<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-21223
PROFESSIONALS GROUP, INC.
(Exact name of registrant as specified in its charter
Michigan 38-3273911
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
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)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ]
The number of shares outstanding of the registrant's common stock, no par
value per share, as of August 12, 1998 was 7,623,869.
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TABLE OF CONTENTS
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PAGE NO.
PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
Condensed Consolidated Balance Sheets at June 30, 1998
(Unaudited) and December 31, 1997 3
Condensed Consolidated Statements of Income for the Three
Months and Six Months Ended June 30, 1998 and 1997 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1998 and 1997 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6-8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9-17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
</TABLE>
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PROFESSIONALS GROUP, INC. AND SUBSIDIARIES
(Formerly Professionals Insurance Company Management Group)
Condensed Consolidated Balance Sheets
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June 30, December 31,
1998 1997
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(Unaudited)
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Assets
Investments:
Fixed maturities available for sale, at fair value
(amortized cost: $355,605,000 and $308,941,000) $361,467,000 $313,633,000
Equity securities available for sale, at fair value
(cost: $2,731,000 and $2,704,000) 2,880,000 2,831,000
Short-term investments, at cost 17,894,000 25,655,000
Real estate, at cost, net of accumulated depreciation 431,000 442,000
------------ ------------
Total investments 382,672,000 342,561,000
Cash 1,991,000 2,176,000
Premiums due from policyholders 18,456,000 7,051,000
Reinsurance balances 25,272,000 24,257,000
Accrued investment income 4,965,000 4,785,000
Deferred federal income taxes 14,121,000 15,003,000
Property and equipment, at cost, net of
accumulated depreciation 8,330,000 9,060,000
Deferred policy acquisition costs 1,418,000 1,376,000
Other assets 8,713,000 6,926,000
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Total assets $465,938,000 $413,195,000
============ ============
Liabilities and Shareholders' Equity
Liabilities:
Loss and loss adjustment expense reserves $281,708,000 $239,151,000
Reserve for extended reporting period claims 15,500,000 15,300,000
Unearned premiums 30,531,000 21,665,000
Long-term debt 20,000,000 22,500,000
Accrued expenses and other liabilities 9,726,000 12,653,000
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Total liabilities 357,465,000 311,269,000
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Shareholders' equity:
Preferred stock, no par value; 5,000,000 shares authorized;
no shares issued and outstanding - -
Common stock, no par value; 25,000,000 shares authorized;
3,505,750 shares issued and outstanding in 1998 and 1997 3,506,000 3,506,000
Additional paid-in capital 14,569,000 14,569,000
Retained earnings 86,430,000 80,671,000
Accumulated other comprehensive income,
net of deferred federal income taxes 3,968,000 3,180,000
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Total shareholders' equity 108,473,000 101,926,000
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Total liabilities and shareholders' equity $465,938,000 $413,195,000
============ ============
See accompanying notes to the unaudited condensed consolidated financial statements.
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PROFESSIONALS GROUP, INC. AND SUBSIDIARIES
(Formerly Professionals Insurance Company Management Group)
Condensed Consolidated Statements of Income
(Unaudited)
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<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Revenues and other income:
Net premiums written $22,816,000 $10,581,000 $55,260,000 $24,957,000
Decrease (increase) in unearned premiums,
net of prepaid reinsurance premiums 1,431,000 2,508,000 (6,937,000) 523,000
----------- ----------- ----------- -----------
Premiums earned, net 24,247,000 13,089,000 48,323,000 25,480,000
Net investment income 5,260,000 4,710,000 10,430,000 8,882,000
Net realized investment gains (losses) 2,000 (34,000) 4,000 (70,000)
Other 526,000 285,000 1,044,000 339,000
----------- ----------- ----------- -----------
Total revenues and other income 30,035,000 18,050,000 59,801,000 34,631,000
----------- ----------- ----------- -----------
Expenses:
Losses and loss adjustment expenses, net 19,332,000 11,249,000 38,624,000 21,633,000
Increase in reserve for extended reporting
period claims 100,000 100,000 200,000 200,000
Policy acquisition and other underwriting
expenses 6,571,000 2,650,000 13,072,000 5,285,000
Interest expense 334,000 370,000 694,000 370,000
----------- ----------- ----------- -----------
Total expenses 26,337,000 14,369,000 52,590,000 27,488,000
----------- ----------- ----------- -----------
Income from operations before federal
income taxes 3,698,000 3,681,000 7,211,000 7,143,000
Federal income taxes 748,000 1,004,000 1,452,000 1,845,000
----------- ------------ ------------ -----------
Net income $2,950,000 $2,677,000 $5,759,000 $5,298,000
=========== =========== =========== ===========
Net income per common share $0.84 $0.76 $1.64 $1.51
=========== =========== =========== ===========
Net income per common share -
assuming dilution $0.84 $0.76 $1.64 $1.51
=========== =========== =========== ===========
Weighted average shares outstanding 3,505,750 3,505,750 3,505,750 3,505,750
=========== =========== =========== ===========
Weighted average shares outstanding -
assuming dilution 3,511,921 3,506,755 3,511,879 3,506,567
=========== =========== =========== ===========
See accompanying notes to the unaudited condensed consolidated financial statements.
</TABLE>
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PROFESSIONALS GROUP, INC. AND SUBSIDIARIES
(Formerly Professionals Insurance Company Management Group)
Condensed Consolidated Statements of Cash Flows
(Unaudited)
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<CAPTION>
Six Months Ended June 30,
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1998 1997
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Net cash provided by operating activities $42,507,000 $4,228,000
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Cash flows from investing activities:
Proceeds from sale or maturity of short-term investments 296,017,000 154,268,000
Purchases of short-term investments (287,782,000) (153,148,000)
Proceeds from maturity of securities available for sale - 370,000
Proceeds from sale of securities available for sale 34,912,000 29,975,000
Purchases of securities available for sale (82,351,000) (55,938,000)
Purchases of property and equipment (388,000) (126,000)
Payment on liability for purchased book of business (600,000) (747,000)
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Net cash used in investing activities (40,192,000) (25,346,000)
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Cash flows from financing activities:
Proceeds from issuance of long-term debt - 22,500,000
Repayment of long-term debt (2,500,000) -
--------------- -------------
Net cash provided by (used in) financing activities (2,500,000) 22,500,000
--------------- -------------
Net increase (decrease) in cash (185,000) 1,382,000
Cash, beginning of period 2,176,000 2,023,000
--------------- -------------
Cash, end of period $1,991,000 $3,405,000
=============== =============
See accompanying notes to the unaudited condensed consolidated financial statements.
</TABLE>
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PROFESSIONALS GROUP, INC. AND SUBSIDIARIES
(Formerly Professionals Insurance Company Management Group)
Notes to Condensed Consolidated Financial Statements (Unaudited)
(1) Basis of Presentation
Professionals Group, Inc. (formerly Professionals Insurance Company
Management Group) ("Professionals Group," and with its direct and
indirect subsidiaries, the "Company") is a business corporation that
was incorporated under the laws of the State of Michigan on January 31,
1996 and functions as an insurance holding company. Professionals Group
has five direct wholly-owned subsidiaries and two indirect wholly-owned
subsidiaries. The direct wholly-owned subsidiaries are ProNational
Insurance Company (formerly PICOM Insurance Company) ("ProNational"),
PICOM Insurance Agency, Inc. ("PIA"), PICOM Financial Services
Corporation ("PFSC"), PPTF Merger Insurance Company ("PPTF Merger")
and American Insurance Management Corporation ("AIMC"). The indirect
wholly-owned entities, all of which are wholly-owned subsidiaries of
ProNational, are PICOM Claims Services Corporation ("PCSC") and
ProNational Casualty Company ("ProNational Casualty").
ProNational is a stock, property and casualty insurer that offers
professional liability insurance to providers of health care services
in Michigan, Illinois, Indiana, Ohio and Pennsylvania. PIA is an
inactive Michigan insurance agency. PFSC is an inactive business
corporation. PPTF Merger is a stock, property and casualty insurer
that was created for the sole purpose of merging Physicians Protective
Trust Fund, a Florida domiciled medical malpractice self-insurance
trust fund, with and into ProNational (see note 5). AIMC is an Indiana
corporation that serves as the attorney-in-fact for American Medical
Insurance Exchange, an inactive Indiana interinsurance reciprocal
exchange. PCSC provides claims management services on a fee for
service basis. ProNational Casualty is a stock, property and casualty
insurer that is currently not issuing policies.
The accompanying unaudited condensed consolidated financial statements
of the Company have been prepared in conformity with generally accepted
accounting principles and with the instructions for Form 10-Q and Rule
10-01 of Regulation S-X as they apply to interim financial information.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. All significant intercompany transactions have
been eliminated in consolidation.
In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation of
financial position and results of operations have been included. The
operating results for the three month and six month periods ended June
30, 1998 are not necessarily indicative of the results to be expected
for the year ending December 31, 1998.
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PROFESSIONALS GROUP, INC. AND SUBSIDIARIES
(Formerly Professionals Insurance Company Management Group)
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
(2) Net Income Per Share
Net income per share is computed by dividing net income by the weighted
average number of shares of common stock and common stock equivalents
(stock options) outstanding during each period after giving effect to
stock dividends and treasury shares, calculated on a daily basis.
(3) Comprehensive Income
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive Income."
This standard establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of SFAS
No. 130 had no impact on the Company's results of operations or
shareholders' equity. SFAS No. 130 requires unrealized gains or losses
on the Company's available-for-sale securities, which prior to adoption
were reported separately in shareholders' equity, to be included in
other comprehensive income. Prior period financial statements have been
reclassified to conform to the requirements of SFAS No. 130.
The components of comprehensive income, net of tax, for the three month
and six-month periods ended June 30, 1998 and 1997 are as follows:
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Three Months Ended Six Months Ended
June 30, June 30,
------------------- -----------------
1998 1997 1998 1997
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(In thousands)
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Net income $2,950 2,677 5,759 5,298
Unrealized holding gains,
net of tax 746 2,579 788 53
------ ----- ------ ------
Comprehensive income $3,696 5,256 6,547 5,351
====== ===== ====== ======
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Accumulated other comprehensive income, net of tax, included in
shareholders' equity at June 30, 1998 and December 31, 1997 consists
exclusively of unrealized holding gains, net of tax.
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PROFESSIONALS GROUP, INC. AND SUBSIDIARIES
(Formerly Professionals Insurance Company Management Group)
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
(4) New Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") has issued SFAS No.
131 "Disclosures About Segments of an Enterprise and Related
Information," which is effective for fiscal years beginning after
December 15, 1997. This standard requires that an enterprise report
financial and descriptive information about its reportable operating
segments. Operating segments are components of an enterprise about
which separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Generally, financial
information is required to be reported on the basis that it is used
internally for evaluating segment performance and deciding how to
allocate resources to segments. The Company is not required to report
pursuant to SFAS No. 131 until December 31, 1998 and has not determined
what effects the adoption of SFAS No. 131 will have on its consolidated
footnote disclosures.
(5) Subsequent Event
On July 1, 1998, Professionals Group consummated its merger with
Physicians Protective Trust Fund, a medical malpractice self-insurance
trust fund located in Coral Gables, Florida ("PPTF"). Pursuant to the
merger agreement, Professionals Group issued 4,087,525 shares of
Professionals Group common stock to the eligible members of PPTF and
paid cash of approximately $66,000 in lieu of fractional shares.
Additionally, 30,594 shares (representing 20% of the 153,000 total
shares to be issued over a period of five years) of Professionals Group
common stock were issued to directors and management of PPTF, as
contemplated by the merger agreement. The transaction will be accounted
for as a "pooling of interests" business combination under generally
accepted accounting principles, whereby Professionals Group will carry
forward to its accounts the assets and liabilities of PPTF at their
respective amounts as reported by PPTF. As a result of such business
combination, Professionals Group's consolidated assets and shareholders
equity increased to approximately $873.7 million and $223.1 million,
respectively on a proforma basis as of March 31, 1998.
June 30, 1998 financial results for PPTF are not currently available
because Professionals Group has not yet completed a reserve analysis
of the carried reserves of PPTF at June 30, 1998, and may increase
reserves in order to better reflect the application of ProNational's
reserving practices. Pooling accounting will also require a
restatement of 1996 and 1997 financial statements to reflect the
proforma combined operations of Professionals Group and PPTF.
-8-
<PAGE> 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction
with the condensed consolidated financial statements and the notes thereto
included elsewhere in this report and the Company's Annual Report on Form 10-K
for the year ended December 31, 1997. The following discussion of the financial
condition and results of operations of the Company contains certain
forward-looking statements relating to anticipated future financial conditions
and operating results of the Company and its current business plans. In the
future, the financial condition and operating results of the Company could
differ materially from those discussed herein and its current business plans
could be altered in response to market conditions and other factors beyond the
Company's control. Important factors that could cause or contribute to such
differences or changes include those discussed in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997. (e.g., See the disclosures under
"Item 1. Business - Forward Looking Statements" and under "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations.")
Financial Condition -- June 30, 1998 Compared to December 31, 1997:
Total assets increased 12.8% to $465.9 million at June 30, 1998, as
compared to $413.2 million at December 31, 1997, primarily due to increases in
invested assets, premiums due from policyholders and prepaid reinsurance
premiums (included in other assets in the accompanying condensed consolidated
balance sheets). Invested assets increased 11.7% to $382.7 million, or
approximately 82% of the Company's total assets at June 30, 1998. This compares
to invested assets of $342.6 million, or approximately 83% of the Company's
total assets at December 31, 1997. The increase in invested assets was primarily
due to a $30.6 million reinsurance premium received as a result of an assumed
reinsurance transaction with Physicians Protective Trust Fund ("PPTF"), a
Florida domiciled medical malpractice self-insurance trust fund, as well as
positive cash flows from operations. The increases in premiums due from
policyholders and prepaid reinsurance premiums reflect the timing of renewals
for the Company's Illinois professional liability book of business, which
generally have a common renewal date of January 1.
The Company's investment portfolio continues to be dominated by fixed
maturity securities at June 30, 1998, and primarily consists of U.S. government
and agency bonds, high-quality corporate bonds, mortgage-backed securities,
redeemable preferred stocks and tax-exempt U.S. municipal bonds. The entire
fixed maturity portfolio, which is classified as available-for-sale, and is
carried at fair value, is sensitive to interest rate changes. At June 30, 1998,
the fixed maturity portfolio had a fair value that was $5.9 million more than
the $355.6 million amortized cost of such portfolio. At December 31, 1997, the
fixed maturity portfolio had a fair value that was $4.7 million higher than the
$308.9 million amortized cost of such portfolio.
Loss and loss adjustment expense reserves represented approximately 79%
and 77% of the Company's consolidated liabilities at June 30, 1998 and December
31, 1997, respectively.
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These reserves are determined on the basis of individual claims and actuarially
determined estimates of future losses based on the Company's past loss
experience and projections as to future claims frequency, severity,
inflationary trends and settlement patterns. Estimating professional liability
reserves is a complex process which is heavily dependent on judgment and
involves many uncertainties. As a result, reserve estimates may vary
significantly from the eventual outcome. It has been the practice of the
Company to establish its loss and loss adjustment expense reserves
conservatively, as it relates to immaturely developed accident years, to
minimize potential uncertainties. The Company's reserves have been established
within the range of acceptable values estimated semi-annually by the Company's
consulting actuary and are recorded based on such actuarial estimates. The
assumptions used in establishing the Company's reserves are regularly reviewed
by management and revised as new data becomes available. Any adjustments
necessary are generally reflected in current operations.
Loss and loss adjustment expense reserves increased 17.8% to $281.7
million at June 30, 1998, from $239.2 million at December 31, 1997. This
increase was primarily attributable to $30.6 million of reserves assumed from
PPTF, as well as a $5.7 million increase in the reserves assumed from Michigan
Educational Employees Mutual Insurance Company ("MEEMIC"). The remaining $6.2
million of the increase was due to an increase in outstanding professional
liability claims at June 30, 1998 as compared to December 31, 1997 and increases
to case reserves.
The unearned premium reserve increased to $30.5 million at June 30,
1998, from $21.7 million at December 31, 1997. The increase was due to the
timing of renewals for the Company's Illinois professional liability book of
business, which generally have a common renewal date of January 1, and an
increase in the Company's net retention from $250,000 to $500,000, effective
January 1, 1998.
Shareholders' equity increased 6.4% to $108.5 million at June 30, 1998,
as compared to $101.9 million at December 31, 1997. The increase in
shareholders' equity was due to net income of $5.8 million and accumulated other
comprehensive income, consisting of unrealized holding gains on the investment
portfolio of $0.8 million during the six month period ended June 30, 1998. The
Company expects to use retained earnings to increase its capital base and
finance future growth and, therefore, there can be no assurance as to any future
cash dividends by the Company.
Results of Operations -- Three Months Ended June 30, 1998 Compared to Three
Months Ended June 30, 1997:
Total net premiums written were $22.8 million for the three months
ended June 30, 1998, an increase of 115.6%, as compared to net premiums written
of $10.6 million for the three months ended June 30, 1997. The reinsurance
premiums assumed from MEEMIC increased net premiums written by $10.4 million for
the three months ended June 30, 1998 (the MEEMIC reinsurance agreement was not
in force during the three months ended June 30, 1997). Professional liability
related net premiums written were $12.4 million for the three months ended
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<PAGE> 11
June 30, 1998, an increase of 16.9%, as compared to net premiums written of
$10.6 million for the three months ended June 30, 1997. The increase in
professional liability net premiums written was primarily due to $830,000 of
additional net written premiums from the Company's Illinois book of business as
all Illinois policies were converted to annual policies with a predominant
common renewal date of January 1. Previously, Illinois policies were six-month
policies with common renewal dates of January 1 and July 1. Additional
increases were caused by increased business in Ohio ($250,000), expansion of
business into Pennsylvania ($130,000) and an increase in the Company's net
retention from $250,000 to $500,000, effective January 1, 1998 ($1.2 million).
The increase in professional liability net premiums written was offset somewhat
by lower premiums written in Michigan and price-based competition ($600,000).
For financial reporting purposes, the previously described $30.6 million
reinsurance transaction with PPTF was recorded net of the $30.6 million in
assumed loss and loss adjustment expense reserves and, therefore, written and
earned premiums and incurred losses and loss adjustment expenses were
unaffected.
During the three months ended June 30, 1998 and 1997, the Company
continued to balance its need for rate adjustments with a goal of maintaining
market share in very competitive environments in Michigan, Illinois, Indiana,
Ohio and Pennsylvania. Although the Company has maintained profitability and is
endeavoring to offset lower premiums charged through more selective underwriting
practices, there can be no assurance that these practices will be successful in
the long run.
Net investment income, excluding realized capital gains and losses, was
$5.3 million for the three months ended June 30, 1998, an increase of 11.7% over
net investment income of $4.7 million for the three months ended June 30, 1997.
The increase in net investment income mainly resulted from an increase in
average invested assets associated with the $30.6 million in reinsurance
premiums received from PPTF, as well as positive cash flows from operations. The
weighted average tax equivalent book yield of the fixed maturity portfolio was
7.0% and 6.8% as of June 30, 1998 and 1997, respectively. Net realized
investment gains/losses were negligible during the three month periods ended
June 30, 1998 and 1997.
Professional liability insurance incurred losses and loss adjustment
expenses (including the increase in reserve for extended reporting period
claims) totaled $12.2 million for the three months ended June 30, 1998, an
increase of 7.4%, as compared to $11.3 million for the three months ended June
30, 1997. As a percentage of premiums earned, the professional liability
insurance incurred loss and loss adjustment expense ratio (including the
increase in reserve for extended reporting period claims) increased to 88.3% for
the three months ended June 30, 1998, as compared to 86.7% for the same period
of 1997. The professional liability insurance incurred loss and loss adjustment
expense ratio has increased due to an increase in outstanding professional
liability claims at June 30, 1998 as compared to June 30, 1997 and a modest
increase in severity caused by increases to case reserves.
Incurred losses and loss adjustment expenses related to the personal
automobile and homeowners insurance assumed from MEEMIC (the "personal liability
insurance") totaled $7.2 million for the three months ended June 30, 1998. As a
percentage of premiums earned, such personal liability insurance generated an
incurred loss and loss adjustment expense ratio of 69.3% for the three months
ended June 30, 1998. The Company believes that the personal
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<PAGE> 12
liability insurance produced a low loss ratio primarily due to lower than
expected storm related losses in Michigan during the second quarter of 1998.
Policy acquisition and underwriting expenses were $6.6 million for the
three months ended June 30, 1998, an increase of 148.0% over policy acquisition
and underwriting expenses of $2.7 million for the same period of 1997. As a
percentage of premiums earned, the underwriting expense ratio increased to 27.1%
for the three months ended June 30, 1998, from 20.3% for the same period of
1997. The increase in such expenses was mainly due to $3.2 million of ceding
commission attributable to the MEEMIC reinsurance agreement, which was not in
force during the three months ended June 30, 1997, and approximately $200,000 of
non-recurring legal, accounting, investment banker and related expenses
associated with the Company's merger and acquisition activities. Additional
expenses during the three months ended June 30, 1998 included start-up expenses
associated with the Company's planned expansion into Florida and Pennsylvania
during 1998. Interest expense was $334,000 for the three months ended June 30,
1998 compared to $370,000 during the same period in 1997 (See "Liquidity and
Capital Resources").
The Company recorded $748,000 in federal income tax expense for the
three months ended June 30, 1998, compared to $1.0 million during the same
period in 1997. The effective tax rate was 20.2% for the three months ended June
30, 1998 compared to 27.3% for the three months ended June 30, 1997. The
Company's lower effective tax rate for the three months ended June 30, 1998 was
due primarily to increased holdings in tax-exempt municipal bonds as compared to
the same period in 1997.
Net income for the three months ended June 30, 1998 was $2.9 million,
or $0.84 per share (assuming dilution) on revenues of $30.0 million. This
compares to net income of $2.7 million, or $0.76 per share (assuming dilution)
on revenues of $18.1 million, for the three months ended June 30, 1997. The
improvement in earnings is primarily attributable to increased net investment
income, as described previously.
Results of Operations -- Six Months Ended June 30, 1998 Compared to Six Months
Ended June 30, 1997:
Total net premiums written were $55.3 million for the six months ended
June 30, 1998, an increase of 121.4%, as compared to net premiums written of
$25.0 million for the six months ended June 30, 1997. The reinsurance premiums
assumed from MEEMIC increased net premiums written by $20.9 million for the six
months ended June 30, 1998 (the MEEMIC reinsurance agreement was not in force
during the six months ended June 30, 1997). Professional liability related net
premiums written were $34.4 million for the six months ended June 30, 1998, an
increase of 37.7%, as compared to net premiums written of $25.0 million for the
six months ended June 30, 1997. The increase in professional liability net
premiums written was primarily due to $5.7 million of additional net written
premiums from the Company's Illinois book of business as all Illinois policies
were converted to annual policies with a
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predominant common renewal date of January 1. Previously, Illinois policies were
six-month policies with common renewal dates of January 1 and July 1. Additional
increases were caused by increased business in Ohio ($2.9 million), expansion of
business into Pennsylvania ($500,000) and an increase in the Company's net
retention from $250,000 to $500,000, effective January 1, 1998 ($2.4 million).
The increase in professional liability net premiums written was offset somewhat
by lower premiums written in Michigan and price-based competition ($2.1
million). For financial reporting purposes, the previously described $30.6
million reinsurance transaction with PPTF was recorded net of the $30.6 million
in assumed loss and loss adjustment expense reserves and, therefore, written and
earned premiums and incurred losses and loss adjustment expenses were
unaffected.
During the six months ended June 30, 1998 and 1997, the Company
continued to balance its need for rate adjustments with a goal of maintaining
market share in very competitive environments in Michigan, Illinois, Indiana,
Ohio and Pennsylvania. Although the Company has maintained profitability and is
endeavoring to offset lower premiums charged through more selective underwriting
practices, there can be no assurance that these practices will be successful in
the long run.
Net investment income, excluding realized capital gains and losses, was
$10.4 million for the six months ended June 30, 1998, an increase of 17.4% over
net investment income of $8.9 million for the six months ended June 30, 1997.
The increase in net investment income mainly resulted from an increase in
average invested assets associated with the $30.6 million in reinsurance
premiums received from PPTF, as well as positive cash flows from operations. The
weighted average tax equivalent book yield of the fixed maturity portfolio was
7.0% and 6.8% as of June 30, 1998 and 1997, respectively. Net realized
investment gains/losses were negligible during the six month periods ended June
30, 1998 and 1997.
Professional liability insurance incurred losses and loss adjustment
expenses (including the increase in reserve for extended reporting period
claims) totaled $24.2 million for the six months ended June 30, 1998, an
increase of 11.1%, as compared to $21.8 million for the six months ended June
30, 1997. As a percentage of premiums earned, the professional liability
insurance incurred loss and loss adjustment expense ratio (including the
increase in reserve for extended reporting period claims) increased to 88.4% for
the six months ended June 30, 1998, as compared to 85.7% for the same period of
1997. The professional liability insurance incurred loss and loss adjustment
expense ratio has increased due to an increase in outstanding professional
liability claims at June 30, 1998 as compared to June 30, 1997 and a modest
increase in severity caused by increases to case reserves.
Incurred losses and loss adjustment expenses related to the personal
automobile and homeowners insurance assumed from MEEMIC (the "personal liability
insurance") totaled $14.6 million for the six months ended June 30, 1998. As a
percentage of premiums earned, such personal liability insurance generated an
incurred loss and loss adjustment expense ratio of 69.8% for the six months
ended June 30, 1998. The Company believes that the personal liability
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<PAGE> 14
insurance produced a low loss ratio primarily due to lower than expected storm
related losses in Michigan during the first six months of 1998.
Policy acquisition and underwriting expenses were $13.1 million for the
six months ended June 30, 1998, an increase of 147.3% over policy acquisition
and underwriting expenses of $5.3 million for the same period of 1997. As a
percentage of premiums earned, the underwriting expense ratio increased to 27.1%
for the six months ended June 30, 1998, from 20.7% for the same period of 1997.
The increase in such expenses was mainly due to $6.5 million of ceding
commission attributable to the MEEMIC reinsurance agreement, which was not in
force during the six months ended June 30, 1997, and approximately $300,000 of
non-recurring legal, accounting, investment banker and related expenses
associated with the Company's merger and acquisition activities. Additional
expenses during the six months ended June 30, 1998 included start-up expenses
associated with the Company's planned expansion into Florida and Pennsylvania
during 1998. Interest expense related to the Company's bank borrowings of $22.5
million obtained in April 1997 was $694,000 for the six months ended June 30,
1998 compared to $370,000 during the same period in 1997 (See "Liquidity and
Capital Resources").
The Company recorded $1.5 million in federal income tax expense for the
six months ended June 30, 1998, compared to $1.8 million during the same period
in 1997. The effective tax rate was 20.1% for the six months ended June 30, 1998
compared to 25.8% for the six months ended June 30, 1997. The Company's lower
effective tax rate for the six months ended June 30, 1998 was due primarily to
increased holdings in tax-exempt municipal bonds as compared to the same period
in 1997.
Net income for the six months ended June 30, 1998 was $5.8 million, or
$1.64 per share (assuming dilution) on revenues of $59.8 million. This compares
to net income of $5.3 million, or $1.51 per share (assuming dilution) on
revenues of $34.6 million, for the six months ended June 30, 1997. The
improvement in earnings is primarily attributable to increased net investment
income, as described previously.
Liquidity and Capital Resources:
Liquidity describes the ability to generate sufficient cash flows to
meet the cash requirements of continuing operations. Liquidity, in the context
of insurance operations, is typically determined by two distinct operations:
underwriting and investing. Net cash flows from underwriting operations are used
to build an investment portfolio, which in turn produces future cash from
investment income. The Company continuously monitors available cash and
short-term investment balances in relation to projected cash needs to maintain
adequate balances for current payments while maximizing cash available for
longer term investment opportunities.
The payment of losses, loss adjustment expenses and operating expenses
in the ordinary course of business represents the Company's principal need for
liquid funds. Payments for
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<PAGE> 15
losses and loss adjustment expenses are distributed fairly evenly throughout the
year. Payments for reinsurance are made within thirty days subsequent to the end
of each quarter, with adjustments made after each reinsurance year.
Historically, cash used to pay for these items has been provided by operations.
The Company did not borrow any additional funds in the six month periods ended
June 30, 1998 or 1997. As of June 30, 1998, no material commitments for capital
expenditures existed, and management believes the Company's present liquidity,
together with its expected cash flow from operations, will be sufficient to fund
any future potential commitments for capital expenditures.
On April 4, 1997, Professionals Group borrowed $22.5 million under a
seven-year unsecured bank term loan, bearing interest at an adjustable rate of
LIBOR plus 62.5 basis points (6.375% at June 30, 1998), and payable quarterly
(the "Credit Agreement"). Principal payments are due on April 30, as follows:
1998 - $2,500,000; 1999 - $2,500,000; 2000 - $3,000,000; 2001 - $3,000,000; 2002
- - $3,500,000; 2003 - $3,500,000; and 2004 - $4,500,000. The principal payment
due on April 30, 1998 was timely paid.
The Credit Agreement contains a covenant which prohibits the payment of
cash dividends on Professionals Group's common stock (except for cash paid in
lieu of fractional shares related to stock dividends declared). Additional
covenants also require the Company to, among other things, maintain total
consolidated shareholders' equity of at least $80.0 million plus 50% of the
preceding fiscal year's consolidated net income, maintain a ratio of debt to
equity of not more than 0.5:1 and maintain a fixed charges coverage ratio and an
interest coverage ratio (as defined by the Credit Agreement) of not less than
1.5:1 and 2.5:1, respectively. The Company was in compliance with, or had
received waivers of, all required covenants at June 30, 1998.
On July 1, 1998, Professionals Group consummated its merger with
Physicians Protective Trust Fund, a medical malpractice self-insurance trust
fund located in Coral Gables, Florida ("PPTF"). Pursuant to the merger
agreement, Professionals Group issued 4,087,525 shares of Professionals Group
common stock to the eligible members of PPTF and paid cash of approximately
$66,000 in lieu of fractional shares. Additionally, 30,594 shares (representing
20% of the 153,000 total shares to be issued over a period of five years) of
Professionals Group common stock were issued to directors and management of
PPTF, as contemplated by the merger agreement. The transaction will be accounted
for as a "pooling of interests" business combination under generally accepted
accounting principles, whereby Professionals Group will carry forward to its
accounts the assets and liabilities of PPTF at their respective amounts as
reported by PPTF. As a result of such business combination, Professionals
Group's consolidated assets and shareholders equity increased to approximately
$873.7 million and $223.1 million, respectively on a proforma basis as of March
31, 1998.
The third quarter results for Professionals Group will include the
pooled results for the merged operations. For the third quarter, Professionals
Group expects to take a one-time after-tax charge for merger related expenses of
up to approximately $3.0 million. June 30, 1998 financial results for PPTF are
not currently available because Professionals Group has not yet completed a
reserve analysis of the carried reserves of PPTF at June 30, 1998, and may
increase reserves in order to better reflect the application of ProNational's
reserving practices.
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<PAGE> 16
The amount of such a charge has not been determined and, if taken, will relate
to the June 30, 1998 pre-merger financial statements of PPTF and will not effect
third quarter income of Professionals Group. Such a charge would be reflected in
Professionals Group's pooled results for 1998. Pooling accounting will also
require a restatement of 1996 and 1997 financial statements to reflect the
proforma combined operations of Professionals Group and PPTF.
Effects of New Accounting Pronouncements:
The FASB has issued SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related Information," which is effective for fiscal years
beginning after December 15, 1997. This standard requires that an enterprise
report financial and descriptive information about its reportable operating
segments. Operating segments are components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. Generally, financial information is required to be
reported on the basis that it is used internally for evaluating segment
performance and deciding how to allocate resources to segments. The Company is
not required to report pursuant to SFAS No. 131 until December 31, 1998 and has
not determined what effects the adoption of SFAS No. 131 will have on its
consolidated footnote disclosures.
Year 2000 Compliance:
The Company has completed an assessment of its computer programs and
has determined that portions of its software will have to be modified or
replaced to facilitate the continued operation of its computers in the Year 2000
and thereafter. Such modifications and replacements, which are not expected to
exceed $500,000, will be expensed as incurred. To date, the Company has incurred
and expensed approximately $250,000 (primarily for such assessment, the
development of a modification plan and the development of modifications to
existing software).
The Company expects to complete its contemplated modifications and
replacements not later than March 31, 1999, which is prior to any anticipated
impact on the Company's operating systems. The Company believes that with timely
modifications to existing software and conversions to new software, Year 2000
compliance will not pose significant operational problems or have a material
impact on the operations of the Company.
The costs and timing of the modifications and replacements currently
contemplated by the Company are based on management's best estimates, which were
derived utilizing numerous assumptions of future events, including the continued
availability of certain resources and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those anticipated. Specific factors that might cause such
material differences include, but are not limited to, the availability and cost
of personnel trained
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<PAGE> 17
in this area and the ability to locate and correct all relevant computer codes.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
By virtue of General Instruction 1 to Item 305 of Regulation S-K, and
because it is neither a bank or thrift and its market capitalization on January
28, 1997 did not exceed $2.5 billion, the Company is not required at this time
to provide disclosures under this Item 3.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Shareholders was held on June 3, 1998.
The Company filed a Current Report on Form 8-K dated July 1, 1998 disclosing
under Item 5 (Other Events) of Form 8-K the submission of various matters to
votes of the stockholders of the Company at such Annual Meeting and the results
of such votes. The disclosures contained under Item 5 of such Current Report on
Form 8-K is hereby incorporated herein by this reference.
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<PAGE> 18
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
<TABLE>
<CAPTION>
Item 601
Regulation S-K
Exhibit Reference
Number Exhibit Description
----------------- -------------------
<S> <C>
(3)(a) Second Amended and Restated Articles of Incorporation of Professionals Group,
Inc. (incorporated by reference to Exhibit 3.1 of the registrant's Current
Report on Form 8-K dated July 1, 1998 (File No. 0-21223)).
(3)(b) By-laws of Professionals Group, Inc. (incorporated by reference to Exhibit
(3)(b)/(4)(b) of the initial filing of the registrant's Registration Statement
on Form S-4 as filed with the Securities and Exchange Commission on April 3,
1996 (registration no. 333-3138)).
(11) No statement re: computation of per share earnings is required to be filed
because the computations can be clearly determined from the materials
contained herein.
(27) Financial Data Schedule of registrant.*
</TABLE>
- --------------------------------
* Filed herewith.
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K dated July 1,
1998 disclosing (i) under Item 2 (Acquisition or Disposition
of Assets) of Form 8-K the Company's merger with Physicians
Protective Trust Fund, a medical malpractice self-insurance
trust fund, located in Coral Gables, Florida, and (ii) under
Item 5 (Other Events) the submission of various matters to
votes of the stockholders of the Company at its 1998 Annual
Meeting of Stockholders and the results of such votes.
No other reports were filed during the three months ended
June 30, 1998.
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<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PROFESSIONALS GROUP, INC.
DATE: August 12, 1998 /s/ John F. Lang
-----------------------------
John F. Lang
Vice President, Treasurer and
Chief Accounting Officer (Principal Financial
Officer and Principal Accounting Officer)
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<PAGE> 20
Exhibit Index
-------------
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED CONSOLIDATED FINACIAL STATEMENTS OF PROFESSIONALS GROUP,
INC. (FORMERLY PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP) AS OF JUNE 30,
1998 AND FOR THE SIX MONTH PERIOD THEN ENDED. (IN THOUSANDS)
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 361,467
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 2,880
<MORTGAGE> 0
<REAL-ESTATE> 431
<TOTAL-INVEST> 382,672
<CASH> 1,991
<RECOVER-REINSURE> 515
<DEFERRED-ACQUISITION> 1,418
<TOTAL-ASSETS> 465,938
<POLICY-LOSSES> 281,708
<UNEARNED-PREMIUMS> 30,531
<POLICY-OTHER> 15,500
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 20,000
0
0
<COMMON> 3,506
<OTHER-SE> 104,967
<TOTAL-LIABILITY-AND-EQUITY> 465,938
48,323
<INVESTMENT-INCOME> 10,430
<INVESTMENT-GAINS> 4
<OTHER-INCOME> 1,044
<BENEFITS> 38,824
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 13,766
<INCOME-PRETAX> 7,211
<INCOME-TAX> 1,452
<INCOME-CONTINUING> 5,759
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,759
<EPS-PRIMARY> 1.64
<EPS-DILUTED> 1.64
<RESERVE-OPEN> 239,151
<PROVISION-CURRENT> 55,696
<PROVISION-PRIOR> (17,072)
<PAYMENTS-CURRENT> 8,511
<PAYMENTS-PRIOR> 18,928
<RESERVE-CLOSE> 281,708
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
