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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): July 1, 1998
PROFESSIONALS GROUP, INC.
(Exact name of registrant as specified in its charter)
Michigan 0-21223 38-3273911
(State or other jurisdiction (Commission File No.) (IRS Employer
of incorporation) 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
Professionals Insurance Company Management Group
(Former name or former address, if changed since last report)
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ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
THE BUSINESS COMBINATION
On July 1, 1998, the business combination of Professionals Insurance
Company Management Group, a Michigan business corporation now known as
"Professionals Group, Inc." ("Professionals Group"), and Physicians Protective
Trust Fund, a medical malpractice self-insurance trust fund organized under
Florida Statutes Section 627.357 ("PPTF"), was consummated pursuant to the First
Amended and Restated Agreement and Plan of Merger dated as of October 3, 1997,
as amended by a First Amendment to First Amended and Restated Agreement and Plan
of Merger dated as of April 13, 1998 (collectively, the "Merger Agreement"),
both executed by and among Professionals Group, PICOM Insurance Company, a
Michigan stock insurance corporation and wholly-owned subsidiary of
Professionals Group now known as "ProNational Insurance Company" ("PICOM"), and
PPTF. PPTF is a medical malpractice self-insurance trust fund that was formed in
1975 under the Florida Insurance Code which permits a group of health care
providers to self-insure against professional medical malpractice liability.
PPTF had consolidated assets of $406.3 million at March 31, 1998, and $434.8
million and $417.5 million at December 31, 1997 and 1996, respectively. (All
capitalized terms not otherwise defined herein shall have the meanings provided
for such terms in the Merger Agreement.)
The business combination of Professionals Group and PPTF was effected
through the merger of PPTF with and into PPTF Merger Insurance Company, a
newly-formed wholly-owned insurance subsidiary of Professionals Group ("INSCO"),
followed immediately by the merger of INSCO with and into PICOM, with PICOM
continuing on as the surviving insurance corporation). As a result of such
business combination, Professionals Group's consolidated assets increased to
approximately $873.7 million on a pro forma basis as of March 31, 1998.
By virtue of the consummation of the transactions contemplated by the
Merger Agreement: (i) Professionals Group remains the parent of PICOM, PICOM
holds all of the assets and liabilities of PPTF and INSCO, and PPTF and INSCO
ceased to exist; (ii) all Members of PPTF ceased to have any rights as Members
of PPTF (including the right to elect trustees, the right to vote as to other
matters, and all rights with respect to the distribution of surplus in
liquidation); (iii) all Membership Rights of PPTF Members were converted into an
aggregate of 4,089,160 shares of Professionals Group Common Stock and ceased to
exist; and (iv) PPTF indemnity agreements became insurance policies issued by
PICOM and were converted from assessable insurance policies to nonassessable
insurance policies, without any endorsement or modification thereto. In
addition, following the consummation of such transactions, PICOM was renamed
"ProNational Insurance Company" (to reflect the combined insurance operations of
PPTF and PICOM). PICOM is maintaining regional executive offices in Okemos,
Michigan and Coral Gables, Florida and local sales and service offices in
Florida, Illinois, Indiana and Ohio.
Upon consummation of the merger of PPTF with and into INSCO all
Membership Rights of PPTF Members were converted into an aggregate of 4,089,160
shares (the "Aggregate Merger Shares") of Common Stock, no par value per share
of Professionals Group ("Professionals Group Common Stock"). In consideration
for such Membership Rights, the Aggregate Merger Shares have been allocated to,
and are being distributed to, Members of PPTF in accordance with the formula
(the "Allocation Formula") that follows: Each Member of PPTF who did not timely
and properly exercise dissenters' rights has been allocated a portion of the
Aggregate Merger Shares in an amount (calculated to two decimal places)
determined by multiplying 4,089,160 shares of Professionals Group Common Stock
by the ratio (calculated to six decimal places) of the earned premium on such
Member's PPTF Policy for the 12 months ending on April 1 (the "Earned PPTF
Policy Premium") to $56,037,359 (which is the
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aggregate of all earned premium on all PPTF Policies for such 12 months) (the
"Aggregate Earned Premium"); provided, however, that in lieu of any fractional
share of Professionals Group Common Stock, such Member shall be paid cash in an
amount determined by multiplying the amount of such fractional share by $37.39
(which is the average of the daily closing prices per share of Professionals
Group Common Stock as reported by the Nasdaq National Market for the period of
20 business days ending on the fifth business day prior to July 1, 1998 (the
closing date with respect to the transactions contemplated by the Merger
Agreement)). The one Member of PPTF who timely and properly exercised
dissenters' rights will be paid the fair value of his Membership Rights.
By way of example, under the Allocation Formula, and assuming he or she
did not exercise dissenters' rights, a Member of PPTF whose PPTF Policy had
$24,000 of Earned PPTF Policy Premium would be entitled to 1,750.16 Aggregate
Merger Shares, determined by multiplying 4,089,160 shares of Professionals Group
Common Stock by .000428 ($24,000 of Earned PPTF Policy Premium divided by
$56,037,359 (the Aggregate Earned Premium)). However, because fractional shares
of Professionals Group Common Stock will not be issued, such Member would
receive 1,750 whole shares of Professionals Group Common Stock and, in lieu of
the fractional share of Professionals Group Common Stock, would be paid cash
equal to $5.98 (which amount was determined by multiplying the amount of such
fractional share (in this example .16) by $37.39).
Each share of Professionals Group Common Stock outstanding immediately
prior to consummation of the transactions contemplated by the Merger Agreement
remains outstanding and unchanged as a result of those transactions. Each option
granted by Professionals Group to purchase shares of Professionals Group Common
Stock outstanding and unexercised immediately prior to the consummation of the
transactions contemplated by the Merger Agreement (i) continues to represent a
right to acquire shares of Professionals Group Common Stock, (ii) remains an
issued and outstanding option to purchase from Professionals Group shares of
Professionals Group Common Stock in the same amount and at the same exercise
price subject to the terms of the Professionals Group stock plans under which
they were issued and the agreements evidencing grants thereunder, and (iii) was
not affected by the consummation of the transactions contemplated by the Merger
Agreement.
The transactions consummated pursuant to the Merger Agreement will be
accounted for as a "pooling-of-interests" transaction under generally accepted
accounting principles. Under such method of accounting, Members of PPTF will be
deemed to have combined their existing interests in PPTF with that of holders of
Professionals Group Common Stock by exchanging their Membership Rights for
shares of Professionals Group Common Stock. Accordingly, the book value of the
assets, liabilities and policyholder fund balance of PPTF, as reported on its
consolidated balance sheet, will be carried over to the consolidated balance
sheet of the combined entity at their recorded amounts and no goodwill will be
created. The combined entity will be able to include in its consolidated income
the consolidated income of PPTF and Professionals Group for all of fiscal year
1998 (however, certain expenses incurred to effect the Mergers must be treated
as current charges against income rather than adjustments to the balance sheet),
and the reported income of the separate entities for prior periods will be
combined and restated as income of the combined entity.
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DIRECTORS
Professionals Group. Following the consummation of the transactions
contemplated by the Merger Agreement, the size of the Board of Directors of
Professionals Group (the "Professionals Group Board") was increased to 16
persons. The table below sets forth certain information regarding the
composition of the Professionals Group Board.
Director Class Term Expires
-------- ----- ------------
Louis P. Brady, M.D. III 1999
Jerry D. Campbell III 1999
W. Peter McCabe, M.D. III 1999
Steven L. Salman, Esq. III 1999
Donald S. Young, Esq. III 1999
William H. Woodhams, M.D. III 1999
Victor T. Adamo, Esq. I 2000
Eliot H. Berg, M.D. I 2000
John F. McCaffrey I 2000
Isaac J. Powell, M.D. I 2000
Edward S. Truppman, M.D. I 2000
Richard G. Alper, M.D. II 2001
R. Kevin Clinton, FCAS, MAAA II 2001
John F. Dodge, Jr., Esq. II 2001
H. Harvey Gass, M.D. II 2001
Ann F. Putallaz, Ph.D. II 2001
In addition, a committee of the Professionals Group Board known as the
"Nominating Committee" was established. This committee (i) is comprised of four
members of the Professionals Group Board (Louis P. Brady, H. Harvey Gass, W.
Peter McCabe and Edward S. Truppman), and (ii) to the fullest extent permitted
under the articles of incorporation and the bylaws of Professionals Group, has
been delegated and authorized to recommend nominees for election to the
Professionals Group Board. Action of the Nominating Committee within the meaning
of Section 523 of the Michigan Business Corporation Act, as amended, will
require the favorable vote of at least 75% of the members of this committee.
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PICOM. Following the consummation of the transactions contemplated by
the Merger Agreement, the composition of the Board of Directors of PICOM was
changed. It now consists of ten persons, namely: Victor T. Adamo, Esq., Eliot H.
Berg, M.D., Joseph P. Cauthen, M.D., David W. Heeke, D.D.S., Richard P. Horsch,
M.D., W. Peter McCabe, M.D., Robert E. Paxton, M.D., Steven L. Salman, Esq.,
George A. Segal, M.D., and Jack Wolfsdorf, M.D.
EXECUTIVE OFFICERS
Professionals Group. Dr. McCabe is the Chairman of the Board of
Professionals Group, Dr. Berg is the Vice-Chairman of the Board of Professionals
Group, Mr. Adamo is the President and Chief Executive Officer of Professionals
Group, and Mr. Salman is the Chief Operating Officer of Professionals Group. The
other executive officers of Professionals Group are: R. Kevin Clinton, Chief
Financial Officer; William P. Sabados, Chief Information Officer; Annette E.
Flood, Vice President and Secretary; and John F. Lang, Vice President, Treasurer
and Chief Accounting Officer.
PICOM. Dr. Berg is the Chairman of the Board of PICOM, as the surviving
corporation in the PICOM Merger; Dr. McCabe is the Vice-Chairman of the Board of
PICOM; and Mr. Salman is the President and Chief Executive Officer of PICOM.
OTHER MATTERS
Section 1.28 Stock. Subject to the terms of the Merger Agreement and
certain Consulting, Confidentiality and Noncompetition Agreements executed by
and between Professionals Group and each of Drs. Richard G. Alper, Eliot H.
Berg, Louis P. Brady, Joseph P. Cauthen, Hubert G. Martinez, George A. Segal,
Kerry M. Schwartz, Robert S. Tolmach, Edward S. Truppman and Jack Wolfsdorf,
Professionals Group has provisionally granted and allocated to the PPTF Trustee
Participants an aggregate of 93,204 shares of Professionals Group Common Stock.
Of such shares of Professionals Group Common Stock, 13,597 shares, 9,159 shares,
8,806 shares, 8,806 shares, 8,806 shares, 8,806 shares, 8,806 shares, 8,806
shares, 8,806 shares, and 8,806 shares have been allocated to Dr. Berg, Dr.
Brady, Dr. Alper, Dr. Schwartz, Dr. Martinez, Dr. Segal, Dr. Tolmach, Dr.
Cauthen, Dr. Truppman and Dr. Wolfsdorf, respectively. On July 1, 1998,
Professionals Group issued and delivered to each PPTF Trustee Participant that
number of shares of Professionals Group Common Stock that is equal to 20% of the
aggregate number of shares of Professionals Group Common Stock allocated to such
PPTF Trustee Participant. The remaining 80% of the aggregate number of shares of
Professionals Group Common Stock allocated to such PPTF Trustee Participant will
be delivered to such PPTF Trustee Participant in four equal and annual
installments, subject to the vesting provisions of his Consulting Agreement.
Under such vesting provisions, a PPTF Trustee Participant will receive an annual
installment of the shares allocated to him only if his Consulting Agreement is
still in effect on the date such annual installment is to be delivered by
Professionals Group. However, all of the shares of Professionals Group Common
Stock allocated to a PPTF Trustee Participant under his Consulting Agreement
will automatically vest if, while his Consulting Agreement is in effect, such
PPTF Trustee Participant dies or a "change of control" of Professionals Group
occurs. (For these purposes, the term "change of control" is defined
substantially the same as it is defined in Professionals Group's Key Employee
Retention Plan.) In this regard, it is to be noted that each of the Consulting
Agreements imposes confidentiality, noncompetition and nonsolicitation
obligations on the PPTF Trustee Participants that are parties thereto.
Subject to the terms of the Merger Agreement and certain
Confidentiality, Noncompetition and Stock Grant Agreements executed by and
between Professionals Group and each of Messrs. William D. Baxter, David R.
Goss, Gregg Hanson, John Hastie, Steven L. Salman and Robert E. White, Jr. and
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Mrs. Peggy Schemenauer, Professionals Group has provisionally granted and
allocated to the PPTF Officers an aggregate of 59,796 shares of Professionals
Group Common Stock. Of such shares of Professionals Group Common Stock, 35,224
shares, 8,806 shares, 7,486 shares, 3,523 shares, 3,523 shares, 881 shares and
353 shares have been allocated to Mr. Salman, Mr. White, Mr. Baxter, Ms.
Schemenauer, Mr. Hanson, Mr. Hastie and Mr. Goss, respectively. On July 1, 1998
Professionals Group issued and delivered to each PPTF Officer the number of
shares of Professionals Group Common Stock that is equal to 20% of the aggregate
number of shares of Professionals Group Common Stock allocated to such PPTF
Officer. The remaining 80% of the aggregate number of shares of Professionals
Group Common Stock allocated to such PPTF Officer will be delivered to such PPTF
Officer in four equal and annual installments, subject to the vesting provisions
of his or her Stock Grant Agreement. Under such vesting provisions, a PPTF
Officer will receive an annual installment of the shares allocated to him or her
only if his or her Stock Grant Agreement is still in effect on the date such
annual installment is to be delivered by Professionals Group. However, all of
the shares of Professionals Group Common Stock allocated to a PPTF Officer under
his or her Stock Grant Agreement will automatically vest if, while his or her
Stock Grant Agreement is in effect, such PPTF Officer dies or a "change of
control" of Professionals Group occurs. (For these purposes, the term "change of
control" is defined substantially the same as it is defined in Professionals
Group's Key Employee Retention Plan.) In this regard, it is to be noted that
each of the Stock Grant Agreements imposes confidentiality, noncompetition and
nonsolicitation obligations on the PPTF Officers that are parties thereto.
The shares of Professionals Group Common Stock to be issued to the PPTF
Trustee Participants and the PPTF Officers pursuant to Section 1.28 of the
Merger Agreement and the applicable Consulting Agreements and the Stock Grant
Agreements are intended to be an incentive for the recipients to be active
participants in the operations and management of Professionals Group and/or
PICOM following the consummation of the transactions contemplated by the Merger
Agreement. Professionals Group has concluded that such active participation will
facilitate and expedite the consolidation and integration of the operations of
PICOM and PPTF within a reasonable time following the consummation of the
transactions contemplated by the Merger Agreement. Professionals Group has
determined that such incentives will provide it continued access to the services
and skills of these persons and will discourage such persons from accepting
offers of employment from competitors.
ITEM 5. OTHER EVENTS
On June 3, 1998, at the 1998 Annual Meeting of Stockholders of
Professionals Group, the stockholders of Professionals Group (i) approved the
transactions contemplated by the Merger Agreement; (ii) approved an amendment
to Article I of Professionals Group's First Amended and Restated Articles of
Incorporation to change the name of Professionals Group to "Professionals
Group, Inc." and (iii) elected Mr. R. Kevin Clinton, John F. Dodge, Jr., Esq.,
H. Harvey Gass, M.D. and Ann F. Putallaz, Ph.D. to the Professionals Group
Board for three year terms expiring in the year 2001 and upon the election
and qualification of their successors or upon their earlier resignation or
removal.
The vote of stockholders with respect to the transactions contemplated
by the Merger Agreement was as follows: For - 2,115,988 shares; Against - 56,736
shares; Abstain - 18,871 shares; Not Voting - 444,633 shares. The vote of
stockholders with respect to amending Professional's Group's First Amended and
Restated Articles of Incorporation to change its name was as follows: For -
2,617,894 shares; Against -3,395 shares; Abstain - 14,939. The vote of
shareholders with respect to the election of directors was as follows:
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<TABLE>
<CAPTION>
Shares
Nominee Shares For Election Withheld
<S> <C> <C>
R. Kevin Clinton 2,620,270 15,958
John F. Dodge, Jr. 2,618,479 17,749
H. Harvey Gass, M.D. 2,620,028 16,200
Ann F. Putallaz, Ph.D. 2,620,270 15,958
</TABLE>
In addition, incumbent directors Victor T. Adamo, Esq., Jerry D.
Campbell, W. Peter McCabe, M.D., John McCaffrey, Issac J. Powell, M.D., Donald
S. Young, Esq., and William H. Woodhams, M.D., continued in office.
The above matters are more fully described in Professionals Group's
Joint Proxy Statement/Prospectus dated April 29, 1998.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements of Business Acquired.
(i) Included with this Current Report on Form 8-K as Exhibit
99.1 are (A) the report dated February 27, 1998 of KPMG Peat Marwick LLP,
independent auditors, on the consolidated financial statements of PPTF; (B)
consolidated balance sheets of PPTF as of December 31, 1997 and 1996; (C)
consolidated statements of income of PPTF for the years ended December 31, 1997,
1996 and 1995; (D) consolidated statements of changes in fund balance of PPTF
for the years ended December 31, 1997, 1996 and 1995; (E) consolidated
statements of cash flows of PPTF for the years ended December 31, 1997, 1996 and
1995; and (F) notes to such consolidated financial statements of PPTF.
(ii) Included with this Current Report on Form 8-K as Exhibit
99.2 are (A) unaudited condensed consolidated balance sheet of PPTF as of March
31, 1998; (B) unaudited condensed consolidated statements of income of PPTF for
the three months ended March 31, 1998 and 1997; (C) unaudited condensed
consolidated statements of cash flows of PPTF for the three months ended March
31, 1998 and 1997; and (D) notes to such unaudited condensed consolidated
financial statements of PPTF.
(b) Pro Forma Financial Information.
Included with this Current Report on Form 8-K as Exhibit 99.3
are (i) unaudited pro forma condensed combined statements of income for
Professionals Group and PPTF for the three months ended March 31, 1998 and 1997
and for the years ended December 31, 1997, 1996 and 1995; (ii) an unaudited pro
forma condensed combined balance sheet of Professionals Group and PPTF at March
31, 1998; and (iii) notes to such unaudited pro forma condensed combined
financial statements.
(c) Exhibits.
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Exhibit Reference
Number Exhibit Description
----------------- -------------------
3.1 Second Amended and Restated
Articles of Incorporation of
Professionals Group, Inc.*
23.1 Consent of KPMG Peat Marwick LLP*
27.1 Financial Data Schedule of
Physicians Protective Trust Fund.*
99.1 Financial statements of
Physicians Protective Trust Fund
("PPTF") as follows: (i) the report
dated February 27, 1998 of KPMG
Peat Marwick LLP, independent
auditors, on the consolidated
financial statements of PPTF; (ii)
consolidated balance sheets of PPTF
as of December 31, 1997 and 1996;
(iii) consolidated statements of
income of PPTF for the years ended
December 31, 1997, 1996 and 1995;
(iv) consolidated statements of
changes in fund balance of PPTF for
the years ended December 31, 1997,
1996 and 1995; (v) consolidated
statements of cash flows of PPTF
for the years ended December 31,
1997, 1996 and 1995; and (vi) notes
to such consolidated financial
statements of PPTF.*
99.2 Financial statements of
Physicians Protective Trust Fund
("PPTF") as follows: (i) unaudited
condensed consolidated balance
sheet of PPTF as of March 31,
1998; (ii) unaudited condensed
consolidated statements of income
of PPTF for the three months ended
March 31, 1998 and 1997;
(iii) unaudited condensed
consolidated statements of cash
flows of PPTF for the three months
ended March 31, 1998 and 1997; and
(iv) notes to such unaudited
condensed consolidated financial
statements of PPTF.*
99.3 Pro forma financial statements
of Professionals Group, Inc.
("Professionals Group") and
Physicians Protective Trust Fund
("PPTF") as follows: (i) unaudited
pro forma condensed combined
statements of income for
Professionals Group and PPTF for
the three months ended March 31,
1998 and 1997 and for the years
ended December 31, 1997, 1996 and
1995; (ii) an unaudited pro forma
condensed combined balance sheet of
Professionals Group and PPTF at
March 31, 1998; and (iii) notes to
such unaudited pro forma condensed
combined financial statements.*
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Exhibit Reference
Number Exhibit Description
- ----------------- -------------------
99.4 First Amended and Restated
Agreement and Plan of Merger dated
as of October 3, 1997 by and among
the registrant, PICOM Insurance
Company and Physicians Protective
Trust Fund (incorporated by
reference to Exhibit 2 of the
registrant's Current Report on Form
8-K dated October 3, 1997 filed
with the Securities and Exchange
Commission on October 10, 1997
(file no. 0- 21223)).
99.5 First Amendment to First
Amended and Restated Agreement and
Plan of Merger dated as of April
13, 1998 by and among the
registrant, PICOM Insurance Company
and Physicians Protective Trust
Fund (incorporated by reference to
Exhibit (2)(b)/(10)(b) of the
registrant's Registration Statement
on Form S-4 (registration no.
333-51071) filed with the
Securities and Exchange Commission
on April 27, 1998).
- ---------------------------------
* Filed herewith
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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 hereunto duly authorized.
PROFESSIONALS GROUP, INC.
Date: July 15, 1998 By:/s/ John F. Lang
---------------------------------------
Name: John F. Lang
Its: Vice President, Treasurer and
Chief Accounting Officer
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EXHIBIT INDEX
-------------
EXHIBIT NO. DESCRIPTION
- ----------- -----------
EXHIBIT 3.1 Second Amended and Restated Articles
of Incorporation of Professionals Group, Inc.
EXHIBIT 23.1 Consent of KPMG Peat Marwick LLP
EXHIBIT 27.1 Financial Data Schedule of Physicians Protective
Trust Fund.
EXHIBIT 99.1 Audited Financial Statements of Physicians Protective
Trust Fund.
EXHIBIT 99.2 Unaudited Financial Statements of Physicians
Protective Trust Fund.
EXHIBIT 99.3 Pro Forma Financial Statements of Professionals
Group, Inc. and Physicians Protective Trust Fund.
<PAGE> 1
EXHIBIT 3.1
SECOND AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
PROFESSIONALS GROUP, INC.
The following Second Amended and Restated Articles of Incorporation
supersede the Articles of Incorporation as amended and/or restated and shall be
the Articles of Incorporation for the corporation:
ARTICLE I
The name of the corporation is Professionals Group, Inc.
ARTICLE II
The purpose or purposes for which the corporation is formed is to
engage in any activity within the purposes for which corporations may be formed
under the Michigan Business Corporation Act, as amended, MCLA Section 450.1181
et seq. (the "Act").
ARTICLE III
The total authorized shares of capital stock which the corporation
shall have authority to issue consisting of shall be 30,000,000 shares. Said
shares shall be divided into two classes, with one class consisting of
25,000,000 shares of common stock (the "Common Stock") and the other class
consisting of 5,000,000 shares of preferred stock (the "Preferred Stock").
Subject to the Act and these Articles of Incorporation, the board of directors
of the corporation is authorized, by resolution of the board of directors, to
provide for the issuance of shares of Preferred Stock from time to time in one
or more series and to prescribe the designation and relative rights and
preferences of each such series. A certificate containing the resolution of the
board of directors that establishes and designates a series of shares of
Preferred Stock and prescribes the relative rights and preferences of such
series (a "Certificate of Designation") shall be filed as contemplated by the
Act and, when filed, shall constitute an amendment to these Articles of
Incorporation. A series of shares of Preferred Stock established and designated
pursuant to a Certificate of Designation shall have only those relative rights
and preferences that are expressly set forth in such Certificate of Designation.
<PAGE> 2
ARTICLE IV
The address and mailing address of the registered office are as
follows: 2600 Professionals Drive, P.O. Box 150, Okemos, Michigan 48805-0150.
The name of the resident agent at the registered office is Annette E.
Flood.
ARTICLE V
The name and address of the incorporator are as follows:
Name Residence or Business Address
Annette E. Flood 4295 Okemos Road
P.O. Box 2510
Okemos, Michigan 48805-9510
ARTICLE VI
The duration of the corporation is perpetual.
ARTICLE VII
A director of the corporation shall not be personally liable to the
corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director. However, this provision does not eliminate or limit the
liability of a director for any of the following:
(a) any breach of the director's duty of loyalty to the
corporation or its shareholders;
(b) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law;
(c) a violation of Section 551(1) of the Act;
(d) a transaction from which the director derived an improper
personal benefit; or
(e) an act or omission occurring prior to the date this Article
VII becomes effective.
Any repeal, amendment or other modification of this Article VII shall
not increase the liability or alleged liability of any director of the
corporation then existing with respect to any state of facts then or theretofore
existing or any action, suit or proceeding theretofore or thereafter brought or
threatened based in whole or in part upon any such state of facts. If the Act is
subsequently amended to authorize corporate action further eliminating or
limiting personal liability of directors, then the liability of directors shall
be eliminated or limited to the fullest extent permitted by the Act as so
amended.
<PAGE> 3
Subject to any limitations imposed by applicable law, these Articles of
Incorporation or the Bylaws of the corporation, the corporation shall indemnify,
and the corporation shall have the power to purchase and maintain insurance on
behalf of, any person who is or was a director, officer, employee, or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, partner, trustee, employee, or agent of another corporation,
partnership, joint venture, trust or other enterprise, against any liability
(including, without limitation, expenses, attorneys' fees, judgments, fines,
settlements, and costs) asserted against such person or incurred by such person
in any such capacity or arising out of his or her status as such.
ARTICLE VIII
Anything in these Articles of Incorporation, the Bylaws of the
corporation, or the Act to the contrary notwithstanding, the holders of shares
of capital stock of the corporation entitled to cast at least one-third of the
votes at any meeting of the shareholders of the corporation shall constitute a
quorum at such meeting.
ARTICLE IX
Any action required or permitted by the Act, these Articles of
Incorporation or the Bylaws of the corporation to be taken at an annual meeting
or a special meeting of shareholders may be taken without a meeting, without
prior notice and without a vote, if before or after the action all the
shareholders entitled to vote on such action consent in writing. The written
consents shall bear the date of signature of each shareholder who signs the
consent and shall be delivered to the corporation's registered office, its
principal place of business, or an officer or agent of the corporation having
custody of the minutes of the proceedings of its shareholders. Delivery made to
the corporation's registered office shall be by hand or by certified or
registered mail, return receipt requested. Prompt notice of the taking of such
corporate action without a meeting of shareholders shall be given to all
shareholders.
ARTICLE X
At an annual meeting of the shareholders, only such business shall be
conducted as shall have been properly brought before such annual meeting. To be
properly brought before an annual meeting business must be (i) specified in the
notice of meeting (or any supplement thereto) given by or at the direction of
the board of directors of the corporation, (ii) otherwise properly brought
before the meeting by or at the direction of the board of directors of the
corporation, or (iii) otherwise properly brought before the meeting by a
shareholder. For business to be properly brought before an annual meeting by a
shareholder, the shareholder must have given timely notice thereof in writing to
the secretary of the corporation. To be timely, a shareholder's notice must be
delivered to and received at the principal executive offices of the corporation,
(i) with respect to the annual meeting of shareholders to be held in 1997, not
later than February 1, 1997, and (ii) with respect to any annual meeting of
shareholders held after December 31, 1997, not later than 120 days prior to the
date one year from the date of the immediately preceding annual meeting of
shareholders.
A special meeting of shareholders may be called at any time by the
chairman of the board of the corporation, or the president of the corporation,
or by a majority of the members of the board of directors then in office, or by
shareholders owning, in the aggregate, not less than 25% of all the shares
entitled
<PAGE> 4
to vote at such special meeting. The method by which such meeting may be called
is as follows: Upon receipt of a specification in writing setting forth the date
and objects of such proposed special meeting, signed by the chairman of the
board, or the president of the corporation, or by a majority of the members of
the board of directors then in office, or by shareholders as above provided, the
secretary of the corporation shall prepare, sign and mail the notices requisite
to such meeting. At a special meeting of the shareholders, only such business
shall be conducted as shall have been properly brought before such special
meeting. To be properly brought before a special meeting business must be (i)
specified in the notice of meeting (or any supplement thereto) given by or at
the direction of the board of directors of the corporation, (ii) otherwise
properly brought before the meeting by or at the direction of the board of
directors of the corporation, or (iii) otherwise properly brought before the
meeting by a shareholder. For business to be properly brought before a special
meeting by a shareholder, the shareholder must have given timely notice thereof
in writing to the secretary of the corporation. To be timely, a shareholder's
notice must be delivered to and received at the principal executive offices of
the corporation, not later than the close of business on the 10th day following
that date that is the earlier of (A) the date on which public disclosure of such
special meeting is made and (B) the date on which formal notice of such special
meeting is first given to shareholders.
A shareholder's notice to the secretary of the corporation pursuant to
this Article X shall set forth as to each matter the shareholder proposes to
bring before the annual meeting or a special meeting (i) a brief description of
the business desired to be brought before the meeting (including the complete
text of any resolutions to be presented at the meeting) and the reasons for
conducing such business at the meeting, (ii) the name and address, as they
appear on the corporation's books, of the shareholder proposing such business,
(iii) a representation that the shareholder is a holder of record of shares of
the corporation entitled to vote at such meeting and intends to appear in person
or by proxy at the meeting to bring before the meeting each matter specified in
the notice, (iv) a description of all arrangements, understandings or
relationships between the shareholder and any other person or persons (naming
such person or persons) with respect to shares of the capital stock of the
corporation or each matter specified in the notice, (v) the class and number of
shares of capital stock of the corporation which are beneficially owned by the
shareholder, and (vi) any material interest of the shareholder in each matter
specified in the notice. Notwithstanding anything in these Articles of
Incorporation or the Bylaws of the corporation to the contrary, no business
shall be conducted at any annual meeting or special meeting of shareholders
except in accordance with the procedures set forth in this Article X. The
chairman of the meeting of shareholders shall, if the facts warrant, determine
and declare to the meeting that business was not properly brought before the
meeting and in accordance with the provisions of this Article X, and if he
should so determine, he shall so declare to the meeting and any such business
not properly brought before the meeting shall not be transacted.
A shareholder may not participate in an annual meeting or special
meeting of shareholders by a conference telephone or by other similar
communications equipment.
ARTICLE XI
Only persons who are nominated in accordance with the procedures set
forth in this Article XI shall be eligible for election as directors of the
corporation. Nominations of persons for election to the board of directors of
the corporation may be made at a meeting of shareholders by or at the direction
of the board of directors of the corporation or by any shareholder of the
corporation entitled to vote for the election of directors at the meeting who
complies with the notice procedures set forth in this Article XI. Such
nominations, other than those made by or at the direction of the board of
directors of the
<PAGE> 5
corporation, shall be made pursuant to timely notice in writing to the secretary
of the corporation. To be timely, a shareholder's notice shall be delivered to
and received at the principal executive offices of the corporation not later
than (i) with respect to an election to be held at the annual meeting of
shareholders to be held in 1997, not later than February 1, 1997, (ii) with
respect to an election to be held at any annual meeting of shareholders held
after December 31, 1997, 120 days prior to the date one year from the date of
the immediately preceding annual meeting of shareholders, and (iii) with respect
to an election to be held at a special meeting of shareholders for the election
of directors, the close of business on the 10th day following that date that is
the earlier of (A) the date on which public disclosure of such special meeting
is first made and (B) the date on which formal notice of such special meeting is
first given to shareholders.
A shareholder's notice to the secretary of the corporation pursuant to
this Article XI shall set forth (i) as to each person whom the shareholder
proposes to nominate for election or re-election as a director of the
corporation, (A) the name, age, business address and residence address of such
person, (B) the principal occupation or employment of such person, (C) the class
and number of shares of the capital stock of the corporation which are
beneficially owned by such person and (D) any other information relating to such
person that is required to be disclosed in solicitations of proxies for election
of directors of the corporation, or is otherwise required, in each case pursuant
to Regulation 14A under the Securities Exchange Act of 1934, as amended
(including without limitation such person's written consent to being named in
the proxy statement as a nominee and to serving as a director of the corporation
if elected); and (ii) as to the shareholder giving the notice (A) the name and
address, as they appear on the corporation's books, of such shareholder, (B) a
representation that the shareholder is a holder of record of shares of the
corporation entitled to vote at such meeting and intends to appear in person or
by proxy at the meeting to nominate the person or persons specified in the
notice, (C) a description of all arrangements, understandings or relationships
between the shareholder and each nominee and any other person or persons (naming
such person or persons) pursuant to which the nomination or nominations are to
be made by the shareholder, (D) such other information regarding each nominee
proposed by such shareholder as would be required to be included in a proxy
statement filed pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended, had the nominee been nominated, or intended to be nominated by
the board of directors of the corporation, and (E) a consent signed by each such
nominee to serve as a director of the corporation if so elected. At the request
of the board of directors of the corporation any person nominated by the board
of directors of the corporation for election as a director of the corporation
shall furnish to the secretary of the corporation that information required to
be set forth in a shareholder's notice of nomination which pertains to the
nominee. No person shall be eligible for election as a director of the
corporation unless nominated in accordance with the procedures set forth in this
Article XI. The chairman of the meeting of shareholders shall, if the facts
warrant, determine and declare to the meeting that a nomination was not made in
accordance with the procedures prescribed hereby, and if he should so determine,
he shall so declare to the meeting and the defective nomination shall be
disregarded.
ARTICLE XII
All of the powers of this corporation, insofar as the same may be
lawfully vested by these Articles of Incorporation in the board of directors of
the corporation, are hereby conferred upon the board of directors of this
corporation. In furtherance and not in limitation of such powers the board of
directors of the corporation shall have the power to make, adopt, amend, alter,
change, add to, and repeal from time to time Bylaws of this corporation, subject
to the right of the shareholders entitled to vote with respect thereto to adopt,
amend, alter, change, add to, and repeal Bylaws made by the board of directors
<PAGE> 6
of the corporation; provided, however, that Bylaws shall not be adopted,
amended, altered, changed, added to, or repealed by the shareholders of the
corporation except by the vote of the holders of not less than three-quarters of
the outstanding shares of capital stock of the corporation entitled to vote
thereon and, in the case of any matter on which the holders of shares of any
class or series of such capital stock shall be entitled to vote as a class or
series, upon the affirmative vote of note less than three-quarters of each such
class or each such series, as the case may be; provided further, however, that
such three-quarters vote shall not be required for any such adoption, amendment,
alteration, change, addition or repeal recommended to shareholders by the
affirmative vote of not less than two-thirds of the board of directors of the
corporation, and such adoption, amendment, alteration, change, addition, or
repeal so recommended shall require only the vote, if any, required under the
applicable provisions of the Act.
ARTICLE XIII
The business and affairs of the corporation shall be managed by or
under the direction of a board of directors. Such board of directors shall
consist of one director until the date of the corporation's first annual meeting
of shareholders (the "Reformation Date"). The corporation's first annual meeting
of shareholders shall be held at least one business day prior to the date that
the corporation acquires record and beneficial ownership of all of the then
issued and outstanding shares of capital stock of PICOM Insurance Company, a
Michigan stock insurance company. From and after the Reformation Date, the board
of directors of the corporation shall consist of not less than nine or more than
18 directors, with the board of directors of the corporation elected on the
Reformation Date consisting of such number of directors as is equal to the
number of directors elected to the board of directors at the corporation's first
annual meeting of shareholders; provided, however, that the exact number of
directors shall be determined from time to time solely by a resolution adopted
by an affirmative vote of a majority of the board of directors of the
corporation then in office. The directors shall be divided into three classes,
designated Class I, Class II and Class III. Each class of directors shall
consist, as nearly as may be possible, of one-third of the total number of
directors constituting the entire board of directors of the corporation. At the
corporation's first annual meeting of shareholders, the Class I directors shall
be elected for a one-year term, the Class II directors shall be elected for a
two-year term, and the Class III directors shall be elected for a three-year
term. At each succeeding annual meeting of shareholders, beginning with the
corporation's annual meeting of shareholders held in the first full calendar
year following the date of the corporation's first annual meeting of
shareholders, successors to the class of directors whose term expires at that
annual meeting shall be elected for a three-year term.
If the number of directors is changed, any increase or decrease shall
be apportioned among the classes of directors so as to maintain the number of
directors in each class as nearly equal as possible, but in no case will a
decrease in the number of directors shorten the term of any incumbent director.
When the number of directors is increased by the board of directors of the
corporation and any newly created directorships are filled by the board of
directors of the corporation, the additional directors shall be classified as
provided by the board of directors of the corporation.
A director shall hold office until the meeting for the year in which
his or her term expires and until his or her successor shall be elected and
shall qualify, subject, however, to prior death, resignation, retirement or
removal from office. Newly created directorships resulting from an increase in
the number of directors and any vacancy on the board of directors of the
corporation may be filled only by the directors by an affirmative vote of a
majority of the board of directors of the corporation then in office. If the
number of directors then in office is less than a quorum, such newly created
directorships and vacancies may be filled by a majority of the directors then in
office, although less than a quorum, or by
<PAGE> 7
the sole remaining director. A director elected by the board of directors of the
corporation to fill a vacancy shall hold office until the meeting for the year
in which his or her term expires and until his or her successor shall be elected
and shall qualify.
Notwithstanding the foregoing, whenever the holders of any one or more
classes or series of Preferred Stock issued by the corporation shall have the
right, voting separately by class or series, to elect directors at an annual
meeting or special meeting of shareholders, the election, term of office,
filling of vacancies and other features of such directorship shall be governed
by the terms of these Articles of Incorporation applicable thereto, except that
the directors so elected by any one or more classes or series of Preferred Stock
shall not be divided into classes pursuant to this Article XIII, and the terms
of office of the directors so elected by any one or more classes or series of
Preferred Stock shall expire at the next succeeding annual meeting of
shareholders.
Notwithstanding anything contained in these Articles of Incorporation
or the Bylaws of the corporation to the contrary (and notwithstanding the fact
that a lesser percentage may be specified by law, in these Articles of
Incorporation or in the Bylaws of the corporation), any director or the entire
board of directors of the corporation may be removed at any time only for cause.
ARTICLE XIV
Control shares acquired in a control share acquisition, with respect to
which no acquiring person statement has been filed with the corporation, may, at
any time during the period ending 60 days after the last acquisition of control
shares or the power to direct the exercise of voting power of control shares by
the acquiring person, be redeemed by the corporation at the fair value of the
shares.
After an acquiring person statement has been filed and after the
meeting at which the voting rights of the control shares acquired in a control
share acquisition are submitted to the shareholders, the shares are subject to
redemption by the corporation at the fair value of the shares unless the shares
are accorded full voting rights by the shareholders pursuant to Section 798 of
the Act.
A redemption of shares by the corporation pursuant to this Article XIV
shall be made upon election to redeem by the board of directors of the
corporation. Written notice of the election shall be sent to the acquiring
person within seven days after the election is made. The determination of the
board of directors of the corporation as to fair value shall be conclusive.
Payment shall be made for the control shares subject to redemption within 30
days after the election to redeem is made at a date and place selected by the
board of directors of the corporation . The board of directors of the
corporation may adopt additional procedures to accomplish a redemption.
This Article XIV is adopted pursuant to Section 799 of the Act, and the
terms used in this Article XIV shall have the meanings of the terms in Section
799 of the Act.
ARTICLE XV
When a compromise or arrangement or a plan of reorganization of this
corporation is proposed between this corporation and its creditors or any class
of them or between this corporation and its shareholders or any class of them, a
court of equity jurisdiction within the state, on application of this
corporation or of a creditor or shareholder thereof, or on application of a
receiver appointed for the
<PAGE> 8
corporation, may order a meeting of the creditors or class of creditors or of
the shareholders or class of shareholders to be affected by the proposed
compromise or arrangement or reorganization, to be summoned in such manner as
the court directs. If a majority in number representing three-fourths in value
of the creditors or class of creditors, or of the shareholders or class of
shareholders to be affected by the proposed compromise or arrangement or a
reorganization, agree to a compromise or arrangement or a reorganization of this
corporation as a consequence of the compromise or arrangement, the compromise or
arrangement and the reorganization, if sanctioned by the court to which the
application has been made, shall be binding on all the creditors or class of
creditors, or on all the shareholders or class of shareholders and also on this
corporation.
ARTICLE XVI
When considering a corporate combination or disposition within the
meaning of Chapter 7 of the Act, or any similar transaction, the board of
directors of the corporation, committees of the board of directors of the
corporation, individual directors and individual officers may, in considering
the best interests of the corporation and its shareholders, to the extent
permitted by Michigan law, consider the effects of any such transaction upon the
employees, customers and suppliers of the corporation and its subsidiaries, and
upon communities in which offices of the corporation and its subsidiaries are
located.
ARTICLE XVII
Notwithstanding anything contained in these Articles of Incorporation
or the Bylaws of the corporation to the contrary (and notwithstanding the fact
that a lesser percentage may be specified by law, in these Articles of
Incorporation, or in the Bylaws of the corporation), neither this Article XVII
nor Articles VII, VIII, IX, X, XI, XII, XIII or XIV, of these Articles of
Incorporation shall be amended, altered, changed, added to or repealed, in any
respect, nor shall any provision which will either (i) have the effect of
modifying or permitting circumvention of this Article XVII or Articles VII,
VIII, IX, X, XI, XII, XIII or XIV, of these Articles of Incorporation or (ii)
establish cumulative voting in the election of directors of the corporation be
adopted and added to these Articles of Incorporation, except upon 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, in the
case of any matter on which the holders of shares of any class or series of such
capital stock shall be entitled to vote as a class or series, upon the
affirmative vote of not less than three-quarters of each such class or each such
series, as the case may be.
Subject to the provisions of these Articles of Incorporation, the
corporation reserves the right to amend any provision contained in these
Articles of Incorporation, in the manner now or hereafter prescribed by statute,
and all rights conferred upon shareholders herein are granted subject to this
reservation.
<PAGE> 1
EXHIBIT 23.1
ACCOUNTANTS' CONSENT
The Board of Trustees
Physicians Protective Trust Fund:
We consent to the inclusion of our report dated February 27, 1998 with respect
to the consolidated balance sheets of Physicians Protective Trust Fund and
subsidiary as of December 31, 1997 and 1996, and the related consolidated
statements of income, changes in fund balance, and cash flows for each of the
years in the three-year period ended December 31, 1997, which report appears in
the Form 8-K of Professionals Group, Inc. dated July 15, 1998 and to the
incorporation by reference of our report in the registration statements on Form
S-8 of Professionals Group, Inc.
KPMG Peat Marwick LLP
Miami, Florida
July 15, 1998
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF PHYSICIANS PROTECTIVE
TRUST FUND AS OF MARCH 31, 1998 AND FOR THE THREE MONTH PERIOD THEN ENDED. (IN
THOUSANDS)
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<DEBT-HELD-FOR-SALE> 293,682
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 4,062
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 306,503
<CASH> 0
<RECOVER-REINSURE> 568
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 406,343
<POLICY-LOSSES> 215,066
<UNEARNED-PREMIUMS> 36,551
<POLICY-OTHER> 10,581
<POLICY-HOLDER-FUNDS> 10,094
<NOTES-PAYABLE> 0
0
0
<COMMON> 0
<OTHER-SE> 120,046
<TOTAL-LIABILITY-AND-EQUITY> 406,343
13,703
<INVESTMENT-INCOME> 4,508
<INVESTMENT-GAINS> 4,036
<OTHER-INCOME> 588
<BENEFITS> 15,752
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 2,066
<INCOME-PRETAX> 5,017
<INCOME-TAX> 1,298
<INCOME-CONTINUING> 3,719
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,719
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 250,056
<PROVISION-CURRENT> 14,059
<PROVISION-PRIOR> 1,440
<PAYMENTS-CURRENT> 362
<PAYMENTS-PRIOR> 19,482
<RESERVE-CLOSE> 215,066
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<PAGE> 1
EXHIBIT 99.1
INDEPENDENT AUDITORS' REPORT
The Board of Trustees
Physicians Protective Trust Fund:
We have audited the consolidated financial statements of Physicians
Protective Trust Fund and subsidiary (the "Trust") as listed in the accompanying
index. These consolidated financial statements are the responsibility of the
Trust's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Physicians
Protective Trust Fund and subsidiary as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Miami, Florida
February 27, 1998
<PAGE> 2
PHYSICIANS PROTECTIVE TRUST FUND
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Investments (note 2):
Available for sale, at fair value:
Fixed maturities (amortized cost: $280,259 and $338,131
in 1997 and 1996, respectively)....................... $289,790 $342,127
Equity securities (cost: $24,550 in 1997).............. 25,609 --
Short-term investments, at cost, which approximates
fair value............................................ 20,682 2,733
-------- --------
Total investments................................. 336,081 344,860
Cash........................................................ 460 74
Restricted cash (note 1(d))................................. 2,070 2,004
Premium receivable.......................................... 30,309 396
Accrued interest receivable................................. 4,736 5,969
Amounts due from reinsurers (note 4)........................ 51,069 52,860
Deferred income taxes (note 6).............................. 6,445 10,258
Furniture and equipment, net (note 3)....................... 775 799
Prepaid reinsurance premiums................................ 2,572 -
Other assets................................................ 278 302
-------- --------
Total assets...................................... $434,795 $417,522
======== ========
LIABILITIES AND FUND BALANCE
Liabilities:
Loss and loss adjustment expense liability (note 5)....... $250,056 $281,593
Unearned premiums......................................... 34,382 --
Liability for extended reporting period claims............ 10,328 8,625
Income taxes payable...................................... 5,680 4,550
Advance premiums.......................................... 1,828 9,057
Other liabilities......................................... 4,473 1,404
Surplus contributions (note 8)............................ 10,094 10,094
-------- --------
Total liabilities................................. 316,841 315,323
-------- --------
Fund balance:
Unassigned funds.......................................... 110,964 99,562
Net unrealized gain on investments, net of tax effect..... 6,990 2,637
-------- --------
Total fund balance (note 9)....................... 117,954 102,199
-------- --------
Commitments and contingencies (note 12)..................... -- --
-------- --------
Total liabilities and fund balance................ $434,795 $417,522
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 3
PHYSICIANS PROTECTIVE TRUST FUND
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues and other income:
Premiums written.......................................... $99,480 $89,968 $103,686
Premiums ceded............................................ 7,612 21,249 3,179
------- ------- --------
Net premiums written........................................ 91,868 68,719 100,507
Increase in unearned premiums, net of prepaid reinsurance
premium................................................... (31,810) -- --
------- ------- --------
Premiums earned................................... 60,058 68,719 100,507
Net investment income (note 2)............................ 20,802 23,310 23,050
Net realized gains on investments (note 2)................ 4,120 2,004 4,511
Reinsurance experience refund (note 7).................... 4,236 3,325 401
Other..................................................... 677 506 311
------- ------- --------
Total revenues.................................... 89,893 97,864 128,780
------- ------- --------
Expenses:
Losses and loss adjustment expenses, net (note 5)......... 67,109 76,393 120,596
Increase in reserve for extended reporting period
claims................................................. 1,703 690 746
Other underwriting and operating expenses (note 10)....... 4,719 6,741 6,202
------- ------- --------
Total expenses.................................... 73,531 83,824 127,544
------- ------- --------
Income before income taxes................................ 16,362 14,040 1,236
Provision for income taxes (note 6)......................... 4,960 4,664 (1,600)
------- ------- --------
Net income (note 9)....................................... $11,402 $ 9,376 $ 2,836
======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 4
PHYSICIANS PROTECTIVE TRUST FUND
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN FUND BALANCE
<TABLE>
<CAPTION>
NET UNREALIZED
GAIN
(LOSS) ON TOTAL
UNASSIGNED INVESTMENTS, NET FUND
FUNDS OF TAX EFFECT BALANCE
---------- ------------------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balances, December 31, 1994.............................. $ 87,350 $(8,440) $ 78,910
Net income............................................. 2,836 -- 2,836
Net appreciation on investments, net of tax effect
(note 2)............................................ -- 20,170 20,170
-------- ------- --------
Balances, December 31, 1995.............................. 90,186 11,730 101,916
Net income............................................. 9,376 -- 9,376
Net depreciation on investments, net of tax effect
(note 2)............................................ -- (9,093) (9,093)
-------- ------- --------
Balances, December 31, 1996.............................. 99,562 2,637 102,199
Net income............................................. 11,402 -- 11,402
Net appreciation on investments, net of tax effect
(note 2)............................................ -- 4,353 4,353
-------- ------- --------
Balances, December 31, 1997.............................. $110,964 $ 6,990 $117,954
======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 5
PHYSICIANS PROTECTIVE TRUST FUND
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................ $ 11,402 $ 9,376 $ 2,836
Adjustments to reconcile net income to net cash (used
in) provided from operating activities:
Depreciation and amortization......................... 945 454 180
Deferred income taxes................................. 1,571 3,212 (2,087)
Net realized gains on investments..................... (4,120) (2,004) (4,511)
Changes in operating assets and liabilities:
Restricted cash....................................... (66) (2,004) --
Premium receivable.................................... (29,913) 563 (63)
Accrued interest receivable........................... 1,233 564 (217)
Amounts due to reinsurers............................. 1,791 (18,094) 21,911
Prepaid reinsurance premiums.......................... (2,572) -- --
Income taxes payable.................................. 1,130 6,460 (2,231)
Loss and loss adjustment expense liability............ (31,537) (20,492) 25,058
Liability for extended reporting period claims........ 1,703 690 746
Unearned premiums..................................... 34,382 -- --
Advance premiums...................................... (7,229) (1,648) (3,584)
Other, net............................................ 3,093 248 (3,676)
--------- --------- ---------
Net cash (used in) provided from operating
activities......................................... (18,187) (22,675) 34,362
--------- --------- ---------
Cash flows from investing activities:
Purchases of short-term investments................... (225,968) (160,192) (181,706)
Proceeds from sale or maturity of short-term
investments........................................ 208,019 174,413 177,862
Purchases of fixed maturity investments............... (151,634) (160,937) (241,113)
Proceeds from sale of fixed maturity investments...... 204,666 153,995 196,320
Proceeds from maturity of fixed maturity
investments........................................ 8,216 20,145 16,946
Purchases of equity securities........................ (27,315) -- --
Proceeds from sale of equity securities............... 2,904 -- --
Purchases of furniture and equipment.................. (317) (340) (474)
Proceeds from sale of furniture and equipment......... 2 -- --
--------- --------- ---------
Net cash provided from (used in) investing
activities......................................... 18,573 27,084 (32,165)
--------- --------- ---------
Cash flows used in financing activities:
Book overdrafts....................................... -- (4,335) (2,197)
--------- --------- ---------
Net increase in cash.................................... 386 74 --
Cash:
Beginning of the year................................. 74 -- --
--------- --------- ---------
End of the year....................................... $ 460 $ 74 $ --
========= ========= =========
Supplemental disclosure of cash flow information:
Income taxes paid during the year..................... $ 2,259 $ 66 $ 2,718
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 6
PHYSICIANS PROTECTIVE TRUST FUND
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
(a) Organization and Principles of Consolidation
The consolidated financial statements include the accounts of Physicians
Protective Trust Fund (the "Trust") and its wholly owned subsidiary, Physicians
Protective Plan, Inc. ("PPP"). The Trust was formed on November 7, 1975 for the
purpose of providing professional liability insurance coverage for member
physicians in Florida. PPP was acquired on April 1, 1977 and provided managerial
and administrative services to the Trust through December 31, 1996. Effective
January 1, 1997, PPP ceased providing these services and now functions as an
insurance agency. All significant intercompany accounts and transactions have
been eliminated.
On October 3, 1997, the Trust entered into a First Amended and Restated
Merger Agreement with Professionals Insurance Company Management Group, a
Michigan corporation (Professionals Group), and PICOM Insurance Company, a
Michigan domiciled stock insurance company and wholly owned subsidiary of
Professionals Group (PICOM). PICOM is Professionals Group's largest subsidiary
and is a regional professional liability insurer licensed in nine states
throughout the Midwest. Professionals Group has consolidated assets of $413.2
million at December 31, 1997. Under the First Amended and Restated Merger
Agreement, PPTF's policyholders/members will exchange their membership rights
for 4,089,160 shares of Professionals Group common stock. The transaction
contemplated by the Merger Agreement is expected to qualify as a
"pooling-of-interests" for accounting and financial reporting purposes.
(b) Basis of Presentation
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles ("GAAP"), which vary in
certain respects from statutory accounting practices followed in reporting to
insurance regulatory authorities (see note 9 for the effect of such
differences).
(c) Short-Term Investments
Short-term investments, which consist principally of commercial paper,
money market funds and U.S. government securities, are stated at cost, which
approximates fair value.
(d) Restricted Cash
Restricted cash is an amount required to be deposited in escrow for the
appeal process of a specific case being litigated and decided upon in
arbitration.
(e) Investments Available for Sale
All of the Trust's securities have been classified as available-for-sale
since the adoption of SFAS No. 115 and therefore, all of the Trust's securities
are available to be sold in response to the Trust's liquidity needs, changes in
market interest rates and asset-liability management strategies, among other
reasons. Investments available-for-sale on the balance sheet are stated at fair
value. Unrealized gains and losses are excluded from earnings and reported as a
separate component of fund balance, net of related deferred income taxes (see
note 2).
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 Trust's investment securities in 1997, 1996 and 1995 were deemed
to be temporary.
<PAGE> 7
PHYSICIANS PROTECTIVE TRUST FUND
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Premiums and discounts are amortized or accreted, respectively, over the
life of the related debt security as an adjustment to yield using a method that
approximates yield to maturity. 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) Furniture and Equipment and Depreciation
Furniture and equipment are carried at cost, net of accumulated
depreciation, which is computed using the straight-line method over periods
ranging from 3 to 10 years (see note 3).
(g) Loss and Loss Adjustment Expense Liability
Trust policies provide for coverage on a claims-made basis. The loss and
loss adjustment expense liability represent the accumulation of individual case
estimates for reported losses and loss adjustment expenses, bulk adjustments to
case estimates and actuarial estimates for incurred but not reported losses and
loss adjustment expenses, based upon the Trust's actual experience, assumptions
and projections as to claims frequency, severity, inflationary trends and
settlement payments. The liability 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. The liability is
stated gross of reinsurance ceded. (see note 4).
(h) Current Liabilities
Under the Trust's cash management system, checks issued but not presented
to banks frequently result in overdraft balances for accounting purposes which
are classified as "Book Overdrafts" in the statement of cash flows.
(i) Premiums
Premiums are recognized as revenue in the accounting period in which
coverage is provided. Upon termination of coverage with the Trust, members have
the option to purchase an extended reporting endorsement, which provides
coverages for incidents occurring during the membership period. Throughout 1996
and in all years prior to 1996, the Trust issued calendar year policies only.
Therefore, there were no unearned premiums at the December 31, 1996 balance
sheet date. During 1997, the Trust began to issue anniversary date policies and
therefore at December 31, 1997 the amount of unearned premiums represents that
portion of written premium relating to premiums that will be earned in future
periods.
(j) Liability for Extended Reporting Period Claims
The liability for extended reporting period claims coverage is recorded
during the term of the original claims-made policy in amounts deemed adequate to
pay for estimated future claims reported subsequent to a policyholder's
departure. Changes in this liability are charged or credited to income.
(k) Income Taxes
Under the asset and liability method of accounting for income taxes,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amount of existing 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 those 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 (see note 6).
<PAGE> 8
PHYSICIANS PROTECTIVE TRUST FUND
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(l) Reinsurance
The Trust is reinsured under medical malpractice reinsurance agreements.
Reinsurance contracts do not relieve the Trust from its obligations to
policyholders. The Trust continually monitors its reinsurers to minimize its
exposure to significant losses from reinsurer insolvencies. The Trust only cedes
risks to reinsurers whom the Trust believes to be financially sound. Beginning
in 1996, General Reinsurance Corporation began reinsuring 100% of the Trust's
ceded risks. The Trust obtains collateral in the form of letters of credit to
secure any reinsurance recoverables from unauthorized reinsurers used prior to
1996. At December 31, 1997 and 1996, all reinsurance recoverables are considered
collectible (see note 4).
(m) Use of Estimates
The preparation of the consolidated financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
reported financial statement balances as well as the disclosure of contingent
assets and liabilities. Actual results could differ materially from those
estimates used.
Similar to other professional liability insurers, the Trust's liability for
unpaid losses and loss expenses, although supported by actuarial projections and
other data, are ultimately based on management's reasoned expectations of future
events. Although considerable variability is inherent in these estimates,
management believes that this liability is adequate. Estimates are reviewed
regularly and adjusted as necessary. Such adjustments are reflected in current
operations. In addition, the realization of the Trust's deferred income tax
assets is dependent on generating sufficient future taxable income. It is
reasonably possible that the expectations associated with these accounts could
change in the near term and that the effect of such changes could be material to
the consolidated financial statements.
(n) Nature of Operations
Following is a description of the most significant risks facing
property/casualty insurers and how the Trust mitigates those risks:
Legal/Regulatory Risk is the risk that the legal or regulatory
environment in which an insurer operates will change and create additional
costs or expenses not anticipated by the insurer in pricing its products.
That is, regulatory initiatives designed to reduce insurer profits or new
legal theories may create costs for the insurer beyond those recorded in
the financial statements. The Trust mitigates this risk through
underwriting and loss adjusting practices, which identify and minimize the
adverse impact of this risk. This risk is concentrated in Florida, where
the Trust writes all of its business.
Credit Risk is the risk that issuers of securities owned by the Trust
will default or other parties, including reinsurers, which owe the Trust
money will not pay. Also, the Trust writes some policies with deductibles,
which requires policyholders to reimburse the Trust for a portion of
indemnity paid. The Trust minimizes this risk by adhering to a conservative
investment strategy, by maintaining sound reinsurance and credit and
collection policies and by providing for any amounts deemed uncollectible.
Interest Rate Risk is the risk that interest rates will change and
cause a decrease in the value of an insurer's investments. The Trust
mitigates this risk by attempting to match the maturity schedule of its
assets with the expected payout of its liabilities. To the extent that
liabilities come due more quickly than assets mature, the Trust would have
to sell assets prior to maturity and recognize a gain or loss. At December
31, 1997, the estimated market value of the Trust's bond portfolio was
greater than its amortized cost.
<PAGE> 9
PHYSICIANS PROTECTIVE TRUST FUND
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(o) Fair Value
The fair value of the Trust's investments are estimated based on bid prices
published by financial services or quotations received from securities dealers
and is reflective of the interest rate environment that existed as of the close
of business on December 31, 1997 and 1996. Changes in interest rates subsequent
to December 31, 1997 will effect the fair value of the Trust's investments.
The carrying amounts for the following financial instrument categories
approximate their fair values at December 31, 1997 and 1996, because of their
short-term nature: cash, short-term investments, premium receivable, reinsurance
recoverable on paid losses, accrued interest receivable, unearned premiums and
reinsurance experience refund payable.
(2) INVESTMENTS AVAILABLE FOR SALE
The amortized cost, gross unrealized gains and losses and estimated fair
value of investments available for sale are as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------------------------- -----------------------------------------------
GROSS GROSS ESTIMATED GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
--------- ---------- ---------- --------- --------- ---------- ---------- ---------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Maturities:
U.S. governments...... $107,610 $ 1,587 $ (212) $108,985 $138,169 $1,819 $(2,599) $137,389
Municipal bonds....... 82,748 5,718 0 88,466 78,171 3,500 (141) 81,530
Corporate bonds....... 53,596 2,319 (53) 55,862 63,235 1,948 (144) 65,039
Mortgage-backed
securities.......... 36,305 192 (20) 36,477 58,556 250 (637) 58,169
-------- ------- ------- -------- -------- ------ ------- --------
Subtotal............ 280,259 9,816 (285) 289,790 338,131 7,517 (3,521) 342,127
-------- ------- ------- -------- -------- ------ ------- --------
Equity securities....... 24,550 2,484 (1,425) 25,609 -- -- -- --
-------- ------- ------- -------- -------- ------ ------- --------
Totals......... $304,809 $12,300 $(1,710) $315,399 $338,131 $7,517 $(3,521) $342,127
======== ======= ======= ======== ======== ====== ======= ========
</TABLE>
A summary of investments available for sale at December 31, 1997, by
contractual maturity, is presented below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or repay
obligations with or without prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED FAIR
COST VALUE
-------------- --------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C>
Due in one year or less............................ $ -- $ --
Due after one year through five years.............. 57,067 57,804
Due after five years through ten years............. 56,452 59,415
Due after ten years................................ 130,435 136,094
Mortgage-backed securities......................... 36,305 36,477
-------- --------
Totals................................... $280,259 $289,790
======== ========
</TABLE>
<PAGE> 10
PHYSICIANS PROTECTIVE TRUST FUND
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of the sources of net investment income follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturities........................... $ 20,242 $ 22,605 $ 22,363
Equity securities.......................... 103 -- --
Short-term investments and cash and cash
equivalents.............................. 1,153 1,368 1,095
Other investment assets.................... 159 38 169
-------- -------- --------
Total investment income.......... 21,657 24,011 23,627
Less investment expenses................... 855 701 577
-------- -------- --------
Net investment income............ $ 20,802 $ 23,310 $ 23,050
======== ======== ========
</TABLE>
Proceeds and related gross realized gains and gross realized losses on
sales of fixed maturities and equity securities follow:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Total proceeds............................. $215,786 $174,140 $213,266
======== ======== ========
Gross realized gains....................... 4,982 3,394 6,036
Gross realized losses...................... (862) (1,390) (1,525)
-------- -------- --------
Net realized gains............... $ 4,120 $ 2,004 $ 4,511
======== ======== ========
</TABLE>
Realized gains and increases (decreases) in net unrealized gains (losses)
follow:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net realized gains (losses):
Fixed maturities......................... $ 3,981 $ 2,004 $ 4,511
Equity securities........................ 139 -- --
-------- -------- --------
Total............................ $ 4,120 $ 2,004 $ 4,511
======== ======== ========
Change in net unrealized gains (losses):
Fixed maturities......................... $ 5,535 $(13,776) $ 30,561
Equity securities........................ 1,059 - -
-------- -------- --------
Total............................ $ 6,594 $(13,776) $ 30,561
======== ======== ========
</TABLE>
(3) FURNITURE AND EQUIPMENT, NET
Furniture and equipment are reported net of accumulated depreciation of
$1,654,000 in 1997 and $1,669,000 in 1996.
(4) REINSURANCE
In the normal course of business, the Trust 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
<PAGE> 11
PHYSICIANS PROTECTIVE TRUST FUND
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
obligate the Trust's reinsurers to reimburse the Trust for their proportionate
share of losses, they do not discharge the primary liability of the Trust. The
Trust remains liable for the ceded amount of any liability for unpaid losses and
loss adjustment expenses and unearned premiums in the event the assuming
insurance organizations are unable to meet their contractual obligations.
As of December 31, 1997, the Trust had an excess of loss reinsurance
contract with General Reinsurance Corporation that covered losses in excess of
the Trust's maximum current net retention per claim of $500,000. In 1996, the
Trust lowered its per claim retention from $1 million to $500,000 through an
"Excess of Loss" reinsurance contract with General Reinsurance Corporation. In
1996, the Trust also entered into a "Loss Ratio" reinsurance contract with
General Reinsurance Corporation, which covered 43% of the losses within a range
of approximately $53 million up to a maximum of $92 million. The "Loss Ratio"
contract was not renewed in 1997.
The Trust continually reviews its reinsurer(s), considering a number of
factors, the most critical of which is their financial stability. Based on these
reviews, the Trust evaluates its position with respect to existing and future
reinsurers.
Amounts due from reinsurers consisted of amounts related to:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Paid losses and loss adjustment expenses................. $ 235 $ 2,930
Unpaid losses and loss adjustment expenses............... 56,591 54,649
Premiums ceded payable................................... (2,709) (1,282)
Experience refunds....................................... (3,048) (3,437)
------- -------
$51,069 $52,860
======= =======
</TABLE>
At December 31, 1997, amounts due from reinsurers were as follows:
<TABLE>
<CAPTION>
AMOUNTS
DUE FROM A.M. BEST
REINSURERS RATING
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
General Reinsurance Corporation.......................... $40,171 A++
Continental Casualty Company............................. 7,321 A
Other.................................................... 3,577 --
-------
Total.......................................... $51,069
=======
</TABLE>
<PAGE> 12
PHYSICIANS PROTECTIVE TRUST FUND
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) LOSS AND LOSS ADJUSTMENT EXPENSE LIABILITY
Activity in the loss and loss adjustment expense reserves is summarized as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at January 1....................... $281,593 $302,085 $277,027
Less reinsurance recoverables............ 54,649 39,078 46,105
-------- -------- --------
Net balance at January 1................... 226,944 263,007 230,922
-------- -------- --------
Incurred related to:
Current year............................. 72,129 72,368 112,121
Prior years.............................. (5,020) 4,025 8,475
-------- -------- --------
Total incurred................... 67,109 76,393 120,596
-------- -------- --------
Paid related to:
Current year............................. 9,167 12,215 8,047
Prior years.............................. 91,421 100,241 80,464
-------- -------- --------
Total paid....................... 100,588 112,456 88,511
-------- -------- --------
Net balance at December 31................. 193,465 226,944 263,007
Plus reinsurance recoverables............ 56,591 54,649 39,078
-------- -------- --------
Balance at December 31..................... $250,056 $281,593 $302,085
======== ======== ========
</TABLE>
In the opinion of the Trustees, the loss and loss adjustment expense
liability is adequate to cover all reported incidents, claims and related
expenses and anticipated claims reported under extended reporting endorsements.
However, medical malpractice claims by nature develop slowly over a number of
years and the reserves may be more or less than the amount ultimately paid. In
the event of a deficit in any year, which could not be covered by the
accumulated fund balance, members of the Trust are fully assessable. It has not
been necessary during the period of operation of the Trust to make such an
assessment.
The amount of loss liability needed is determined by management after
evaluating the projected ultimate losses developed by the Trust's independent
consulting actuary. Greater volatility in loss experience associated with the
Trust's higher retention in 1994 and 1995 warranted adding small percentage
increases to the Trust's prior years loss reserves during 1995 and 1996. More
favorable loss experience in the report year 1995 combined with the
implementation of systems designed to control loss adjustment expenses have
resulted in a small percentage decrease in prior years loss reserves in 1997.
Loss reserves are established within a range that assures certification by the
Trust's independent actuary.
(6) INCOME TAXES
The Trust and its subsidiary are required to file separate federal and
state income tax returns.
<PAGE> 13
PHYSICIANS PROTECTIVE TRUST FUND
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The provision for income tax expense (benefit) includes the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal..................................... $ 2,585 $ 936 $ 628
State....................................... 804 516 (141)
------- ------- -------
3,389 1,452 487
------- ------- -------
Deferred:
Federal..................................... 1,506 2,863 (2,066)
State....................................... 65 349 (21)
------- ------- -------
1,571 3,212 (2,087)
------- ------- -------
Total expense (benefit)....................... $ 4,960 $ 4,664 $(1,600)
======= ======= =======
</TABLE>
The provision for income taxes differs from the "expected" income tax
expense, computed by applying the U.S. federal corporate tax rate of 34 percent
for 1997, 1996 and 1995 to income before income taxes, as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Computed "expected" tax expense............... $ 5,563 $ 4,774 $ 420
Tax-exempt interest income.................... (1,216) (1,242) (1,633)
State income taxes, net of federal income tax
benefit..................................... 596 492 (107)
Other, net.................................... 17 640 (280)
------- ------- -------
Total............................... $ 4,960 $ 4,664 $(1,600)
======= ======= =======
</TABLE>
The tax effect of the temporary differences that give rise to the total net
deferred tax asset as of December 31, 1997 and 1996 are presented below:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred federal income tax assets arising from:
Discounting of loss reserves for tax but not for
financial statement purposes...................... $ 7,247 $ 8,307
Unearned premiums disallowance for tax but not for
financial statement purposes...................... 2,163 --
Deferred reinsurance experience refund............... 763 2,477
Alternative minimum tax credit....................... 348 1,243
------- -------
Total deferred federal income tax assets..... $10,521 $12,027
------- -------
Deferred federal income tax liabilities arising from:
Unrealized gain on investments available for sale.... (3,601) (1,359)
State tax effect of book-tax differences............. (458) (393)
Depreciation book-tax difference..................... (17) (17)
------- -------
Total deferred federal income tax
liabilities................................ (4,076) (1,769)
------- -------
Net deferred federal income taxes.................... $ 6,445 $10,258
======= =======
</TABLE>
<PAGE> 14
PHYSICIANS PROTECTIVE TRUST FUND
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Trust has not recorded a valuation allowance, as the deferred tax
assets are presently considered by management to be realizable based on the
level of anticipated future taxable income. Net deferred tax assets and federal
income tax expense in future years can be significantly affected by changes in
enacted tax rates or by unexpected adverse events that would impact management's
conclusions as to the ultimate realizability of deferred tax assets.
For 1997, 1996 and 1995, deferred income tax expense and benefit resulted
from temporary differences in the recognition of income and expenses for
financial reporting and income tax purposes. The sources of these differences
and the tax effects of each year are presented below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred reinsurance experience refund......... $ 1,714 $ (178) $(1,396)
Loss reserve discounting....................... 1,060 3,971 (218)
Unearned premiums.............................. (2,163) -- --
Alternative minimum tax credit................. 895 (649) (594)
State tax effect............................... 65 145 118
Other.......................................... -- (77) 3
------- ------ -------
Deferred income tax expense (benefit).......... $ 1,571 $3,212 $(2,087)
======= ====== =======
</TABLE>
(7) REINSURANCE EXPERIENCE REFUND
The Trust's reinsurance contracts through December 31, 1997, include profit
sharing provisions whereby premiums are refunded to the Trust after five years
if they exceed actual losses incurred and an allowance for expenses. Interest
income accrues on excess premiums computed. The reinsurance experience refunds
earned for calendar years 1997, 1996 and 1995 were $4,236,000, $3,325,000 and
$401,000, respectively. These amounts include interest income of $1,250,000 for
1997, $1,095,000 for 1996 and $212,000 for 1995. The profits received by PPTF
under the contracts emanate from report years prior to 1991 and have exceeded
the amounts recognized as profits on the income statement. This results in
establishing a deferred credit for the difference, which is subject to variation
until the ultimate outcome of outstanding claims is known. Prior to 1995,
reinsurance experience refunds were recognized on the income statement based on
ultimate loss projections established by the Trust's independent actuary. Since
1995, the number of outstanding claims has decreased in number, so that it is
appropriate to assess claims on an individual case by case basis. Accordingly,
since 1995 reinsurance experience refunds have been recognized based on the
closure rate of outstanding claims and the assumption that the few remaining
open claims will be settled for a conservative amount above the claim's existing
case basis reserve.
(8) SURPLUS CONTRIBUTIONS
From 1984 through 1990, members joining the Trust were required to make a
contribution to surplus. This contribution was required during a high growth
period and was intended to strengthen the Trust's premium to surplus ratio and
protect the residual value interests of policyholders who produced surplus in
prior years through the profitability of the Trust. When the contribution was
paid, a non-interest-bearing surplus note was issued. Under the terms of the
note, repayment of principal and payment of any interest are at the sole
discretion of the board of trustees. If the board of trustees decided to pay any
or all of the contributions, the Department of Insurance would also be required
to approve such payment. Generally, the surplus contributions are nonrefundable.
<PAGE> 15
PHYSICIANS PROTECTIVE TRUST FUND
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) RECONCILIATION OF FUND BALANCE
The following is a reconciliation of fund balance at December 31, 1997,
1996 and 1995 and net income for the years then ended, as determined using
statutory accounting practices compared to those determined in accordance with
generally accepted accounting principles.
<TABLE>
<CAPTION>
FUND BALANCE NET INCOME
-------------------- -----------------------------
1997 1996 1997 1996 1995
-------- -------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
As reported to regulatory authorities
(unaudited).......................... $113,309 $105,076 $ 8,106 $12,724 $ 6,081
Adjust net income reported on statutory
basis (unaudited).................... -- -- -- 594 (594)
Net gain (loss) on subsidiary.......... -- -- (173) (128) (635)
Deferred income taxes (PPTF only)...... 6,453 10,266 (1,571) (3,212) 2,087
Deferred reinsurance experience
refund............................... (2,244) (7,284) 5,040 (522) (4,107)
Net unrealized gain (losses) on
securities available for sale
(gross).............................. 9,531 3,996 -- -- --
Surplus contributions (see note 8)..... (10,094) (10,094) -- -- --
Other non-admitted assets.............. 999 239 -- (80) 4
-------- -------- ------- ------- -------
As reported herein..................... $117,954 $102,199 $11,402 $ 9,376 $ 2,836
======== ======== ======= ======= =======
</TABLE>
(10) OTHER UNDERWRITING AND OPERATING EXPENSES
Other underwriting and operating expenses are net of earned ceding
commissions in the amounts of $758,000, $41,000 and $477,000 for the years,
1997, 1996 and 1995, respectively. The net amount of $4,719,000 for the
year-ended December 31, 1997 includes premium tax refunds totaling $2,566,000.
These non-recurring refunds are the result of amended returns filed for prior
years pursuant to a court ruling allowing the use of credits in determining
premium tax expense. Also, included are expenses, totaling $1,478,000, related
to the merger activity described in note 1(a).
(11) PENSION PLAN
The Trust and its subsidiary have a simplified employee pension plan
("SEP") which is a noncontributory defined contribution pension plan. The
pension plan expense was $351,000 in 1997, $363,000 in 1996 and $283,000 in
1995.
(12) COMMITMENTS AND CONTINGENCIES
The Trust and its subsidiary are obligated under various non-cancelable
operating lease agreements for Trust offices and automobiles. The minimum future
payments under these agreements for the year ended December 31, 1997 are as
follows:
<TABLE>
<S> <C>
1998............................. $ 519,000
1999............................. 512,000
2000............................. 487,000
2001............................. 473,000
2002............................. 382,000
Thereafter....................... 911,000
----------
Total.................. $3,284,000
==========
</TABLE>
<PAGE> 16
PHYSICIANS PROTECTIVE TRUST FUND
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Rental expense amounted to $518,000, $478,000 and $466,000 in 1997, 1996
and 1995, respectively.
The Trust is involved in numerous legal actions arising primarily from
claims against policies issued by the Trust. The legal actions arising from
claims against these policies have been considered by the Trust in establishing
its liability. Insurers are susceptible to lawsuits that award substantial
judgments, including material amounts of punitive damages, or to substantial
settlements. To date, no such lawsuit has resulted in an award for a material
amount against the Trust. Among litigation pending is an action brought against
the Trust on 11/23/94 that resulted in a judgment against a policyholder insured
by the Trust for approximately $8.4 million. The policyholder has filed a motion
for a new trial with the appellate court. While the outcome of this legal action
is not presently determinable, the Trust's management and its legal counsel are
of the opinion that it is highly probable that the appellate court will reverse
the original judgment and grant a new trial. Management believes that the case
will ultimately be settled for an amount substantially less than the original
judgment and will not have a material adverse effect on the Trust's financial
position or results of operations. Management has provided for the estimated
ultimate loss as part of the loss and loss adjustment expense liability.
Subsequent Events
Effective February 1, 1998, the Trust entered into an Adverse Development
Stop Loss Reinsurance Contract with PICOM as part of the Trust's over-all
reinsurance program for years prior to January 1, 1997. Under this contract the
Trust will pay $30.6 million to reinsure losses and loss adjustment expenses
paid by PPTF after July 1, 1997 on claims arising under policies issued prior to
January 1, 1997. The Trust will retain the first $147 million and the limit
under the reinsurance contract is capped at $40 million.
<PAGE> 1
EXHIBIT 99.2
PHYSICIANS PROTECTIVE TRUST FUND
AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
Assets 1998 1997
------ ---- ----
(in thousands)
<S> <C> <C>
Investments available for sale, at fair value:
Fixed maturities (amortized cost: $284,842
and $280,259 at March 31, 1998 and
December 31, 1997, respectively) $ 293,682 289,790
Equity securities (cost: $4,775 and
$24,550 at March 31, 1998 and
December 31, 1997, respectively) 4,062 25,609
Short term investments 8,759 20,682
-------- --------
Total investments 306,503 336,081
Cash - 460
Restricted cash 2,070 2,070
Premium receivable, net 30,053 30,309
Accrued interest receivable 4,468 4,736
Amounts due from reinsurers 51,683 51,069
Deferred income taxes 7,178 6,445
Furniture and equipment, net 713 775
Prepaid reinsurance premiums 2,888 2,572
Other assets 787 278
-------- --------
Total assets $ 406,343 434,795
======== ========
Liabilities and Fund Balance
----------------------------
Liabilities:
Loss and loss adjustment expense liability $ 215,066 250,056
Unearned premiums 36,551 34,382
Liability for extended reporting period claims 10,581 10,328
Income taxes payable 6,175 5,680
Book overdrafts 5,868 -
Advance premiums 547 1,828
Other liabilities 1,415 4,473
Surplus contributions 10,094 10,094
-------- --------
Total liabilities 286,297 316,841
-------- --------
Fund balance:
Unassigned funds 114,683 110,964
Accumulated other comprehensive income, net of tax effect 5,363 6,990
-------- --------
Total fund balance 120,046 117,954
-------- --------
Total liabilities and fund balance $ 406,343 434,795
======== ========
</TABLE>
See accompanying notes to the unaudited condensed consolidated financial
statements.
<PAGE> 2
PHYSICIANS PROTECTIVE TRUST FUND
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Revenue:
Premiums written $ 17,038 64,070
Premiums ceded 1,482 4,777
------- ------
Net premiums written 15,556 59,293
Increase in unearned premiums, net of
prepaid reinsurance premium (1,853) (42,585)
------ ------
Premiums earned 13,703 16,708
Investment income, net 4,508 5,486
Net realized gains on investments 4,036 173
Reinsurance experience refund 400 700
Other income 188 190
------- ------
Total revenues 22,835 23,257
------ ------
Expenses:
Losses and loss adjustment expenses, net 15,499 19,183
Increase in liability for extended reporting period claims 253 515
Other underwriting and operating expenses 2,066 472
------- ------
Total expenses 17,818 20,170
------ ------
Income before income taxes 5,017 3,087
Provision for income taxes 1,298 861
------- ------
Net income $ 3,719 2,226
======= ======
</TABLE>
See accompanying notes to the unaudited condensed consolidated financial
statements.
<PAGE> 3
PHYSICIANS PROTECTIVE TRUST FUND
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
---------------------------------
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,719 2,226
Adjustments to reconcile net income to net cash provided from
operating activities:
Depreciation and amortization 230 179
Deferred income taxes 105 (304)
Net realized gains from investments (4,036) (173)
Changes in operating assets and liabilities:
Accrued interest receivable 268 1,305
Amounts due from reinsurers (614) 3,785
Loss and loss adjustment expense liability (34,990) (1,771)
Unearned premiums 2,169 46,128
Liability for extended reporting period claims 253 515
Income taxes payable 495 843
Advance premiums (1,281) (9,057)
Other, net (3,627) (41,967)
--------- --------
Net cash (used in) provided from operating
activities (37,309) 1,709
--------- --------
Cash flows from investing activities:
Purchases of short term investments (46,389) (20,803)
Proceeds from sale or maturity of short term investments 58,312 7,031
Purchases of fixed maturity investments (44,752) (56,496)
Proceeds from sale of fixed maturity investments 38,783 60,024
Proceeds from maturity of fixed maturity investments 1,454 3,725
Proceeds from sale of equity securities 23,601 -
Purchases of furniture and equipment (28) (105)
--------- --------
Net cash provided from (used in) investing
activities 30,981 (6,624)
--------- --------
Cash flows from financing activities:
Book overdrafts 5,868 4,841
--------- --------
Net decrease in cash (460) (74)
Cash:
Beginning of the period 460 74
--------- --------
End of the period $ - -
========= ========
Supplemental disclosure of cash flow information:
Income taxes paid during the period $ 729 322
========= ========
</TABLE>
See accompanying notes to the unaudited condensed consolidated financial
statements.
<PAGE> 4
PHYSICIANS PROTECTIVE TRUST FUND
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Basis of presentation
(a) The accompanying unaudited condensed consolidated financial statements
include the accounts of Physicians Protective Trust Fund (the "Trust")
and its wholly owned subsidiary, Physicians Protective Plan, Inc.
("PPP") and have been prepared in accordance with generally accepted
accounting principles for interim financial information. Accordingly,
they do not include all of the information and notes required by
generally accepted accounting principles for complete financial
statements. All significant inter-company transactions have been
eliminated in consolidation. In the opinion of management, all
adjustments, consisting of normal recurring accruals, considered
necessary for a fair presentation of financial position and results of
operations have been included. Operating results for the three-month
period ended March 31, 1998 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1998.
These consolidated financial statements and notes should be read in
conjunction with the financial statements and notes included in the
audited consolidated financial statements of the Trust for the year
ended December 31, 1997.
On October 3, 1997, the Trust entered into a First Amended and Restated
Merger Agreement, (amended April 13, 1998) with Professionals Insurance
Company Management Group, a Michigan corporation (Professionals Group),
and PICOM Insurance Company, a Michigan domiciled stock insurance
company and wholly owned subsidiary of Professionals Group (PICOM).
PICOM is Professionals Group's largest subsidiary and is a regional
professional liability insurer licensed in nine states throughout the
Midwest. Professionals Group had consolidated assets of $467.4 million
at March 31, 1998. Under the First Amended and Restated Merger
Agreement, PPTF's policyholders/members will exchange their membership
rights for 4,089,160 shares of Professionals Group common stock.
(b) Comprehensive Income
As of January 1, 1998, the Trust 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 Trust's results of operations or fund
balance. SFAS No. 130 requires unrealized gains or losses on the
Trust's available-for-sale securities, which prior to adoption were
reported separately in fund balance, 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 related tax, for the
three-month periods ended March 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Net income $3,719 2,226
Unrealized holding losses, net of tax (1,627) (4,968)
------ ------
Comprehensive income $2,092 (2,742)
====== ======
</TABLE>
The components of accumulated other comprehensive income, net of
related tax, included in fund balance at March 31, 1998 and December
31, 1997 include only unrealized holding gains, net of tax.
<PAGE> 5
PHYSICIANS PROTECTIVE TRUST FUND
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
(2) Loss and Loss Adjustment Expense Liability
Trust policies provide for coverage on a claims-made basis. The loss
and loss adjustment expense liability is based on actual projections of
the best estimate of ultimate losses and loss adjustment expenses as
determined semi-annually by the Trust's independent consulting actuary,
Tillinghast Towers Perrin at December 31, 1997. In the opinion of the
Trustees, the loss and loss adjustment expense liability is adequate to
cover all reported incidents, claims and related expenses and
anticipated claims reported under extended reporting endorsements.
(3) Reinsurance
Insurance companies purchase reinsurance to limit risk on individual
exposures, protect against catastrophic losses and increase their
capacity to write insurance. Reinsurance involves an insurance company
transferring, or ceding, all or a portion of its exposure on a given
insurance policy to a reinsurer. The reinsurer assumes the exposure in
return for a portion of the premium received by the insurance company.
Reinsurance does not discharge the insurer from its obligation to its
insureds. If the reinsurer fails to meet its obligations, the ceding
insurer remains liable to pay the insured.
The Trust cedes a material amount of its premium to reinsurers to
spread risk and limit loss per exposure and to protect a policyholders'
equity interests from large or unusual loss activity. At the present
time, the Trust has (1) excess of loss reinsurance (i.e., reinsurance
in which the Trust has ceded to a reinsurer, and such reinsurer has
assumed, all or a portion of losses associated with a given policy in
excess of a specified retention level up to a predetermined limit),
(2) extra contractual obligations ("ECO")reinsurance (i.e.,
reinsurance which protects the Trust from potential claims asserted by
its insureds for negligence in handling claims) and (3) losses in
excess of policy limits ("LEPL") reinsurance (i.e., reinsurance which
protects the Trust against losses in excess of policy limits claims).
The Trust's per claim retention as of March 31, 1998 is $500,000. There
is no aggregate limit on the excess of loss contract the Trust has with
its reinsurer.
Effective February 1, 1998, the Trust entered into an Adverse
Development Stop Loss Reinsurance Contract with PICOM (see note (1))as
part of the Trust's over-all reinsurance program for years prior to
January 1, 1997. Under this contract the Trust paid $30.6 million to
reinsure losses and loss adjustment expenses paid by PPTF after July 1,
1997 on claims arising under policies issued prior to January 1, 1997.
The Trust will retain the first $147 million and the limit under the
reinsurance contract is capped at $40 million.
The Trust periodically reviews the financial stability of its
reinsurers. On the basis of such review, as of March 31, 1998, and
December 31, 1997, the Trust concluded that there was no material
exposure to uncollectible reinsurance balances payable to the Trust by
its reinsurers. The Trust has not experienced any difficulties in
collecting amounts due from reinsurers and believes (i) that its
reinsurance is maintained with financially stable reinsurers and (ii)
that any reinsurance security maintained is adequate to protect its
interests. However, the inability of the Trust to collect on its
aggregate reinsurance recoverable, or the inability of the Trust's
reinsurers to make payments under the terms of reinsurance treaties
(due to insolvency or otherwise), could have a material adverse effect
on the Trust's future results of operations and financial condition.
<PAGE> 6
PHYSICIANS PROTECTIVE TRUST FUND
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
(4) Unearned Premiums
Prior to July 1, 1997 the Trust's policies were written on a calendar
year basis. In July of 1997 the Trust began switching its existing
policies, as well as, any new policies issued to an anniversary date
basis.
(5) Commitments and Contingencies
The Trust is involved in numerous legal actions arising primarily from
claims against policies issued by the Trust. The legal actions arising
from claims against these policies have been considered by the Trust in
establishing its liability. Insurers are susceptible to lawsuits that
award substantial judgments, including material amounts of punitive
damages, or to substantial settlements. To date, no such lawsuit has
resulted in an award for a material amount against the Trust. Among
litigation pending is an action brought against the Trust on 11/23/94
that resulted in a judgment against a policyholder insured by the Trust
for approximately $8.4 million. Management believes that the case will
ultimately be settled for an amount substantially less than the
original judgment and will not have a material adverse effect on the
Trust's financial position or results of operations. Management has
provided for the estimated ultimate loss as part of the loss and loss
adjustment expense liability.
(6) Subsequent Events
On June 1, 1998, the Trust purchased an 80% interest in the assets of
Medical Advantage, Inc., a credentials verification organization, for
$2.8 million in cash, with provision for additional contingent
consideration. These assets were then exchanged for 80% of the stock in
a newly formed corporation, Med Advantage, Inc. (Med Advantage).
Revenues from Med Advantage will provide PPTF with non-risk revenue
diversification and provide policyholders with desired credentialing
services.
<PAGE> 1
EXHIBIT 99.3
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
PROFESSIONALS GROUP, INC.
AND PHYSICIANS PROTECTIVE TRUST FUND
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following Professionals Group, Inc. and Physicians Protective Trust
Fund Unaudited Pro Forma Condensed Combined Statements of Income combine the
historical Consolidated Statements of Income of Professionals Group, Inc. and
Physicians Protective Trust Fund giving effect to the transactions contemplated
by the Merger Agreement, which have been accounted for as a
"pooling-of-interests," as if those transactions had been effective as of the
beginning of the earliest period indicated and after giving effect to the pro
forma adjustments described in the Notes to Professionals Group, Inc. and
Physicians Protective Trust Fund Unaudited Pro Forma Condensed Combined
Financial Statements. This information should be read in conjunction with the
historical consolidated financial statements of Professionals Group, Inc.,
including the notes thereto, and the historical consolidated financial
statements of Physicians Protective Trust Fund, including the notes thereto.
<PAGE> 2
The proforma financial data do not give effect to any anticipated revenue
enhancements in connection with the transactions contemplated by the Merger
Agreement and are not necessarily indicative of either the results that
actually would have occurred had the transactions contemplated by the Merger
Agreement been consummated on the dates indicated or the results that may be
obtained in the future.
<PAGE> 3
PROFESSIONALS GROUP, INC.
AND PHYSICIANS PROTECTIVE TRUST FUND
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the Three Months Ended March 31, 1998
-----------------------------------------
Professionals
Group PPTF Pro Forma Pro Forma
Historical Historical Adjustments Combined
---------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Revenues and other income:
Net premiums written $ 32,444 $ 15,556 $ - $ 48,000
Increase in unearned premiums,
net of prepaid reinsurance premiums (8,368) (1,853) (10,221)
------------------ --------------- ----------------- -----------------
Premiums earned, net 24,076 13,703 - 37,779
Net investment income 5,171 4,508 9,679
Net realized investment gains 2 4,036 4,038
Reinsurance experience refund - 400 400
Other income 518 188 706
------------------ --------------- ----------------- -----------------
Total revenues and other income 29,767 22,835 - 52,602
------------------ --------------- ----------------- -----------------
Expenses:
Losses and loss adjustment expenses, net 19,293 15,499 34,792
Increase in reserve for extended reporting
period claims 100 253 353
Policy acquisition and other underwriting
expenses 6,501 2,066 8,567
Interest expense 360 - 360
------------------ --------------- ----------------- -----------------
Total expenses 26,254 17,818 - 44,072
------------------ --------------- ----------------- -----------------
Income before federal income taxes 3,513 5,017 - 8,530
Federal income taxes 704 1,298 2,002
------------------ --------------- ----------------- -----------------
Net income $ 2,809 $ 3,719 $ - (4) $ 6,528
================== =============== ================= =================
Net Income Per Share:
Primary $ 0.80 $ - $ - $ 0.86 (1)
================== =============== ================= =================
Fully diluted $ 0.80 $ - $ - $ 0.86 (1)
================== =============== ================= =================
Weighted Average Shares Outstanding:
Primary 3,505,750 - 4,089,160 (2) 7,594,910
================== =============== ================= =================
Fully diluted 3,511,837 - 4,089,160 (2) 7,600,997
================== =============== ================= =================
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
<PAGE> 4
PROFESSIONALS GROUP, INC.
AND PHYSICIANS PROTECTIVE TRUST FUND
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the Three Months Ended March 31, 1997
-----------------------------------------
Professionals
Group PPTF Pro Forma Pro Forma
Historical Historical Adjustments Combined
---------- ---------- ----------- ------------------
<S> <C> <C> <C> <C>
Revenues and other income:
Net premiums written $ 14,376 $ 59,293 $ - $ 73,669
Increase in unearned premiums,
net of prepaid reinsurance premiums (1,985) (42,585) (44,570)
------------------ --------------- ----------------- ------------------
Premiums earned, net 12,391 16,708 - 29,099
Net investment income 4,172 5,486 9,658
Net realized investment gains (losses) (36) 173 137
Reinsurance experience refund - 700 700
Other income 54 190 244
------------------ --------------- ----------------- ------------------
Total revenues and other income 16,581 23,257 - 39,838
------------------ --------------- ----------------- ------------------
Expenses:
Losses and loss adjustment expenses, net 10,384 19,183 29,567
Increase in reserve for extended reporting
period claims 100 515 615
Policy acquisition and other underwriting
expenses 2,635 472 3,107
Interest expense - - -
------------------ --------------- ----------------- ------------------
Total expenses 13,119 20,170 - 33,289
------------------ --------------- ----------------- ------------------
Income before federal income taxes 3,462 3,087 - 6,549
Federal income taxes 841 861 1,702
------------------ --------------- ----------------- ------------------
Net income $ 2,621 $ 2,226 $ - (4) $ 4,847
================== =============== ================= ==================
Net Income Per Share:
Primary $ 0.75 $ - $ - $ 0.64 (1)
================== =============== ================= ==================
Fully diluted $ 0.75 $ - $ - $ 0.64 (1)
================== =============== ================= ==================
Weighted Average Shares Outstanding:
Primary 3,505,750 - 4,089,160 (2) 7,594,910
================== =============== ================= ==================
Fully diluted 3,506,380 - 4,089,160 (2) 7,595,540
================== =============== ================= ==================
</TABLE>
See Notes to Unuadited Pro Forma Condensed Combined Financial Statements.
<PAGE> 5
PROFESSIONALS GROUP, INC.
AND PHYSICIANS PROTECTIVE TRUST FUND
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------------
PROFESSIONALS
GROUP PPTF PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
------------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues and other income:
Net premiums written......................... $ 71,146 $ 91,868 $ 163,014
Decrease (increase) in unearned premiums, net
of prepaid reinsurance premiums............ 822 (31,810) (30,988)
--------- -------- --------- ---------
Premiums earned, net......................... 71,968 60,058 132,026
Net investment income........................ 18,719 20,802 39,521
Net realized investment gains (losses)....... (207) 4,120 3,913
Reinsurance experience refund................ -- 4,236 4,236
Other income................................. 1,169 677 1,846
--------- -------- --------- ---------
Total revenues and other income.... 91,649 89,893 181,542
--------- -------- --------- ---------
Expenses:
Losses and loss adjustment expenses, net..... 57,125 67,109 124,234
Increase in reserve for extended reporting
period claims.............................. 505 1,703 2,208
Policy acquisition and other underwriting
expenses................................... 19,014 4,719 23,733
Interest expense............................. 1,098 -- 1,098
--------- -------- --------- ---------
Total expenses..................... 77,742 73,531 151,273
--------- -------- --------- ---------
Income before Federal income taxes........... 13,907 16,362 30,269
Federal income taxes......................... 2,881 4,960 7,841
--------- -------- --------- ---------
Net income................................... $ 11,026 $ 11,402 --(4) $ 22,428
========= ======== ========= =========
Net income per share:
Basic...................................... $ 3.15 $ -- $ 2.95(1)
Assuming dilution.......................... $ 3.14 $ -- $ 2.95(1)
Weighted average shares outstanding:
Basic...................................... 3,505,750 -- 4,089,160(2) 7,594,910
Assuming dilution.......................... 3,507,761 -- 4,089,160(2) 7,596,921
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
<PAGE> 6
PROFESSIONALS GROUP, INC.
AND PHYSICIANS PROTECTIVE TRUST FUND
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
-------------------------------------------------------
PROFESSIONALS
GROUP PPTF PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
------------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues and other income:
Net premiums written......................... $ 55,464 $68,719 $ 124,183
Decrease in unearned premiums, net of prepaid
reinsurance premiums....................... 1,223 -- 1,223
--------- ------- --------- ---------
Premiums earned, net......................... 56,687 68,719 125,406
Net investment income........................ 15,741 23,310 39,051
Net realized investment gains (losses)....... (473) 2,004 1,531
Reinsurance experience refund................ -- 3,325 3,325
Other income................................. 287 506 793
--------- ------- --------- ---------
Total revenues and other income.... 72,242 97,864 170,106
--------- ------- --------- ---------
Expenses:
Losses and loss adjustment expenses, net..... 48,368 76,393 124,761
Increase in reserve for extended reporting
period claims.............................. 713 690 1,403
Policy acquisition and other underwriting
expenses................................... 11,138 6,741 17,879
--------- ------- --------- ---------
Total expenses..................... 60,219 83,824 144,043
--------- ------- --------- ---------
Income before Federal income taxes........... 12,023 14,040 26,063
Federal income taxes......................... 2,438 4,664 7,102
--------- ------- --------- ---------
Net income................................... $ 9,585 $ 9,376 --(4) $ 18,961
========= ======= ========= =========
Net income per share:
Basic...................................... $ 2.75 $ -- $ 2.50(1)
Assuming dilution.......................... $ 2.75 $ -- $ 2.50(1)
Weighted average shares outstanding:
Basic...................................... 3,486,698 -- 4,089,160(2) 7,575,858
Assuming dilution.......................... 3,486,723 -- 4,089,160(2) 7,575,883
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
<PAGE> 7
PROFESSIONALS GROUP, INC.
AND PHYSICIANS PROTECTIVE TRUST FUND
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1995
-------------------------------------------------------
PROFESSIONALS
GROUP PPTF PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
------------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues and other income:
Net premiums written......................... $ 55,151 $100,507 $ 155,658
Decrease in unearned premiums, net of prepaid
reinsurance premiums....................... 533 -- 533
--------- -------- --------- ---------
Premiums earned, net......................... 55,684 100,507 156,191
Net investment income........................ 14,729 23,050 37,779
Net realized investment gains (losses)....... (6) 4,511 4,505
Reinsurance experience refund................ -- 401 401
Other income................................. 165 311 476
--------- -------- --------- ---------
Total revenues and other income.... 70,572 128,780 199,352
--------- -------- --------- ---------
Expenses:
Losses and loss adjustment expenses, net..... 35,558 120,596 156,154
Increase in reserve for extended reporting
period claims.............................. 1,344 746 2,090
Policy acquisition and other underwriting
expenses................................... 9,328 6,202 15,530
--------- -------- --------- ---------
Total expenses..................... 46,230 127,544 173,774
--------- -------- --------- ---------
Income from continuing operations before
Federal income taxes....................... 24,342 1,236 25,578
Federal income taxes (benefits).............. 8,276 (1,600) 6,676
--------- -------- --------- ---------
Income from continuing operations............ $ 16,066 $ 2,836 --(4) $ 18,902
========= ======== ========= =========
Income per share from continuing operations:
Basic...................................... $ 4.68 $ -- $ 2.51(1)
Assuming dilution.......................... $ 4.68 $ -- $ 2.51(1)
Weighted average shares outstanding:
Basic...................................... 3,432,339 -- 4,089,160(2) 7,521,499
Assuming dilution.......................... 3,432,339 -- 4,089,160(2) 7,521,499
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
<PAGE> 8
PROFESSIONALS GROUP, INC.
AND PHYSICIANS PROTECTIVE TRUST FUND
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
(IN THOUSANDS)
The following Professionals Group, Inc. and Physicians Protective Trust
Fund Unaudited Pro Forma Condensed Combined Balance Sheet combines the
historical Consolidated Balance Sheets of Professionals Group, Inc. and
Physicians Protective Trust Fund giving effect to the transactions contemplated
by the Merger Agreement, which will be accounted for as a
"pooling-of-interests," as if those transactions had been effective on March
31, 1998 and after giving effect to the pro forma adjustments described in the
Notes to Professionals Group, Inc. and Physicians Protective Trust Fund
Unaudited Pro Forma Condensed Combined Financial Statements. This information
should be read in conjunction with the historical consolidated financial
statements of Professionals Group, Inc. including the notes thereto, and the
historical consolidated financial statements of Physicians Protective Trust
Fund, including the notes thereto. The pro forma financial data do not give
effect to any anticipated revenue enhancements in connection with the
transactions contemplated by the Merger Agreement and are not necessarily
indicative of either the results that actually would have occurred had the
transactions contemplated by the Merger Agreement been consummated on March 31,
1998 or the results that may be obtained in the future.
<PAGE> 9
PROFESSIONALS GROUP, INC.
AND PHYSICIANS PROTECTIVE TRUST FUND
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
AT MARCH 31, 1998
-----------------
Professionals
Group PPTF Pro Forma Pro Forma
Historical Historical Adjustments Combined
------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Assets
Investments:
Fixed maturities available for sale, at fair value $ 349,286 $ 293,682 $ - $ 642,968
Equity securities available for sale, at fair value 2,871 4,062 6,933
Short-term investments, at cost 30,399 8,759 39,158
Real estate, at cost, net of accumulated
depreciation 436 - 436
------------ ----------- ----------- ------------
Total investments 382,992 306,503 - 689,495
Cash, unrestricted 1,232 - 1,232
Cash, restricted - 2,070 2,070
Premiums due from policyholders 18,847 30,053 48,900
Reinsurance balances 23,617 51,683 75,300
Accrued investment income 6,276 4,468 10,744
Deferred federal income taxes 14,565 7,178 21,743
Property and equipment, at cost, net of -
accumulated depreciation 8,281 713 8,994
Deferred policy acquisition costs 1,259 - 1,259
Other assets 10,306 3,675 13,981
------------ ----------- ----------- ------------
Total assets $ 467,375 $ 406,343 $ - $ 873,718
============ =========== =========== ============
Liabilities and Shareholders' Equity
Liabilities:
Loss and loss adjustment expense reserves $ 277,721 $ 215,066 $ - $ 492,787
Reserve for extended reporting period claims 15,400 10,581 25,981
Unearned premiums 33,350 36,551 69,901
Long-term debt 22,500 - 22,500
Surplus contributions - 10,094 10,094
Accrued expenses and other liabilities 13,627 14,005 1,700 (4) 29,332
------------ ----------- ----------- ------------
Total liabilities 362,598 286,297 1,700 650,595
------------ ----------- ----------- ------------
Shareholders' Equity:
Preferred stock, no par value - - -
Common stock, no par value 3,506 - 4,089 (3) 7,595
Additional paid-in capital 14,569 - (4,089)(3) 10,480
Retained earnings 83,480 114,683 (1,700)(4) 196,463
Accumulated other comprehensive income 3,222 5,363 8,585
------------ ----------- ----------- ------------
Total shareholders' equity 104,777 120,046 (1,700) 223,123
------------ ----------- ----------- ------------
Total liabilities and shareholders' equity $ 467,375 $ 406,343 $ - $ 873,718
============ =========== =========== ============
</TABLE>
See Notes to Unuadited Pro Forma Condensed Combined Financial Statements.
<PAGE> 10
NOTES TO PROFESSIONALS GROUP, INC.
AND PHYSICIANS PROTECTIVE TRUST FUND
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(1) Historical earnings per share for Physicians Protective Trust Fund is not
meaningful due to its legal structure as a medical malpractice
self-insurance trust fund. Pro forma primary and fully diluted earnings per
share is computed by dividing pro forma net income by the pro forma
weighted average number of shares outstanding during each period.
(2) Pro forma weighted average shares outstanding was determined using
historical amounts, adjusted to reflect the issuance of 4,089,160 shares of
common stock of Professionals Group, Inc. to be issued in conjunction with
the business combination of Professionals Group, Inc. and Physicians
Protective Trust Fund.
(3) This adjustment reflects the transfer from additional paid-in capital to
common stock for the stated value of 4,089,160 shares of common stock
of Professionals Group, Inc. to be issued in conjunction with the business
combination of Professionals Group, Inc. and Physicians Protective Trust
Fund.
(4) The accompanying pro forma condensed combined statement of income gives
effect to actual expenses related to the transactions contemplated by the
Merger Agreement of approximately $0.5 million for the three months ended
March 31, 1998. An additional $1.7 million is expected to be incurred
with respect to the transactions contemplated by the Merger Agreement after
March 31, 1998. Accordingly, $1.7 million of expenses have been reflected
as an adjustment to pro forma retained earnings as of March 31, 1998.
