<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------- -------------
Commission file number 0-21223
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
(Exact name of registrant as specified in its charter)
Michigan 38-3273911
(State of Incorporation) (I.R.S. Employer Identification No.)
2600 Professionals Drive, Okemos, Michigan 48864
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (517) 349-6500
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
The number of shares of the registrant's common stock, no par value per share,
outstanding as of November 12, 1997 was 3,505,750.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at September 30, 3
1997 (Unaudited) and December 31, 1996
Condensed Consolidated Statements of Income for the 4
Three Months and Nine Months Ended September 30, 1997
and 1996 (Unaudited)
Condensed Consolidated Statements of Cash Flows for the 5
Nine Months Ended September 30, 1997 and 1996 (Unaudited)
Notes to Condensed Consolidated Financial Statements 6-8
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition 9-17
and Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
-2-
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
Assets 1997 1996
------------- ------------
Investments: (Unaudited)
<S> <C> <C>
Fixed maturities available for sale, at fair value
(amortized cost: $306,583,000 and $285,976,000) $310,013,000 $286,274,000
Equity securities available for sale, at fair value
(cost: $2,671,000 and $2,630,000) 2,798,000 2,692,000
Short-term investments, at cost 22,986,000 10,711,000
Real estate, at cost, net of accumulated depreciation 447,000 455,000
------------ ------------
Total investments 336,244,000 300,132,000
Cash 3,067,000 2,023,000
Premiums due from policyholders 16,093,000 7,268,000
Reinsurance recoverables 27,394,000 17,550,000
Accrued investment income 4,926,000 3,885,000
Deferred federal income taxes 15,126,000 17,301,000
Property and equipment, at cost, net of
accumulated depreciation 2,552,000 2,459,000
Deferred policy acquisition costs 1,245,000 998,000
Other assets 8,106,000 5,766,000
------------ ------------
Total assets $414,753,000 $357,382,000
============ ============
Liabilities and Shareholders' Equity
Liabilities:
Loss and loss adjustment expense reserves $240,316,000 $219,919,000
Reserve for extended reporting period claims 15,095,000 14,795,000
Unearned premiums 28,611,000 21,945,000
Long-term debt 22,500,000 -
Accrued expenses and other liabilities 9,890,000 12,765,000
------------ ------------
Total liabilities 316,412,000 269,424,000
------------ ------------
Shareholders' equity:
Preferred stock, no par value; 5,000,000 shares authorized;
no shares issued and outstanding - -
Common stock, no par value; 25,000,000 shares authorized;
3,505,750 shares issued and outstanding in 1997 and 1996 3,506,000 3,506,000
Additional paid-in capital 14,569,000 14,569,000
Retained earnings 77,918,000 69,645,000
Net unrealized appreciation on investments,
net of deferred federal income taxes 2,348,000 238,000
------------ ------------
Total shareholders' equity 98,341,000 87,958,000
------------ ------------
Total liabilities and shareholders' equity $414,753,000 $357,382,000
============ ============
</TABLE>
See accompanying notes to the unaudited condensed consolidated financial
statements.
-3-
<PAGE> 4
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues and other income:
Net premiums written $28,700,000 $19,427,000 $53,657,000 $47,819,000
Increase in unearned premiums, net of
prepaid reinsurance premiums (5,632,000) (5,307,000) (5,110,000) (5,275,000)
----------- ----------- ----------- -----------
Premiums earned, net 23,068,000 14,120,000 48,547,000 42,544,000
Net investment income 4,897,000 3,853,000 13,779,000 11,558,000
Net realized investment losses (6,000) (103,000) (77,000) (480,000)
Other 296,000 55,000 636,000 227,000
----------- ----------- ----------- -----------
Total revenues and other income 28,255,000 17,925,000 62,885,000 53,849,000
----------- ----------- ----------- -----------
Expenses:
Losses and loss adjustment expenses, net 17,650,000 11,691,000 39,283,000 36,172,000
Increase in reserve for extended reporting
period claims 100,000 300,000 300,000 400,000
Policy acquisition and other underwriting expenses 6,444,000 2,683,000 11,729,000 8,099,000
Interest expense 361,000 - 730,000 -
----------- ----------- ----------- -----------
Total expenses 24,555,000 14,674,000 52,042,000 44,671,000
----------- ----------- ----------- -----------
Income from operations before federal income taxes 3,700,000 3,251,000 10,843,000 9,178,000
Federal income taxes 725,000 855,000 2,570,000 2,296,000
----------- ----------- ----------- -----------
Net income $ 2,975,000 $ 2,396,000 $ 8,273,000 $ 6,882,000
=========== =========== =========== ===========
Net income per common share $0.85 $0.68 $2.36 $1.98
=========== =========== =========== ===========
Weighted average shares outstanding 3,508,596 3,505,787 3,507,243 3,480,313
=========== =========== =========== ===========
</TABLE>
See accompanying notes to the unaudited condensed consolidated financial
statements.
-4-
<PAGE> 5
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Net cash provided by operating activities $13,575,000 $17,886,000
------------ ------------
Cash flows from investing activities:
Proceeds from sale or maturity of short-term investments 214,027,000 227,853,000
Purchases of short-term investments (226,031,000) (230,065,000)
Proceeds from maturity of securities available for sale 1,870,000 1,500,000
Proceeds from sale of securities available for sale 45,655,000 84,854,000
Purchases of securities available for sale (69,296,000) (97,080,000)
Payable for securities - (3,205,000)
Purchases of property and equipment (509,000) (323,000)
Payment on liability for purchased book of business (747,000) (894,000)
------------ ------------
Net cash used in investing activities (35,031,000) (17,360,000)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 22,500,000 -
------------ ------------
Net cash provided by financing activities 22,500,000 -
------------ ------------
Net increase in cash 1,044,000 526,000
Cash, beginning of period 2,023,000 1,279,000
------------ ------------
Cash, end of period $3,067,000 $1,805,000
============ ============
Supplemental disclosure of non-cash investing
and financing activities:
Issuance of treasury shares as stock bonus $- $697,000
============ ============
Issuance of treasury shares for acquired company $- $935,000
============ ============
</TABLE>
See accompanying notes to the unaudited condensed consolidated financial
statements.
-5-
<PAGE> 6
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
(1) Basis of Presentation
Professionals Insurance Company Management Group ("Professionals
Group," and with its direct and indirect subsidiaries, the "Company")
is a business corporation incorporated under the laws of the State of
Michigan that functions as an insurance holding company. Professionals
Group has four direct wholly-owned subsidiaries and two indirect
wholly-owned subsidiaries. The direct wholly-owned subsidiaries are
PICOM Insurance Company ("PICOM"), PICOM Insurance Agency, Inc.
("PIA"), PICOM Financial Services Corporation ("PFSC") and American
Insurance Management Corporation ("AIMC"). The indirect wholly-owned
entities, all of which are wholly-owned subsidiaries of PICOM, are
PICOM Claims Services Corporation ("PCSC") and PICOM Insurance Company
of Illinois ("PICOM-Illinois").
PICOM is a stock, property and casualty insurer that offers
professional liability insurance to providers of health care services
in Michigan, Indiana and Ohio. PIA is an inactive Michigan insurance
agency. PFSC is an inactive business corporation. AIMC is an Indiana
corporation that serves as the attorney-in-fact for American Medical
Insurance Exchange, an Indiana interinsurance reciprocal exchange.
PCSC provides claims management services on a fee for service basis.
PICOM-Illinois is a stock, property and casualty insurer that provides
medical malpractice insurance to physicians and clinics in Illinois.
The accompanying unaudited condensed consolidated financial
statements of the Company have been prepared in conformity with
generally accepted accounting principles and with the instructions for
Form 10-Q and Rule 10-01 of Regulation S-X as they apply to interim
financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. All significant
intercompany transactions have been eliminated in consolidation.
In the opinion of management, all adjustments (consisting of
normal recurring adjustments) considered necessary for a fair
presentation of financial position and results of operations have been
included. The operating results for the three month and nine month
periods ended September 30, 1997 are not necessarily indicative of the
results to be expected for the year ending December 31, 1997.
-6-
<PAGE> 7
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
(2) Net Income Per Share
Net income per share is computed by dividing net income by the
weighted average number of shares of common stock and common stock
equivalents (stock options) outstanding during each period after giving
effect to stock dividends and treasury shares, calculated on a daily
basis.
(3) Long-Term Debt
On April 4, 1997, Professionals Group obtained $22.5 million in
proceeds from a seven-year unsecured bank term loan, bearing interest
at an adjustable rate of LIBOR plus 62.5 basis points (6.41% at
September 30, 1997), and payable quarterly (the "Credit Agreement").
Principal payments are due on April 30, as follows: 1998 - $2,500,000;
1999 - $2,500,000; 2000 - $3,000,000; 2001 - $3,000,000; 2002 -
$3,500,000; 2003 - $3,500,000; and 2004 - $4,500,000.
The Credit Agreement contains a covenant which prohibits the
payment of cash dividends on Professionals Group's common stock (except
for cash paid in lieu of fractional shares related to stock dividends
declared). Additional covenants also require the Company to, among
other things, maintain total consolidated shareholders' equity of at
least $80.0 million plus 50% of the preceding fiscal year's
consolidated net income, maintain a ratio of debt to equity of not more
than 0.5:1 and maintain a fixed charges coverage ratio and an interest
coverage ratio (as defined by the Credit Agreement) of not less than
1.5:1 and 2.5:1, respectively. The Company was in compliance with, or
has received waivers of, all required covenants at September 30, 1997.
(4) New Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") has issued
Statement of Financial Accounting Standards No. 128 "Earnings Per
Share" ("SFAS No. 128") which is effective for financial statements
issued for both interim and annual periods ending after December 15,
1997. Earlier application is not permitted. This standard replaces the
presentation of primary earnings per share with a presentation of basic
earnings per share and also requires dual presentation of basic and
diluted earnings per share for all entities with complex capital
structures. Because early adoption of SFAS No. 128 is not permitted,
there is no impact on the Company's earnings per share amounts for the
interim periods presented herein. However, upon adoption in the fourth
quarter of 1997, all prior interim and annual period earnings per share
data presented will be restated to conform with the provisions of SFAS
No. 128. The Company does not expect the impact of the adoption of
SFAS No. 128 to be material to previously reported earnings per share
amounts.
-7-
<PAGE> 8
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
(4) New Accounting Pronouncements, Continued
The FASB has also issued SFAS No. 130 "Reporting Comprehensive
Income," which is effective for fiscal years beginning after December
15, 1997. This standard requires that an enterprise (a) classify items
of other comprehensive income by their nature in a financial statement
and (b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the
equity section of a statement of financial position.
(5) Commitments and Contingencies
On August 15, 1997, Professionals Group announced that it had
signed a definitive agreement to merge PICOM with Physicians Protective
Trust Fund, a medical malpractice self-insurance trust fund located in
Coral Gables, Florida ("PPTF"). PPTF is the largest provider of
medical malpractice insurance for physicians and physician corporations
in the State of Florida. This agreement was amended and restated on
October 3, 1997, and pursuant to the amended and restated agreement,
Professionals Group will issue 4,089,160 shares of Professionals Group
common stock to the eligible members of PPTF upon consummation of the
merger. The transaction is expected to be accounted for as a pooling
of interests. The closing of the merger is expected to occur in the
first quarter of 1998, subject to regulatory and
shareholder/policyholder approval.
On September 22, 1997, and in connection with agreements signed
in April 1997 with Michigan Educational Employees Mutual Insurance
Company ("MEEMIC"), Professionals Group assisted MEEMIC with its
purchase of the net assets of Michigan Educators Insurance Agency,
Inc. The purchase price is equal to 3.75% of all premiums to be
written through MEIA II, a newly formed subsidiary of MEEMIC, through
July 2004, subject to a guaranteed minimum purchase price of $43.0
million. To fund this purchase, MEEMIC paid cash of $22.5 million,
MEEMIC guaranteed payment of the next $3.0 million and Professionals
Group guaranteed payment of the final $17.5 million (during the years
2001 - 2004). Professionals Group's guarantee obligation would only
become necessary if the 3.75% payment stream fails to equal $43.0
million. Based upon current projections of MEEMIC's written premiums
through 2004, the Company believes the likelihood that the guarantee
obligation would become payable is minimal.
-8-
<PAGE> 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis should be read in conjunction
with the condensed consolidated financial statements and the notes thereto
included elsewhere in this report and the Company's Annual Report to
Shareholders for the year ended December 31, 1996.
Financial Condition -- September 30, 1997 Compared to December 31, 1996:
Total assets increased 16.1% to $414.8 million at September 30, 1997,
as compared to $357.4 million at December 31, 1996, primarily due to increases
in invested assets, premiums due from policyholders and reinsurance
recoverables. The increase in invested assets was primarily due to proceeds
received from the Company's bank term loan which were used to purchase a $21.5
million surplus note issued by another insurance company (see "Liquidity and
Capital Resources" herein for further discussion) as well as positive cash
flows from operations. The increase in premiums due from policyholders
resulted from the timing of renewals for a significant portion of the Company's
professional liability book of business, which typically occurs during the
third quarter. The increase in reinsurance recoverables was primarily due to
$9.9 million of reinsurance premiums assumed by PICOM from Michigan Educational
Employees Mutual Insurance Company ("MEEMIC"). PICOM started acting as a
reinsurer of MEEMIC on July 1, 1997.
Invested assets increased 12.0% to $336.2 million, or approximately
81% of the Company's total assets at September 30, 1997. This compares to
invested assets of $300.1 million, or approximately 84% of the Company's total
assets at December 31, 1996. The Company's investment portfolio continues to
be dominated by fixed maturity securities at September 30, 1997, and primarily
consists of U.S. government and agency bonds, high-quality corporate bonds,
mortgage-backed securities, redeemable preferred stocks and tax-exempt U.S.
municipal bonds. The entire fixed maturity portfolio, which is classified as
available-for-sale, and is carried at fair value, is sensitive to interest rate
changes. At September 30, 1997, the fixed maturity portfolio had a fair value
that was $3.4 million higher than the $306.6 million amortized cost of such
portfolio. At December 31, 1996, the fixed maturity portfolio had a fair value
that was $298,000 higher than the $286.0 million amortized cost of such
portfolio.
Loss and loss adjustment expense reserves represented approximately
76% and 82% of the Company's consolidated liabilities at September 30, 1997 and
December 31, 1996, respectively. The decrease in this ratio was mainly due to
the Company's issuance of long-term debt during the second quarter of 1997 (see
further discussion below), which was partially offset by an increase in loss
and loss adjustment expense reserves because of the assumed reinsurance
agreement with MEEMIC (see further discussion below). These reserves are
determined on the basis of individual claims and actuarially determined
estimates of future losses based on the Company's past loss experience and
projections as to future claims frequency, severity, inflationary trends and
settlement patterns. Estimating professional liability reserves is a complex
process which is heavily dependent on judgment and involves many uncertainties.
As a result, reserve estimates may vary significantly
-9-
<PAGE> 10
from the eventual outcome. The assumptions used in establishing the Company's
reserves are reviewed and updated regularly as new data becomes available. Any
adjustments necessary are generally reflected in current operations. The loss
and loss adjustment expense reserves are determined by the Company's actuary,
who is an officer of the Company and a Fellow of the Casualty Actuarial
Society, as well as by an independent actuarial consulting firm. Management of
the Company believes that the loss and loss adjustment expense reserves are
adequate and are at or above the actuarial best estimate. The loss and loss
adjustment expense reserves have been established on an undiscounted basis.
Loss and loss adjustment expense reserves increased 9.3% to $240.3
million at September 30, 1997, from $219.9 million at December 31, 1996. This
increase was primarily attributable to the loss and loss adjustment expense
reserves assumed from MEEMIC as well as an increase in the number of
outstanding professional liability claims at September 30, 1997 as compared to
December 31, 1996.
On April 4, 1997, Professionals Group obtained $22.5 million in
proceeds from a seven-year unsecured bank term loan. See "Liquidity and
Capital Resources" herein for further discussion of this transaction.
Shareholders' equity increased 11.8% to $98.3 million at September 30,
1997, as compared to $88.0 million at December 31, 1996. The increase in
shareholders' equity was due to net income of $8.3 million during the nine
month period ended September 30, 1997 as well as $2.0 million of net unrealized
appreciation on investments, net of deferred federal income taxes. The Company
expects to use retained earnings to increase its capital base and finance
future growth and will defer consideration of cash dividends for the
foreseeable future.
Results of Operations -- Three Months Ended September 30, 1997 Compared to
Three Months Ended September 30, 1996:
For purposes of the following discussion, the Company's professional
liability coverages (and the related Service Marks) are defined as follows:
CorpCare(SM) - Offers professional liability coverage for group practices;
DoctorCare(SM) - Offers professional liability coverage for individual
physicians, surgeons and dentists;
HealthPro(SM) - Offers professional liability coverage for other health care
specialists such as nurses, psychologists and optometrists;
HealthServices(SM) - Offers professional liability coverage for health care
organizations such as hospitals, clinics, hospices and surgery centers; and
LawyerCare(SM) - Offers professional liability coverage for lawyers and law
firms.
-10-
<PAGE> 11
Net premiums written were $28.7 million for the three months ended
September 30, 1997, an increase of 47.7%, as compared to net premiums written
of $19.4 million for the three months ended September 30, 1996. The increase
was primarily due to $9.9 million of reinsurance premiums assumed from MEEMIC,
which started in the third quarter of 1997. Professional liability premiums
changed as follows:
DoctorCare(SM) premiums decreased by $282,000 due primarily to the
continued consolidation of individual practices into group practices and
price-based competition in the Michigan and Illinois insurance markets.
CorpCare(SM) premiums decreased by $780,000 because of price-based competition.
Also, HealthServices(SM), HealthPro(SM) and other premiums decreased by
$149,000. Additionally, LawyerCare(SM) premiums decreased by $405,000 because of
the ceding of all LawyerCare(SM) policies in-force as of June 1, 1997 to
Michigan Lawyers Mutual Insurance Company ("MLM"). However, the Company started
assuming reinsurance premiums from MLM during the third quarter of 1997, which
resulted in additional premiums of $1.0 million. Of the $17.8 million of direct
professional liability net premiums written in the third quarter of 1997 (i.e.,
excludes the premiums assumed from MEEMIC and MLM), approximately 94.5% was
generated by DoctorCare(SM) and CorpCare(SM) coverages, 2.8% was generated by
HealthServices(SM) and HealthPro(SM) coverages, 0.0% was generated by
LawyerCare(SM) coverage (due to the ceding of all LawyerCare(SM) business as
previously mentioned) and 2.7% was generated by other types of coverage. Of the
$19.4 million of direct professional liability net premiums written in the third
quarter of 1996, approximately 92.1% was generated by DoctorCare(SM) and
CorpCare(SM) coverages, 2.8% was generated by HealthServices(SM) and
HealthPro(SM) coverages, 2.1% was generated by LawyerCare(SM) coverage and 3.0%
was generated by other types of coverage.
During each of the three months ended September 30, 1997 and 1996, the
Company continued to balance its desire for upward rate adjustments with its
goal of maintaining market share in very competitive environments in Michigan,
Illinois, Indiana and Ohio. As a result, the Company offered discounts to its
published premium rates to retain market share and experienced margin or price
reductions as a result of competitive market conditions in those periods.
Although the Company has maintained profitability and is endeavoring to offset
lower premiums charged through more selective underwriting practices, there can
be no assurance that these practices will be successful in the long run.
Net investment income, excluding realized capital gains and losses,
totaled $4.9 million for the three months ended September 30, 1997 as compared
to net investment income of $3.9 million for the three months ended September
30, 1996, an increase of 27.1%. The increase in net investment income mainly
resulted from an increase in average invested assets primarily due to proceeds
received from the Company's bank term loan which were used to purchase a $21.5
million surplus note from MEEMIC (see "Liquidity and Capital Resources" herein
for further discussion) as well as continued positive cash flows from
operations. The weighted average tax equivalent book yield of the fixed
maturity portfolio was 6.8% and 6.7% as of September 30, 1997 and 1996,
respectively. Net realized investment losses were negligible during both three
month periods ended September 30, 1997 and 1996.
-11-
<PAGE> 12
Incurred losses and loss adjustment expenses (including the increase
in reserve for extended reporting period claims) increased to $17.8 million for
the three months ended September 30, 1997 from $12.0 million for the three
months ended September 30, 1996. As a percentage of premiums earned, the
incurred loss and loss adjustment expense ratio (including the increase in
reserve for extended reporting period claims) was 76.9% for the three months
ended September 30, 1997, down from 84.9% for the same period of 1996. The
decrease in the three month incurred loss and loss adjustment expense ratio was
primarily due to the business assumed from MEEMIC, which generated a 65.1% loss
and loss adjustment expense ratio. The third quarter 1997 incurred loss and
loss adjustment expense ratio would have been 86.1%, excluding the business
assumed from MEEMIC.
Policy acquisition and underwriting expenses increased to $6.4 million
for the three months ended September 30, 1997 from $2.7 million for the three
months ended September 30, 1996. As a percentage of premiums earned, the
underwriting expense ratio was 27.9% for the three months ended September 30,
1997, up from an underwriting expense ratio of 19.0% for the same period of
1996. The increase was mainly attributable to certain non-recurring legal,
accounting, investment banker and related expenses associated with the
Company's merger and acquisition activities (see "Liquidity and Capital
Resources" herein for further discussion), as well as the ceding commission
paid to MEEMIC related to the assumed reinsurance agreement.
The Company recorded $361,000 of interest expense for the three months
ended September 30, 1997 because of the issuance of $22.5 million of long-term
debt in April 1997 (see "Liquidity and Capital Resources" herein for further
discussion).
The Company recorded $725,000 in federal income tax expense for the
three months ended September 30, 1997, compared to $855,000 during the same
period in 1996. The effective tax rate was 19.6% for the three months ended
September 30, 1997 versus 26.3% for the three months ended September 30, 1996.
The lower effective tax rate for the three months ended September 30, 1997 was
primarily due to an increase in the amount of tax-exempt interest earned as
well as an increase in the dividends received deduction, as compared to the
same period of 1996.
Net income for the three months ended September 30, 1997 was $3.0
million, or $0.85 per share on revenues of $28.2 million, as compared to net
income of $2.4 million, or $0.68 per share on revenues of $17.9 million, for
the three months ended September 30, 1996. The 24.2% increase in net income was
primarily attributable to increased net investment income, fee income received
from a management services agreement with MEEMIC and an improved loss and loss
adjustment expense ratio resulting from the business assumed from MEEMIC.
-12-
<PAGE> 13
Results of Operations -- Nine Months Ended September 30, 1997 Compared to Nine
Months Ended September 30, 1996:
Net premiums written were $53.7 million for the nine months ended
September 30, 1997, an increase of 12.2%, as compared to net premiums written
of $47.8 million for the nine months ended September 30, 1996. The increase
was primarily due to $9.9 million of reinsurance premiums assumed from MEEMIC,
which started in the third quarter of 1997. Professional liability premiums
changed as follows:
DoctorCare(SM) premiums decreased by $3.6 million due primarily to the
continued consolidation of individual practices into group practices and
price-based competition in the Michigan and Illinois insurance markets.
Additionally, a $786,000 decrease in CorpCare(SM) premiums and a $62,000
decrease in HealthServices(SM) and HealthPro(SM) premiums were offset by a
$198,000 increase in other premiums. Also, LawyerCare(SM) premiums decreased by
$814,000 because of the ceding of all LawyerCare(SM) policies in-force as of
June 1, 1997 to MLM. However, the Company started assuming reinsurance premiums
from MLM during the third quarter of 1997, which resulted in additional premiums
of $1.0 million. Of the $42.8 million of direct professional liability net
premiums written in 1997 (i.e., excludes the premiums assumed from MEEMIC and
MLM), approximately 92.1% was generated by DoctorCare(SM) and CorpCare(SM)
coverages, 4.8% was generated by HealthServices(SM) and HealthPro(SM) coverages,
negative 0.3% was generated by LawyerCare(SM) coverage (due to the ceding of all
LawyerCare(SM) business as previously mentioned) and 3.4% was generated by other
types of coverage. Of the $47.8 million of direct professional liability net
premiums written in 1996, approximately 91.5% was generated by DoctorCare(SM)
and CorpCare(SM) coverages, 4.4% was generated by HealthServices(SM) and
HealthPro(SM) coverages, 1.5% was generated by LawyerCare(SM) coverage and 2.6%
was generated by other types of coverage.
During each of the nine months ended September 30, 1997 and 1996, the
Company continued to balance its desire for upward rate adjustments with its
goal of maintaining market share in very competitive environments in Michigan,
Illinois, Indiana and Ohio. As a result, the Company offered discounts to its
published premium rates to retain market share and experienced margin or price
reductions as a result of competitive market conditions in those periods.
Although the Company has maintained profitability and is endeavoring to offset
lower premiums charged through more selective underwriting practices, there can
be no assurance that these practices will be successful in the long run.
Net investment income, excluding realized capital gains and losses,
totaled $13.8 million for the nine months ended September 30, 1997 as compared
to net investment income of $11.6 million for the nine months ended September
30, 1996, an increase of 19.2%. The increase in net investment income mainly
resulted from an increase in average invested assets primarily due to proceeds
received from the Company's bank term loan which were used to purchase a $21.5
million surplus note from MEEMIC (see "Liquidity and Capital Resources" herein
for further discussion) as well as continued positive cash flows from
operations. The weighted average tax equivalent book yield of the fixed
maturity portfolio was 6.8% and 6.7% as of September 30, 1997 and 1996,
respectively. Net realized investment losses were $77,000 during the nine
month period ended September 30, 1997 as compared to a net investment loss of
$480,000 during the same period of 1996. The 1996 net realized investment loss
was taken to reposition the fixed maturity portfolio to increase after-tax
yield.
-13-
<PAGE> 14
Incurred losses and loss adjustment expenses (including the increase
in reserve for extended reporting period claims) increased to $39.6 million for
the nine months ended September 30, 1997 from $36.6 million for the nine months
ended September 30, 1996. As a percentage of premiums earned, the incurred
loss and loss adjustment expense ratio (including the increase in reserve for
extended reporting period claims) was 81.5% for the nine months ended September
30, 1997, down from 86.0% for the same period of 1996. The decrease in the
nine month incurred loss and loss adjustment expense ratio was primarily due to
the business assumed from MEEMIC, which generated a 65.1% loss and loss
adjustment expense ratio. The 1997 incurred loss and loss adjustment expense
ratio would have been 85.8%, excluding the business assumed from MEEMIC.
Policy acquisition and underwriting expenses increased to $11.7
million for the nine months ended September 30, 1997 from $8.1 million for the
nine months ended September 30, 1996. As a percentage of premiums earned, the
underwriting expense ratio was 24.2% for the nine months ended September 30,
1997, up from an underwriting expense ratio of 19.0% for the same period of
1996. The increase was mainly attributable to certain non-recurring legal,
accounting, investment banker and related expenses associated with the
Company's merger and acquisition activities (see "Liquidity and Capital
Resources" herein for further discussion), as well as the ceding commission
paid to MEEMIC related to the assumed reinsurance agreement.
The Company recorded $730,000 of interest expense for the nine months
ended September 30, 1997 because of the issuance of $22.5 million of long-term
debt in April 1997 (see "Liquidity and Capital Resources" herein for further
discussion).
The Company recorded $2.6 million in federal income tax expense for
the nine months ended September 30, 1997, compared to $2.3 million during the
same period in 1996. The effective tax rate was 23.7% for the nine months
ended September 30, 1997 versus 25.0% for the nine months ended September 30,
1996. The lower effective tax rate for the nine months ended September 30,
1997 was primarily due to an increase in the amount of tax-exempt interest
earned as well as an increase in the dividends received deduction, as compared
to the same period of 1996.
Net income for the nine months ended September 30, 1997 was $8.3
million, or $2.36 per share on revenues of $62.9 million, as compared to net
income of $6.9 million, or $1.98 per share on revenues of $53.8 million, for
the nine months ended September 30, 1996. The 20.2% increase in net income was
primarily attributable to increased net investment income, a decrease in net
realized investment losses, fee income received from a management services
agreement with MEEMIC and an improved loss and loss adjustment expense ratio
resulting from the business assumed from MEEMIC.
-14-
<PAGE> 15
Liquidity and Capital Resources:
Liquidity describes the ability to generate sufficient cash flows to
meet the cash requirements of continuing operations. Liquidity, in the context
of insurance operations, is typically determined by two distinct operations:
underwriting and investing. Net cash flows from underwriting operations are
used to build an investment portfolio, which in turn produces future cash from
investment income. The Company continuously monitors available cash and
short-term investment balances in relation to projected cash needs to maintain
adequate balances for current payments while maximizing cash available for
longer term investment opportunities.
The payment of losses, loss adjustment expenses and operating expenses
in the ordinary course of business represents the Company's principal need for
liquid funds. Payments for losses and loss adjustment expenses are distributed
fairly evenly throughout the year. Payments for reinsurance are made within
thirty days subsequent to the end of each quarter, with adjustments made after
each reinsurance year. Historically, cash used to pay for these items has been
provided by operations. The Company did not borrow any funds in the nine month
periods ended September 30, 1997 or 1996 for capital expenditures; however, as
of September 30, 1997, the Company has $6.7 million of commitments for a new
home office facility in Okemos, Michigan and to purchase new furniture and
equipment. (See discussion below regarding funds borrowed by the Company
during 1997 for purposes other than capital expenditures). As of September 30,
1997, no other material commitments for capital expenditures existed, and
management believes the Company's present liquidity, together with its expected
cash flow from operations, will be sufficient to fund these commitments for
capital expenditures, which are anticipated to be funded during the fourth
quarter of 1997.
On June 1, 1997, PICOM ceded all of its LawyerCare(SM) policies
in-force to Michigan Lawyers Mutual Insurance Company ("MLM") and
started reinsuring 35% of MLM's net premiums. This reinsurance is projected to
increase PICOM's gross written premiums to approximately $2.0 million on an
annualized basis.
In April 1997, the Company completed an agreement with Michigan
Educational Employees Mutual Insurance Company ("MEEMIC"), a Michigan-domiciled
specialty writer of personal automobile and homeowners coverages for teachers
and other members of the educational community in Michigan. Pursuant to the
agreement and based on the approvals of the Michigan Commissioner of Insurance:
(i) PICOM purchased a twelve-year, $21.5 million surplus note from MEEMIC,
bearing interest at 8.5% per annum (the "Surplus Note"); (ii) effective July 1,
1997, PICOM started reinsuring approximately 40% of MEEMIC's net premiums (this
is projected to increase PICOM's gross written premiums by approximately $35.0
million on an annualized basis); (iii) Professionals Group will provide MEEMIC
with information systems services and certain consulting services pursuant to a
ten-year management services agreement for a base fee of $2.0 million; and (iv)
nominees of Professionals Group have been elected to all positions on the Board
of Directors of MEEMIC. The Company had also agreed to assist MEEMIC in
acquiring the net assets of Michigan Educators Insurance Agency, Inc. ("MEIA").
MEIA had the exclusive right to distribute MEEMIC insurance products.
On September 22, 1997, MEEMIC completed its purchase of the net assets
of MEIA for a purchase price equal to 3.75% of all premiums to be written
through MEIA II, a newly formed subsidiary of MEEMIC, through July 2004,
subject to a guaranteed minimum purchase price of $43.0 million. To fund this
purchase, MEEMIC paid cash of $22.5 million (utilizing the proceeds
-15-
<PAGE> 16
of the Surplus Note), MEEMIC guaranteed payment of the next $3.0 million and
Professionals Group guaranteed payment of the final $17.5 million (during the
years 2001 - 2004). Professionals Group's guarantee obligation would only
become necessary if the 3.75% payment stream fails to equal $43.0 million.
Based upon current projections of MEEMIC's written premiums through 2004, the
Company believes the likelihood that the guarantee obligation would become
payable is minimal.
At a future date, Professionals Group and MEEMIC expect to pursue
demutualization of MEEMIC. Such demutualization would be subject to regulatory
approval by the Michigan Commissioner of Insurance, approval by MEEMIC's
policyholders and approval by Professionals Group's shareholders. No specific
timetable has been set for this proposed demutualization and there can be no
assurances that MEEMIC will be demutualized.
Concurrent with the April agreement entered into with MEEMIC,
Professionals Group obtained $22.5 million in proceeds from a seven-year
unsecured bank term loan, bearing interest at an adjustable rate of LIBOR plus
62.5 basis points (6.41% at September 30, 1997), and payable quarterly (the
"Credit Agreement"). Principal payments are due on April 30, as follows: 1998
- - $2,500,000; 1999 - $2,500,000; 2000 - $3,000,000; 2001 - $3,000,000; 2002 -
$3,500,000; 2003 - $3,500,000; and 2004 - $4,500,000. Professionals Group used
$20.0 million of the proceeds received from this loan to make a capital
contribution to PICOM, which in turn, used the proceeds to purchase the Surplus
Note from MEEMIC.
The Credit Agreement contains a covenant which prohibits the payment
of cash dividends on Professionals Group's common stock (except for cash paid
in lieu of fractional shares related to stock dividends declared). Additional
covenants also require the Company to, among other things, maintain total
consolidated shareholders' equity of at least $80.0 million plus 50% of the
preceding fiscal year's consolidated net income, maintain a ratio of debt to
equity of not more than 0.5:1 and maintain a fixed charges coverage ratio and
an interest coverage ratio (as defined by the Credit Agreement) of not less
than 1.5:1 and 2.5:1, respectively. The Company was in compliance with, or has
received waivers of, all required covenants at September 30, 1997.
On August 15, 1997, Professionals Group announced that it had
signed a definitive agreement to merge PICOM with Physicians Protective Trust
Fund, a medical malpractice self-insurance trust fund located in Coral Gables,
Florida ("PPTF"). PPTF is the largest provider of medical malpractice
insurance for physicians and physician corporations in the State of Florida.
This agreement was amended and restated on October 3, 1997, and pursuant to the
amended and restated agreement, Professionals Group will issue 4,089,160 shares
of Professionals Group common stock to the eligible members of PPTF upon
consummation of the merger. The transaction is expected to be accounted for as
a pooling of interests. The closing of the merger is expected to occur in the
first quarter of 1998, subject to regulatory and shareholder/policyholder
approval.
-16-
<PAGE> 17
Effects of New Accounting Pronouncements:
The Financial Accounting Standards Board ("FASB") has issued Statement
of Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS No. 128")
which is effective for financial statements issued for both interim and annual
periods ending after December 15, 1997. Earlier application is not permitted.
This standard replaces the presentation of primary earnings per share with a
presentation of basic earnings per share and also requires dual presentation of
basic and diluted earnings per share for all entities with complex capital
structures. Because early adoption of SFAS No. 128 is not permitted, there is
no impact on the Company's earnings per share amounts for the interim periods
presented herein. However, upon adoption in the fourth quarter of 1997, all
prior interim and annual period earnings per share data presented will be
restated to conform with the provisions of SFAS No. 128. The Company does not
expect the impact of the adoption of SFAS No. 128 to be material to previously
reported earnings per share amounts.
The FASB has also issued SFAS No. 130 "Reporting Comprehensive
Income," which is effective for fiscal years beginning after December 15, 1997.
This standard requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
<TABLE>
<CAPTION>
Item 601
Regulation S-K
Exhibit Reference
Number Exhibit Description
----------------- -------------------
<S> <C>
(11) No statement re: computation of per share earnings is required to be filed
because the computations can be clearly determined from the materials
contained herein.
(27) Financial Data Schedule of registrant.*
</TABLE>
- --------------------------
* Filed herewith.
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K dated August
14, 1997, in connection with the execution of an
Agreement and Plan of Merger dated August 14, 1997, among
Professionals Group, PICOM and Physicians Protective Trust
Fund, a medical malpractice self-insurance trust fund, located
in Coral Gables, Florida. No other reports were filed during
the three months ended September 30, 1997.
-17-
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PROFESSIONALS INSURANCE COMPANY
MANAGEMENT GROUP
DATE: November 12, 1997 /s/ R. Kevin Clinton
------------------------------------
R. Kevin Clinton
Vice President, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
-18-
<PAGE> 19
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
----------- -----------
EX-11 No statement re: computation
of per share earnings is
required to be filed because
the computations can be
clearly determined from the
materials contained herein.
EX-27 Financial Data Schedule of
registrant.
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF PROFESSIONALS INSURANCE
COMPANY MANAGEMENT GROUP AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTH PERIOD
THEN ENDED (IN THOUSANDS).
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 310,013
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 2,798
<MORTGAGE> 0
<REAL-ESTATE> 447
<TOTAL-INVEST> 336,244
<CASH> 3,067
<RECOVER-REINSURE> 232
<DEFERRED-ACQUISITION> 1,245
<TOTAL-ASSETS> 414,753
<POLICY-LOSSES> 240,316
<UNEARNED-PREMIUMS> 28,611
<POLICY-OTHER> 15,095
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 22,500
0
0
<COMMON> 3,506
<OTHER-SE> 94,835
<TOTAL-LIABILITY-AND-EQUITY> 414,753
48,547
<INVESTMENT-INCOME> 13,779
<INVESTMENT-GAINS> (77)
<OTHER-INCOME> 636
<BENEFITS> 39,583
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 12,459
<INCOME-PRETAX> 10,843
<INCOME-TAX> 2,570
<INCOME-CONTINUING> 8,273
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,273
<EPS-PRIMARY> 2.36
<EPS-DILUTED> 2.36
<RESERVE-OPEN> 219,919
<PROVISION-CURRENT> 39,701
<PROVISION-PRIOR> (418)
<PAYMENTS-CURRENT> 763
<PAYMENTS-PRIOR> 27,362
<RESERVE-CLOSE> 240,316
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
