 $ 5,839,897
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of the unaudited consolidated
financial statements.
F-22
<PAGE>
MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE
COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENT OF POLICYHOLDERS' SURPLUS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
NET
UNREALIZED
APPRECIATION
(DEPRECIATION)
ON INVESTMENTS
NET OF
DEFERRED TOTAL
UNASSIGNED FEDERAL INCOME POLICYHOLDERS'
SURPLUS TAX EFFECT SURPLUS
------------- -------------- -------------
<S> <C> <C> <C>
Balances, January 1, 1998.......................................... $ 42,009,495 $ 1,272,077 $43,281,572
Net income......................................................... 4,842,677 4,842,677
Accumulated other comprehensive income............................. 1,246,660 1,246,660
------------- -------------- -------------
Balances, September 30, 1998....................................... $ 46,852,172 $ 2,518,737 $49,370,909
------------- -------------- -------------
------------- -------------- -------------
</TABLE>
The accompanying notes are an integral part of the unaudited consolidated
financial statements.
F-23
<PAGE>
MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE
COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income...................................................................... $ 4,842,677 $ 5,839,897
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization................................................. 2,656,896 477,000
Realized gains on investments................................................. (25,552) (22,863)
Net accretion of discount on investments...................................... 24,718 81,337
Deferred federal income taxes................................................. (1,014,792) (352,784)
Changes in assets and liabilities:
Premiums due from policyholders............................................. (881,189) (1,136,213)
Amounts due from reinsurers................................................. (7,503,465) (674,733)
Accrued investment income................................................... (21,186) (196,988)
Prepaid reinsurance premiums................................................ -- 6,591,000
Deferred policy acquisition costs........................................... 1,445,677 (336,369)
Other assets................................................................ (159,412) (1,802)
Loss and loss adjustment expense reserves................................... 8,476,511 6,802,790
Unearned premiums........................................................... 1,857,637 (206,416)
Accrued expenses and other liabilities...................................... 2,751,764 3,092,602
Federal income taxes payable................................................ (850,000) (1,100,000)
-------------- --------------
Net cash provided by operating activities................................. 11,600,284 18,856,458
-------------- --------------
Cash flows from investing activities:
Proceeds from sale or maturity of short-term investments........................ 1,894,475 1,892,731
Purchases of short-term investments............................................. (1,896,943) (1,894,196)
Proceeds from maturity of securities available for sale......................... 11,737,052 10,018,565
Purchases of securities available for sale...................................... (19,089,548) (29,087,807)
Proceeds from sales of property and equipment................................... 41,756 32,678
Purchases of property and equipment............................................. (701,720) (913,627)
Cash paid for acquired company, net............................................. -- (22,363,709)
-------------- --------------
Net cash used in investing activities..................................... (8,014,928) (42,315,365)
-------------- --------------
Cash flows from financing activities:
Issuance of surplus note........................................................ -- 21,500,000
Payment on payable related to acquisition....................................... (1,000,000) --
-------------- --------------
Net increase (decrease) in cash................................................... 2,585,356 (1,958,907)
Cash, beginning of period......................................................... 2,204,325 2,178,335
-------------- --------------
Cash, end of period............................................................... $ 4,789,681 $ 219,428
-------------- --------------
-------------- --------------
Supplemental disclosure of cash flow information:
Interest paid................................................................... $ 1,341,835 --
-------------- --------------
-------------- --------------
Federal income taxes paid....................................................... $ 3,250,000 $ 2,600,000
-------------- --------------
-------------- --------------
Supplemental disclosure of noncash transaction:
In connection with the acquisition entered into during 1997, the Company assumed
a liability for the deferred portion of the purchase price equal to
$20,500,000.
</TABLE>
The accompanying notes are an integral part of the unaudited consolidated
financial statements.
F-24
<PAGE>
MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE
COMPANY AND SUBSIDIARY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
a. UNAUDITED INTERIM FINANCIAL INFORMATION: The balance sheet as of
September 30, 1998 and the statements of operations and cash flows for the nine
months ended September 30, 1998 and 1997 have not been audited. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been reflected herein. Results
of operations for interim periods are not necessarily indicative of results
expected for the full year.
2. 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. Prior period financial statements have
been reclassified to conform to the requirements of SFAS No. 130.
The components of comprehensive income, net of tax, for the nine month
periods ended September 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Net income........................................................ $ 4,842,677 $ 5,839,897
Unrealized gains on investments, net of tax....................... 1,246,660 (213,751)
------------ ------------
Comprehensive income.......................................... $ 6,089,337 $ 5,626,146
------------ ------------
------------ ------------
</TABLE>
Accumulated other comprehensive income, net of tax, included in
policyholders' surplus consists exclusively of unrealized gains on investments.
F-25
<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-26
<PAGE>
PERSONAL LINES AND LIFE DIVISIONS OF
MICHIGAN EDUCATORS INSURANCE AGENCY, INC.
BALANCE SHEET
DECEMBER 31, 1996 AND SEPTEMBER 22, 1997 (DATE OF ACQUISITION) (UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER DECEMBER
22, 1997 31, 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash.............................................................. $ 586,429 $ 264
Receivables:
Commissions..................................................... 322,693 89,356
Other........................................................... 3,565 3,758
Prepaid expenses.................................................. -- 9,717
----------- -----------
Total current assets............................................ 912,687 103,095
Property and equipment:
Furniture and fixtures............................................ 541,663 541,663
Computer equipment................................................ 369,688 369,688
Software.......................................................... 94,776 94,776
Leasehold improvements............................................ 334,892 334,892
----------- -----------
1,341,019 1,341,019
Less accumulated depreciation..................................... 967,458 884,654
----------- -----------
Property and equipment, net..................................... 373,561 456,365
Other assets........................................................ -- 20,000
----------- -----------
Total assets.................................................... $1,286,248 $ 579,460
----------- -----------
----------- -----------
LIABILITIES AND DIVISIONAL DEFICIT
Current liabilities:
Commissions payable............................................... $1,099,653 $ 523,136
Accounts payable and accrued liabilities.......................... 273,158 972,633
----------- -----------
Total current liabilities....................................... 1,372,811 1,495,769
Divisional deficit.................................................. (86,563) (916,309)
----------- -----------
Total liabilities and divisional deficit........................ $1,286,248 $ 579,460
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of the divisional financial
statements.
F-27
<PAGE>
PERSONAL LINES AND LIFE DIVISIONS OF
MICHIGAN EDUCATORS INSURANCE AGENCY, INC.
STATEMENT OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE PERIOD FROM JANUARY 1, 1997 TO
SEPTEMBER 22, 1997 (DATE OF ACQUISITION) (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE
PERIOD
FROM JANUARY
1,
1997 TO FOR THE
SEPTEMBER YEAR
22, ENDED
1997 (DATE DECEMBER
OF 31,
ACQUISITION) 1996
------------ ----------
(UNAUDITED)
<S> <C> <C>
Commission revenue................................................ $10,320,639 $13,727,111
Operating expenses................................................ 8,341,525 10,828,592
------------ ----------
Operating income.............................................. 1,979,114 2,898,519
Other expense:
Interest expense................................................ -- 58,536
Loss on sales of property and equipment......................... -- 114
------------ ----------
Total other expenses.......................................... -- 58,650
------------ ----------
Net income.................................................... $1,979,114 $2,839,869
------------ ----------
------------ ----------
</TABLE>
The accompanying notes are an integral part of the divisional financial
statements.
F-28
<PAGE>
PERSONAL LINES AND LIFE DIVISIONS OF
MICHIGAN EDUCATORS INSURANCE AGENCY, INC.
STATEMENT OF DIVISIONAL DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE PERIOD FROM JANUARY 1, 1997 TO
SEPTEMBER 22, 1997 (DATE OF ACQUISITION) (UNAUDITED)
<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)
Net income..................................................................... 1,979,114
Distributions of divisional equity............................................. (1,149,368)
-----------
Balance, September 22, 1997 (unaudited)........................................ $ (86,563)
-----------
-----------
</TABLE>
The accompanying notes are an integral part of the divisional financial
statements.
F-29
<PAGE>
PERSONAL LINES AND LIFE DIVISIONS OF
MICHIGAN EDUCATORS INSURANCE AGENCY, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE PERIOD FROM JANUARY 1, 1997 TO
SEPTEMBER 22, 1997 (DATE OF ACQUISITION) (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE
PERIOD
FROM JANUARY
1,
1997 TO
SEPTEMBER FOR THE
22, YEAR
1997 (DATE ENDED
OF DECEMBER
ACQUISITION) 31, 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income...................................................... $1,979,114 $2,839,869
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................. 82,804 120,956
Loss on sales of property and equipment....................... -- 114
Changes in operating assets and liabilities which increase
(decrease) cash flows:
Receivables:
Commissions............................................... (233,337) (62,921)
Other..................................................... 193 (5,228)
Prepaid expenses............................................ 9,717 (9,717)
Other assets................................................ 20,000 --
Commissions payable......................................... 576,517 70,753
Accounts payable and accrued liabilities.................... (699,475) 928,027
------------ -----------
Net cash provided by operating activities................. 1,735,533 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.............................. (1,149,368) (3,830,766)
Payments of capital lease obligations........................... -- (41,832)
------------ -----------
Net cash used in financing activities..................... (1,149,368) (3,872,598)
------------ -----------
Net decrease in cash.............................................. 586,165 (54,046)
Cash, beginning of period......................................... 264 54,310
------------ -----------
Cash, end of period............................................... $ 586,429 $ 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-30
<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 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.
f. UNAUDITED INTERIM FINANCIAL INFORMATION: The balance sheet as of
September 22, 1997 and the statements of operations and cash flows for the
period from January 1, 1997 to September 22, 1997 have not been audited. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been reflected herein. Results
of operations for interim periods are not necessarily indicative of results
expected for the full year.
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-31
<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-32
<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 MEEMIC HOLDINGS, INC. 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.
-------
------------------------
-------
UP TO 4,297,791 SHARES
[LOGO]
MEEMIC HOLDINGS, INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
FEBRUARY 15, 1999
-------
------------------------
-------
UNTIL , 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OF MEEMIC HOLDINGS, INC.,
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.
<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 (other than
underwriting discounts and commissions) expected to be incurred by the Company
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........... $ 18,348.00
Nasdaq and Entry Listing Fee.................................. 66,875.00
Printing, mailing and engraving expenses*..................... 275,000.00
Legal fees and expenses*...................................... 300,000.00
Appraisal fees and expenses*.................................. 250,000.00
Accounting fees and expenses*................................. 250,000.00
Blue Sky fees and expenses*................................... 15,000.00
Transfer agent and registrar fees and expenses*............... 310,000.00
Miscellaneous*................................................ 14,777.00
------------
Total*.................................................... $1,500,000.00
------------
------------
</TABLE>
- ------------------------
* Estimated
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 561 through 571 of the Michigan Business Corporation Act (the
"MBCA") govern the indemnification of officers, directors and other persons. In
this regard, the MBCA provides for indemnification of directors and officers
acting in good faith and in a manner they reasonably believe to be in, or not
opposed to, the best interest of MEEMIC Holdings, Inc. or its shareholders (and,
with respect to a criminal proceeding, if they have no reasonable cause to
believe their conduct to be unlawful). Such indemnification may be made against
(a) expenses (including attorneys' fees), judgments, penalties, fines and
amounts paid in settlement actually and reasonably incurred in connection with
any threatened, pending or completed action, suit or proceeding (other than an
action by, or in the right of, MEEMIC Holdings, Inc.) arising by reason of the
fact that they were serving as a director, officer, employee or agent of MEEMIC
Holdings, Inc. (or some other entity at MEEMIC Holdings, Inc.'s request), and
(b) expenses (including attorneys' fees) and amounts paid in settlement actually
and reasonably incurred in connection with a threatened, pending or completed
action or suit by, or in the right of, MEEMIC Holdings, Inc., unless the
director or officer is found liable to MEEMIC Holdings, Inc. and an appropriate
court does not determine that he or she is nevertheless fairly and reasonably
entitled to indemnification. The MBCA requires indemnification for expenses to
the extent that a director or officer is successful in defending against any
such action, suit or proceeding, and otherwise requires in general that the
indemnification provided for in (a) and (b) above be made only on a
determination by a majority vote of a quorum of the Board of Directors comprised
of members who were not parties to or threatened to be made parties to such
action. In certain circumstances, the MBCA further permits advances to cover
such expenses before a final determination that indemnification is permissible,
upon receipt of (i) a written affirmation by the director or officer of his or
her good faith belief that he or she has met the applicable standard of conduct
set forth in the MBCA, and (ii) a written undertaking by or on behalf of the
director or officer to repay such amounts unless it shall ultimately be
determined that he or she is entitled to indemnification and a determination
that the facts then known to those making the advance would not preclude
indemnification. MEEMIC Holdings, Inc.'s Articles of Incorporation provide the
same indemnification rights as the MBCA.
II-1
<PAGE>
Subject to the exceptions recited in the following sentence, MEEMIC
Holdings, Inc.'s Articles of Incorporation provide that no director shall be
personally liable to MEEMIC Holdings, Inc. or its shareholders for damages for
any action taken or any failure to take action. Such exculpatory language does
not, however, eliminate or limit the liability of a director for (a) the amount
of a financial benefit received by a director to which he or she is not
entitled, (b) intentional infliction of harm on the corporation or its
shareholders, (c) certain other violations of the Michigan Business Corporation
Act, or (d) an intentional violation of criminal law.
The MBCA permits MEEMIC Holdings, Inc. to purchase insurance on behalf of
its directors and officers against liabilities arising out of their positions
with MEEMIC Holdings, Inc., whether or not such liabilities would be within the
indemnification provisions of the MBCA. Under an insurance policy maintained by
MEEMIC Holdings, Inc. and MEEMIC, the directors and officers of MEEMIC Holdings,
Inc. are insured, within the limits and subject to the limitations of the
policy, against certain expenses in connection with the defense of certain
claims, actions, suits or proceedings, and certain liabilities which might be
imposed as a result of such claims, actions, suits or proceedings, which may be
brought against them by reason of being or having served as directors and
officers of MEEMIC Holdings, Inc. of certain other entities.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to officers and directors pursuant to the foregoing provisions,
MEEMIC Holdings, Inc. has been informed that, in the opinion of the Commission,
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
As referenced in the Prospectus, in October, 1998, the Company sold one
share of stock to Kevin R. Clinton for $10.00. The Company has not otherwise
sold any securities within the last three years which were not registered under
the Securities Act.
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 , 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
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ----------------------------------------------------------------------
<C> <S>
**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 , 1998
**10.12 Severance/Benefits Agreement with Lynn M. Kalinowski dated August 10,
1993
**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)
27.1 Financial Data Schedule
99.1 Stock Order Form*
99.2 Question and Answer Brochure*
99.3 Letter to Prospective Purchasers*
</TABLE>
- ------------------------
* To be filed by amendment
** Previously filed
(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.
II-3
<PAGE>
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 of 1933;
(ii) to reflect in the prospectus any fact or events arising after the
effective date 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 of 1933, 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-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant certifies
that it has duly caused this Amendment No. 1 to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Auburn Hills, State of Michigan on January 20, 1999.
<TABLE>
<S> <C> <C>
MEEMIC HOLDINGS, INC.
By: /s/ R. KEVIN CLINTON
-----------------------------------------
R. Kevin Clinton
PRESIDENT
</TABLE>
POWER OF ATTORNEY
Each of the undersigned whose signature appears below hereby constitutes and
appoints R. Kevin Clinton, Annette E. Flood, Christine C. Schmitt and each of
them acting alone, his or her true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for him or her and in his name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement (or any
other Registration Statement for the same offering that is to be effective upon
filing pursuant to Rule 462(b) under the Securities Act), and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite or necessary to be done in and about the premises,
as full to all intents and purposes as he or she might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents or
any of them or their or his or her substitute or substitutes may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Amendment No. 1 to
registration statement has been signed by the following persons in the
capacities indicated on January 20, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------------------ ------------------------------------------------------
<C> <S>
/s/ R. KEVIN CLINTON
------------------------------------------- President and Chief Executive Officer
R. Kevin Clinton and a Director
*
------------------------------------------- Secretary
Annette E. Flood
*
------------------------------------------- Treasurer and Chief Financial Officer
Christine C. Schmitt
*
------------------------------------------- Director
Victor T. Adamo
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------------------ ------------------------------------------------------
<C> <S>
*
------------------------------------------- Director
Thomas E. Hoeg
*
------------------------------------------- Director
Lynn M. Kalinowski
*
------------------------------------------- Director
James O. Wood
</TABLE>
<TABLE>
<S> <C>
*By: /s/ R. KEVIN CLINTON
-------------------------
R. Kevin Clinton
AS ATTORNEY-IN-FACT FOR
EACH OF THE PERSONS
INDICATED
</TABLE>
II-6
<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 ,
1998
**10.12 Severance/Benefits Agreement with Lynn M. Kalinowski dated
August 10, 1993
**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)
27.1 Financial Data Schedule
99.1 Stock Order Form*
99.2 Question and Answer Brochure*
99.3 Letter to Prospective Purchasers*
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously submitted.
<PAGE>
[LETTERHEAD]
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 representations given by MEEMIC, which are annexed hereto; and
(iii) 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 reached herein will be accepted by the Internal Revenue
Service or judicial authorities if
- -----------------
(1) All capitalized terms (other than proper nouns) and acronyms not
defined herein shall have the meanings set forth in Article 1 of the Plan.
<PAGE>
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 persons'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>
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,
/s/ PricewaterhouseCoopers LLP
-----------------------------
PricewaterhouseCoopers LLP
3
<PAGE>
[LETTERHEAD]
ABN AMRO INCORPORATED
208 South LaSalle Street
Chicago, Illinois 60604-1003
(312) 855-7600
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 captions "THE
DEMUTUALIZATION -- Actions of the Independent Committee and the Board," and
"THE DEMUTUALIZATION -- Stock Price and Number of Shares Issued" and of our
name and our opinion regarding the subscription rights under the caption
"CERTAIN FEDERAL INCOME TAX CONSIDERATIONS -- Subscription Rights" in MEEMIC
Holdings, Inc.'s Registration Statement on Form S-1 filed with the Securities
and Exchange Commission on November 2, 1998. We further consent to the
filing of our valuation analysis, on a confidential basis, with the
Securities and Exchange Commission for review. 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 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
January 19, 1999
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 (File
No. 333-66671) of our reports dated July 2, 1998, on our audits of the
financial statements of Michigan Educational Employees Mutual Insurance
Company and Subsidiary and 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 Demutualization and Subscription Offering. In addition,
we consent to the reference to our firm and to the description of our tax
opinion under the caption "FEDERAL INCOME TAX CONSIDERATIONS" and to
reference to our firm under the caption "Experts."
/s/ PricewaterhouseCoopers LLP
Grand Rapids, Michigan
January 19, 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 SEPTEMBER 30, 1998 AND DECEMBER 31, 1997 AND FOR THE
NINE MONTHS AND YEAR THEN ENDED, RESPECTIVELY AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 SEP-30-1998
<DEBT-HELD-FOR-SALE> 109,648,780 118,889,522
<DEBT-CARRYING-VALUE> 0 0
<DEBT-MARKET-VALUE> 0 0
<EQUITIES> 0 0
<MORTGAGE> 0 0
<REAL-ESTATE> 0 0
<TOTAL-INVEST> 111,543,255 120,786,465
<CASH> 2,204,325 4,789,681
<RECOVER-REINSURE> 429,449 202,925
<DEFERRED-ACQUISITION> 1,604,449 158,772
<TOTAL-ASSETS> 214,858,173 231,382,350
<POLICY-LOSSES> 84,920,578 93,397,089
<UNEARNED-PREMIUMS> 29,436,092 31,293,729
<POLICY-OTHER> 0 0
<POLICY-HOLDER-FUNDS> 0 0
<NOTES-PAYABLE> 42,000,000 41,000,000
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 43,281,572 49,370,909
<TOTAL-LIABILITY-AND-EQUITY> 214,858,173 231,382,350
67,830,283 47,886,971
<INVESTMENT-INCOME> 6,676,783 5,213,292
<INVESTMENT-GAINS> 32,214 25,552
<OTHER-INCOME> 840,725 1,485,002
<BENEFITS> 47,301,864 33,814,603
<UNDERWRITING-AMORTIZATION> 0 0
<UNDERWRITING-OTHER> 18,776,741 14,538,331
<INCOME-PRETAX> 9,301,400 6,257,883
<INCOME-TAX> 2,672,239 1,415,206
<INCOME-CONTINUING> 6,629,161 4,842,677
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 6,629,161 4,842,677
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
<RESERVE-OPEN> 80,352,682 0
<PROVISION-CURRENT> 54,053,427 0
<PROVISION-PRIOR> (6,751,563) 0
<PAYMENTS-CURRENT> 30,176,142 0
<PAYMENTS-PRIOR> 14,805,826 0
<RESERVE-CLOSE> 84,920,578 0
<CUMULATIVE-DEFICIENCY> 0 0
</TABLE>
