<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement
[X] Definitive proxy statement [ ] Confidential, for use of
the Commission Only (as
[ ] Definitive additional materials permitted by Rule 14a-
6(e)(2))
[ ] Soliciting material pursuant to
Rule 14a-11(c) or Rule 14a-12
Professionals Insurance Company Management Group
(Name of Registrant as Specified in its Charter)
(Name of Person(s) Filing Proxy Statement,
if other than the Registrant)
Payment of filing fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
[X] Fee paid previously with preliminary materials.
The filing fee, which was $28,624.12 and was previously paid, was
calculated on the basis of the information that follows:
Aggregate number of securities to which transaction applies: 4,089,160
shares of common stock, no par value per share, of Professionals
Insurance Company Management Group. Per unit price or other underlying
value of transaction was computed pursuant to Exchange Act Rule 0-11
and equaled $35.00 (the average of the high and low prices for common
stock of Professionals Insurance Company Management Group as reported
on the Nasdaq National Market on November 3, 1997).
<PAGE> 2
Proposed maximum aggregate value of transaction: $143,120,600.00
(4,089,160 shares x $35.00 per share).
Total fee paid: $28,624.12 (amount was paid on October 28, 1997).
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 3
PROFESSIONALS INSURANCE CO. MANAGEMENT GROUP LOGO
April 29, 1998
Dear Stockholder:
You are cordially invited to attend the 1998 Annual Meeting of Stockholders
of Professionals Insurance Company Management Group to be held at 2600
Professionals Drive, Okemos, Michigan, at 10:00 a.m., local time, on Wednesday,
June 3, 1998 (the "Professionals Group Annual Meeting").
At the Professionals Group Annual Meeting, stockholders of Professionals
Insurance Company Management Group ("Professionals Group") will be asked to
elect four directors of Professionals Group and to consider and vote upon two
proposals. The first proposal (the "Merger Proposal") is a proposal to approve
and adopt 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 (the "Merger
Agreement"), by and among Professionals Group, PICOM Insurance Company, a
Michigan stock insurance company and wholly-owned subsidiary of Professionals
Group ("PICOM"), and Physicians Protective Trust Fund, a medical malpractice
self-insurance trust fund organized under Florida Statutes sec.627.357 ("PPTF"),
and all of the transactions contemplated by the Merger Agreement. The second
proposal (the "Name Change Proposal") is a proposal to approve an amendment to
the Professionals Group's First Amended and Restated Articles of Incorporation
to change the name of Professionals Group to "Professionals Group, Inc." (the
"Name Change Amendment").
The Board of Directors of Professionals Group (the "Professionals Group
Board") has nominated Mr. R. Kevin Clinton, John F. Dodge, Jr., Esq., H. Harvey
Gass, M.D. and Ann F. Putallaz, Ph.D. (the "Professionals Group Board
Nominees"), for election to the Professionals Group Board for three year terms
expiring at the Annual Meeting of Stockholders to be held in the year 2001 and
upon the election and qualification of their successors or upon their earlier
resignation or removal. The Professionals Group Board believes that the election
of all of the Professionals Group Board Nominees to the Professionals Group
Board is in the best interests of Professionals Group and its stockholders. THE
PROFESSIONALS GROUP BOARD RECOMMENDS THAT YOU VOTE FOR THE ELECTION OF ALL OF
THE PROFESSIONALS GROUP BOARD NOMINEES TO THE PROFESSIONALS GROUP BOARD.
The Merger Agreement contemplates a "merger of equals" of Professionals
Group with PPTF 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. Upon consummation of
these transactions, (i) PICOM will be renamed to reflect the combined insurance
operations of PPTF and PICOM, (ii) PICOM will maintain regional executive
offices in Okemos, Michigan and Coral Gables, Florida and local sales and
service offices in Florida, Illinois, Indiana and Ohio; and (iii) subject to
their exercise of dissenters' rights, the aggregate rights of Members (as
defined in the accompanying Joint Proxy Statement/Prospectus) of PPTF (the
"Membership Rights") will be converted into 4,089,160 shares (the "Aggregate
Merger Shares") of common stock, no par value per share, of Professionals Group
("Professionals Group Common Stock") as described in the accompanying Joint
Proxy Statement/Prospectus. In consideration for the Membership Rights, each
Member of PPTF who does not exercise dissenters' rights will be allocated and
will be entitled to receive a portion of the Aggregate Merger Shares in
accordance with an allocation formula described in the accompanying Joint Proxy
Statement/Prospectus. Only Members of PPTF who do not exercise dissenters'
rights will be entitled to be allocated and to receive a portion of the
Aggregate Merger Shares. Except for the Aggregate Merger Shares (and cash in
lieu of any fractional share) issued to such Members of PPTF and the shares
issued or issuable pursuant to Section 1.28 of the Merger Agreement (which,
subject to certain vesting requirements, contemplates the issuance of an
aggregate of 153,000 shares
<PAGE> 4
of Professionals Group Common Stock to certain PPTF trustees and officers over a
four year period), no other shares of Professionals Group Common Stock (or cash
in lieu of any fractional share) will be issued or issuable upon consummation of
the transactions contemplated by the Merger Agreement.
Consummation of the transactions contemplated by the Merger Agreement is
subject to certain conditions (including requisite regulatory approvals, the
approval of the Members of PPTF and of the stockholders of Professionals Group,
and the receipt of certain opinions and certificates). Upon consummation of the
transactions contemplated by the Merger Agreement, and assuming none of them
exercise dissenters' rights, Members of PPTF will own shares of Professionals
Group Common Stock representing approximately 53.8% of the then outstanding
voting power of Professionals Group. However, no single Member of PPTF will own
shares of Professionals Group Common Stock representing more than one percent of
the then outstanding voting power of Professionals Group.
The Professionals Group Board believes that the transactions contemplated
by the Merger Agreement are in the best interests of Professionals Group and its
stockholders. Professionals Group believes that the transactions contemplated by
the Merger Agreement present a unique opportunity to expand Professionals
Group's existing insurance operations and that such transactions, by creating a
combined entity that will be larger and stronger than Professionals Group alone,
will enhance acquisition and other opportunities for growth and diversification
and will improve the competitive position of the combined entity in a
consolidating insurance industry. THE PROFESSIONALS GROUP BOARD HAS APPROVED THE
MERGER AGREEMENT AND THE NAME CHANGE AMENDMENT AND RECOMMENDS THAT YOU VOTE FOR
THE MERGER PROPOSAL AND FOR THE NAME CHANGE PROPOSAL.
The accompanying Notice and Joint Proxy Statement/Prospectus describe in
more detail the matters to be acted upon at the Professionals Group Annual
Meeting and set forth the voting rights of holders of Professionals Group Common
Stock with respect to such matters. Stockholders are urged to review carefully
the accompanying Notice and Joint Proxy Statement/Prospectus, which contain
descriptions of, among other things, the Professionals Group Board Nominees, the
Merger Proposal, the Merger Agreement and its terms and conditions, the
transactions contemplated by the Merger Agreement and the Name Change Proposal.
Your continuing interest in the business of Professionals Group is
appreciated. Because of the significance of the matters to be considered at the
Professionals Group Annual Meeting (including the transactions contemplated by
the Merger Agreement, and the Name Change Amendment), your participation in the
Professionals Group Annual Meeting, in person or by proxy, is especially
important. Accordingly, whether or not you plan to attend the Professionals
Group Annual Meeting, please sign, date and mail the enclosed Proxy promptly in
the postage-paid envelope that has been provided to you for your convenience.
Thank you, and we look forward to your participation in the Professionals
Group Annual Meeting.
W. PETER MCCABE, M.D.
W. Peter McCabe, M.D.
Chairman
VICTOR T. ADAMO
Victor T. Adamo
President and Chief Executive Officer
<PAGE> 5
NOTICE OF 1998 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 3, 1998
NOTICE IS HEREBY GIVEN that the 1998 Annual Meeting of Stockholders of
Professionals Insurance Company Management Group ("Professionals Group") will be
held at 2600 Professionals Drive, Okemos, Michigan, at 10:00 a.m., local time,
on Wednesday, June 3, 1998 (the "Professionals Group Annual Meeting"), for the
following purposes, all of which are more fully described in the accompanying
Joint Proxy Statement/Prospectus:
1. To elect four persons to the Board of Directors of Professionals Group
for three year terms expiring at the Annual Meeting of Stockholders to
be held in the year 2001 and upon the election and qualification of
their successors or upon their earlier resignation or removal.
2. To consider and vote upon a proposal (the "Merger Proposal") to approve
and adopt 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 (the "Merger Agreement"), by and among Professionals Group, PICOM
Insurance Company, a Michigan stock insurance company and wholly-owned
subsidiary of Professionals Group ("PICOM"), and Physicians Protective
Trust Fund, a medical malpractice self-insurance trust fund organized
under Florida Statutes sec.627.357 ("PPTF"), and all of the transactions
contemplated by the Merger Agreement. The Merger Agreement provides for
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.
Upon consummation of the merger of PPTF with and into INSCO, and subject
to their exercise of dissenters' rights, the aggregate rights of Members
(as defined in the accompanying Joint Proxy Statement/Prospectus) of
PPTF (collectively, the "Membership Rights") will be converted into
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 the Membership Rights, each Member of PPTF
who does not timely and properly exercise dissenters' rights will be
allocated and will be entitled to receive a portion of the Aggregate
Merger Shares in accordance with an allocation formula described in the
accompanying Joint Proxy Statement/Prospectus. In addition, and subject
to certain vesting requirements, Section 1.28 of the Merger Agreement
contemplates the issuance of an aggregate of 153,000 shares of
Professionals Group Common Stock to certain PPTF trustees and officers
over a four year period.
3. To consider and vote upon a proposal (the "Name Change Proposal") to
amend Article I of the First Amended and Restated Articles of
Incorporation of Professionals Group to change the name of Professionals
Group to "Professionals Group, Inc."
4. To transact such other business as may properly come before the
Professionals Group Annual Meeting or any adjournments or postponements
thereof. (The Board of Directors of Professionals Group is not aware of
any other business to come before the Professionals Group Annual
Meeting.)
The Board of Directors of Professionals Group has fixed the close of
business on April 6, 1998 as the record date for the determination of
stockholders entitled to notice of and to vote at the Professionals Group Annual
Meeting and any adjournments or postponements thereof. Only stockholders of
record at the close of business on such date are entitled to notice of and to
vote at the Professionals Group Annual Meeting and any adjournments or
postponements thereof. A list of Professionals Group stockholders entitled to
vote at the Professionals Group Annual Meeting will be available for examination
at the Professionals Group Annual Meeting.
Professionals Group Common Stock constitutes the only security of
Professionals Group whose holders are entitled to vote upon the proposals to be
presented at the Professionals Group Annual Meeting.
Your vote is important regardless of the number of shares you own. Each
Professionals Group stockholder is requested to sign, date and return the
enclosed Proxy without delay in the enclosed postage-paid
<PAGE> 6
envelope. You may revoke your Proxy at any time prior to its exercise. Any
stockholder of record present at the Professionals Group Annual Meeting or at
any adjournments or postponements thereof may revoke his or her Proxy and vote
personally on each matter brought before the Professionals Group Annual Meeting.
By Order of the Board of Directors
ANNETTE E. FLOOD
Annette E. Flood
Secretary
April 29, 1998
THE BOARD OF DIRECTORS OF PROFESSIONALS GROUP RECOMMENDS THAT YOU VOTE FOR
THE ELECTION OF ALL OF THE PROFESSIONALS GROUP BOARD NOMINEES TO THE
PROFESSIONALS GROUP BOARD, FOR THE MERGER PROPOSAL, AND FOR THE NAME CHANGE
PROPOSAL.
PLEASE DATE AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE
ENCLOSED POSTAGE-PAID RETURN ENVELOPE.
<PAGE> 7
<TABLE>
<S> <C>
- -------------------------------------------- --------------------------------------------
PROFESSIONALS INSURANCE PROFESSIONALS INSURANCE
COMPANY MANAGEMENT GROUP COMPANY MANAGEMENT GROUP
AND PROSPECTUS
PHYSICIANS PROTECTIVE TRUST FUND 4,089,160 SHARES
JOINT PROXY STATEMENT OF COMMON STOCK, NO PAR VALUE PER SHARE
- -------------------------------------------- --------------------------------------------
</TABLE>
This Joint Proxy Statement/Prospectus (the "Joint Proxy
Statement/Prospectus") is being furnished to stockholders of Professionals
Insurance Company Management Group, a Michigan business corporation
("Professionals Group"), in connection with the solicitation of proxies by the
Board of Directors of Professionals Group (the "Professionals Group Board") to
be used at the 1998 Annual Meeting of Stockholders of Professionals Group to be
held on June 3, 1998 (including any adjournments or postponements thereof, the
"Professionals Group Annual Meeting"). At the Professionals Group Annual
Meeting, holders of the common stock, no par value per share, of Professionals
Group (the "Professionals Group Common Stock") will be asked to elect four
persons to the Professionals Group Board for three year terms expiring at the
Annual Meeting of Stockholders to be held in the year 2001 and upon the election
and qualification of their successors or upon their earlier resignation or
removal, and to consider and vote upon two proposals. The first proposal (the
"Merger Proposal") is a proposal to approve and adopt the First Amended and
Restated Agreement and Plan of Merger dated as of October 3, 1997 (the "Restated
Merger Agreement"), as amended by a First Amendment to First Amended and
Restated Agreement and Plan of Merger dated as of April 13, 1998 (the "First
Amendment," and together with the Restated Merger Agreement, 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 ("PICOM"), and Physicians Protective Trust Fund, a medical
malpractice self-insurance trust fund organized under Florida Statutes
sec.627.357 ("PPTF"), and all of the transactions contemplated by the Merger
Agreement (including, without limitation, 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). The second proposal (the "Name Change Proposal") is a proposal to
approve 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." (the "Name Change Amendment"). The Professionals
Group Board has nominated Mr. R. Kevin Clinton, John F. Dodge, Jr., Esq., H.
Harvey Gass, M.D., and Ann F. Putallaz, Ph.D. (the "Professionals Group Board
Nominees"), for election to the Professionals Group Board at the Professionals
Group Annual Meeting. The record date for the Professionals Group Annual Meeting
is April 6, 1998 (the "Professionals Group Record Date").
This Joint Proxy Statement/Prospectus is also being furnished to each
person or entity who is the named insured on an indemnity agreement issued by
PPTF that is in effect on April 1, 1998 (a "Member") in connection with the
solicitation of proxies by the Board of Trustees of PPTF (the "PPTF Board") to
be used at the Special Meeting of Members of PPTF to be held on June 5, 1998
(including any adjournments or postponements thereof, the "PPTF Special
Meeting," and together with the Professionals Group Annual Meeting, the
"Meetings"). On each matter submitted to the Members of PPTF, each indemnity
agreement issued by PPTF that is in effect on April 1, 1998 (a "PPTF Policy") is
entitled to one vote. As of the PPTF Record Date, the number of PPTF Policies,
and the maximum number of votes entitled to be cast on each matter submitted to
a vote of PPTF Members at the PPTF Special Meeting, is 3,586. The vote
represented by each PPTF Policy may only be cast, in person or by proxy, by the
person or entity who is the named insured on such PPTF Policy and there is only
one named insured for each PPTF Policy. Approval of the Merger Proposal requires
the affirmative vote of two-thirds of the number of votes eligible to be cast.
(This percentage was fixed by the PPTF Board with the approval of the Department
of Insurance of the State of Florida (the "Florida Insurance Department").) The
record date for the PPTF Special Meeting is April 1, 1998 (the "PPTF Record
Date").
SEE "RISK FACTORS" ON PAGE 30 OF THIS JOINT PROXY STATEMENT/PROSPECTUS FOR
CERTAIN CONSIDERATIONS RELEVANT TO VOTING AND TO AN INVESTMENT IN PROFESSIONALS
GROUP COMMON STOCK.
<PAGE> 8
This Joint Proxy Statement/Prospectus also constitutes a prospectus of
Professionals Group with respect to up to 4,089,160 shares of Professionals
Group Common Stock to be issued or reserved for issuance to Members of PPTF in
connection with the transactions contemplated by the Merger Agreement (including
the merger of PPTF with and into INSCO (the "INSCO Merger") followed immediately
by the merger of INSCO with and into PICOM, with PICOM continuing on as the
surviving insurance company (the "PICOM Merger," and together with the INSCO
Merger, the "Mergers")). Upon consummation of the INSCO Merger, but subject to
the exercise of dissenters' rights, all "Membership Rights" (as defined) will be
converted into an aggregate of 4,089,160 shares (the "Aggregate Merger Shares")
of Professionals Group Common Stock. In consideration for all Membership Rights,
the Aggregate Merger Shares will be allocated and distributed to Members of PPTF
in accordance with the formula (the "Allocation Formula") that follows: Each
Member of PPTF who does not timely and properly exercise dissenters' rights will
be 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
the PPTF Record Date (the "Earned PPTF Policy Premium") to $56,037,359 (which is
the 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
the cash equivalent value thereof based on 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 the closing date with respect to the transactions contemplated by
the Merger Agreement (the "Average Price"). Members of PPTF who timely and
properly exercise dissenters' rights will be paid the fair value of their
Membership Rights. The Allocation Formula was determined by the PPTF Board.
Earned premium is the prorated portion of an insurance premium which is no
longer considered prepaid as a result of the elapsed time the insurance policy
has been in force. For example, after six months, $12,000 of a prepaid $24,000
annual premium is considered earned premium. For the definition of "Membership
Rights," see "INDEX OF DEFINED TERMS" and "GLOSSARY OF SELECTED MERGER RELATED
TERMS."
By way of example, under the Allocation Formula, and assuming he or she
does not exercise dissenters' rights, a Member of PPTF whose PPTF Policy has
$24,000 of Earned PPTF Policy Premium would be entitled to 1,754.16 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 1,754 whole shares of Professionals Group Common Stock and, in lieu of
the fractional share of Professionals Group Common Stock, would be paid cash in
an amount determined by multiplying the amount of such fractional share (in this
example .16) by the Average Price.
Only Members of PPTF who do not exercise dissenters' rights will be
entitled to be allocated and to receive a portion of the Aggregate Merger
Shares. Except for the shares (and cash in lieu of any fractional share) issued
to such Members of PPTF and the shares issued or issuable pursuant to Section
1.28 of the Merger Agreement (which, subject to certain vesting requirements,
contemplates the issuance of an aggregate of 153,000 shares of Professionals
Group Common Stock to certain PPTF trustees and officers over a four year
period), no other shares of Professionals Group Common Stock (or cash in lieu of
any fractional share) will be issued or issuable upon consummation of the
transactions contemplated by the Merger Agreement. Upon consummation of the
transactions contemplated by the Merger Agreement, and assuming none of them
exercise dissenters' rights, Members of PPTF will own shares of Professionals
Group Common Stock representing approximately 53.8% of the outstanding voting
power of Professionals Group.
This Joint Proxy Statement/Prospectus does not cover any resales of
Professionals Group Common Stock to be received by Members of PPTF upon
consummation of the INSCO Merger, and no person is authorized to make use of
this Joint Proxy Statement/Prospectus in connection with any such resale. This
Joint Proxy Statement/Prospectus also does not cover Professionals Group Common
Stock to be issued pursuant to Section 1.28 of the Merger Agreement.
<PAGE> 9
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Joint Proxy Statement/Prospectus is April 29, 1998. This
Joint Proxy Statement/ Prospectus and the accompanying forms of proxy are first
being mailed to the stockholders of Professionals Group and to the Members of
PPTF on or about April 30, 1998.
Professionals Group Common Stock is traded on the Nasdaq National Market.
The last sales price of Professionals Group Common Stock on October 2, 1997 (the
last trading day prior to the public announcement of the execution of the
Restated Merger Agreement was $38.75. The last sales price of Professionals
Group Common Stock on April 9, 1998 (the last trading day prior to the execution
of the First Amendment was $42.00. The last sales price of Professionals Group
Common Stock on April 24, 1998 (the last practicable trading day prior to the
mailing of this Joint Proxy Statement/Prospectus) was $41.25.
<PAGE> 10
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Index of Defined Terms...................................... 2
Available Information....................................... 4
Incorporation of Certain Documents by Reference............. 4
Summary..................................................... 6
The Companies............................................. 6
The Meetings.............................................. 7
The Transactions.......................................... 10
Interests of Certain Persons.............................. 16
Reinsurance Contract...................................... 18
Management and Operations After the Transactions.......... 19
Certain Federal Income Tax Consequences................... 20
Certain Regulatory Considerations......................... 21
Comparison of Stockholder Rights with Membership Rights... 21
Information Regarding the Professionals Group Annual
Meeting................................................ 22
Summary Condensed Consolidated Historical Financial and
Operating Data of Professionals Insurance Company
Management Group....................................... 23
Summary Condensed Consolidated Historical Financial and
Operating Data of Physicians Protective Trust Fund..... 25
Summary Unaudited Pro Forma Condensed Combined Financial
and Operating Data of Professionals Insurance Company
Management Group and Physicians Protective Trust
Fund................................................... 26
Professionals Insurance Company Management
Group/Physicians Protective Trust Fund Per Share
Data................................................... 27
Comparative Stock Prices.................................. 28
Risk Factors................................................ 30
Industry Factors May Impact Results and Operations........ 30
Significant Competition................................... 30
Health Care Industry Consolidation May Impact Results and
Operations............................................. 31
Underwriting Losses and Reserves Based on Actuarial
Assumptions............................................ 31
Reliance on Reinsurance................................... 32
Reliance on Independent Insurance Agencies................ 32
Holding Company Dependent on Results and Operations of
Subsidiaries........................................... 32
Regulatory Considerations................................. 33
Tort Reform May Impact Results and Operations............. 34
Possible Stock Price Fluctuation.......................... 34
Anti-Takeover Provisions May Discourage Takeovers......... 34
Potential Adverse Consequences of Acquisitions, Business
Combinations and Reinsurance Relationships............. 35
Shares Eligible for Future Sale Could Affect Prevailing
Market Prices.......................................... 35
Additional Authorized Securities Could be Issued.......... 36
Certain Forward-Looking Information....................... 36
The Companies............................................... 37
Professionals Insurance Company Management Group.......... 37
PICOM Insurance Company................................... 37
</TABLE>
i
<PAGE> 11
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INSCO..................................................... 37
Physicians Protective Trust Fund.......................... 38
The Meetings................................................ 38
Dates, Times and Places................................... 38
Matters to be Considered.................................. 38
Votes Required............................................ 39
Voting of Proxies......................................... 41
Revocability of Proxies................................... 42
Record Dates; Voting Rights; Quorums...................... 42
Dissenters' Rights........................................ 43
Solicitation of Proxies................................... 44
The Transactions............................................ 46
Structure................................................. 46
Transaction Consideration and Allocation Formula.......... 46
Background of the Transactions............................ 48
Reasons for the Transactions.............................. 64
Board Recommendations..................................... 69
Opinion of Professionals Group Financial
Advisor -- Cochran, Caronia & Co....................... 70
Opinion of Professionals Group Financial
Advisor -- McDonald & Company.......................... 73
Opinion of PPTF Financial Advisor -- Donaldson, Lufkin &
Jenrette............................................... 77
Summary of the Merger Agreement........................... 82
Capitalization of INSCO................................... 93
Procedures for Exchange of Membership Rights.............. 93
No Solicitation of Transactions........................... 94
Regulatory Approvals Required............................. 95
Interests of Certain Persons.............................. 95
Anticipated Accounting Treatment.......................... 96
Resale of Professionals Group Common Stock; Restrictions
on Transfer............................................ 97
Dissenters' Rights........................................ 98
Pro Forma Condensed Combined Financial Information.......... 98
Professionals Insurance Company Management Group and
Physicians Protective Trust Fund Unaudited Pro Forma
Condensed Combined Statements of Income................ 100
Professionals Insurance Company Management Group and
Physicians Protective Trust Fund Unaudited Pro Forma
Condensed Combined Balance Sheet....................... 104
Notes to Professionals Insurance Company Management Group
and Physicians Protective Trust Fund Unaudited Pro
Forma Condensed Combined Financial Statements.......... 105
Interests of Certain Persons................................ 106
Directors................................................. 106
Executive Officers........................................ 106
Other Matters............................................. 107
Reinsurance Contract........................................ 111
Management and Operations After the Transactions............ 112
Directors.............................................. 112
Executive Officers..................................... 116
Dividend Policy........................................ 117
</TABLE>
ii
<PAGE> 12
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Beneficial Ownership of Professionals Group Common Stock.... 118
Certain Federal Income Tax Consequences..................... 119
Certain Regulatory Considerations........................... 121
General................................................ 121
Change or Acquisition of Control....................... 122
Insolvency Funds; Mandatory Pools...................... 122
Restrictions on Dividends.............................. 123
Risk-Based Capital..................................... 124
NAIC-IRIS Ratios....................................... 124
Effect of Federal Legislation.......................... 125
Tort Reform............................................ 125
Selected Consolidated Financial Data of Physicians
Protective Trust Fund..................................... 126
Management's Discussion and Analysis of Financial Condition
and Results of Operations of Physicians Protective Trust
Fund...................................................... 127
Overview............................................... 127
Financial Position..................................... 127
Results of Operations -- Year ended December 31, 1997
versus Year ended December 31, 1996................... 129
Results of Operations -- Year ended December 31, 1996
versus Year ended December 31, 1995................... 129
Liquidity and Capital Resources........................ 130
Impact of Inflation and Changing Prices................ 131
Business and Properties of Physicians Protective Trust
Fund...................................................... 131
Overview............................................... 131
Products and Services.................................. 132
Marketing.............................................. 132
Underwriting........................................... 132
Claims Management...................................... 133
Reserves and Losses.................................... 134
Investments............................................ 137
Ceded Reinsurance...................................... 138
Competition............................................ 139
Regulation............................................. 140
Subsidiaries........................................... 140
Employees.............................................. 140
Properties............................................. 140
Legal Proceedings...................................... 140
Management of Physicians Protective Trust Fund.............. 141
Trustees............................................... 141
Executive Officers..................................... 141
Trustee Remuneration................................... 141
Management Remuneration................................ 142
Compensation Committee Interlocks and Insider
Participation......................................... 143
Beneficial Ownership of Physicians Protective Trust Fund.... 143
Related Party Transactions of Physicians Protective Trust
Fund...................................................... 144
Amendment to Professionals Group's First Amended and
Restated Articles of Incorporation........................ 144
</TABLE>
iii
<PAGE> 13
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Description of Professionals Group Capital Stock............ 145
General................................................... 145
Preferred Stock........................................... 145
Common Stock.............................................. 145
Transfer Agent............................................ 146
Authorized but Unissued Shares............................ 146
Comparison of Stockholder Rights with Membership Rights..... 146
General................................................... 147
Board of Directors/Trustees; Voting for
Directors/Trustees; Removal of Directors/Trustees...... 148
Director/Trustee Nominations.............................. 149
Voting Requirements....................................... 150
Anti-Takeover Laws and Charter Provisions................. 151
Meetings.................................................. 152
Director/Trustee Liability and Indemnification............ 153
Dividends................................................. 153
Charter Amendments........................................ 154
Dissolution............................................... 154
Other Matters............................................. 155
Information Regarding the Professionals Group Annual
Meeting................................................... 155
Election of Directors..................................... 155
Board of Directors Meetings and Committees................ 157
Director Compensation and Benefits........................ 157
Management Remuneration................................... 159
Stock Purchase Plan....................................... 161
Employment Severance Compensation Plans................... 161
Compensation Committee Report............................. 161
Compensation Committee Interlocks and Insider
Participation.......................................... 164
Stock Performance Graph................................... 165
Section 16(a) Beneficial Ownership Reporting Compliance... 165
Related Party Transactions................................ 166
Other Matters............................................. 166
Legal Matters............................................... 167
Experts..................................................... 167
Stockholder Proposals....................................... 167
Glossary of Selected Merger Related Terms................... 168
Glossary of Selected Insurance Terms........................ 168
Index to Financial Statements of Physicians Protective Trust
Fund...................................................... FS-1
</TABLE>
iv
<PAGE> 14
<TABLE>
<C> <S>
Annexes
Annex A -- Professionals Insurance Company Management Group Annual
Report on Form 10-K for the Year Ended December 31, 1997
(without exhibits)
Annex B -- First Amended and Restated Agreement and Plan of Merger
dated as of October 3, 1997 by and among Professionals
Insurance Company Management Group, PICOM Insurance Company
and Physicians Protective Trust Fund (without any exhibits
or schedules)
Annex C -- First Amendment to First Amended and Restated Agreement and
Plan of Merger dated as of April 13, 1998 by and among
Professionals Insurance Company Management Group, PICOM
Insurance Company and Physicians Protective Trust Fund
Annex D -- Proposed Amendment to First Amended and Restated Articles of
Incorporation of Professionals Insurance Company Management
Group
Annex E -- Opinion of Cochran, Caronia & Co.
Annex F -- Opinion of McDonald & Company Securities, Inc.
Annex G -- Opinion of Donaldson, Lufkin & Jenrette Securities
Corporation
Annex H -- Certain Provisions of the Florida Business Corporation Act,
as amended, regarding Dissenters' Rights
</TABLE>
v
<PAGE> 15
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
JOINT PROXY STATEMENT/PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY
PROFESSIONALS GROUP OR PPTF. THIS JOINT PROXY STATEMENT/PROSPECTUS DOES NOT
CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY STATE IN WHICH SUCH OFFER
OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS JOINT PROXY
STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF PROFESSIONALS GROUP OR PPTF SINCE THE DATE HEREOF OR THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO SUCH DATE. ALL
INFORMATION CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS RELATING TO
PROFESSIONALS GROUP AND ITS SUBSIDIARIES HAS BEEN SUPPLIED BY PROFESSIONALS
GROUP AND ALL INFORMATION CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS
RELATING TO PPTF AND ITS SUBSIDIARY HAS BEEN SUPPLIED BY PPTF.
INDEX OF DEFINED TERMS
Set forth below is a list of certain defined terms used in this Joint Proxy
Statement/Prospectus and the page of this Joint Proxy Statement/Prospectus on
which each such term is defined. See also "GLOSSARY OF SELECTED MERGER RELATED
TERMS" and "GLOSSARY OF SELECTED INSURANCE TERMS" on page 167 of this Joint
Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
TERM PAGE
---- ----------
<S> <C>
A.M. Best Rating................ 168
Affiliate....................... 35
Aggregate Earned Premium........ Cover Page
Aggregate Merger Shares......... Cover Page
Allocation Formula.............. Cover Page
Average Price................... Cover Page
Cede............................ 168
Claims-made policy.............. 168
Closing Date.................... 10
Code............................ 20
Combined ratio.................. 168
Commission...................... 4
Confidentiality Agreement....... 49
Consulting Agreement............ 17
DLJ Opinion..................... 14
Donaldson, Lufkin & Jenrette.... 14
Earned premium.................. 168
Earned PPTF Policy Premium...... Cover Page
ECO............................. 138
Enterprise Value................ 78
EPS............................. 78
Excess of loss reinsurance...... 168
Exchange Agent.................. 93
Exchange Act.................... 4
Expense ratio................... 168
FBCA............................ 16
First Amendment................. Cover Page
Florida Dissenters' Rights
Provisions.................... 43
</TABLE>
<TABLE>
<CAPTION>
TERM PAGE
---- ----------
<S> <C>
Florida Insurance Code.......... 7
Florida Insurance Department.... Cover Page
FPIC............................ 12
FPIC Confidentiality
Agreement..................... 55
FPIC Numerator.................. 12
FPIC Proposals.................. 12
Frontier........................ 139
GAAP............................ 23
GenRe........................... 128
HSR Act......................... 15
IBNR............................ 168
Incurred but not reported....... 168
Indemnified Parties............. 89
Initial Merger Agreement........ 7
INSCO........................... Cover Page
INSCO Certificate of Merger..... 10
INSCO Effective Time............ 10
INSCO Investment................ 37
INSCO Merger.................... Cover Page
IRIS............................ 33
Joint Proxy
Statement/Prospectus.......... Cover Page
KMIC............................ 115
LAE............................. 31
LEPL............................ 138
LFQ............................. 79
LFY............................. 78
Loss and LAE ratio.............. 169
LTM............................. 79
MBCA............................ 16
</TABLE>
2
<PAGE> 16
<TABLE>
<CAPTION>
TERM PAGE
---- ----------
<S> <C>
Medical Protective.............. 139
Meetings........................ Cover Page
Member.......................... Cover Page
Membership Rights............... 168
Merger Agreement................ Cover Page
Merger Proposal................. Cover Page
Mergers......................... Cover Page
McDonald & Company.............. 13
Michigan Insurance Code......... 6
Michigan Insurance
Commissioner.................. 15
MMI Transaction................. 79
MPMLC Transaction............... 79
NAIC............................ 33
Name Change Amendment........... Cover Page
Name Change Proposal............ Cover Page
Net premiums written............ 169
New Benefit Plans............... 86
Note............................ 37
Notice.......................... 94
November FPIC Proposal.......... 12
Occurrence policy............... 169
October FPIC Proposal........... 12
Original FPIC Proposal.......... 12
PG PICOM Directors.............. 19
PICOM........................... Cover Page
PICOM Certificate of Merger..... 10
PICOM Effective Time............ 10
PICOM Merger.................... Cover Page
PICOM pension plans............. 159
PPP............................. 7
PPTF............................ Cover Page
PPTF Board...................... Cover Page
PPTF Change in Control
Agreement..................... 17
PPTF Charter Documents.......... 21
PPTF Officer.................... 18
PPTF PICOM Directors............ 20
PPTF Policy..................... Cover Page
PPTF Record Date................ Cover Page
PPTF Representatives............ 19
PPTF Special Meeting............ Cover Page
PPTF Trustee Participant........ 17
</TABLE>
<TABLE>
<CAPTION>
TERM PAGE
---- ----------
<S> <C>
Pre-Merger Notification
Agencies...................... 15
Proceeding...................... 89
Professionals Group............. Cover Page
Professionals Group Annual
Meeting....................... Cover Page
Professionals Group Board....... Cover Page
Professionals Group Board
Nominees...................... Cover Page
Professionals Group Charter
Documents..................... 19
Professionals Group Common
Stock......................... Cover Page
Professionals Group Preferred
Stock......................... 145
Professionals Group Record
Date.......................... Cover Page
Professionals Group
Representatives............... 19
ProNational Casualty............ 6
Publicly Traded Companies....... 78
Quota Share Reinsurance......... 169
RBC............................. 124
Registration Statement.......... 4
Reinsurance Contract............ 18
Reserves........................ 169
Reserve redundancy.............. 169
Restated Merger Agreement....... Cover Page
Rule 144........................ 35
Rule 145........................ 35
SAP............................. 23
Securities Act.................. 4
Selected Companies.............. 74
Selected Medical Malpractice
Insurance Companies........... 79
Selected Medical Malpractice
Insurance Transactions........ 79
Selected P&C Transactions....... 79
Selected Peer Group............. 72
SSSP............................ 132
Standard & Poor's ratings....... 169
Statutory surplus............... 169
Stock Formula................... 51
Stock Grant Agreement........... 18
Transaction Value............... 79
1997 Professionals Group 10-K... 4
</TABLE>
3
<PAGE> 17
AVAILABLE INFORMATION
Professionals Group is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information concerning Professionals Group can be inspected
and copied at the public reference facilities maintained by the Commission at
450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the
Commission's Regional Offices at Seven World Trade Center, Suite 1300, New York,
New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such material also can be obtained from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. In addition, the Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding the
electronic filings of Professionals Group with the Commission. The address of
the Commission's Web site is "http://www.sec.gov".
Professionals Group has filed with the Commission a Registration Statement
on Form S-4 (together with any amendments thereto, the "Registration Statement")
under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the shares of Professionals Group Common Stock to be issued or
reserved for issuance in connection with the INSCO Merger. This Joint Proxy
Statement/Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits thereto. Such additional information may
be inspected and copied as set forth above. Statements contained in this Joint
Proxy Statement/Prospectus or in any document incorporated in this Joint Proxy
Statement/Prospectus by reference as to the contents of any contract or other
document referred to herein or therein are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement or such other document, each such
statement being qualified in all respects by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All of the documents filed with the Commission by Professionals Group (File
No. 0-21223) pursuant to the Exchange Act since the end of its fiscal year ended
December 31, 1997 are incorporated by reference in this Joint Proxy
Statement/Prospectus. Such documents include the following:
1. Professionals Group's Annual Report on Form 10-K for the Year Ended
December 31, 1997 (the "1997 Professionals Group 10-K").
2. All other reports filed by Professionals Group pursuant to Section
13(a) or 15(d) of the Exchange Act since the end of the fiscal year covered
by the 1997 Professionals Group 10-K.
3. The description of Professionals Group Common Stock incorporated by
reference in Professionals Group's Registration Statement on Form 8-A filed
on August 20, 1996 pursuant to Section 12(g) of the Exchange Act and set
forth under the captions "Description of Holding Company Capital Stock" and
"Comparison of Shareholder Rights" included in the final prospectus as
filed pursuant to Rule 424(b)(3) under the Securities Act in connection
with the registration statement on Form S-4 (registration no. 333-3138) of
Professionals Group.
Such incorporation by reference will not be deemed to specifically
incorporate by reference the information referred to in Item 402(a)(8) of
Regulation S-K.
Professionals Group's Annual Report on Form 10-K for the Year Ended
December 31, 1997 (without exhibits) has been reproduced and attached to this
Joint Proxy Statement/Prospectus as Annex A.
All documents filed with the Commission by Professionals Group pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of
effectiveness of the Registration Statement of which this Joint Proxy
Statement/Prospectus forms a part and prior to the date of the Professionals
Group Annual Meeting or the date of the PPTF Special Meeting, as applicable, are
incorporated herein by reference and such documents will be deemed to be a part
hereof from the date of filing of such documents. Any statement contained in
this Joint Proxy Statement/Prospectus or in a document incorporated or deemed to
be
4
<PAGE> 18
incorporated by reference herein will be deemed to be modified or superseded for
purposes of this Joint Proxy Statement/Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any statement so modified or superseded will not be deemed, except as
so modified or superseded, to constitute a part of this Joint Proxy
Statement/Prospectus.
UPON WRITTEN OR ORAL REQUEST, PROFESSIONALS GROUP WILL PROVIDE WITHOUT
CHARGE A COPY OF ITS ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1997 FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. SUCH
REQUEST SHOULD BE MADE TO ANNETTE E. FLOOD, ESQ., SECRETARY, PROFESSIONALS
INSURANCE COMPANY MANAGEMENT GROUP, 2600 PROFESSIONALS DRIVE, P.O. BOX 150,
OKEMOS, MICHIGAN 48805-0150; TELEPHONE: (517) 359-6500.
THIS JOINT PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE
WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. SUCH DOCUMENTS (OTHER THAN
EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY
REFERENCE) ARE AVAILABLE, WITHOUT CHARGE, TO ANY PERSON, INCLUDING ANY
BENEFICIAL OWNER OR MEMBER, TO WHOM THIS JOINT PROXY STATEMENT/PROSPECTUS IS
DELIVERED, ON WRITTEN OR ORAL REQUEST, IN THE CASE OF DOCUMENTS RELATING TO
PROFESSIONALS GROUP, TO ANNETTE E. FLOOD, ESQ., SECRETARY, PROFESSIONALS
INSURANCE COMPANY MANAGEMENT GROUP, 2600 PROFESSIONALS DRIVE, P.O. BOX 150,
OKEMOS, MICHIGAN 48805-0150; TELEPHONE: (517) 349-6500; OR IN THE CASE OF
DOCUMENTS RELATING TO PPTF, TO PEGGY SCHEMENAUER, ADMINISTRATIVE MANAGER,
PHYSICIANS PROTECTIVE TRUST FUND, 2121 PONCE DE LEON BOULEVARD, P.O. BOX 149001,
CORAL GABLES, FLORIDA 33114-9001, TELEPHONE: (305) 442-8119. IN ORDER TO ENSURE
TIMELY DELIVERY OF THE DOCUMENTS, REQUESTS SHOULD BE RECEIVED BY WEDNESDAY, MAY
27, 1998 (IN THE CASE OF PROFESSIONALS GROUP), AND BY MONDAY, MAY 29, 1998 (IN
THE CASE OF PPTF).
5
<PAGE> 19
SUMMARY
The following is a summary of certain information contained elsewhere in
this Joint Proxy Statement/ Prospectus or in documents incorporated herein by
reference. Although it summarizes all material information contained elsewhere
in this Joint Proxy Statement/Prospectus, this summary is necessarily
incomplete. Consequently, reference is made to, and this summary is qualified in
its entirety by, the more detailed information contained elsewhere in this Joint
Proxy Statement/Prospectus (including the Annexes attached hereto and the
information incorporated herein by reference). Stockholders of Professionals
Group and Members of PPTF are urged to read this Joint Proxy
Statement/Prospectus and the Annexes attached hereto in their entirety and with
care. Certain capitalized terms which are used but not defined in this summary
are defined elsewhere in this Joint Proxy Statement/Prospectus. See "INDEX OF
DEFINED TERMS."
THE COMPANIES
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
Professionals Insurance Company Management Group is a Michigan business
corporation that was incorporated under the laws of the State of Michigan on
January 31, 1996 for the purpose of serving as the holding company for PICOM and
its subsidiaries. Professionals Group, which conducts its activities through
subsidiaries, had consolidated assets of $413.2 million and $357.4 million at
December 31, 1997 and 1996, respectively. Following consummation of the
transactions contemplated by the Merger Agreement, all direct and indirect
subsidiaries of Professionals Group (including PICOM and ProNational Casualty
Company, an Illinois stock insurance company formerly known as "PICOM Insurance
Company of Illinois" ("ProNational Casualty")) will continue to operate under
their existing insurance licenses and none of such subsidiaries will be required
to reapply for any of such licenses. The principal executive offices for
Professionals Group are located at 2600 Professionals Drive, Okemos, Michigan
48864, and its telephone number is (517) 349-6500.
PICOM INSURANCE COMPANY
PICOM Insurance Company is a wholly-owned subsidiary of Professionals Group
and a stock insurance company incorporated under the Michigan Insurance Code of
1956, as amended (together with the regulations promulgated thereunder, the
"Michigan Insurance Code"), in 1980. PICOM, which is licensed as a property and
casualty insurer in Michigan, Florida, Illinois, Indiana, Iowa, Kentucky,
Missouri, Ohio, and Pennsylvania, began business on June 27, 1980 by assuming
the assets, liabilities and business of the Brown-McNeely Insurance Fund. (The
Brown-McNeely Fund was created by the State of Michigan in 1975 to provide
doctors with an effective and reliable source of medical malpractice insurance.)
Beginning July 1, 1980, PICOM offered its own policies to doctors and clinics
throughout Michigan. PICOM began insuring dentists in 1983 and hospitals and
other health care institutions in 1993, and began offering professional
liability insurance to lawyers and law firms in 1994. Since January 1, 1995,
PICOM, through ProNational Casualty has insured doctors and clinics in Illinois.
The principal product currently offered by PICOM is professional liability
insurance for providers of health care services in Michigan and Illinois. PICOM
(including ProNational Casualty) had total statutory combined admitted assets of
$363.8 million and $317.1 million at December 31, 1997 and 1996, respectively.
The principal executive offices of PICOM are located at 2600 Professionals
Drive, Okemos, Michigan 48864, and its telephone number is (517) 349-6500.
INSCO
INSCO is a newly-formed wholly-owned subsidiary of Professionals Group and
a stock insurance company that was incorporated under the laws of the State of
Florida solely for the purpose of effecting the transactions contemplated by the
Merger Agreement. INSCO does not have any business operations and, because it
was formed solely for the purpose of effecting the transactions contemplated by
the Merger Agreement, it will not write or underwrite any lines of insurance.
The principal executive offices for INSCO are located at 2121 Ponce de Leon
Boulevard, Suite 350, Coral Gables, Florida 33134-5221, and its telephone number
is (305) 442-8119.
6
<PAGE> 20
For additional information regarding Professionals Group, PICOM and INSCO,
see "AVAILABLE INFORMATION," "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE,"
"THE COMPANIES" and "ANNEX A -- PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997."
PHYSICIANS PROTECTIVE TRUST FUND
PPTF is a medical malpractice self-insurance trust fund that was formed in
1975 under Title XXXVII, Florida Statutes, as amended (together with the
regulations promulgated thereunder, the "Florida Insurance Code"), which permits
a group of health care providers to self-insure against professional medical
malpractice liability. PPTF was formed to provide physicians an effective and
reliable source of medical malpractice insurance. The Florida Insurance
Department granted approval to PPTF to write policies on January 1, 1976 for
physicians and their professional associations, partnerships and corporations
throughout Florida. Further approvals were granted to write coverage for
podiatrists on June 1, 1994, for physician hospital organizations on January 1,
1995 and for chiropractors on August 1, 1997. PPTF has one wholly-owned
subsidiary, Physicians Protective Plan, Inc., a Florida business corporation
doing business as "The PPTF Agency" ("PPP"), which was acquired by PPTF to
provide administrative functions and services to PPTF. These administrative
functions and services, as well as the personnel employed by PPP, were
transferred to PPTF on January 1, 1997. PPP has been operating as an insurance
agency since June 26, 1996. PPTF had consolidated assets of $434.8 million and
$417.5 million at December 31, 1997 and 1996, respectively. The principal
executive offices of PPTF are located at 2121 Ponce de Leon Boulevard, Suite
350, Coral Gables, Florida 33134-5221, and its telephone number is (305)
442-8119.
For additional information regarding PPTF, see "THE COMPANIES," "SELECTED
CONSOLIDATED FINANCIAL DATA OF PHYSICIANS PROTECTIVE TRUST FUND," "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
PHYSICIANS PROTECTIVE TRUST FUND," "BUSINESS AND PROPERTIES OF PHYSICIANS
PROTECTIVE TRUST FUND," "MANAGEMENT OF PHYSICIANS PROTECTIVE TRUST FUND,"
"BENEFICIAL OWNERSHIP OF PHYSICIANS PROTECTIVE TRUST FUND MEMBERSHIP RIGHTS" and
"RELATED PARTY TRANSACTIONS OF PHYSICIANS PROTECTIVE TRUST FUND."
The First Amended and Restated Agreement and Plan of Merger dated as of
October 3, 1997 amended and restated in its entirety the Agreement and Plan of
Merger dated August 14, 1997 by and among Professionals Group, PICOM and PPTF
(the "Initial Merger Agreement"). The First Amendment to First Amended and
Restated Agreement and Plan of Merger dated as of April 13, 1998 amended the
First Amended and Restated Agreement and Plan of Merger dated October 3, 1997 by
and among Professionals Group, PICOM and PPTF. Prior to the execution of the
Initial Merger Agreement, neither Professionals Group nor PICOM had engaged in
any transactions with PPTF, and except to the extent contemplated by, or
resulting from, the Merger Agreement and the transactions contemplated thereby,
neither Professionals Group nor PICOM is affiliated with PPTF.
THE MEETINGS
DATES, TIMES AND PLACES
Professionals Group. The 1998 Annual Meeting of Stockholders of
Professionals Group will be held at 2600 Professionals Drive, Okemos, Michigan,
at 10:00 a.m., local time, on Wednesday, June 3, 1998. See "THE
MEETINGS -- Dates, Times and Places."
PPTF. A Special Meeting of Members of PPTF will be held at The Holiday Inn,
1350 South Dixie Highway, Coral Gables, Florida, at 2:00 p.m., local time, on
Friday, June 5, 1998. See "THE MEETINGS -- Dates, Times and Places."
7
<PAGE> 21
MATTERS TO BE CONSIDERED
Professionals Group. At the Professionals Group Annual Meeting, holders of
Professionals Group Common Stock will be asked to elect four persons to the
Professionals Group Board for three year terms expiring at the Annual Meeting of
Stockholders to be held in the year 2001 and upon the election and qualification
of their successors or upon their earlier resignation or removal, and to
consider and vote upon two proposals. The first proposal is the Merger Proposal
(i.e., the proposal to approve and adopt 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, both executed by and among Professionals Group, PICOM and PPTF
and all of the transactions contemplated by the Merger Agreement (including,
without limitation, the merger of PPTF with and into INSCO followed immediately
by the merger of INSCO with and into PICOM, with PICOM continuing on as the
surviving insurance corporation)). The second proposal is the Name Change
Proposal (i.e., the proposal to approve 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."). The
Professionals Group Board has nominated Mr. R. Kevin Clinton, John F. Dodge,
Jr., Esq., H. Harvey Gass, M.D., and Ann F. Putallaz, Ph.D., for election to the
Professionals Group Board at the Professionals Group Annual Meeting.
Professionals Group stockholders will also consider and vote upon such other
matters as may properly be brought before the Professionals Group Annual
Meeting. See "THE MEETINGS -- Matters to be Considered."
PPTF. At the PPTF Special Meeting, Members of PPTF will consider and vote
upon the Merger Proposal. Members of PPTF will also consider and vote upon such
other matters as may properly be brought before the PPTF Special Meeting. See
"THE MEETINGS -- Matters to be Considered."
A conformed copy of the First Amended and Restated Agreement and Plan of
Merger dated as of October 3, 1997 by and among Professionals Group, PICOM and
PPTF (without any exhibits or schedules) is attached to this Joint Proxy
Statement/Prospectus as Annex B and is incorporated herein by reference. A
conformed copy of the First Amendment to First Amended and Restated Agreement
and Plan of Merger dated as of April 13, 1998 by and among Professionals Group,
PICOM and PPTF is attached to this Joint Proxy Statement/Prospectus as Annex C
and is incorporated herein by reference.
The Name Change Amendment, if approved by the stockholders of Professionals
Group, will amend Article I of Professionals Group's First Amended and Restated
Articles of Incorporation and change the name of Professionals Group from
"Professionals Insurance Company Management Group" to "Professionals Group,
Inc." A copy of the Name Change Amendment is attached to this Joint Proxy
Statement/Prospectus as Annex D and is incorporated herein by reference. See
"AMENDMENT TO PROFESSIONALS GROUP'S FIRST AMENDED AND RESTATED ARTICLES OF
INCORPORATION."
VOTES REQUIRED
Professionals Group. On each matter submitted to the stockholders of
Professionals Group, each outstanding share of Professionals Group Common Stock
is entitled to one vote. Directors of Professionals Group will be elected by a
plurality of the votes present in person or represented by proxy at the
Professionals Group Annual Meeting. Approval of the Merger Proposal by the
stockholders of Professionals Group requires the affirmative vote of a majority
of the outstanding shares of Professionals Group Common Stock. Approval of the
Name Change Proposal by the stockholders of Professionals Group requires the
affirmative vote of a majority of the outstanding shares of Professionals Group
Common Stock. In all matters other than the election of directors, the Merger
Proposal and the Name Change Proposal, the affirmative vote of the majority of
shares present in person or represented by proxy at the Professionals Group
Annual Meeting and entitled to vote on the matter will be the act of
Professionals Group's stockholders. Approval of the Merger Proposal by the
requisite votes of the stockholders of Professionals Group and the Members of
PPTF is a condition to, and is required for, consummation of the transactions
contemplated by the Merger Agreement (including, without limitation, the merger
of PPTF with and into INSCO followed immediately by the merger of INSCO with and
into PICOM, with PICOM continuing on as the surviving insurance corporation).
Approval of the Name Change Proposal by the requisite vote of Professionals
Group stockholders is not a condition to, and is not
8
<PAGE> 22
required for, the consummation of the transactions contemplated by the Merger
Agreement. Assuming its approval by the stockholders of Professionals Group, the
Name Change Proposal will become effective regardless of whether the Merger
Proposal is approved by the stockholders of Professionals Group. The record date
for the Professionals Group Annual Meeting is April 6, 1998. Only Professionals
Group stockholders at the close of business on the Professionals Group Record
Date are entitled to notice of, and to vote at, the Professionals Group Annual
Meeting. As of the Professionals Group Record Date, Professionals Group had
issued and outstanding approximately 3,505,750 shares of Professionals Group
Common Stock. See "THE MEETINGS -- Votes Required" and "-- Record Dates; Voting
Rights; Quorums."
As of the Professionals Group Record Date, directors and executive officers
of Professionals Group and their affiliates were the beneficial owners of
205,083, approximately 5.8%, of the outstanding shares of Professionals Group
Common Stock (including 38,750 shares of Professionals Group Common Stock which
may be acquired upon the exercise of options which are exercisable within 60
days of such date). The directors and executive officers of Professionals Group
have indicated that they intend to vote all shares of Professionals Group Common
Stock owned by them for the election of all of the Professionals Group Board
Nominees to the Professionals Group Board, for the Merger Proposal and for the
Name Change Proposal. As of the Professionals Group Record Date, the trustees
and executive officers of PPTF and their affiliates were the beneficial owners
of 5,500, less than 0.1%, of the outstanding shares of Professionals Group
Common Stock. The trustees and executive officers of PPTF have indicated that
they intend to vote all shares of Professionals Group Common Stock owned by them
for the election of all of the Professionals Group Board Nominees to the
Professionals Group Board, for the Merger Proposal and for the Name Change
Proposal.
As of the Professionals Group Record Date, neither Professionals Group nor
any of its subsidiaries had or shared the right to vote any of the outstanding
shares of Professionals Group Common Stock. As of the Professionals Group Record
Date, neither PPTF nor its sole subsidiary had or shared the right to vote any
of the outstanding shares of Professionals Group Common Stock.
The affirmative vote of a majority of the shares of Professionals Group
Common Stock present in person or represented by proxy at the Professionals
Group Annual Meeting may authorize the adjournment or postponement of the
Professionals Group Annual Meeting; provided, however, that no proxy which was
voted against any proposal will be voted in favor of adjournment or postponement
to solicit further proxies for such proposal.
PPTF. On each matter submitted to the Members of PPTF, each indemnity
agreement issued by PPTF that is in effect on April 1, 1998 (a "PPTF Policy") is
entitled to one vote. As of the PPTF Record Date, the number of PPTF Policies,
and the maximum number of votes entitled to be cast on each matter submitted to
a vote of PPTF Members at the PPTF Special Meeting, is 3,586. The vote
represented by each PPTF Policy may only be cast, in person or by proxy, by the
person or entity who is the named insured on such PPTF Policy and there is only
one named insured for each PPTF Policy. Approval of the Merger Proposal requires
the affirmative vote of two-thirds of the number of votes eligible to be cast.
(This percentage was fixed by the PPTF Board with the approval of the Florida
Insurance Department.) In all matters other than the Merger Proposal, the
affirmative vote of a majority of the votes present in person or represented by
proxy at the PPTF Special Meeting and entitled to vote on the matter will be the
act of PPTF's Members. Approval of the Merger Proposal by the requisite votes of
the stockholders of Professionals Group and the Members of PPTF is a condition
to, and is required for, consummation of the transactions contemplated by the
Merger Agreement (including, without limitation, the merger of PPTF with and
into INSCO followed immediately by the merger of INSCO with and into PICOM, with
PICOM continuing on as the surviving insurance corporation). The record date for
the PPTF Special Meeting is April 1, 1998. Only Members of PPTF at the close of
business on the PPTF Record Date are entitled to receive notice of, and to vote
at, the PPTF Special Meeting. As of the PPTF Record Date, PPTF had 3,586
Members. See "THE MEETINGS -- Votes Required" and "-- Record Dates; Voting
Rights; Quorums."
As of the PPTF Record Date, trustees of PPTF and their affiliates were the
beneficial owners of 24, or less than 0.7%, of the outstanding PPTF Policies
and, by virtue of such PPTF Policies, are entitled to cast 24, or less than
0.7%, out of a total of 3,586 votes entitled to be cast at the PPTF Special
Meeting. The trustees of PPTF have indicated that they intend to cast all of
their votes for the Merger Proposal. As of the PPTF
9
<PAGE> 23
Record Date, executive officers of PPTF and their affiliates did not own, and
directors and executive officers of Professionals Group and their affiliates did
not own, beneficially or of record, any PPTF Policies. Accordingly, the
executive officers of PPTF and their affiliates, and the directors and executive
officers of Professionals Group and their affiliates, do not have any votes to
cast at the PPTF Special Meeting.
As of the PPTF Record Date, neither PPTF nor its sole subsidiary owned,
beneficially or of record, any of the PPTF Policies. Accordingly, neither PPTF
nor its sole subsidiary has or shares the right to cast any votes at the PPTF
Special Meeting. As of the PPTF Record Date, neither Professionals Group nor any
of its subsidiaries owned, beneficially or of record, any of the PPTF Policies.
Accordingly, neither Professionals Group nor any of its subsidiaries has or
shares the right to cast any votes at the PPTF Special Meeting.
The affirmative vote of a majority of the votes present in person or
represented by proxy at the PPTF Special Meeting may authorize the adjournment
or postponement of the PPTF Special Meeting; provided, however, that no proxy
which was voted against any proposal will be voted in favor of adjournment or
postponement to solicit further proxies for such proposal.
THE TRANSACTIONS
STRUCTURE
Pursuant to the Merger Agreement, and at the effective time (the "INSCO
Effective Time") set forth in articles of merger (the "INSCO Certificate of
Merger") to be filed with the appropriate authorities of the State of Florida on
the closing date with respect to the transactions contemplated by the Merger
Agreement (the "Closing Date"), PPTF will merge with and into INSCO, with INSCO
being the surviving corporation in the INSCO Merger. Pursuant to the Merger
Agreement, and immediately following the INSCO Merger, at the effective time
(the "PICOM Effective Time") set forth in certificates of merger (each, a "PICOM
Certificate of Merger") to be filed with the appropriate authorities of the
State of Florida and of the State of Michigan on the Closing Date, INSCO will
merge with and into PICOM, with PICOM continuing on as the surviving insurance
corporation. In order to comply with the requirements and provisions of the
Michigan Insurance Code and the Florida Insurance Code, the business combination
of Professionals Group and PPTF involves two mergers, the INSCO Merger and the
PICOM Merger (which is expected to occur promptly after the INSCO Merger). Upon
consummation of the transactions contemplated by the Merger Agreement, (i)
Professionals Group will be the parent of PICOM, PICOM will hold all of the
assets and liabilities of PPTF and INSCO, and PPTF and INSCO will cease to
exist, (ii) PICOM will be renamed to reflect the combined insurance operations
of PPTF and PICOM, (iii) PICOM will maintain regional executive offices in
Okemos, Michigan and Coral Gables, Florida and local sales and service offices
in Florida, Illinois, Indiana and Ohio; (iv) all Members of PPTF will cease 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); (v) subject to the exercise of
dissenters' rights, all Membership Rights will be converted into an aggregate of
4,089,160 shares of Professionals Group Common Stock and will cease to exist;
and (vi) PPTF Policies will become and be insurance policies issued by PICOM and
will be converted from assessable insurance policies to nonassessable insurance
policies, without any endorsement or modification thereto. See "THE
TRANSACTIONS -- Structure" and "MANAGEMENT AND OPERATIONS AFTER THE
TRANSACTIONS."
TRANSACTION CONSIDERATION AND ALLOCATION FORMULA
Upon consummation of the INSCO Merger, but subject to the exercise of
dissenters' rights, all Membership Rights will be converted into an aggregate of
4,089,160 shares of Professionals Group Common Stock. In consideration for all
of the Membership Rights, the Aggregate Merger Shares will be allocated and
distributed to Members of PPTF in accordance with the Allocation Formula, which
provides as follows: Each Member of PPTF who does not timely and properly
exercise dissenters' rights will be 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 the PPTF Record Date (the
10
<PAGE> 24
Earned PPTF Policy Premium) to $56,037,359 (which is the 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 the cash equivalent value thereof based
on 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 the closing date with
respect to the transactions contemplated by the Merger Agreement. Members of
PPTF who timely and properly exercise dissenters' rights will be paid the fair
value of their Membership Rights. The Allocation Formula was determined by the
PPTF Board. Earned premium is the prorated portion of an insurance premium which
is no longer considered prepaid as a result of the elapsed time the insurance
policy has been in force. For example, after six months, $12,000 of a prepaid
$24,000 annual premium is considered earned premium.
By way of example, under the Allocation Formula, and assuming he or she
does not exercise dissenters' rights, a Member of PPTF whose PPTF Policy has
$24,000 of Earned PPTF Policy Premium would be entitled to 1,754.16 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 1,754 whole shares of Professionals Group Common Stock, and in lieu of
the fractional share of Professionals Group Common Stock, would be paid cash in
an amount determined by multiplying the amount of such fractional share (in this
example .16) by the Average Price.
In establishing the Allocation Formula, the PPTF Board determined that the
Allocation Formula should be based on Article 12 of the Amended Trust Agreement
dated January 1, 1987 of PPTF. That Article provides, in part, that upon
dissolution, trust assets are to be distributed "in that proportion that the
Members of [PPTF] paid premiums to the Trustees at the last date upon which such
premiums were collected from each Member."
The PPTF Board determined, however, that consistent with the original
intent of Article 12, the Allocation Formula should be based on "earned premium"
(i.e., the prorated portion of an insurance premium which is no longer
considered prepaid as a result of the elapsed time the insurance policy has been
in force) during the 12 months prior to the PPTF Record Date, rather than the
"last premium paid" before the PPTF Record Date. The PPTF Board made this
decision because changes in the operating practices of PPTF since 1987 have made
the use of the "last premium paid" inappropriate. The operating changes that
cause this result are (i) the decision by PPTF on July 1, 1997 to cease writing
calendar year policies and begin writing anniversary date policies, and (ii) the
fact that the Members make premium payments based on a number of plans other
than the single payment on January 1 of each year (including prepayment plans).
The PPTF Board determined that the use of earned premium was more consistent
with the original intent of Article 12 and would result in a more equitable
distribution of the Aggregate Merger Shares.
Only Members of PPTF who do not exercise dissenters' rights will be
entitled to be allocated and to receive a portion of the Aggregate Merger
Shares. Except for the shares (and cash in lieu of any fractional share) issued
to such Members of PPTF and the shares issued or issuable pursuant to Section
1.28 of the Merger Agreement (which, subject to certain vesting requirements,
contemplates the issuance of an aggregate of 153,000 shares of Professionals
Group Common Stock to certain PPTF trustees and officers over a four year
period), no other shares of Professionals Group Common Stock (or cash in lieu of
any fractional share) will be issued or issuable upon consummation of the
transactions contemplated by the Merger Agreement.
Each share of Professionals Group Common Stock outstanding immediately
prior to consummation of the transactions contemplated by the Merger Agreement
will remain outstanding and unchanged as a result of those transactions. Each
option granted by Professionals Group to purchase shares of Professionals Group
Common Stock which is outstanding and unexercised immediately prior to the
consummation of the transactions contemplated by the Merger Agreement (i) will
continue to represent a right to acquire shares of Professionals Group Common
Stock, (ii) will remain an issued and outstanding option to purchase from
Professionals Group shares of Professionals Group Common Stock in the same
amount and at the same
11
<PAGE> 25
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) will not be affected by the consummation of the transactions contemplated
by the Merger Agreement. See "THE TRANSACTIONS -- Transaction Consideration and
Allocation Formula."
REASONS FOR THE TRANSACTIONS
Professionals Group. The Board of Directors of Professionals Group believes
that the terms of the transactions contemplated by the Merger Agreement are in
the best interests of Professionals Group and its stockholders and that such
transactions, by creating a combined entity that will be larger and stronger
than Professionals Group alone, will enhance acquisition and other opportunities
for growth and diversification and will improve the competitive position of the
combined corporation in a consolidating insurance industry. The determinations
of the Professionals Group Board were not affected by the fact that its
financial advisors did not address the fairness of the provisions in Section
1.28 of the Merger Agreement. See "THE TRANSACTIONS -- Reasons for the
Transactions."
PPTF. The Board of Trustees of PPTF believes that the terms of the
transactions contemplated by the Merger Agreement are in the best interests of
PPTF and its Members and that such transactions, by creating a combined entity
that will be larger and stronger than PPTF alone, will enhance acquisition and
other opportunities for growth and diversification (including geographic
expansion and diversification of its lines of insurance), will improve the
competitive position of the combined corporation in a consolidating insurance
industry, may result in revenue enhancements, and will result in Members no
longer being assessable for a deficiency in the event of an inability of the
combined entity to meet its insurance obligations. It is to be noted that
between August 14, 1997 (the date the Initial Merger Agreement was executed) and
the date of this Joint Proxy Statement/Prospectus, the PPTF Board received from
FPIC Insurance Group, Inc. ("FPIC") a written non-binding acquisition proposal
dated September 26, 1997 (the "Original FPIC Proposal"), a second written
non-binding acquisition proposal dated October 17, 1997 (the "October FPIC
Proposal"), and a third written non-binding acquisition proposal dated November
7, 1997 (the "November FPIC Proposal," and together with the Original FPIC
Proposal and the October FPIC Proposal, the "FPIC Proposals"). Each of the FPIC
Proposals contemplated an acquisition of PPTF by FPIC in which the Membership
Rights of Members of PPTF would be converted into a number of shares of FPIC
common stock determined by dividing a specified dollar amount (the "FPIC
Numerator") by an "average market price" for FPIC common stock (subject to a
minimum average price and a maximum average price). Each of the Original FPIC
Proposal and the October FPIC Proposal contemplated a FPIC Numerator of $166.5
million. The November FPIC Proposal contemplated a FPIC Numerator of $180
million. The PPTF Board placed the same financial values on each of the FPIC
Proposals as was specified in such FPIC Proposal. The PPTF Board directed
management not to negotiate with FPIC after receipt of the November FPIC
Proposal. In making its determinations, the PPTF Board was aware of the fact
that its financial advisor did not address the fairness of either the provisions
in Section 1.28 of the Merger Agreement or the FPIC Proposals, and the
determinations of the PPTF Board were not affected by the fact that its
financial advisor did not address whether the consideration that individual
Members of PPTF will receive is fair, or whether the allocation of the Aggregate
Merger Shares among the Members of PPTF is fair, or any of the FPIC Proposals or
the fairness of the provisions in Section 1.28 of the Merger Agreement. See "THE
TRANSACTIONS -- Background of the Transactions" and "-- Reasons for the
Transactions."
BOARD RECOMMENDATIONS
Professionals Group. On October 1, 1997, the Professionals Group Board
unanimously (with 11 directors present and no directors absent) approved the
First Amended and Restated Agreement and Plan of Merger dated as of October 3,
1997. On December 5, 1997, the Professionals Group Board unanimously (with ten
directors present and one director absent) approved the Name Change Amendment.
On February 25, 1998, the Professionals Group Board unanimously (with all
directors present and no directors absent) nominated Mr. R. Kevin Clinton, John
F. Dodge, Jr., Esq., H. Harvey Gass, M.D. and Ann F. Putallaz, Ph.D. for
election to the Professionals Group Board at the Professionals Group Annual
Meeting. On April 13, 1998,
12
<PAGE> 26
by unanimous written consent, the Professionals Group Board approved the First
Amendment to First Amended and Restated Agreement and Plan of Merger dated as of
April 13, 1998. The Professionals Group Board recommends that Professionals
Group stockholders vote FOR the election of all of the Professionals Group Board
Nominees to the Professionals Group Board, FOR the Merger Proposal, and FOR the
Name Change Proposal. See "THE TRANSACTIONS -- Board Recommendations,"
"AMENDMENT TO PROFESSIONALS GROUP'S FIRST AMENDED AND RESTATED ARTICLES OF
INCORPORATION" and "INFORMATION REGARDING THE PROFESSIONALS GROUP ANNUAL
MEETING."
PPTF. On October 3, 1997, the PPTF Board unanimously (with eight trustees
present and one trustee absent) approved the First Amended and Restated
Agreement and Plan of Merger dated October 3, 1997. On April 14, 1998, the PPTF
Board unanimously (with nine trustees present and no trustees absent) ratified
the First Amendment to First Amended and Restated Agreement and Plan of Merger
dated as of April 13, 1998. The PPTF Board recommends that PPTF Members vote FOR
the Merger Proposal. See "THE TRANSACTIONS -- Board Recommendations."
OPINIONS OF FINANCIAL ADVISORS
Professionals Group. On October 1, 1997, Cochran, Caronia & Co. delivered
to the Professionals Group Board its oral opinion, which opinion was
subsequently confirmed in writing, that as of October 1, 1997 the consideration
to be paid by Professionals Group to the Members of PPTF in respect of their
Membership Rights was fair, from a financial point of view, to Professionals
Group stockholders. The Cochran, Caronia & Co. opinion is addressed to the
Professionals Group Board and does not constitute a recommendation to any
stockholder of Professionals Group or any Member of PPTF as to how such
stockholder or Member should vote at the Meetings. In connection with its review
and in arriving at its opinion, Cochran, Caronia & Co. relied upon the accuracy
and completeness of the financial information and other pertinent information
provided by Professionals Group and PPTF to Cochran, Caronia & Co. for purposes
of rendering its opinion. Such information included financial forecasts and
projections that Cochran, Caronia & Co. assumed had been reasonably prepared on
bases reflecting the best available estimates and judgments of Professionals
Group and PPTF as to the future performance of the separate and combined
entities and that such information provided a reasonable basis upon which
Cochran, Caronia & Co. could form its opinion. Because the financial forecasts
and projections were based upon numerous variables and assumptions that are
inherently uncertain, actual results could vary significantly from those set
forth therein. Furthermore, the Cochran, Caronia & Co. opinion assumed that the
transactions contemplated by the Merger Agreement (i) would be consummated in
accordance with the terms set forth in the Merger Agreement, without any waiver
of any material terms or conditions by Professionals Group, and (ii) would be
recorded as a "pooling-of-interests" in accordance with generally accepted
accounting principles. Finally, Cochran, Caronia & Co. did not express an
opinion with respect to any issuance of stock, payments or other compensation
that may be made to trustees or officers of PPTF pursuant to Section 1.28 of the
Merger Agreement or otherwise, other than in respect of their Membership Rights.
For information on the assumptions made, matters considered and limits of the
reviews by Cochran, Caronia & Co., see "THE TRANSACTIONS -- Opinion of
Professionals Group Financial Advisor -- Cochran, Caronia & Co." and the opinion
of Cochran, Caronia & Co. attached to this Joint Proxy Statement/Prospectus as
Annex E.
On October 1, 1997, McDonald & Company Securities, Inc. ("McDonald &
Company") delivered to the Professionals Group Board its oral opinion, which
opinion was subsequently confirmed in writing, that as of October 1, 1997 the
consideration to be paid by Professionals Group to the Members of PPTF in
respect of their Membership Rights was fair, from a financial point of view, to
Professionals Group stockholders. The McDonald & Company opinion is addressed to
the Professionals Group Board and should not be construed by holders of
Professionals Group Common Stock as to how such holders should vote at the
Professionals Group Annual Meeting. McDonald & Company assumed and relied,
without independent investigation, upon the accuracy and completeness of the
financial information and other pertinent information provided by Professionals
Group and PPTF to it or publicly available, relied upon the representations and
warranties of Professionals Group and PPTF contained in the Merger Agreement,
and did not independently attempt to
13
<PAGE> 27
verify any such information. McDonald & Company has also assumed that all of the
conditions to the Mergers as set forth in the Merger Agreement, including the
tax-free treatment of the Mergers to the Members of PPTF, would be satisfied on
a timely basis in the manner contemplated by the Merger Agreement. In connection
with rendering its opinion, McDonald & Company considered a variety of financial
analyses and made numerous assumptions with respect to industry performance,
general business and economic conditions, and other matters. The analyses
performed by McDonald & Company are not necessarily indicative of actual values,
which may be significantly more or less favorable than the values suggested by
such analyses and any estimates contained in McDonald & Company's analyses are
not necessarily indicative of future results or values, which may be
significantly more or less favorable than such estimates. Finally, McDonald &
Company was not engaged to and did not express an opinion with respect to any
issuance of stock, payments or other compensation that may be made to trustees
or officers of PPTF pursuant to Section 1.28 of the Merger Agreement or
otherwise, other than in respect of their Membership Rights. For information on
the assumptions made, matters considered and limits of the reviews by McDonald &
Company, see "THE TRANSACTIONS -- Opinion of Professionals Group Financial
Advisor -- McDonald & Company" and the opinion of McDonald & Company attached to
this Joint Proxy Statement/Prospectus as Annex F.
PPTF. On October 3, 1997, Donaldson, Lufkin & Jenrette Securities
Corporation ("Donaldson, Lufkin & Jenrette") delivered to the PPTF Board its
written opinion dated October 3, 1997 (the "DLJ Opinion") that, as of such date
and based on and subject to the assumptions, limitations and qualifications set
forth in such opinion, the number of Aggregate Merger Shares to be received by
the Members of PPTF was fair to those Members, as a group, from a financial
point of view. The DLJ Opinion was prepared for the PPTF Board and is directed
only to the fairness, from a financial point of view, of the Aggregate Merger
Shares to be received by the Members, as a group, and does not constitute either
a recommendation to any Member as to how to vote at the PPTF Special Meeting or
an opinion as to the price at which Professionals Group Common Stock will
actually trade at any time. In arriving at its opinion, Donaldson, Lufkin &
Jenrette reviewed financial and other information that was publicly available or
furnished to it by PPTF and Professionals Group, including information provided
during discussions with their respective managements and certain financial
projections prepared by such management. Donaldson, Lufkin & Jenrette relied
upon and assumed the accuracy and completeness of all of the financial and other
information that was available to it from public sources, that was provided to
it by PPTF and Professionals Group or their respective representatives, or that
was otherwise reviewed by it. With respect to the financial projections supplied
to it, Donaldson, Lufkin & Jenrette assumed that they were reasonably prepared
on a basis reflecting the best currently available estimates and judgments of
the management preparing such projections as to the future operating and
financial performance of the entity concerned. Donaldson, Lufkin & Jenrette did
not assume any responsibility for making an independent evaluation of PPTF's and
Professionals Group's assets or liabilities or for making any independent
verification of any of the information reviewed by it. The analyses performed by
Donaldson, Lufkin & Jenrette are not necessarily indicative of actual values or
future results, which may be significantly more or less favorable than those
suggested by such analyses. Donaldson, Lufkin & Jenrette's opinion did not
address whether the consideration that individual Members of PPTF will receive
is fair, or whether the allocation of the Aggregate Merger Shares among the
Members of PPTF is fair, or the FPIC Proposals, or the fairness of the
provisions in Section 1.28 of the Merger Agreement. For information on the
assumptions made, procedures followed, other matters considered and limits of
the reviews by Donaldson, Lufkin & Jenrette see "THE TRANSACTIONS -- Opinion of
PPTF Financial Advisor -- Donaldson, Lufkin & Jenrette" and the opinion of
Donaldson, Lufkin & Jenrette attached to this Joint Proxy Statement/Prospectus
as Annex G.
CONDITIONS TO THE CONSUMMATION OF THE TRANSACTIONS
Consummation of the transactions contemplated by the Merger Agreement is
subject to various conditions, including, among other things, obtaining
satisfactory and requisite stockholder, Member and regulatory approvals, and
receipt of certain certificates and opinions (including fairness opinions,
certain legal opinions as to the tax-free nature of the transactions for Federal
income tax purposes, and letters from KPMG Peat Marwick LLP to the effect that
the transactions will qualify for "pooling-of-interests" accounting treatment).
The receipt of such stockholder, Member and regulatory approvals, the receipt of
such legal opinions and the receipt of such letters from KPMG Peat Marwick LLP
are conditions to the consummation
14
<PAGE> 28
of the transactions contemplated by the Merger Agreement that will not be waived
by either Professionals Group or PPTF. Although the remaining conditions to the
consummation of the transactions contemplated by the Merger Agreement may be
waived by the party entitled to the benefit thereof, neither Professionals Group
nor PPTF intends to waive any such condition except in those circumstances where
the Professionals Group Board or the PPTF Board, as the case may be, deems such
waiver to be in the best interests of Professionals Group or PPTF, as the case
may be, and its respective stockholders or Members. There can be no assurances
as to when and if such conditions will be satisfied (or, where permissible,
waived) or that the transactions contemplated by the Merger Agreement will be
consummated. Professionals Group, PICOM and PPTF are in compliance with all
conditions and other requirements required to have been satisfied by each of
them prior to the date of this Joint Proxy Statement/Prospectus. See "THE
TRANSACTIONS -- Summary of the Merger Agreement," "-- Regulatory Approvals
Required" and "-- Anticipated Accounting Treatment."
NO SOLICITATION OF TRANSACTIONS
The Merger Agreement prohibits Professionals Group, PPTF, and their
respective subsidiaries from, directly or indirectly, authorizing or permitting
any of their respective directors, trustees, officers, employees,
representatives or agents to entertain, solicit, encourage or take any other
action to facilitate any inquiries or the making of any proposal which
constitutes, or may lead to, any "acquisition proposal" for Professionals Group
or PPTF. However, the Professionals Group Board or the PPTF Board may consider
an unsolicited "acquisition proposal" if, among other things, it is advised by
its legal counsel and financial advisors that such action is required to
discharge its fiduciary duties to its stockholders or Members. Under certain
circumstances specified in the Merger Agreement and described in this Joint
Proxy Statement/Prospectus, either Professionals Group or PPTF may be obligated
to pay to the other the sum of $4.5 million plus all out-of-pocket expenses as
liquidated damages upon termination of the Merger Agreement. See "THE
TRANSACTIONS -- Summary of the Merger Agreement" and "-- No Solicitation of
Transactions."
REGULATORY APPROVALS REQUIRED
The Merger Agreement and certain of the transactions contemplated thereby
are subject to certain regulatory reviews and approvals, including review and
approval by the Florida Insurance Department and the Commissioner of Insurance
of the State of Michigan (the "Michigan Insurance Commissioner"). The Florida
Insurance Department has approved an application to incorporate and license
INSCO as a Florida property and casualty insurance company for the purpose of
effecting the Mergers. The Florida Insurance Department, has issued a consent
order approving the transactions contemplated by the Merger Agreement. The
Michigan Insurance Commissioner, which has issued an Order of Acquisition
Exemption and Preliminary Approval of Merger with respect to the transactions
contemplated by the Merger Agreement, must issue a final order approving the
merger of INSCO with and into PICOM, with PICOM being the surviving corporation.
In addition, certain aspects of the transactions contemplated by the Merger
Agreement will require notifications to, and/or approvals from, certain Federal
authorities (including the Federal Trade Commission and the Antitrust Division
of the Department of Justice (the "Pre-Merger Notification Agencies")).
Professionals Group and PPTF have each filed with the Pre-Merger Notification
Agencies a notification and report form pursuant to the Hart-Scott-Rodino
Anti-Trust Improvements Act, as amended (the "HSR Act"), and the waiting period
under the HSR Act has expired. As of the date of this Joint Proxy
Statement/Prospectus, all regulatory documents to be filed with governmental
authorities having jurisdiction have been filed. There can be no assurances as
to if or when any necessary regulatory or governmental approvals required for
the transactions contemplated by the Merger Agreement will be obtained. There
can also be no assurances that any such approvals will not contain a condition
or requirement which causes such approvals to fail to satisfy the conditions to
the consummation of such transactions. There can be no assurance that the
Florida Insurance Department, the Michigan Insurance Commissioner, the
Pre-Merger Notification Agencies or any other governmental authority will not
challenge all or some of the transactions contemplated by the Merger Agreement
or as to the result of any such challenge, if made. See "THE
TRANSACTIONS -- Regulatory Approvals Required" and "CERTAIN REGULATORY
CONSIDERATIONS."
15
<PAGE> 29
ANTICIPATED ACCOUNTING TREATMENT
The transactions contemplated by the Merger Agreement are expected to
qualify as a "pooling-of-interests" for accounting and financial reporting
purposes. The Merger Agreement provides that a condition to the consummation of
the Mergers is receipt by each of Professionals Group and PPTF of a letter from
KPMG Peat Marwick LLP regarding the appropriateness of "pooling-of-interests"
accounting for the transactions contemplated by the Merger Agreement under
generally accepted accounting principles if closed and consummated in accordance
with the Merger Agreement. The receipt of such letters is a condition to the
transactions contemplated by the Merger Agreement that will not be waived by
either Professionals Group or PPTF. See "THE TRANSACTIONS -- Anticipated
Accounting Treatment."
DISSENTERS' RIGHTS
Professionals Group. Holders of shares of Professionals Group Common Stock
will not have dissenters' rights under the Michigan Business Corporation Act, as
amended (the "MBCA"), in connection with, or as a result of, the matters to be
acted upon at the Professionals Group Annual Meeting. See "THE
MEETINGS -- Dissenters' Rights" and "THE TRANSACTIONS -- Dissenters' Rights."
PPTF. Members of PPTF who deliver to PPTF a notice of intent to demand
payment for their Membership Rights before the vote of Members is taken at the
PPTF Special Meeting and who do not vote in favor of the Merger Proposal, and
further comply with the other provisions of the Florida Insurance Code and the
Florida Business Corporation Act, as amended (the "FBCA"), regarding the rights
of dissenting Members, will be paid the fair value of their Membership Rights.
Under Florida law, and with respect to the transactions contemplated by the
Merger Agreement, Members of PPTF do not have any rights other than their
Membership Rights and they do not have dissenters' rights with respect to any
rights other than their Membership Rights. If Professionals Group and a
dissenting Member are unable to agree upon the fair value of such Membership
Rights, then such fair value will be determined in a judicial proceeding. None
of Professionals Group, PICOM and PPTF can make any representation as to the
outcome of such a proceeding and each dissenting Member of PPTF should recognize
that such a proceeding could result in a determination of fair value that is
lower than, higher than, or equivalent to, the value of the shares of
Professionals Group Common Stock otherwise issuable to such Member upon
consummation of the transactions contemplated by the Merger Agreement.
Consummation of the transactions contemplated by the Merger Agreement is subject
to, among other things, the condition that the percentage interests of those
Members of PPTF perfecting their dissenters' rights, when aggregated, not exceed
10% of the percentage interests of all Members of PPTF taken as a whole. For
information regarding the procedures to be followed by Members of PPTF to
dissent from the Merger Proposal, see "THE MEETINGS -- Dissenters' Rights," "THE
TRANSACTIONS -- Dissenters' Rights," and "ANNEX H -- CERTAIN PROVISIONS OF THE
FLORIDA BUSINESS CORPORATION ACT, AS AMENDED, REGARDING DISSENTERS' RIGHTS."
INTERESTS OF CERTAIN PERSONS
Certain members of Professionals Group's management and the Professionals
Group Board, and PPTF's management and the PPTF Board, respectively, have
certain interests in the transactions contemplated by the Merger Agreement that
are in addition to their interests as stockholders of Professionals Group or
Members of PPTF, as the case may be. These interests arise from provisions in
the Merger Agreement relating to (i) the appointment of PPTF Trustees to the
Boards of Directors of Professionals Group and PICOM, (ii) trustee, director and
officer indemnification and insurance, (iii) employment and employee benefits
after the INSCO Merger, (iv) the assumption by Professionals Group or PICOM of
certain employment and change in control agreements between PPTF and certain
PPTF officers, (v) the assumption by Professionals Group of the employment
agreement of Mr. Steven L. Salman (the President and Chief Executive Officer of
PPTF) with PPTF, and (vi) the issuance, as contemplated by Section 1.28 of the
Merger Agreement and subject to certain vesting requirements, of an aggregate of
153,000 shares of Professionals Group Common Stock to certain trustees and
officers of PPTF over a four year period. They also arise from certain
employment agreements or plans of Professionals Group or PPTF and to which such
persons are parties. The Professionals Group Board and the PPTF Board were aware
of these interests and considered them, among other matters, in approving
16
<PAGE> 30
the Merger Agreement and the transactions contemplated thereby. See "INTERESTS
OF CERTAIN PERSONS."
Although the transactions contemplated by the Merger Agreement will
constitute a "change of control" under Professionals Group's Key Employee
Retention Plan (which covers Professionals Group's five most highly compensated
executives (Victor T. Adamo, John O. Bashant, R. Kevin Clinton, Annette E. Flood
and Darryl K. Thomas) and two employees of PICOM (Valerie G. Purdy and John F.
Lang), no payments will be made to a participant under that plan unless that
participant's employment is terminated for any reason other than "cause" within
24 months after the consummation of the transactions contemplated by the Merger
Agreement. In the event that the employment of all persons currently entitled to
benefits under Professionals Group's Key Employee Retention Plan is so
terminated within such period, then, under such plan and as of December 31,
1997, the aggregate amount payable would be $2,409,004. With respect to
Professionals Group's five most highly compensated executives, in the event that
his or her employment is so terminated within such period, then, under such plan
and as of December 31, 1997, Messrs. Adamo, Bashant, Clinton and Thomas and Ms.
Flood would be entitled to payments of $558,410, $328,300, $517,790, $301,891
and $301,691, respectively. There are no plans to so terminate the employment of
any plan participant during such period.
Although the transactions contemplated by the Merger Agreement will
constitute a "change in control" under certain Executive Termination Following
Change in Control Agreements (each, a "PPTF Change in Control Agreement")
between PPTF and each of its senior managers (namely, Messrs. William D. Baxter,
David R. Goss, Gregg Hanson, John Hastie and Robert E. White, Jr. and Mrs. Peggy
Schemenauer, but excluding Mr. Steven L. Salman), no payments will be made
thereunder unless his or her employment is terminated "other than for cause"
within two years after the consummation of the transactions contemplated by the
Merger Agreement. In the event that the employment of all of such senior
managers is so terminated during such period, then, under such PPTF Change in
Control Agreements and as of December 31, 1997, the aggregate amount payable
would be $1,675,538. In the event that the employment of such a senior manager
is so terminated during such period, then, under his or her respective PPTF
Change in Control Agreement and as of December 31, 1997, Messrs. Baxter, Goss,
Hanson, Hastie and White and Mrs. Schemenauer would be entitled to payments of
$281,000, $138,000, $276,000, $245,104, $527,934 and $206,500, respectively.
There are no plans to so terminate the employment of any of such senior managers
during such period.
Mr. Salman's employment agreement with PPTF contains a "change in control"
provision which provides for a lump sum payment by PPTF to Mr. Salman equal to
three times Mr. Salman's average annualized compensation (defined to include
salary, bonus and amounts paid for group insurance plans and retirement plans)
less $1 if, after a "change in control" of PPTF, PPTF terminates Mr. Salman's
employment "other than for cause" within two years after the "change in control"
or Mr. Salman terminates his employment for the reasons described in the
employment agreement. Although the transactions contemplated by the Merger
Agreement constitute a "change in control" for purposes of Mr. Salman's
employment agreement, no payments will be required to be made under his
employment agreement unless Mr. Salman's employment is terminated "other than
for cause" within two years after the consummation of the Mergers. (Mr. Salman
has agreed to waive his right to terminate the employment agreement under the
"change in control" provision.) Consequently, if his employment is so terminated
during such period, then, as of December 31, 1997 and under such employment
agreement, Mr. Salman would be entitled to a payment of $1,096,875.
Subject to the terms of the Merger Agreement and certain Consulting,
Confidentiality and Noncompetition Agreements (each, a "Consulting Agreement")
to be executed by and between Professionals Group and each of Drs. Alper, Berg,
Brady, Cauthen, Martinez, Segal, Schwartz, Tolmach, Truppman and Wolfsdorf
(each, a "PPTF Trustee Participant"), 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 the date of the first meeting of the Professionals Group
17
<PAGE> 31
Board following the INSCO Effective Time, Professionals Group will deliver 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 (each, a "Stock Grant Agreement") to
be executed by and between Professionals Group and each of Messrs. Baxter, Goss,
Hanson, Hastie, Salman and White and Mrs. Schemenauer (each, a "PPTF Officer"),
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, 7,496
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 the date of the first meeting of the
Professionals Group Board following the INSCO Effective Time, Professionals
Group will issue and deliver 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 impose 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 Stock Grant
Agreements are intended to be a reasonable 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 believes that such active participation
will facilitate and expedite the consolidation and integration of the combined
entity's insurance operations within a reasonable time following the
consummation of the transactions contemplated by the Merger Agreement.
Professionals Group also believes that such incentive will discourage the
recipients from accepting offers of employment from competitors.
REINSURANCE CONTRACT
On October 28, 1997, PPTF and PICOM entered into an Adverse Development
Stop Loss Reinsurance Contract (the "Reinsurance Contract") effective February
1, 1998 as part of PPTF's overall reinsurance for years prior to January 1,
1997. Under the Reinsurance Contract, PICOM will reinsure PPTF for an aggregate
18
<PAGE> 32
of $40 million of net losses paid on or after July 1, 1997 for claims made on
policies issued prior to January 1, 1997 in excess of $147 million. Based upon
an independent actuarial analysis, reserves for net losses covered by the
Reinsurance Contract approximated $179 million at June 30, 1997. The Reinsurance
Contract provides PPTF adverse development protection up to $187 million. To the
extent net losses under PPTF's reinsured policies for periods prior to January
1, 1997 exceed $187 million, such losses will be borne by PPTF. The premium for
the Reinsurance Contract was $30.645 million. The Reinsurance Contract provides
that in the event of a change in control of PPTF, PICOM may unilaterally
terminate the Reinsurance Contract. This provision is designed to protect PICOM
from any material adverse development in net losses that could result if control
of PPTF is acquired by an entity that has claims settlement philosophies and
practices that vary significantly from those of PPTF. This termination provision
was included in the Reinsurance Contract in lieu of a commutation provision
because assuming reinsurers customarily re-evaluate companies from whom they
assume business, including instances where there is a change in control of such
companies. If PICOM terminates the Reinsurance Contract, an amount equal to the
difference between the premium paid to PICOM and an amount equal to the net
losses paid by PICOM, plus 5% interest and less a servicing fee of $0.5 million,
will be refunded to PPTF. The Reinsurance Contract was an arm's-length
transaction entered into in the regular course of business and neither PICOM nor
PPTF received any constructive ownership interest in the other. Both PICOM and
PPTF evaluated the merits of the Reinsurance Contract and independently
concluded that it contained terms favorable to it, including coverage and
premium. The Reinsurance Contract (like other reinsurance agreements of PPTF)
preserves PPTF's ability to continue its vigorous claims handling practices. See
"REINSURANCE CONTRACT."
MANAGEMENT AND OPERATIONS AFTER THE TRANSACTIONS
DIRECTORS
Professionals Group. At each of the INSCO Effective Time and the PICOM
Effective Time, the Board of Directors of Professionals Group will consist of 16
persons, including all 11 of the persons who are currently directors of
Professionals Group (including W. Peter McCabe, M.D., Victor T. Adamo, and R.
Kevin Clinton, FCAS, MAAA, who is the President of Michigan Educational
Employees Mutual Insurance Company) (the "Professionals Group Representatives"),
and Eliot H. Berg, M.D., Steven L. Salman, Richard G. Alper, M.D., Louis P.
Brady, M.D., and Edward S. Truppman, M.D. (the "PPTF Representatives"). The PPTF
Representatives will be divided as equally as practicable among the three
classes of directors of Professionals Group; provided, however, (i) that Dr.
McCabe will not be in the same class as Dr. Berg, (ii) that Mr. Adamo will not
be in the same class as either Mr. Salman or Mr. Clinton, and (iii) that Mr.
Salman will not be in the same class as Mr. Clinton. See "MANAGEMENT AND
OPERATIONS AFTER THE TRANSACTIONS -- Directors."
At each of the INSCO Effective Time and the PICOM Effective Time there will
be a committee of the Professionals Group Board known as the "Nominating
Committee." This committee (i) will be comprised of four members of the
Professionals Group Board, with two members being selected from the
Professionals Group Representatives and two members being selected from the PPTF
Representatives, and (ii) to the fullest extent permitted under the First
Amended and Restated Articles of Incorporation and the Bylaws of Professionals
Group (collectively, the "Professionals Group Charter Documents"), will be
delegated and authorized to exercise the full power and authority of the
Professionals Group Board with respect to recommending nominees for election to
the Professionals Group Board. Action of the Nominating Committee within the
meaning of Section 523 of the MBCA will require the favorable vote of at least
75% of the members of this committee. As of the date of this Joint Proxy
Statement/Prospectus, no directors of Professionals Group have been appointed to
the Nominating Committee. See "MANAGEMENT AND OPERATIONS AFTER THE
TRANSACTIONS -- Directors."
PICOM. At the PICOM Effective Time, the Board of Directors of PICOM, as the
surviving corporation in the PICOM Merger, will consist of ten persons,
including Dr. McCabe, Mr. Adamo, and three other persons to be named as
directors of PICOM, as the surviving corporation in the PICOM Merger, by the
Professionals Group Board (the "PG PICOM Directors"), and Dr. Berg and Mr.
Salman, Joseph C. Cauthen,
19
<PAGE> 33
M.D., George A. Segal, M.D., and Jack Wolfsdorf, M.D. (the "PPTF PICOM
Directors"). The PG PICOM Directors and the PPTF PICOM Directors will be divided
as equally as practicable among the three classes of directors of PICOM, as the
surviving corporation in the PICOM Merger, in proportion to the aggregate
representation set forth in the preceding sentence; provided, however, (i) that
Dr. McCabe will not be in the same class of directors as Dr. Berg, (ii) that Mr.
Adamo will not be in the same class of directors as Mr. Salman, and (iii) that
Mr. Salman will not be in the same class of directors as Dr. Berg. As of the
date of this Joint Proxy Statement/Prospectus, no additional directors of the
Board of Directors of PICOM have been designated by the Professionals Group
Board. See "MANAGEMENT AND OPERATIONS AFTER THE TRANSACTIONS -- Directors."
EXECUTIVE OFFICERS
Professionals Group. At and after each of the INSCO Effective Time and the
PICOM Effective Time, Dr. McCabe will be the Chairman of the Board of
Professionals Group, Dr. Berg will be the Vice-Chairman of the Board of
Professionals Group, Mr. Adamo will be the President and Chief Executive Officer
of Professionals Group, and Mr. Salman will be the Chief Operating Officer of
Professionals Group. See "MANAGEMENT AND OPERATIONS AFTER THE
TRANSACTIONS -- Executive Officers."
PICOM. At the PICOM Effective Time, Dr. Berg will be the Chairman of the
Board of PICOM, as the surviving corporation in the PICOM Merger; Dr. McCabe
will be the Vice-Chairman of the Board of PICOM, as the surviving corporation in
the PICOM Merger; and Mr. Salman will be the President and Chief Executive
Officer of PICOM, as the surviving corporation in the PICOM Merger. See
"MANAGEMENT AND OPERATIONS AFTER THE TRANSACTIONS -- Executive Officers."
DIVIDEND POLICY
The holders of Professionals Group Common Stock are entitled to receive
such dividends as may be declared from time to time by the Professionals Group
Board out of funds legally available therefor. Professionals Group is not
expected to declare cash dividends on Professionals Group Common Stock at any
time prior to the INSCO Effective Time or for the foreseeable future following
the consummation of the transactions contemplated by the Merger Agreement
because it is expected that earnings of Professionals Group and its subsidiaries
will be retained and used for operations. However, following the consummation of
such transactions, the Professionals Group Board may consider developing a
dividend policy that could result in future cash dividends and, even in the
absence of any such policy, may consider declaring cash dividends in the future.
Any future dividends will depend upon, among other things, future financial
results and requirements and contractual restrictions applicable to
Professionals Group and its subsidiaries. The ability of Professionals Group to
fund its operations and to pay dividends on Professionals Group Common Stock
following consummation of the transactions contemplated by the Merger Agreement
will depend on its receipt of dividends from PICOM. The ability of PICOM to pay
dividends is subject to regulatory restrictions. There can be no assurance as to
payment of any future dividends by Professionals Group or PICOM. See "RISK
FACTORS," "MANAGEMENT AND OPERATIONS AFTER THE TRANSACTIONS -- Dividend Policy"
and "CERTAIN REGULATORY CONSIDERATIONS."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Consummation of the transactions contemplated by the Merger Agreement is
conditioned upon there being delivered opinions of counsel to each of
Professionals Group and PPTF, dated as of the INSCO Effective Time,
substantially to the effect that for Federal income tax purposes the Mergers
will constitute a reorganization within the meaning of Section 368 of the
Internal Revenue Code of 1986, as amended (the "Code"). Based on such opinions,
and among other things, no gain or loss will be recognized by Professionals
Group or PPTF, and no gain or loss will be recognized by Members of PPTF who
exchange their Membership Rights solely for shares of Professionals Group Common
Stock pursuant to the INSCO Merger (except with respect to cash received in lieu
of fractional share interests in Professionals Group Common Stock or in
satisfaction of dissenters' rights). The receipt of such legal opinions is a
condition to the consummation of the
20
<PAGE> 34
transactions contemplated by the Merger Agreement that will not be waived by
either Professionals Group or PPTF. See "THE TRANSACTIONS -- Summary of the
Merger Agreement" and "CERTAIN FEDERAL INCOME TAX CONSEQUENCES."
CERTAIN REGULATORY CONSIDERATIONS
As insurance holding companies, insurance companies, or self-insurance
trust funds, Professionals Group, PICOM, PPTF and their respective subsidiaries
are subject to regulatory restrictions, and examination and reporting
requirements, of regulatory authorities. See "CERTAIN REGULATORY
CONSIDERATIONS."
COMPARISON OF STOCKHOLDER RIGHTS WITH MEMBERSHIP RIGHTS
There are significant differences between the rights of PPTF Members and
the rights of Professionals Group stockholders. PPTF is a medical malpractice
self-insurance trust in Florida that is managed by a board of trustees and whose
Members are the persons and entities who are named insureds on PPTF Policies.
Professionals Group is a business corporation organized under the MBCA that is
managed by a board of directors and has stockholders. The Membership Rights of a
Member of PPTF are governed by PPTF's Amended Trust Agreement dated January 1,
1987 and By-laws (the "PPTF Charter Documents") and the laws of the State of
Florida (including the Florida Insurance Code and, in some respects, the FBCA),
and are evidenced by the PPTF Charter Documents and such Member's PPTF Policy.
In contrast, the rights of a stockholder of Professionals Group are governed by
the provisions of Professionals Group's First Amended and Restated Articles of
Incorporation and By-laws and the MBCA and are evidenced by a stock certificate.
Upon consummation of the transactions contemplated by the Merger Agreement, (i)
all Members of PPTF will cease 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); (ii) subject
to the exercise of dissenters' rights, all Membership Rights will be converted
into an aggregate of 4,089,160 shares of Professionals Group Common Stock and
will cease to exist; (iii) Members of PPTF who do not exercise dissenters'
rights and who receive shares of Professionals Group Common Stock in the INSCO
Merger will become stockholders of Professionals Group, and their rights will be
governed by the Professionals Group Charter Documents and the MBCA; and (iv)
PPTF Policies will become and be insurance policies issued by PICOM and will be
converted from assessable insurance policies to nonassessable insurance
policies, without any endorsement or modification thereto. In the absence of the
consummation of the transactions contemplated by the Merger Agreement, the
Membership Rights of a PPTF Member would terminate upon the earlier of the
termination of such Member's PPTF Policy and the dissolution of PPTF. For a
description of the rights of PPTF Members and the rights of Professionals Group
stockholders, see "COMPARISON OF STOCKHOLDER RIGHTS WITH MEMBERSHIP RIGHTS".
Insurance holding companies, insurance companies and self-insurance trust
funds are extensively regulated. While the nature and extent of such regulation
vary from jurisdiction to jurisdiction, such regulation typically involves (i)
prior approval of the acquisition of control of an insurance company or
self-insurance trust fund or of any company controlling an insurance company or
self-insurance trust fund, (ii) regulation of certain transactions entered into
by an insurance company or self-insurance trust fund with any of its affiliates,
(iii) approval of premium rates, forms and policies used for many lines of
insurance, (iv) standards of solvency and minimum amounts of capital and surplus
which must be maintained, (v) establishment of reserves required to be
maintained for unearned premium, losses and loss expenses or for other purposes,
(vi) limitations on types and amounts of investments, (vii) restrictions on the
size of risks which may be insured by a single entity, (viii) licensing of
insurers and agents, (ix) deposits of securities for the benefit of
policyholders, and (x) the filing of periodic reports with respect to financial
condition and other matters. Such regulation, which has had significant effects
on the operating results of insurance holding companies, insurance companies and
self-insurance trust funds in the past and is expected to have significant
effects in the future, is generally intended for the protection of policyholders
rather than security holders. See "RISK FACTORS" and "CERTAIN REGULATORY
CONSIDERATIONS."
21
<PAGE> 35
It is to be noted that Professionals Group is a legal entity separate and
distinct from its various subsidiaries. As a holding company with no significant
operations of its own, the principal sources of its funds are dividends and
other distributions from its subsidiaries, borrowings, and sales of equity. The
rights of Professionals Group, and consequently its stockholders, to participate
in any distribution of assets of any of its subsidiaries is subject to prior
claims of policyholders, creditors and preferred stockholders, if any, of
Professionals Group's subsidiaries (except to the extent claims of Professionals
Group in its capacity as a creditor are recognized), and to certain regulatory
restrictions. Consequently, Professionals Group's ability to fund its
operations, and to pay debts, expenses and cash dividends to its stockholders
may be limited. See "RISK FACTORS," "CERTAIN REGULATORY CONSIDERATIONS" and
"COMPARISON OF STOCKHOLDER RIGHTS WITH MEMBERSHIP RIGHTS."
INFORMATION REGARDING THE PROFESSIONALS GROUP ANNUAL MEETING
At the Professionals Group Annual Meeting, holders of Professionals Group
Common Stock will be asked to elect four persons to the Professionals Group
Board for three year terms expiring at the Annual Meeting of Stockholders to be
held in the year 2001 and upon the election and qualification of their
successors or upon their earlier resignation or removal, and to consider and
vote upon the Merger Proposal, and the Name Change Proposal. The Professionals
Group Board has nominated Mr. R. Kevin Clinton, John F. Dodge, Jr., Esq., H.
Harvey Gass, M.D., and Ann F. Putallaz, Ph.D., for election to the Professionals
Group Board at the Professionals Group Annual Meeting. For information regarding
the Professionals Group Annual Meeting, the Professionals Group Board Nominees,
and the matters to be considered at the Professionals Group Annual Meeting, see
"AVAILABLE INFORMATION," "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE," "THE
TRANSACTIONS -- Board Recommendations," "AMENDMENT TO PROFESSIONALS GROUP'S
FIRST AMENDED AND RESTATED ARTICLES OF INCORPORATION," "INFORMATION REGARDING
THE PROFESSIONALS GROUP ANNUAL MEETING" and "ANNEX A -- PROFESSIONALS INSURANCE
COMPANY MANAGEMENT GROUP ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER
31, 1997."
The Professionals Group Board recommends that Professionals Group
stockholders vote FOR the election of all of the Professionals Group Board
Nominees to the Professionals Group Board, FOR the Merger Proposal, and FOR the
Name Change Proposal.
22
<PAGE> 36
SUMMARY CONDENSED CONSOLIDATED HISTORICAL FINANCIAL AND OPERATING
DATA OF PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DOLLAR AMOUNTS)
The following table presents certain condensed consolidated historical
financial and operating data of Professionals Group for each of the years in the
five year period ended December 31, 1997. The following table should be read in
conjunction with the consolidated financial statements of Professionals Group,
including the notes thereto, which are incorporated by reference in this Joint
Proxy Statement/Prospectus. See "INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE" and "ANNEX A -- PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997." All
information is presented in accordance with generally accepted accounting
principles ("GAAP") except for statutory data, which are presented in accordance
with statutory accounting practices ("SAP").
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:(1)
Gross premiums written............ $ 81,690 $ 64,771 $ 67,727 $ 51,110 $ 50,514
Net premiums written.............. 71,146 55,464 55,151 48,778 48,177
Net premiums earned............... 71,968 56,687 55,684 48,490 48,192
Net investment income............. 18,719 15,741 14,729 13,379 12,363
Total revenues and other income... 91,649 72,242 70,572 59,867 67,476
Losses and loss adjustment
expenses(2)(4)................. 57,125 48,368 35,558 44,853 44,585
Total expenses.................... 77,742 60,219 46,230 52,669 52,775
Income before cumulative effect of
change in accounting method.... 11,026 9,585 16,066 5,154 9,866
Cumulative effect of change in
accounting method(2)........... -- -- (8,125) -- --
-------- -------- -------- -------- --------
Net income........................ $ 11,026 $ 9,585 $ 7,941 $ 5,154 $ 9,866
======== ======== ======== ======== ========
PER SHARE DATA:
Earnings per share:(3)
Income before cumulative effect
of change in accounting
method....................... $ 3.15 $ 2.75 $ 4.68 $ 1.45 $ 2.77
Cumulative effect of change in
accounting method(2)......... -- -- (2.37) -- --
-------- -------- -------- -------- --------
Net income per share.............. $ 3.15 $ 2.75 $ 2.31 $ 1.45 $ 2.77
======== ======== ======== ======== ========
Earnings per share -- assuming
dilution:(3)
Income before cumulative effect
of change in accounting
method....................... $ 3.14 $ 2.75 $ 4.68 $ 1.45 $ 2.77
Cumulative effect of change in
accounting method(2)......... -- -- (2.37) -- --
-------- -------- -------- -------- --------
Net income per share --assuming
dilution..................... $ 3.14 $ 2.75 $ 2.31 $ 1.45 $ 2.77
======== ======== ======== ======== ========
Cash dividends declared per
share.......................... $ -- $ -- $ -- $ -- $ --
Book value per share(3)........... $ 29.07 $ 25.09 $ 22.84 $ 17.75 $ 18.23
Weighted average shares
outstanding.................... 3,506 3,487 3,432 3,557 3,557
Weighted average shares
outstanding -- assuming
dilution....................... 3,508 3,487 3,432 3,557 3,557
</TABLE>
23
<PAGE> 37
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total investments................. $342,561 $300,132 $280,607 $249,979 $253,133
Total assets...................... 413,195 357,382 330,712 297,926 301,106
Loss and loss adjustment expense
reserves(2).................... 239,151 219,919 199,605 188,544 191,221
Reserve for extended reporting
period claims.................. 15,300 14,795 14,082 12,738 12,238
Unearned premiums................. 21,665 21,945 23,122 24,557 24,347
Long-term debt.................... 22,500 -- -- -- --
Stockholders' equity.............. 101,926 87,958 78,411 63,142 64,839
SELECTED STATUTORY DATA:
Loss ratio(4)..................... 80.1% 85.4% 71.5% 93.5% 94.1%
Combined ratio(4)................. 103.8% 101.3% 88.8% 108.9% 109.9%
Statutory surplus................. $108,178 $ 80,572 $ 67,006 $ 47,149 $ 40,431
Net premiums written to statutory
surplus........................ .66x .74x .82x 1.03x 1.19x
SELECTED GAAP DATA:
GAAP combined ratio(4)............ 106.5% 106.2% 83.0% 108.6% 109.5%
</TABLE>
- ---------------
(1) Effective January 1, 1995, Professionals Group began writing a book of
business previously written by an Illinois insurance company. Effective July
1, 1997, Professionals Group began assuming 40% of the net premiums of
Michigan Educational Employees Mutual Insurance Company, a Michigan mutual
insurance company that writes personal automobile and homeowners coverages.
(2) Professionals Group discounted its loss and loss adjustment expense reserves
through 1994. In 1993, Professionals Group changed its loss and loss
adjustment expense reserve discount rate from 3.75% to 3%. The reduction in
reserve discount rate was treated as a change in accounting estimate and
resulted in a decrease in net income of $2.0 million for 1993. The effects
of such change in the reserve discount rate, which was previously presented
as a change in accounting method, has been reclassified and presented as a
change in accounting estimate. Effective January 1, 1995, Professionals
Group eliminated its practice of discounting loss and loss adjustment
expense reserves for GAAP reporting purposes, which was treated as a change
in accounting method.
(3) Weighted average shares outstanding are in thousands. Prior period amounts
have been restated for the effects of 10% stock dividends on December 16,
1996 and December 1, 1994 and 1993, respectively.
(4) In 1995 Professionals Group reduced its estimated liability for loss and
loss adjustment expense reserves by $12.3 million for redundancies. The
ratio includes the increase in reserve for extended reporting period claims.
24
<PAGE> 38
SUMMARY CONDENSED CONSOLIDATED HISTORICAL FINANCIAL AND OPERATING
DATA OF PHYSICIANS PROTECTIVE TRUST FUND
(DOLLARS IN THOUSANDS)
The following table presents certain condensed consolidated historical
financial and operating data of PPTF for each of the years in the five year
period ended December 31, 1997. The following table should be read in
conjunction with the consolidated financial statements of PPTF, including the
notes thereto, which are included elsewhere in this Joint Proxy
Statement/Prospectus. See "INDEX TO FINANCIAL STATEMENTS OF PHYSICIANS
PROTECTIVE TRUST FUND." All information is presented in accordance with GAAP
except for statutory data, which are presented in accordance with SAP.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Gross premiums written............ $ 99,480 $ 89,968 $103,686 $103,307 $ 97,953
Net premiums written.............. 91,868 68,719 100,507 99,303 72,541
Net premiums earned............... 60,058 68,719 100,507 99,303 72,541
Net investment income............. 20,802 23,310 23,050 20,018 18,359
Total revenues and other income... 89,893 97,864 128,780 128,016 101,122
Losses and loss adjustment
expenses....................... 67,109 76,393 120,596 112,027 79,187
Total expenses.................... 73,531 83,824 127,544 121,025 91,186
Net income........................ $ 11,402 $ 9,376 $ 2,836 $ 6,379 $ 7,932
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total investments................. $336,081 $344,860 $384,049 $317,286 $299,223
Total assets...................... 434,795 417,522 438,116 399,049 372,974
Loss and loss adjustment expense
reserves....................... 250,056 281,593 302,085 277,027 236,034
Reserve for extended reporting
period claims.................. 10,328 8,625 7,935 7,189 7,386
Unearned premiums(1).............. 34,382 -- -- -- --
Advance premiums.................. 1,828 9,057 10,705 14,290 14,397
Surplus contributions............. 10,094 10,094 10,094 10,094 10,094
Fund balance...................... 117,954 102,199 101,916 78,910 93,958
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
SELECTED STATUTORY DATA:
Loss ratio(2)..................... 115.0% 112.3% 119.0% 112.2% 107.8%
Combined ratio(2)(3).............. 122.6% 121.2% 125.0% 118.1% 115.3%
Statutory surplus................. $113,309 $105,076 $ 92,370 $ 87,086 $ 78,258
Net premiums written to statutory
surplus........................ .81x .65x 1.09x 1.14x .93x
SELECTED GAAP DATA
GAAP combined ratio(2)(3)........... 122.4% 122.0% 126.9% 118.1% 115.7%
</TABLE>
- ---------------
(1) Policies written between January 1, 1992 and June 30, 1997 were written on a
calendar year basis. Thus, there are no unearned premiums at year end.
(2) The ratio for 1997 includes non-recurring premium tax refunds totaling $2.57
million.
(3) The ratio includes the increase in reserve for extended reporting period
claims, but does not include the dividend credits issued in 1994 and 1993.
25
<PAGE> 39
SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL AND
OPERATING DATA OF PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
AND PHYSICIANS PROTECTIVE TRUST FUND
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DOLLAR AMOUNTS)
The following table sets forth certain unaudited pro forma condensed
combined financial and operating data for Professionals Group 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 occurred as of the
beginning of the earliest period indicated and after giving effect to the pro
forma adjustments described in the Notes to Professionals Insurance Company
Management Group and Physicians Protective Trust Fund Unaudited Pro Forma
Condensed Combined Financial Statements. For a description of
"pooling-of-interests" accounting with respect to the transactions contemplated
by the Merger Agreement, see "THE TRANSACTIONS -- Anticipated Accounting
Treatment." This information should be read in conjunction with the historical
consolidated financial statements of Professionals Group, including the notes
thereto, which are incorporated by reference in this Joint Proxy
Statement/Prospectus, the historical consolidated financial statements of PPTF,
including the notes thereto, which appear elsewhere in this Joint Proxy
Statement/Prospectus, and the consolidated historical financial data for
Professionals Group and PPTF and the other pro forma financial information,
including the notes thereto, which appear elsewhere in this Joint Proxy
Statement/Prospectus. See "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE,"
"PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION," "INDEX TO FINANCIAL
STATEMENTS OF PHYSICIANS PROTECTIVE TRUST FUND" and "ANNEX A -- PROFESSIONALS
INSURANCE COMPANY MANAGEMENT GROUP ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 1997." 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 the dates indicated or
the results that may be obtained in the future.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Gross premiums written.................................... $181,170 $154,739 $171,413
Net premiums written...................................... 163,014 124,183 155,658
Net premiums earned....................................... 132,026 125,406 156,191
Net investment income..................................... 39,521 39,051 37,779
Total revenues and other income........................... 181,542 170,106 199,352
Losses and loss adjustment expenses....................... 124,234 124,761 156,154
Total expenses............................................ 151,273 144,043 173,774
Income from continuing operations......................... $ 22,428 $ 18,961 $ 18,902
PER SHARE DATA:
Earnings per share:
Income per share from continuing operations............. $ 2.95 $ 2.50 $ 2.51
Income per share from continuing operations -- assuming
dilution.............................................. $ 2.95 $ 2.50 $ 2.51
Cash dividends declared per share....................... $ -- $ -- $ --
Book value per share.................................... $ 28.66
Weighted average shares outstanding..................... 7,595 7,576 7,521
Weighted average shares outstanding -- assuming
dilution.............................................. 7,597 7,576 7,521
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
--------------------
(UNAUDITED)
<S> <C>
BALANCE SHEET DATA:
Total investments......................................... $678,642
Total assets.............................................. 847,990
Loss and loss adjustment expense reserves................. 489,207
Reserve for extended reporting period claims.............. 25,628
Unearned premiums......................................... 56,047
Long-term debt............................................ 22,500
Surplus contributions..................................... 10,094
Stockholders' equity...................................... 217,680
</TABLE>
26
<PAGE> 40
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
PHYSICIANS PROTECTIVE TRUST FUND
PER SHARE DATA
(Unaudited)
The following table sets forth (i) certain historical and pro forma per
share information for Professionals Group Common Stock and (ii) certain
historical and pro forma per share information for PPTF Membership Rights. The
historical and pro forma per share information for PPTF assume that the PPTF
Membership Rights are equivalent to 4,089,160 shares (which is also the maximum
number of shares of Professionals Group Common Stock to be issued in exchange
for the PPTF Membership Rights). The pro forma 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 would have occurred had those transactions been
consummated on the dates indicated or the results that may be obtained in the
future. The information presented herein should be read in conjunction with the
unaudited pro forma combined financial information, including the notes thereto,
appearing elsewhere in this Joint Proxy Statement/ Prospectus. See "PRO FORMA
COMBINED FINANCIAL INFORMATION."
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED
DECEMBER 31,
------------------------------
1997 1996 1995
------ ----- -----
<S> <C> <C> <C>
PROFESSIONALS GROUP COMMON STOCK
Earnings per share(1)
Historical.............................................. $ 3.15 $2.75 $4.68
Pro forma(2)............................................ $ 2.95 $2.50 $2.51
Earnings per share -- assuming dilution(1)
Historical.............................................. $ 3.14 $2.75 $4.68
Pro forma(2)............................................ $ 2.95 $2.50 $2.51
Cash dividends declared per share
Historical.............................................. $ -- $ -- $ --
Pro forma............................................... $ -- $ -- $ --
Book value per share -- end of period
Historical.............................................. $29.07
Pro forma(3)............................................ $28.66
PPTF MEMBERSHIP RIGHTS
Earnings per share(1)
Historical(4)........................................... $ 2.79 $2.29 $0.69
Pro forma(2)............................................ $ 2.95 $2.50 $2.51
Earnings per share -- assuming dilution(1)
Historical(4)........................................... $ 2.79 $2.29 $0.69
Pro forma(2)............................................ $ 2.95 $2.50 $2.51
Cash dividends declared per share
Historical.............................................. $ -- $ -- $ --
Pro forma............................................... $ -- $ -- $ --
Book value per share -- end of period
Historical(4)........................................... $28.85
Pro forma(3)............................................ $28.66
</TABLE>
- ---------------
(1) Earnings per share and earnings per vote have been calculated using income
before cumulative effect of change in accounting method.
(2) Gives effect to the transactions contemplated by the Merger Agreement as if
those transactions had occurred at the beginning of the earliest period
presented. Such transactions include the issuance of 4,089,160 shares of
Professionals Group Common Stock upon consummation of the INSCO Merger. See
"THE TRANSACTIONS -- Transaction Consideration and Allocation Formula."
(3) Gives effect to the transactions contemplated by the Merger Agreement as if
those transactions had occurred at the end of the period presented. Such
transactions include the issuance of 4,089,160 shares of Professionals Group
Common Stock upon consummation of the INSCO Merger. See "THE TRANSACTIONS --
Transaction Consideration and Allocation Formula."
(4) The historical and pro forma per share information for PPTF assume that the
PPTF Membership Rights are equivalent to 4,089,160 shares (which is also the
maximum number of shares of Professionals Group Common Stock to be issued in
exchange for the PPTF Membership Rights).
27
<PAGE> 41
COMPARATIVE STOCK PRICES
Upon consummation of the INSCO Merger, all Membership Rights, other than
those as to which dissenters' rights have been exercised, will be converted into
an aggregate of 4,089,160 shares of Professionals Group Common Stock. In
consideration for the Membership Rights, the Aggregate Merger Shares will be
allocated and distributed only to Members of PPTF who do not exercise
dissenters' rights and each such Member of PPTF will be allocated and will be
entitled to receive a portion of the Aggregate Merger Shares determined in
accordance with the Allocation Formula. See "THE TRANSACTIONS -- Transaction
Consideration and Allocation Formula."
Professionals Group Common Stock is traded on the Nasdaq National Market
under the symbol "PICM." Although transactions in Professionals Group Common
Stock have been, and are expected to continue to be, facilitated by
market-makers (including McDonald & Company), there can be no assurance that an
established or liquid trading market in Professionals Group Common Stock will
continue. The following table sets forth, for the periods indicated, the high
and low sale prices per share of Professionals Group Common Stock as reported by
the Nasdaq National Market. In each case the sale prices have been adjusted as
if the ten percent stock dividend paid on December 16, 1996 had occurred prior
to such quarters. The information with respect to such sale prices was obtained
from the National Association of Securities Dealers, Inc. Such information
reflects interdealer prices, without retail markup, markdown, or commission, and
may not represent actual transactions.
<TABLE>
<CAPTION>
PROFESSIONALS GROUP
COMMON STOCK
--------------------
HIGH LOW
-------- --------
<S> <C> <C>
1995 First Quarter......................................... $10.68 $ 9.09
Second Quarter....................................... 14.32 10.00
Third Quarter........................................ 17.05 12.73
Fourth Quarter....................................... 19.77 16.36
1996 First Quarter......................................... 23.41 18.86
Second Quarter....................................... 22.95 19.77
Third Quarter........................................ 22.27 19.55
Fourth Quarter....................................... 22.00 19.77
1997 First Quarter......................................... 25.25 20.00
Second Quarter....................................... 29.50 22.00
Third Quarter........................................ 40.00 27.00
Fourth Quarter....................................... 44.50 32.75
1998 First Quarter......................................... 44.50 39.00
Second Quarter (through April 23, 1998).............. 42.50 41.25
</TABLE>
PPTF has been a privately held entity since its formation and no trading
market for PPTF Membership Rights exists because the Membership Rights are not
transferable except by operation of law.
On August 14, 1997, the last trading day before the public announcement of
the execution of the Initial Merger Agreement, the last sales price of
Professionals Group Common Stock on the Nasdaq National Market was $29.50. On
October 2, 1997, the last trading day before the public announcement of the
execution of the Restated Merger Agreement, the last sales price of
Professionals Group Common Stock on the Nasdaq National Market was $38.75. On
April 9, 1998, the last trading day before the execution of the First Amendment,
the last sales price of Professionals Group Common Stock on the Nasdaq National
Market was $42.00. On April 24, 1998, the last practicable trading day prior to
the mailing of this Joint Proxy Statement/ Prospectus, the last sales price of
Professionals Group Common Stock on the Nasdaq National Market was $41.25.
Members of PPTF and stockholders of Professionals Group are advised to
obtain current market quotations for Professionals Group Common Stock. No
assurance can be given concerning the market price of Professionals Group Common
Stock before or after the date or dates on which any of the transactions
28
<PAGE> 42
contemplated by the Merger Agreement are consummated. Although the number of
Aggregate Merger Shares is fixed, the market price of Professionals Group Common
Stock will fluctuate between the date of this Joint Proxy Statement/Prospectus
and the date on which the transactions contemplated by the Merger Agreement are
consummated and thereafter. Consequently, the aggregate value of the Aggregate
Merger Shares may increase or decrease as the market price of Professionals
Group Common Stock fluctuates. The following table illustrates this relationship
between the market price of Professionals Group Common Stock and the aggregate
value of the Aggregate Merger Shares:
<TABLE>
<CAPTION>
MARKET PRICE AGGREGATE
OF VALUE OF
PROFESSIONALS GROUP AGGREGATE
COMMON STOCK MERGER SHARES
------------------- -------------
<S> <C>
$30.00............................ $122,674,800
$33.00............................ $134,942,280
$36.00............................ $147,209,760
$39.00............................ $159,477,240
$42.00............................ $171,744,720
$43.00............................ $175,833,880
$44.00............................ $179,923,040
$45.00............................ $184,012,200
</TABLE>
Based on the last sales price of Professionals Group Common Stock on April
24, 1998 (the last practicable trading day prior to the mailing of this Joint
Proxy Statement/Prospectus), which was $41.25, the aggregate value of the
Aggregate Merger Shares was $168,677,850. See "THE TRANSACTIONS -- Transaction
Consideration and Allocation Formula."
On the Professionals Group Record Date, there were approximately 2,612
holders of record of Professionals Group Common Stock. On the PPTF Record Date,
there were 3,586 Members of PPTF.
29
<PAGE> 43
RISK FACTORS
An investment in the securities offered pursuant to this Joint Proxy
Statement/Prospectus may involve a high degree of risk. The several risk factors
discussed below, along with general investment risks and the other matters
discussed in this Joint Proxy Statement/Prospectus, should be considered in
making an investment decision and in evaluating the transactions contemplated by
the Merger Agreement.
INDUSTRY FACTORS MAY IMPACT RESULTS AND OPERATIONS
Market Conditions. A majority of the direct insurance premium revenues of
Professionals Group are derived from medical malpractice risks. Many factors
influence the financial results of the medical malpractice insurance business,
several of which are beyond the control of Professionals Group. The supply of
medical malpractice insurance, or the industry's underwriting capacity, is
determined principally by the industry's level of capitalization, historical
underwriting results, returns on investment and perceived premium rate adequacy.
Historically, the financial performance of the medical malpractice insurance
industry has tended to fluctuate in cyclical patterns characterized by periods
of greater competition in pricing and underwriting terms and conditions (a "soft
insurance market") followed by periods of capital shortage and lesser
competition (a "hard insurance market"). For several years, the medical
malpractice insurance industry and Professionals Group have faced a soft
insurance market that has generally resulted in lower premiums and reduced
profitability. Although Professionals Group is endeavoring to offset lower
premiums charged through more selective underwriting practices, there can be no
assurance that these practices will be successful. There can be no assurances
regarding whether or when market conditions will improve, or the manner in
which, or the extent to which, changes in market conditions may impact the
results and operations of Professionals Group.
Economic Conditions. Insurance companies rely on the positive performance
of their investment portfolios to offset insurance losses and to enhance
profitable results. Consequently, prevailing economic conditions, particularly
changes in market interest rates, may significantly affect the operations of an
insurance company that depend on its net investment income. In addition, changes
in interest rates also can affect the value of an insurance company's
interest-earning assets, which are comprised of fixed and adjustable-rate
investment securities. Generally, the value of fixed-rate investment securities
fluctuates inversely with changes in interest rates. Changes in interest rates
also can affect the average life of investment securities. An insurance company
is subject to reinvestment risk to the extent that it is not able to reinvest
prepayments at rates which are comparable to the rates on the maturing
investments.
Changes in market interest rates have resulted in significant changes in
the market value of Professionals Group's portfolio of fixed maturity
investments. As of December 31, 1997, such portfolio had a modified duration of
approximately four years and a market value that was $4.7 million more than the
$308.9 million amortized cost of such portfolio. As of December 31, 1996, such
portfolio had a modified duration of approximately four years and a market value
that was $298,000 more than the $286.0 million amortized cost of such portfolio.
As of December 31, 1997, a one hundred basis point increase in market interest
rates would decrease the value of this portfolio by approximately three and
one-half percent, whereas a one hundred basis point decrease in market interest
rates would increase the value of this portfolio by approximately three percent.
The success of Professionals Group may also be influenced by general
economic and legal conditions in the geographic markets served by it and its
respective subsidiaries. No assurance can be given that favorable economic and
legal conditions will exist in such markets.
SIGNIFICANT COMPETITION
Professionals Group competes with numerous insurance companies as well as
various self-insurance mechanisms. Principal competitors in the Midwest consist
of three customer-owned local insurance companies (Michigan Physicians Mutual
Liability Company, Illinois State Medical Inter-Insurance Exchange and Michigan
Hospital Association Insurance Company) and several national companies
(including The St. Paul Companies, The Medical Protective Company, American
International Group, MMI Companies, Cincinnati
30
<PAGE> 44
Insurance Company, and CNA Insurance Companies). The majority of these
competitors have substantially greater financial resources than do Professionals
Group and its subsidiaries.
Competition in the medical malpractice insurance industry may take several
forms, including pricing, service quality, breadth and flexibility of coverages,
method of sale, and insurance carrier financial stability and ratings.
Professionals Group competes through name recognition and reputation, especially
in the Michigan market, by emphasizing a high level of customer service to
insureds, and by using local insurance agencies to sell and distribute its
insurance products. Professionals Group has attempted to balance its need for
upward rate adjustments with the goal of maintaining market share in a very
competitive insurance market. Although Professionals Group 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 term.
HEALTH CARE INDUSTRY CONSOLIDATION MAY IMPACT RESULTS AND OPERATIONS
Professionals Group derives a majority of its direct premium income from
physicians and other individual health care providers, physician groups, and
smaller health care facilities. The health care industry is undergoing rapid
market driven change and consolidation which may negatively impact the medical
practice and economic independence of physicians who are the primary customer
base of Professionals Group. For example, the emergence of "managed care" has
made it more difficult for physicians to conduct a traditional fee-for-service
practice and has caused some physicians to leave private practice for employment
with medical systems or to join or contractually affiliate with managed care
organizations or practice management organizations. Such change and
consolidation may result in the elimination of, or a significant decrease in,
the role of the physician in the medical malpractice insurance purchasing
decision. It could also result in greater emphasis on the role of professional
managers, who may seek to purchase insurance on a price competitive basis and
who may favor insurance companies that are larger and more highly rated than
Professionals Group. In addition, such change and consolidation could reduce
medical malpractice premiums available to Professionals Group as groups of
insurance purchasers generally retain more risk by accepting higher deductibles
and self insured retentions or by forming their own captive insurance
mechanisms.
The movement from traditional fee-for-service practice to the managed care
environment may also result in an increase in the liability profile of
Professionals Group's insureds. The majority of Professionals Group's insured
physicians practice in primary care specialties such as internal medicine,
family practice, general practice and pediatrics. In the managed care
environment, these primary care physicians are being required to take on the
role of "gatekeeper" and control the use of specialty care by controlling access
to specialists and by performing certain procedures that would customarily be
performed by specialists in a fee-for-service setting. These practice changes
may result in an increase in the claims frequency and severity experienced by
primary care physicians and by their insurance carrier.
UNDERWRITING LOSSES AND RESERVES BASED ON ACTUARIAL ASSUMPTIONS
Professionals Group collects premiums for the insurance coverage it
provides. Such premiums are based upon certain actuarial and other assumptions.
Although Professionals Group's insurance subsidiaries employ actuarial
assumptions that they believe are reasonable, such assumptions are, by their
nature, estimates. To the extent that the actuarial and other assumptions used
by Professionals Group prove to be incorrect, it may incur unanticipated
underwriting losses on the risks that it insures. Medical malpractice claims and
expenses may be paid over a period of ten years or more, which is longer than
most property and casualty insurance. Trends in losses may therefore be slow to
appear and accordingly, the reaction of Professionals Group, in terms of
modifying underwriting practices and changing premium rates, may lag underlying
loss trends. In addition, inflation may increase the ultimate loss costs of
Professionals Group.
The loss and loss adjustment expense ("LAE") reserves established by
Professionals Group are estimates of amounts needed to pay reported and
unreported claims and related loss adjustment expenses. The estimates are based
on assumptions related to the ultimate cost of settling such claims. If the
reserves of Professionals Group are inadequate, it will be required to increase
its reserves and thus reduce its net income or
31
<PAGE> 45
stockholders' equity in the period in which the deficiency is identified.
Unanticipated underwriting losses or materially underestimated reserves could
have a material adverse effect on Professionals Group.
RELIANCE ON REINSURANCE
In order to reduce risk and to increase its underwriting capacity,
Professionals Group obtains reinsurance from unaffiliated reinsurers (including
domestic and foreign companies), although it retains a portion of each risk
reinsured. Professionals Group is subject to credit risk with respect to its
reinsurers because reinsurance does not relieve Professionals Group of its
original liability to its insureds for the risks ceded to reinsurers. Although
Professionals Group believes that its reinsurance is maintained with financially
stable reinsurers and that any reinsurance security maintained is adequate to
protect its interests, the inability to collect on its reinsurance recoverables,
or the inability of its reinsurers to make payments under the terms of
reinsurance treaties (due to insolvency or otherwise), could have a material
adverse effect on its future results of operations and financial position.
The amount and cost of reinsurance available to companies specializing in
medical professional liability insurance are subject, in large part, to
prevailing market conditions beyond the control of Professionals Group. The
ability of Professionals Group to provide professional liability insurance at
competitive premium rates and coverage limits on a continuing basis will depend
in part upon its ability to obtain adequate reinsurance in amounts and at rates
that will not adversely affect their competitive position. Although
Professionals Group anticipates that it will continue to be able to obtain such
reinsurance, there can be no assurance that this will be the case.
RELIANCE ON INDEPENDENT INSURANCE AGENCIES
Professionals Group markets its professional liability products primarily
through independent insurance agencies. Professionals Group has contractual
relationships with all of its agents. In the Michigan market, Professionals
Group and agencies representing over 95% of Michigan premiums written through
agencies have entered into written agreements that prohibit the agencies from
transferring existing Professionals Group medical malpractice insureds to
another insurance company without Professionals Group's written consent,
although the agencies may place newly sourced business with another insurance
company. In other markets, the agencies retain full ownership of expirations
and, accordingly, may transfer an existing Professionals Group insured to
another insurance company without Professionals Group's consent. Professionals
Group anticipates that as it enters new states and offers non-medical
malpractice insurance products in Michigan and other states, the agencies
representing Professionals Group will retain full ownership of expirations.
For the years ended December 31, 1997, 1996 and 1995, Professionals Group's
top ten agencies accounted for approximately 55%, 58% and 55%, respectively, of
Professionals Group's direct premiums written. In each of those years, the top
agency accounted for approximately 10% of Professionals Group's direct premiums
written. Professionals Group's business depends, in part, on the marketing
efforts of these agencies and on Professionals Group's ability to continue to
offer insurance products that meet the needs of these agencies and their
policyholders. In addition, Professionals Group's ability to expand into
additional markets will depend, in part, on its ability to successfully
establish a network of independent insurance agencies and to compete with other
insurance companies that are represented by these agencies.
HOLDING COMPANY IS DEPENDENT ON RESULTS AND OPERATIONS OF SUBSIDIARIES
Professionals Group is a legal entity separate and distinct from its
various subsidiaries. As a holding company with no significant operations of its
own, the principal sources of its funds are dividends and other distributions
from its subsidiaries, borrowings and sales of equity. The rights of
Professionals Group, and consequently its stockholders, to participate in any
distribution of assets of any of its subsidiaries is subject to prior claims of
policyholders, creditors and preferred stockholders, if any, of such subsidiary
(except to the extent claims of Professionals Group in its capacity as a
creditor are recognized), and to certain regulatory restrictions. Consequently,
Professionals Group's ability to fund its operations, and to pay debts, expenses
and
32
<PAGE> 46
cash dividends to its stockholders may be limited. See "CERTAIN REGULATORY
CONSIDERATIONS" and "COMPARISON OF STOCKHOLDER RIGHTS WITH MEMBERSHIP RIGHTS."
Professionals Group may engage in activities in addition to providing
insurance through its subsidiaries. Such activities could include activities
related to providing insurance, such as claims and risk management services, and
activities unrelated to insurance, such as medical practice management services.
To the extent that Professionals Group engages in activities that are unrelated
to medical malpractice insurance, it may have no or limited experience or senior
management expertise related to such new activities.
REGULATORY CONSIDERATIONS
Extensive Regulation. Because insurance holding companies and insurance
companies are heavily regulated, the success of Professionals Group is impacted
not only by competitive factors but also by regulations affecting insurance
holding companies and insurance companies. These regulations are primarily
intended to protect policyholders, not stockholders. Regulation of the insurance
industry is continuously changing and the ultimate effect of such changes cannot
be predicted. Regulations now affecting Professionals Group may be modified at
any time and new regulations affecting Professionals Group may be enacted. There
is no assurance that such modifications or new regulations will not adversely
affect the business of Professionals Group. In addition, under the insolvency or
guaranty fund laws of most of the states in which Professionals Group operates,
insurers doing business in those states are regularly assessed for policyholder
losses of insolvent insurance companies. In addition, from time to time, states
may make special assessments in response to extraordinary circumstances. No
assurance can be given that there will not be such assessments in the future.
Risk-Based Capital Requirements. In addition to state-imposed insurance
laws and regulations, Professionals Group and its insurance company subsidiaries
are subject to statutory accounting principles and the reporting format of the
National Association of Insurance Commissioners (the "NAIC"). The NAIC recently
adopted a risk-based capital formula to establish minimum capital and surplus
requirements for property and casualty insurance companies. The risk-based
capital formula is based principally on underwriting risk (loss and LAE reserve
risk and premium risk), asset risk and reinsurance credit risk. At December 31,
1997, the statutory surplus of Professionals Group's insurance subsidiaries
exceeded the minimum capital and surplus requirements established under NAIC's
current property and casualty risk-based capital formula. See "CERTAIN
REGULATORY CONSIDERATIONS."
NAIC-IRIS Ratios. The NAIC's Insurance Regulatory Information System
("IRIS") was developed by a committee of state insurance regulators and is
primarily intended to assist state insurance departments in executing their
statutory mandates to oversee the financial condition of insurers operating in
their respective states. IRIS identifies 11 industry ratios and specifies "usual
values" for each ratio. Departure from the usual values on four or more ratios
generally leads to inquiries from individual state insurance commissioners.
In 1997, 1996 and 1995, PICOM did not have any ratios which varied from the
"usual value" range.
In 1995, ProNational Casualty had two ratios which varied from the "usual
value" range as follows:
<TABLE>
<CAPTION>
PRONATIONAL
RATIO USUAL RANGE CASUALTY VALUE
----- ------------ --------------
<S> <C> <C>
Two year over-all operating ratio up to 100% 125%
Change in surplus (10%) to 50% (26%)
</TABLE>
In 1996, ProNational Casualty had two ratios which varied from the "usual
value" range as follows:
<TABLE>
<CAPTION>
PRONATIONAL
RATIO USUAL RANGE CASUALTY VALUE
----- ------------ --------------
<S> <C> <C>
Two year over-all operating ratio up to 100% 122%
Change in net writings (33%) to 33% (99%)
</TABLE>
33
<PAGE> 47
In 1997, ProNational Casualty had two ratios which varied from the "usual
value" range as follows:
<TABLE>
<CAPTION>
PRONATIONAL
RATIO USUAL RANGE CASUALTY VALUE
----- ------------ --------------
<S> <C> <C>
Change in Surplus (10%) to 50% 69%
Change in net writings (33%) to 33% (99%)
</TABLE>
At present, no inquiries have been received from any state insurance
commissioner as a result of the "unusual values" for ProNational Casualty. In an
effort to remediate such "unusual values", and in order to allow ProNational
Casualty to assume PICOM's A.M. Best Rating, ProNational Casualty and PICOM
entered into a quota share reinsurance contract whereby not less than 90% of the
insurance risks written by ProNational Casualty are reinsured by PICOM. This
reinsurance mechanism, which will not affect the Company's consolidated results,
is expected to stabilize the underwriting results of ProNational Casualty. See
"CERTAIN REGULATORY CONSIDERATIONS."
TORT REFORM MAY IMPACT RESULTS AND OPERATIONS
On a state level, several states, including Michigan and Florida, have
adopted tort reforms designed to moderate the risk of practice to health care
providers. Although such legislation generally has a positive impact by reducing
malpractice losses, it also causes the particular state to be more attractive to
other insurance companies seeking to expand their markets. Professionals Group
has seen an increase in competition in its markets due, in part, to the passage
of tort reform.
On the federal level, attempts to reform the delivery of medical care have
contained provisions that could, if adopted, have a material impact on
Professionals Group and its insurance products. An example of such a change is
the concept of "enterprise liability" that was contained in President Clinton's
health care proposal. Under the enterprise liability concept, doctors would not
bear individual liability for malpractice events with such liability being borne
by the hospital or other enterprise in which the doctor practices. If enterprise
liability or a similar concept were adopted, Professionals Group could be at a
competitive disadvantage since its business is concentrated in physician risks
and larger, more established, companies already provide medical malpractice
insurance for the enterprise risks.
POSSIBLE STOCK PRICE FLUCTUATION
Factors such as quarterly variations in financial results, announcements by
Professionals Group, and other developments affecting Professionals Group or its
subsidiaries or the insurance or health care industries generally could cause
the market price of the Professionals Group Common Stock to fluctuate
substantially. In addition, the stock market has experienced price and volume
fluctuations in recent years. These fluctuations have had a substantial effect
on the market prices for many securities unrelated to the operating performance
of the companies that issued such securities.
ANTI-TAKEOVER PROVISIONS MAY DISCOURAGE TAKEOVERS
The Michigan Insurance Code, the MBCA and the Professionals Group Charter
Documents contain provisions that could discourage attempts to acquire
Professionals Group or to remove incumbent directors even if some or a majority
of Professionals Group's stockholders deem such an attempt to be in
Professionals Group's and their best interest and even if the potential acquiror
is willing to pay a premium over the prevailing market price of the
Professionals Group Common Stock. Professionals Group's First Amended and
Restated Articles of Incorporation authorizes the Professionals Group Board to
issue, from time to time, shares of Preferred Stock with such designations and
preferences as the Professionals Group Board shall determine. These shares could
be used to discourage attempts to acquire Professionals Group or remove
incumbent directors. See "CERTAIN REGULATORY CONSIDERATIONS" and "COMPARISON OF
STOCKHOLDER RIGHTS WITH MEMBERSHIP RIGHTS."
34
<PAGE> 48
POTENTIAL ADVERSE CONSEQUENCES OF ACQUISITIONS, BUSINESS COMBINATIONS AND
REINSURANCE RELATIONSHIPS
Professionals Group has experienced significant growth in premium volume as
a result of acquisitions, business combinations and reinsurance relationships.
Professionals Group intends to continue to pursue such transactions and
relationships to the extent suitable candidates and acceptable terms may be
identified. Professionals Group is unable to predict whether or when any
candidate for such a transaction or relationship will become available or the
likelihood that any such transaction or relationship will be completed or, in
the case of reinsurance relationships, continued in the future. Professionals
Group competes for acquisition, business combination, reinsurance and expansion
opportunities with many entities that have substantially greater resources. In
addition, such transactions and relationships may involve difficulties in the
retention of personnel, diversion of management's attention, unexpected legal
liabilities, and tax and accounting issues. There can be no assurance that
Professionals Group will be able to successfully identify suitable candidates
for such transactions or relationships, complete any such transactions or
relationships, integrate acquired businesses into its operations, or expand into
new markets. Once integrated, such transactions or relationships may not achieve
comparable levels of revenues, profitability, or productivity as the existing
business of Professionals Group or otherwise perform as expected.
SHARES ELIGIBLE FOR FUTURE SALE COULD AFFECT PREVAILING MARKET PRICES
After consummation of the transactions contemplated by the Merger
Agreement, but without giving effect to the issuance of any of the 153,000
shares of Professionals Group Common Stock issuable pursuant to Section 1.28 of
the Merger Agreement, Professionals Group will have 7,594,910 shares of
Professionals Group Common Stock issued and outstanding. Of these shares,
approximately 7,390,253 shares of Professionals Group Common Stock will be
freely tradeable without restriction under the Securities Act by persons who are
believed by Professionals Group not to be "Affiliates" (as defined) of
Professionals Group. All the remaining shares of Professionals Group Common
Stock, which will be held by persons believed by Professionals Group to be an
affiliate of Professionals Group for purposes of Rule 144 promulgated under the
Securities Act ("Rule 144") or an affiliate of PPTF for purposes of Rule 145
promulgated under the Securities Act ("Rule 145") (each such person being an
"Affiliate"), will be "restricted securities" and may not be sold unless they
are sold pursuant to an exemption from registration, including an exemption
contained in Rule 145, or are registered under the Securities Act. Consummation
of the transactions contemplated by the Merger Agreement is conditioned upon,
among other things, the receipt by Professionals Group, from each director,
executive officer and other person who is reasonably believed to be an Affiliate
of a written agreement intended to ensure compliance with these requirements.
In general, under Rule 145 as currently in effect, the holder of such
restricted securities, including persons who may be deemed "affiliates" of
either Professionals Group or PPTF, would be entitled to sell, within any
three-month period, up to a number of restricted securities that does not exceed
the greater of (i) 1% of the then outstanding shares of Professionals Group
Common Stock and (ii) the average weekly trading volume for Professionals Group
Common Stock during the four calendar weeks preceding the date on which notice
of the sale is filed with the Commission provided that certain restrictions
relating to manner of sale, notice and the availability of current public
information about Professionals Group are satisfied. In addition, when a period
of one year has elapsed from the date the restricted securities were acquired
from Professionals Group, and provided the holder is not then, or has not been
within the past three months, an affiliate of Professionals Group, the holder of
the restricted securities will be able to dispose of them without compliance
with such restrictions other than the availability of current public information
about Professionals Group and when a period of two years has elapsed, and
provided the holder is not then, or has not been within the past three months,
an affiliate of Professionals Group, without restriction.
Following the consummation of the transactions contemplated by the Merger
Agreement, sales of substantial amounts of Professionals Group Common Stock in
the public market pursuant to registration under the Securities Act, Rule 145 or
otherwise, or even the potential for such sales, could adversely affect the
prevailing market prices for Professionals Group Common Stock and impair
Professionals Group's ability to raise capital through the sale of its equity
securities.
35
<PAGE> 49
ADDITIONAL AUTHORIZED SECURITIES COULD BE ISSUED
Professionals Group is authorized to issue 25,000,000 shares of
Professionals Group Common Stock. After consummation of the transactions
contemplated by the Merger Agreement, Professionals Group will have 7,594,910
shares of Professionals Group Common Stock issued and outstanding. In addition,
an aggregate of 350,000 shares of Professionals Group Common Stock have been
reserved for issuance pursuant to the Professionals Group 1996 Non-Employee
Directors Stock Option Plan and the Professionals Group 1996 Long Term Incentive
Plan and an aggregate of 153,000 shares have been reserved for issuance pursuant
to Section 1.28 of the Merger Agreement. Uncommitted authorized but unissued
shares of Professionals Group Common Stock may be issued from time to time to
such persons and for such consideration as may be determined by the
Professionals Group Board; and, holders of the then outstanding Professionals
Group Common Stock may or may not be given the opportunity to vote thereon,
depending on the nature of such transactions, applicable law, the rules and
policies of any stock exchange upon which such securities may be listed, and the
judgment of the Professionals Group Board regarding the submission of such
issuance to Professionals Group stockholders for their approval.
The availability of authorized but unissued shares of Professionals Group
Common Stock is intended to provide Professionals Group with the flexibility to
take advantage of opportunities to issue such stock to obtain capital, as
consideration for possible acquisitions or for other purposes (including,
without limitation, the issuance of additional shares of Professionals Group
Common Stock through stock splits and stock dividends in appropriate
circumstances). There are, at present, no plans, understandings, agreements or
arrangements concerning the issuance of additional shares of Professionals Group
Common Stock, except for shares to be issued pursuant to the transactions
contemplated by the Merger Agreement (and shares to be reserved for issuance
upon exercise of options). However, it is possible that, depending on factors
then considered relevant by the Professionals Group Board, that Professionals
Group may, at any time in the future, issue additional shares of Professionals
Group Common Stock in a public offering or private transaction. Professionals
Group stockholders will not have preemptive rights to subscribe for newly issued
shares. See "DESCRIPTION OF PROFESSIONALS GROUP CAPITAL STOCK."
CERTAIN FORWARD-LOOKING INFORMATION
This Joint Proxy Statement/Prospectus contains certain forward-looking
information concerning possible or assumed future results of Professionals
Group, PPTF and the combined entity or the benefits of the transactions
contemplated by the Merger Agreement. Such information is subject to risks and
uncertainties. Professionals Group and PPTF have identified certain important
factors in addition to those discussed elsewhere in this Joint Proxy
Statement/Prospectus and in the documents incorporated herein by reference,
which could cause actual results to differ materially from any such results
which might be projected, forecasted, estimated or budgeted in forward-looking
information. All of such factors are difficult to predict and many are beyond
the control of Professionals Group and PPTF. These important factors include:
(i) future economic conditions in the regional and national markets in which the
companies compete; (ii) financial market conditions, including, but not limited
to, changes in interest rates; (iii) inflation; (iv) estimates of loss reserves
and trends in losses and LAE; (v) changing competition; (vi) the ability to
carry out business plans (including, without limitation, the ability of the
combined entity to achieve any anticipated savings or revenue enhancements in
connection with the transactions contemplated by the Merger Agreement or to
achieve a loss ratio comparable to that of PICOM and industry averages); (vii)
the ability to enter new markets successfully and capitalize on growth
opportunities; and (viii) adverse changes in applicable law, regulations or
rules governing insurance holding companies and insurance companies, and
environmental, tax or accounting matters. For additional information regarding
certain risks and uncertainties to which Professionals Group and PPTF may be
subject, see the disclosures set forth in "Item 1. Business -- Forward Looking
Statements" of "ANNEX A -- PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997."
36
<PAGE> 50
THE COMPANIES
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
Professionals Insurance Company Management Group is a Michigan business
corporation that was incorporated under the laws of the State of Michigan on
January 31, 1996 for the purpose of serving as the holding company for PICOM and
its subsidiaries. Professionals Group, which conducts its activities through
subsidiaries, had consolidated assets of $413.2 million and $357.4 million at
December 31, 1997 and 1996, respectively. Following consummation of the
transactions contemplated by the Merger Agreement, all direct and indirect
subsidiaries of Professionals Group (including PICOM and ProNational Casualty)
will continue to operate under their existing insurance licenses and none of
such subsidiaries will be required to reapply for any of such licenses. The
principal executive offices for Professionals Group are located at 2600
Professionals Drive, Okemos, Michigan 48864, and its telephone number is (517)
349-6500.
In connection with the transactions contemplated by the Merger Agreement,
PICOM loaned $7.5 million to Professionals Group for the purpose of enabling
Professionals Group to form, capitalize and license INSCO in accordance with the
Florida Insurance Code and the Michigan Insurance Code. Professionals Group
invested all of that sum in INSCO in exchange for all of the issued and
outstanding shares of capital stock of INSCO. INSCO invested the $7.5 million in
United States government obligations with maturities of less than one year (the
"INSCO Investment"). The loan from PICOM to Professionals Group is evidenced by
a short-term, non-renewable, interest bearing promissory note having a stated
principal amount of $7.5 million and a stated maturity date that is the earlier
of the INSCO Effective Time or December 31, 1998 (the "Note"). The Note is
secured by a pledge of all of the issued and outstanding shares of INSCO.
Interest on the Note accrues at a rate equivalent to the rate of interest paid
on the INSCO Investment. Upon consummation of the INSCO Merger, the INSCO
Investment, and all interest accrued thereon, will become and be the property of
PICOM. Following consummation of the INSCO Merger, PICOM will declare and pay to
Professionals Group a dividend in an amount equal to the amount then outstanding
under the Note, and Professionals Group will then pay the proceeds of such
dividend to PICOM in full satisfaction of the Note. See "THE
TRANSACTIONS -- Capitalization of INSCO."
PICOM INSURANCE COMPANY
PICOM Insurance Company is a wholly-owned subsidiary of Professionals Group
and a stock insurance company incorporated under the Michigan Insurance Code in
1980. PICOM, which is licensed as a property and casualty insurer in Michigan,
Florida, Illinois, Indiana, Iowa, Kentucky, Missouri, Ohio and Pennsylvania,
began business on June 27, 1980 by assuming the assets, liabilities and business
of the Brown-McNeely Insurance Fund. (The Brown-McNeely Fund was created by the
State of Michigan in 1975 to provide doctors with an effective and reliable
source of medical malpractice insurance.) Beginning July 1, 1980, PICOM offered
its own policies to doctors and clinics throughout Michigan. PICOM began
insuring dentists in 1983 and hospitals and other health care institutions in
1993, and began offering professional liability insurance to lawyers and law
firms in 1994. Since January 1, 1995, PICOM, through ProNational Casualty, has
insured doctors and clinics in Illinois. The principal product currently offered
by PICOM is professional liability insurance for providers of health care
services in Michigan and Illinois. PICOM (including ProNational Casualty) had
total statutory combined admitted assets of $363.8 million and $317.1 million at
December 31, 1997 and 1996, respectively. The principal executive offices of
PICOM are located at 2600 Professionals Drive, Okemos, Michigan 48864, and its
telephone number is (517) 349-6500.
INSCO
INSCO is a newly-formed wholly-owned subsidiary of Professionals Group and
a stock insurance company that was incorporated under the laws of the State of
Florida solely for the purpose of effecting the transactions contemplated by the
Merger Agreement. INSCO does not have any business operations and, because it
was formed solely for the purpose of effecting the transactions contemplated by
the Merger Agreement, it will not write or underwrite any lines of insurance.
The principal executive offices for INSCO
37
<PAGE> 51
are located at 2121 Ponce de Leon Boulevard, Suite 350, Coral Gables, Florida
33134-5221, and its telephone number is (305) 442-8119.
For additional information regarding Professionals Group and PICOM, see
"AVAILABLE INFORMATION," "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE" and
"ANNEX A -- PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP ANNUAL REPORT ON
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997."
PHYSICIANS PROTECTIVE TRUST FUND
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 was formed to provide physicians an effective and reliable source of
medical malpractice insurance. The Florida Insurance Department granted approval
to PPTF to write policies on January 1, 1976 for physicians and their
professional associations, partnerships and corporations throughout Florida.
Further approvals were granted to write coverage for podiatrists on June 1,
1994, for physician hospital organizations on January 1, 1995 and for
chiropractors on August 1, 1997. PPTF has one wholly-owned subsidiary,
Physicians Protective Plan, Inc., which was acquired by PPTF to provide
administrative functions and services to PPTF. These administrative functions
and services, as well as the personnel employed by PPP, were transferred to PPTF
on January 1, 1997. PPP has been operating as an insurance agency since June 26,
1996. PPTF had consolidated assets of $434.8 million and $417.5 million at
December 31, 1997 and 1996, respectively. The principal executive offices of
PPTF are located at 2121 Ponce de Leon Boulevard, Suite 350, Coral Gables,
Florida 33134-5221, and its telephone number is (305) 442-8119.
For additional information regarding PPTF, see "SELECTED CONSOLIDATED
FINANCIAL DATA OF PHYSICIANS PROTECTIVE TRUST FUND," "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PHYSICIANS
PROTECTIVE TRUST FUND," "BUSINESS AND PROPERTIES OF PHYSICIANS PROTECTIVE TRUST
FUND," "MANAGEMENT OF PHYSICIANS PROTECTIVE TRUST FUND," "BENEFICIAL OWNERSHIP
OF PHYSICIANS PROTECTIVE TRUST FUND MEMBERSHIP RIGHTS" and "RELATED PARTY
TRANSACTIONS OF PHYSICIANS PROTECTIVE TRUST FUND."
Prior to the execution of the Initial Merger Agreement, neither
Professionals Group nor PICOM had engaged in any transactions with PPTF, and
except to the extent contemplated by, or resulting from, the Merger Agreement
and the transactions contemplated thereby, neither Professionals Group nor PICOM
is affiliated with PPTF.
THE MEETINGS
DATES, TIMES AND PLACES
Professionals Group. The 1998 Annual Meeting of Stockholders of
Professionals Group will be held at 2600 Professionals Drive, Okemos, Michigan,
at 10:00 a.m., local time, on Monday, March 30, 1998.
PPTF. A Special Meeting of Members of PPTF will be held at The Holiday Inn,
1350 South Dixie Highway, Coral Gables, Florida, at 2:00 p.m., local time, on
Friday, June 5, 1998.
MATTERS TO BE CONSIDERED
Professionals Group. At the Professionals Group Annual Meeting, holders of
Professionals Group Common Stock will be asked to elect four persons to the
Professionals Group Board for three year terms expiring at the Annual Meeting of
Stockholders to be held in the year 2001 and upon the election and qualification
of their successors or upon their earlier resignation or removal, and to
consider and vote upon two proposals. The first proposal is the Merger Proposal
(i.e., the proposal to approve and adopt the First Amended and Restated
Agreement and Plan of Merger dated as of October 3, 1997, as amended by a First
38
<PAGE> 52
Amendment to First Amended and Restated Agreement and Plan of Merger dated as of
April 13, 1998, both executed by and among Professionals Group, PICOM and PPTF
and all of the transactions contemplated by the Merger Agreement (including,
without limitation, the merger of PPTF with and into INSCO followed immediately
by the merger of INSCO with and into PICOM, with PICOM continuing on as the
surviving insurance corporation)). The second proposal is the Name Change
Proposal (i.e., the proposal to approve 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."). The
Professionals Group Board has nominated Mr. R. Kevin Clinton, John F. Dodge,
Jr., Esq., H. Harvey Gass, M.D., and Ann F. Putallaz, Ph.D., for election to the
Professionals Group Board at the Professionals Group Annual Meeting.
Professionals Group stockholders will also consider and vote upon such other
matters as may properly be brought before the Professionals Group Annual
Meeting. See "THE MEETINGS -- Matters to be Considered."
THE PROFESSIONALS GROUP BOARD RECOMMENDS THAT PROFESSIONALS GROUP
STOCKHOLDERS VOTE FOR THE ELECTION OF ALL OF THE PROFESSIONALS GROUP BOARD
NOMINEES TO THE PROFESSIONALS GROUP BOARD, FOR THE MERGER PROPOSAL, AND FOR THE
NAME CHANGE PROPOSAL.
PPTF. At the PPTF Special Meeting, Members of PPTF will consider and vote
upon the Merger Proposal. Members of PPTF will also consider and vote upon such
other matters as may properly be brought before the PPTF Special Meeting.
THE PPTF BOARD RECOMMENDS THAT MEMBERS OF PPTF VOTE FOR THE MERGER
PROPOSAL.
A conformed copy of the First Amended and Restated Agreement and Plan of
Merger dated as of October 3, 1997 by and among Professionals Group, PICOM and
PPTF (without any exhibits or schedules) is attached to this Joint Proxy
Statement/Prospectus as Annex B. A conformed copy of the First Amendment to
First Amended and Restated Agreement and Plan of Merger dated as of April 13,
1998 by and among Professionals Group, PICOM and PPTF is attached to this Joint
Proxy Statement/Prospectus as Annex C.
The Name Change Amendment, which, if approved by the stockholders of
Professionals Group, will amend Article I of Professionals Group's First Amended
and Restated Articles of Incorporation and change the name of Professionals
Group from "Professionals Insurance Company Management Group" to "Professionals
Group, Inc.", is attached to this Joint Proxy Statement/Prospectus as Annex D
and is incorporated herein by reference. See "AMENDMENT TO PROFESSIONALS GROUP'S
FIRST AMENDED AND RESTATED ARTICLES OF INCORPORATION."
VOTES REQUIRED
Professionals Group. On each matter submitted to the stockholders of
Professionals Group, each outstanding share of Professionals Group Common Stock
is entitled to one vote. Directors of Professionals Group will be elected by a
plurality of the votes present in person or represented by proxy at the
Professionals Group Annual Meeting. Approval of the Merger Proposal by the
stockholders of Professionals Group requires the affirmative vote of a majority
of the outstanding shares of Professionals Group Common Stock. Approval of the
Name Change Proposal by the stockholders of Professionals Group requires the
affirmative vote of a majority of the outstanding shares of Professionals Group
Common Stock. In all matters other than the Merger Proposal and the Name Change
Proposal, the affirmative vote of the majority of shares present in person or
represented by proxy at the Professionals Group Annual Meeting and entitled to
vote on the matter will be the act of Professionals Group's stockholders.
Approval of the Merger Proposal by the requisite votes of the stockholders of
Professionals Group and the Members of PPTF is a condition to, and is required
for, consummation of the transactions contemplated by the Merger Agreement
(including, without limitation, the merger of PPTF with and into INSCO followed
immediately by the merger of INSCO with and into PICOM, with PICOM continuing on
as the surviving insurance corporation). Approval of the Name Change Proposal by
the requisite vote of Professionals Group stockholders is not a condition to,
and is not required for, the consummation of the transactions contemplated by
the Merger Agreement. Assuming its approval by the stockholders of Professionals
Group, the Name Change Proposal will become effective regardless of whether
39
<PAGE> 53
the Merger Proposal is approved by the stockholders of Professionals Group. The
record date for the Professionals Group Annual Meeting is April 6, 1998. Only
Professionals Group stockholders at the close of business on the Professionals
Group Record Date are entitled to notice of, and to vote at, the Professionals
Group Annual Meeting. As of the Professionals Group Record Date, Professionals
Group had issued and outstanding approximately 3,505,750 shares of Professionals
Group Common Stock.
As of the Professionals Group Record Date, directors and executive officers
of Professionals Group and their affiliates were the beneficial owners of
205,083, approximately 5.8%, of the outstanding shares of Professionals Group
Common Stock (including 38,750 shares of Professionals Group Common Stock which
may be acquired upon the exercise of options which are exercisable within 60
days of such date). The directors and executive officers of Professionals Group
have indicated that they intend to vote all shares of Professionals Group Common
Stock owned by them for the election of all of the Professionals Group Board
Nominees to the Professionals Board, for the Merger Proposal, and for the Name
Change Proposal. As of the Professionals Group Record Date, the trustees and
executive officers of PPTF and their affiliates were the beneficial owners of
5,500, less than 0.1%, of the outstanding shares of Professionals Group Common
Stock. The trustees and executive officers of PPTF have indicated that they
intend to vote all shares of Professionals Group Common Stock owned by them for
the election of all of the Professional Group Board Nominees to the
Professionals Group Board, for the Merger Proposal, and for the Name Change
Proposal.
As of the Professionals Group Record Date, neither Professionals Group nor
any of its subsidiaries had or shared the right to vote any of the outstanding
shares of Professionals Group Common Stock. As of the Professionals Group Record
Date, neither PPTF nor its sole subsidiary had or shared the right to vote any
of the outstanding shares of Professionals Group Common Stock.
The affirmative vote of a majority of the shares of Professionals Group
Common Stock present in person or represented by proxy at the Professionals
Group Annual Meeting may authorize the adjournment or postponement of the
Professionals Group Annual Meeting; provided, however, that no proxy which was
voted against any proposal will be voted in favor of adjournment or postponement
to solicit further proxies for such proposal.
PPTF. On each matter submitted to the Members of PPTF, each indemnity
agreement issued by PPTF that is in effect on April 1, 1998 is entitled to one
vote. As of the PPTF Record Date, the number of PPTF Policies, and the maximum
number of votes entitled to be cast on each matter submitted to a vote of PPTF
Members at the PPTF Special Meeting, is 3,586. The vote represented by each PPTF
Policy may only be cast, in person or by proxy, by the person or entity who is
the named insured on such PPTF Policy and there is only one named insured for
each PPTF Policy. Approval of the Merger Proposal requires the affirmative vote
of two-thirds of the number of votes eligible to be cast. (This percentage was
fixed by the PPTF Board with the approval of the Florida Insurance Department.)
In all matters other than the Merger Proposal, the affirmative vote of a
majority of the votes present in person or represented by proxy at the PPTF
Special Meeting and entitled to vote on the matter will be the act of PPTF's
Members. Approval of the Merger Proposal by the requisite votes of the
stockholders of Professionals Group and the Members of PPTF is a condition to,
and is required for, consummation of the transactions contemplated by the Merger
Agreement (including, without limitation, the merger of PPTF with and into INSCO
followed immediately by the merger of INSCO with and into PICOM, with PICOM
continuing on as the surviving insurance corporation). The record date for the
PPTF Special Meeting is April 1, 1998. Only Members of PPTF at the close of
business on the PPTF Record Date are entitled to receive notice of, and to vote
at, the PPTF Special Meeting. As of the PPTF Record Date, PPTF had 3,586
Members.
As of the PPTF Record Date, trustees of PPTF and their affiliates were the
beneficial owners of 24, or less than 0.7%, of the outstanding PPTF Policies
and, by virtue of such PPTF Policies, are entitled to cast 24, or less than
0.7%, out of a total of 3,586 votes entitled to be cast at the PPTF Special
Meeting. The trustees of PPTF have indicated that they intend to cast all of
their votes for the Merger Proposal. As of the PPTF Record Date, executive
officers of PPTF and their affiliates did not own, and directors and executive
officers of Professionals Group and their affiliates did not own, beneficially
or of record, any PPTF Policies. Accordingly,
40
<PAGE> 54
the executive officers of PPTF and their affiliates, and the directors and
executive officers of Professionals Group and their affiliates, do not have any
votes to cast at the PPTF Special Meeting.
As of the PPTF Record Date, neither PPTF nor its sole subsidiary owned,
beneficially or of record, any of the PPTF Policies. Accordingly, neither PPTF
nor its sole subsidiary has or shares the right to cast any votes at the PPTF
Special Meeting. As of the PPTF Record Date, neither Professionals Group nor any
of its subsidiaries owned, beneficially or of record, any of the PPTF Policies.
Accordingly, neither Professionals Group nor any of its subsidiaries has or
shares the right to cast any votes at the PPTF Special Meeting.
The affirmative vote of a majority of the votes present in person or
represented by proxy at the PPTF Special Meeting may authorize the adjournment
or postponement of the PPTF Special Meeting; provided, however, that no proxy
which was voted against any proposal will be voted in favor of adjournment or
postponement to solicit further proxies for such proposal.
VOTING OF PROXIES
Professionals Group. Shares of Professionals Group Common Stock represented
by properly executed proxies received at or prior to the Professionals Group
Annual Meeting will be voted at the Professionals Group Annual Meeting in the
manner specified therein by the holders of such shares. Properly executed
Professionals Group proxies which do not contain voting instructions will be
voted FOR the election of all of the Professionals Group Board Nominees to the
Professionals Group Board, FOR the Merger Proposal, and FOR the Name Change
Proposal. Management of Professionals Group believes that brokers who hold
shares of Professionals Group Common Stock for customers are not authorized to
vote on the Merger Proposal or the Name Change Proposal without specific voting
instructions as to such proposal (a "broker nonvote"). However, solely for
purposes of determining whether each of the Merger Proposal and the Name Change
Proposal has received the vote of Professionals Group stockholders required for
approval, each of a "broker nonvote" and an abstention is functionally
equivalent to a vote "against" the Merger Proposal and "against" the Name Change
Proposal. If any other matters are properly presented at the Professionals Group
Annual Meeting for consideration, including, among other things, consideration
of a motion to adjourn or postpone the Professionals Group Annual Meeting to
another time and/or place (including, without limitation, for the purpose of
soliciting additional proxies), the persons named in the relevant form of proxy
enclosed herewith and acting thereunder will have discretion to vote on such
matters in accordance with their best judgment; provided, however, that no proxy
voted against any proposal will be voted in favor of adjournment or postponement
to solicit further proxies for such proposal. Professionals Group knows of no
other matters to be brought before the Professionals Group Annual Meeting other
than those referred to in this Joint Proxy Statement/Prospectus, but if any
other business should properly come before the Professionals Group Annual
Meeting, the persons named in the proxy, or authorized substitutes, intend to
vote in accordance with their best judgment.
HOLDERS OF PROFESSIONALS GROUP COMMON STOCK ARE URGED TO COMPLETE, DATE AND
SIGN THE ACCOMPANYING PROFESSIONALS GROUP PROXY AND RETURN IT IN THE ENCLOSED
POSTAGE-PAID ENVELOPE.
PPTF. Votes represented by properly executed proxies received at or prior
to the PPTF Special Meeting will be voted at the PPTF Special Meeting in the
manner specified therein by the Member executing such proxy.
Properly executed PPTF proxies which do not contain voting instructions
will be voted FOR the Merger Proposal. If any other matters are properly
presented at the PPTF Special Meeting for consideration, including, among other
things, consideration of a motion to adjourn or postpone the PPTF Special
Meeting to another time and/or place (including, without limitation, for the
purpose of soliciting additional proxies), the persons named in the relevant
form of proxy enclosed herewith and acting thereunder will have discretion to
vote on such matters in accordance with their best judgment; provided, however,
that no proxy voted against any proposal will be voted in favor of adjournment
or postponement to solicit further proxies for such proposal. PPTF knows of no
other matters to be brought before the PPTF Special Meeting other than those
referred to in this Joint Proxy Statement/Prospectus, but if any other business
should properly come before the PPTF
41
<PAGE> 55
Special Meeting, the persons named in the proxy, or authorized substitutes,
intend to vote in accordance with their best judgment.
MEMBERS OF PPTF ARE URGED TO COMPLETE, DATE AND SIGN THE ACCOMPANYING PPTF
PROXY AND RETURN IT IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
REVOCABILITY OF PROXIES
Professionals Group. The grant of a proxy on the enclosed Professionals
Group form of proxy does not preclude a Professionals Group stockholder from
voting in person or otherwise revoking a proxy. Attendance at the Professionals
Group Annual Meeting will not in and of itself constitute revocation of a proxy.
A Professionals Group stockholder may revoke a proxy at any time prior to its
exercise by filing with the Secretary of Professionals Group a duly executed
revocation or a proxy bearing a later date or by voting in person at the
Professionals Group Annual Meeting.
PPTF. The grant of a proxy on the enclosed PPTF form of proxy does not
preclude a Member of PPTF from voting in person or otherwise revoking a proxy.
Attendance at the PPTF Special Meeting will not in and of itself constitute
revocation of a proxy. A Member of PPTF may revoke a proxy at any time prior to
its exercise by filing with the Secretary of PPTF a duly executed revocation or
a proxy bearing a later date or by voting in person at the PPTF Special Meeting.
RECORD DATES; VOTING RIGHTS; QUORUMS
Professionals Group. Only holders of record of Professionals Group Common
Stock at the close of business on April 6, 1998 will be entitled to receive
notice of and to vote at the Professionals Group Annual Meeting. As of the
Professionals Group Record Date, Professionals Group had issued and outstanding
approximately 3,505,750 shares of Professionals Group Common Stock. Shares
representing at least one-third of the aggregate number of outstanding shares of
Professionals Group Common Stock entitled to vote must be represented in person
or by proxy at the Professionals Group Annual Meeting in order for a quorum to
be present at the Professionals Group Annual Meeting. "Broker nonvotes" and
abstentions are counted for purposes of determining a quorum. However, solely
for purposes of determining whether the Merger Proposal or the Name Change
Proposal has received the vote of Professionals Group stockholders required for
approval, each of a "broker nonvote" and an abstention is functionally
equivalent to a vote "against" the Merger Proposal and "against" the Name Change
Proposal.
PPTF. On each matter submitted to the Members of PPTF, each indemnity
agreement issued by PPTF that is in effect on April 1, 1998 is entitled to one
vote. As of the PPTF Record Date, the number of PPTF Policies, and the maximum
number of votes entitled to be cast on each matter submitted to a vote of PPTF
Members at the PPTF Special Meeting, is 3,586. The vote represented by each PPTF
Policy may only be cast, in person or by proxy, by the person or entity who is
the named insured on such PPTF Policy and there is only one named insured for
each PPTF Policy. Only Members of PPTF at the close of business on the PPTF
Record Date are entitled to receive notice of, and to vote at, the PPTF Special
Meeting. In order for a quorum to be present at the PPTF Special Meeting, an
aggregate of 1,794 votes must be represented in person or by proxy at the PPTF
Special Meeting. An abstention by a Member is functionally equivalent to a vote
"against" the Merger Proposal.
42
<PAGE> 56
DISSENTERS' RIGHTS
Professionals Group. Holders of shares of Professionals Group Common Stock
will not have dissenters' rights under the MBCA in connection with, or as a
result of, the matters to be acted upon at the Professionals Group Annual
Meeting.
PPTF. Florida law accords the Members of PPTF the right to dissent from the
transactions contemplated by the Merger Agreement. Consummation of the
transactions contemplated by the Merger Agreement is subject to, among other
things, the condition that the percentage interests of those Members perfecting
their dissenters' rights, when aggregated, not exceed 10% of the percentage
interests of all Members of PPTF taken as a whole. See "THE
TRANSACTIONS -- Summary of the Merger Agreement." A Member may dissent from the
transactions contemplated by the Merger Agreement and receive in cash the fair
value of the Membership Rights held by such Member as of the close of business
on the day prior to the PPTF Special Meeting pursuant to Sections 607.1301,
607.1302 and 607.1320 of the FBCA (the "Florida Dissenters' Rights Provisions").
Such fair value will exclude any appreciation or depreciation in the value of
Membership Rights in anticipation of the transactions contemplated by the Merger
Agreement, unless such exclusion would be inequitable. None of Professionals
Group, PICOM and PPTF can make any representation as to the outcome of such a
proceeding and each dissenting Member of PPTF should recognize that such a
proceeding could result in a determination of fair value that is lower than,
higher than, or equivalent to, the value of the shares of Professionals Group
Common Stock otherwise issuable to such Member upon consummation of the
transactions contemplated by the Merger Agreement. The following summary of the
Florida Dissenters' Rights Provisions is qualified in its entirety by reference
to the full text of those provisions, which are set forth as Annex H to this
Joint Proxy Statement/Prospectus.
Under the Florida Dissenters' Rights Provisions, a Member may dissent from
the transactions contemplated by the Merger Agreement by complying with the
following procedures: (i) prior to the PPTF Special Meeting, the dissenting
Member must deliver to PPTF written notice of the dissenting Member's intent to
demand payment for the Membership Rights if the transactions contemplated by the
Merger Agreement are consummated; (ii) the dissenting Member must not vote in
favor of the Merger Proposal; (iii) within 10 days after the date of the PPTF
Special Meeting, PPTF must give written notice of approval of the Merger
Proposal by the Members to each dissenting Member; and (iv) within 20 days after
PPTF gives notice of approval of the Merger Proposal to each dissenting Member,
the dissenting Member must file with PPTF a notice of election and a demand for
payment of the fair value of the Membership Rights. Any dissenting Member filing
an election to dissent must deposit a true copy of the Member's PPTF Policy with
PPTF simultaneously with the filing of the election to dissent. A Member may
dissent as to less than all of such Member's Membership Rights and, in such
event, the Member will be treated as two separate Members. Once PPTF offers to
pay a dissenting Member for the Membership Rights with respect to which such
Member has dissented, the dissenting Member's notice of election cannot be
withdrawn except with the consent of PPTF and Professionals Group. However, the
right of a dissenting Member to be paid the fair value of the Membership Rights
with respect to which such Member has dissented will cease if (i) the demand is
properly withdrawn, (ii) the transactions contemplated by the Merger Agreement
are abandoned or rescinded or the Members of PPTF revoke the authority to effect
the transactions contemplated by the Merger Agreement, (iii) no demand or
petition for determination of fair value is filed with the appropriate court
within the time provided by law or (iv) a court of competent jurisdiction
determines that such Member is not entitled to the relief provided by the
Florida Dissenters' Rights Provisions.
SUBMISSION OF A PROXY OR A VOTE AGAINST THE MERGER PROPOSAL DOES NOT
CONSTITUTE A NOTICE OF INTENT TO DEMAND PAYMENT UNDER THE FLORIDA DISSENTERS'
RIGHTS PROVISIONS.
MEMBERS OF PPTF THAT INTEND TO DEMAND PAYMENT FOR THEIR MEMBERSHIP RIGHTS
IF THE TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT ARE CONSUMMATED MUST
DELIVER WRITTEN NOTICE TO PPTF TO THAT EFFECT NOT LATER THAN JUNE 4, 1998.
43
<PAGE> 57
Within 10 days after the later of (i) the expiration of the period in which
the dissenting Member may file the Member's notice of election to dissent or
(ii) the INSCO Effective Time, Professionals Group is required to make a written
offer to each dissenting Member to pay an amount that Professionals Group
estimates to be the fair value of the Membership Rights with respect to which
such Member has dissented. If within 30 days after the making of such offer, the
applicable dissenting Member accepts the same, payment for such Membership
Rights must be made within 90 days after the later of (i) the date such offer
was made or (ii) the consummation of the transactions contemplated by the Merger
Agreement. If within such 30-day period, Professionals Group and the dissenting
Member are unable to agree with respect to the fair value of the Membership
Rights with respect to which such Member has dissented, Professionals Group,
within 30 days after receipt of written demand from such dissenting Member given
within 60 days after the INSCO Effective Time, must or at its election within
such period may, file an action in a court of competent jurisdiction in Dade
County, Florida requesting that the fair value of such Membership Rights be
determined. If Professionals Group fails to institute such proceedings, any
dissenting Member may do so in the name of Professionals Group. All dissenting
Members will be made parties to the proceeding as an action against their
Membership Rights. In such proceeding, the court may, if it so elects, appoint
one or more persons as appraisers to receive evidence and recommend a decision
on the question of fair value. Professionals Group will be required to pay each
dissenting Member the amount found to be due to him within 10 days after the
final determination of the proceedings. Upon payment of such judgment, the
dissenting Member will cease to have any interest in the shares of Professionals
Group Common Stock.
A judgment rendered in a dissent proceeding may, at the discretion of the
court, include an allowance for interest at a rate the court deems fair. The
costs and expenses of a dissent proceeding will be determined by the court and
assessed against Professionals Group, but all or any part of such costs and
expenses may be apportioned and assessed against any or all of the dissenting
Members in such amount as the court deems equitable, if the court determines
that Professionals Group made an offer to the dissenting Members and the
dissenting Members' failure to accept such offer was arbitrary, vexatious or not
in good faith. The expenses awarded by the court will include compensation for,
and reasonable expenses of, the appraisers but will not include the fees and
expenses of counsel or experts employed by any party. If the fair value of the
Membership Rights of the dissenting Members, as determined by the proceeding,
materially exceeds the amount which Professionals Group initially offered to
pay, or if no offer was made, the court, in its discretion, may award dissenting
Members who are parties to the proceeding such sum as the court may determine to
be reasonable compensation for attorneys and experts employed by the dissenting
Members in the proceeding.
The foregoing discussion only describes certain provisions of the Florida
Dissenters' Rights Provisions. Members are urged to review the Florida
Dissenters' Rights Provisions in their entirety, which are set forth as Annex H
to this Joint Proxy Statement/Prospectus. Any Member who intends to dissent from
the transactions contemplated by the Merger Agreement should review the text of
the Florida Dissenters' Rights Provisions carefully and also should consult with
an attorney. Members who fail to strictly follow the procedure set forth in the
Florida Dissenters' Rights Provisions will forfeit their dissenters' rights.
SOLICITATION OF PROXIES
Professionals Group. Professionals Group will bear the cost of soliciting
proxies from its stockholders, including the cost of printing and mailing this
Joint Proxy Statement/Prospectus to Professionals Group stockholders. In
addition to solicitation by mail, proxies may be solicited by telephone,
telegram, datagram, in person or by other forms of communication. Arrangements
will be made with brokerage firms, nominees, fiduciaries and other custodians
for the forwarding of solicitation materials to the beneficial owners of shares
held of record by such persons, and Professionals Group will reimburse such
persons for their reasonable out-of-pocket expenses in connection therewith.
Proxies will be solicited on behalf of Professionals Group by mail or
personally, or by telephone, telegraph, datagram or other forms of
communication, by directors, officers and regular employees of Professionals
Group and its subsidiaries (none of whom shall receive any additional
compensation for such services, but will be reimbursed for reasonable
out-of-pocket expenses incurred in connection with such solicitation). In
addition, Morrow & Co., Inc. will assist in the solicitation of proxies by
Professionals Group for a fee of approximately $10,000, plus reasonable
out-of-pocket expenses.
44
<PAGE> 58
PPTF. PPTF will bear the cost of soliciting proxies from its Members,
including the cost of printing and mailing this Joint Proxy Statement/Prospectus
to Members of PPTF. In addition to solicitation by mail, proxies may be
solicited by telephone, telegram, datagram, in person or by other forms of
communication. PPTF and Morrow & Co., Inc. will forward the solicitation
materials to Members of PPTF, and PPTF will reimburse Morrow & Co., Inc. for its
reasonable out-of-pocket expenses in connection therewith. Proxies will be
solicited on behalf of PPTF by mail or personally, or by telephone, telegraph,
datagram or other forms of communication, by trustees, directors, officers and
regular employees of PPTF and its subsidiary (none of whom shall receive any
additional compensation for such services, but will be reimbursed for reasonable
out-of-pocket expenses incurred in connection with such solicitation). In
addition, Morrow & Co., Inc. will assist in the solicitation of proxies by PPTF
for a fee of $25,000, plus reasonable out-of-pocket expenses.
NEITHER PROFESSIONALS GROUP STOCKHOLDERS NOR PPTF MEMBERS SHOULD
SEND STOCK CERTIFICATES OR PPTF POLICIES WITH THEIR PROXY CARDS.
45
<PAGE> 59
THE TRANSACTIONS
The following discussion describes certain transactions contemplated by the
Merger Agreement and summarizes certain provisions of the Merger Agreement.
Although it describes and summarizes all material information regarding those
transactions, such discussion is necessarily incomplete. Consequently, reference
is made to, and such descriptions and summaries are qualified in their entirety
by, the Merger Agreement. A conformed copy of the First Amended and Restated
Agreement and Plan of Merger dated as of October 3, 1997, among Professionals
Group, PICOM and PPTF (without any exhibits or schedules) is attached to this
Joint Proxy Statement/Prospectus as Annex B and is incorporated herein by
reference. A conformed copy of the First Amendment to First Amended and Restated
Agreement and Plan of Merger dated as of April 13, 1998, among Professionals
Group, PICOM and PPTF is attached to this Joint Proxy Statement/Prospectus as
Annex C and is incorporated herein by reference.
STRUCTURE
Pursuant to the Merger Agreement, and at the INSCO Effective Time, PPTF
will merge with and into INSCO, with INSCO being the surviving corporation in
the INSCO Merger. Pursuant to the Merger Agreement, and immediately following
the INSCO Merger, at the PICOM Effective Time, INSCO will merge with and into
PICOM, with PICOM continuing on as the surviving insurance corporation. In order
to comply with the requirements and provisions of the Michigan Insurance Code
and the Florida Insurance Code, the business combination of Professionals Group
and PPTF involves two mergers, the INSCO Merger and the PICOM Merger (which is
expected to occur promptly after the INSCO Merger). Upon consummation of the
transactions contemplated by the Merger Agreement, (i) Professionals Group will
be the parent of PICOM, PICOM will hold all of the assets and liabilities of
PPTF and INSCO, and PPTF and INSCO will cease to exist, (ii) PICOM will be
renamed to reflect the combined insurance operations of PPTF and PICOM, (iii)
PICOM will maintain regional executive offices in Okemos, Michigan and Coral
Gables, Florida and local sales and service offices in Florida, Illinois,
Indiana and Ohio; (iv) all Members of PPTF will cease 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); (v) subject to the exercise of dissenters' rights, all Membership
Rights will be converted into an aggregate of 4,089,160 shares of Professionals
Group Common Stock and will cease to exist; and (vi) PPTF Policies will become
and be insurance policies issued by PICOM and will be converted from assessable
insurance policies to nonassessable insurance policies, without any endorsement
or modification thereto.
TRANSACTION CONSIDERATION AND ALLOCATION FORMULA
Upon consummation of the INSCO Merger, but subject to the exercise of
dissenters' rights, all Membership Rights will be converted into an aggregate of
4,089,160 shares of Professionals Group Common Stock. In consideration for all
of the Membership Rights, the Aggregate Merger Shares will be allocated and
distributed to Members of PPTF in accordance with the Allocation Formula, which
provides as follows: Each Member of PPTF who does not timely and properly
exercise dissenters' rights will be 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 PPTF premium on such Member's PPTF Policy for
the 12 months ending on the PPTF Record Date (the Earned PPTF Policy Premium) to
$56,037,359 (which is the 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 the cash equivalent value thereof based on 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 the closing date with respect to the transactions
contemplated by the Merger Agreement. Members of PPTF who timely and properly
exercise dissenters' rights will be paid the fair value of their Membership
Rights. The Allocation Formula was determined by the PPTF Board. Earned premium
is the prorated portion of an insurance premium which is no longer considered
prepaid as a result of the elapsed time the insurance
46
<PAGE> 60
policy has been in force. For example, after six months, $12,000 of a prepaid
$24,000 annual premium is considered earned premium.
By way of example, under the Allocation Formula, and assuming he or she
does not exercise dissenters' rights, a Member of PPTF whose PPTF Policy has
$24,000 of Earned PPTF Policy Premium would be entitled to 1,754.16 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 1,754 whole shares of Professionals Group Common Stock, and in lieu of
the fractional share of Professionals Group Common Stock, would be paid cash in
an amount determined by multiplying the amount of such fractional share (in this
example .16) by the Average Price.
In establishing the Allocation Formula, the PPTF Board determined that the
Allocation Formula should be based on Article 12 of the Amended Trust Agreement
dated January 1, 1987 of PPTF. That Article provides, in part, that upon
dissolution, trust assets are to be distributed "in that proportion that the
Members of [PPTF] paid premiums to the Trustees at the last date upon which such
premiums were collected from each Member."
The PPTF Board determined, however, that consistent with the original
intent of Article 12, the Allocation Formula should be based on "earned premium"
during the 12 months prior to the Record Date, rather than the "last premium
paid" before the PPTF Record Date. The PPTF Board made this decision because
changes in the operating practices of PPTF since 1987 have made the use of the
"last premium paid" inappropriate. The operating changes that cause this result
are (i) the decision by PPTF on July 1, 1997 to cease writing calendar year
policies and begin writing anniversary date policies, and (ii) the fact that the
Members make premium payments based on a number of plans other than the single
payment on January 1 of each year (including prepayment plans). The PPTF Board
determined that the use of earned premium was more consistent with the original
intent of Article 12 and would result in a more equitable distribution of the
Aggregate Merger Shares.
Only Members of PPTF who do not exercise dissenters' rights will be
entitled to be allocated and to receive a portion of the Aggregate Merger
Shares. Except for the shares (and cash in lieu of any fractional share) issued
to such Members of PPTF and the shares issued or issuable pursuant to Section
1.28 of the Merger Agreement (which, subject to certain vesting requirements,
contemplates the issuance of an aggregate of 153,000 shares of Professionals
Group Common Stock to certain PPTF trustees and officers over a four year
period), no other shares of Professionals Group Common Stock (or cash in lieu of
any fractional share) will be issued or issuable upon consummation of the
transactions contemplated by the Merger Agreement.
Notwithstanding anything express or implied to the contrary in the Merger
Agreement or the Allocation Formula: (i) the aggregate number of shares of
Professionals Group Common Stock issuable as a result of the INSCO Merger will
be not more than 4,089,160 shares of Professionals Group Common Stock; (ii) no
fractional shares of Professionals Group Common Stock will be issued to any
Member and, in lieu thereof, all of said fractional shares will be paid the cash
equivalent value thereof based on 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 the closing date with respect to the transactions contemplated by the Merger
Agreement; and (iii) except as otherwise expressly provided in Section 1.28 of
the Merger Agreement (which, subject to certain vesting requirements,
contemplates the issuance of an aggregate of 153,000 shares of Professionals
Group Common Stock to certain PPTF trustees and officers over a four year
period), no shares of Professionals Group Common Stock (or cash in lieu of any
fractional share) will be issuable or issued upon consummation of the
transactions contemplated by the Merger Agreement to any person or entity other
than a Member of PPTF who does not exercise dissenters' rights.
Each share of Professionals Group Common Stock outstanding immediately
prior to consummation of the transactions contemplated by the Merger Agreement
will remain outstanding and unchanged as a result of those transactions. Each
option granted by Professionals Group to purchase shares of Professionals Group
Common Stock which is outstanding and unexercised immediately prior to the
consummation of the transactions contemplated by the Merger Agreement (i) will
continue to represent a right to acquire shares of
47
<PAGE> 61
Professionals Group Common Stock, (ii) will remain 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) will not be affected by the
consummation of the transactions contemplated by the Merger Agreement.
If, prior to the INSCO Effective Time, the outstanding shares of
Professionals Group Common Stock are increased, decreased, changed into or
exchanged for a different number or kind of shares or securities as a result of
a reorganization, recapitalization, reclassification, stock dividend, stock
split, reverse stock split, or other similar change in capitalization, then an
appropriate and proportionate adjustment will be made to the number of Aggregate
Merger Shares. For example, if such an event increased the number of shares of
Professionals Group Common Stock outstanding prior to the INSCO Effective Time
by 10%, then the number of Aggregate Merger Shares would correspondingly be
increased by 10%.
Membership Rights to which dissenters' rights are perfected under
applicable law will not be converted into or represent the right to receive any
shares, or any cash payment in lieu of any fractional shares, of Professionals
Group Common Stock; provided, however, that if any holder of the dissenting
Membership Rights timely withdraws the demand for payment of the fair value of
Membership Rights or fails to perfect the dissenters' rights in accordance with
applicable law, then such holder's dissenting Membership Rights will cease to be
dissenting Membership Rights and will, subject to the terms of the Merger
Agreement, be converted into and represent the right to receive a certificate
representing the number of whole shares of Professionals Group Common Stock and
cash in lieu of any fractional share of Professionals Group Common Stock into
which such Membership Rights have been converted pursuant to the Merger
Agreement.
Based upon the number of Professionals Group stock options and shares of
Professionals Group Common Stock issued and outstanding as of the Professionals
Group Record Date, and without giving effect to the issuance of any shares of
Professionals Group Common Stock to trustees and officers of PPTF pursuant to
Section 1.28 of the Merger Agreement, at the INSCO Effective Time, Members of
PPTF will own shares of Professionals Group Common Stock representing
approximately 53.8% of the then outstanding voting power of Professionals Group.
Such percentage would be approximately 52.8% if all of the shares of
Professionals Group Common Stock issuable upon exercise or vesting of
outstanding Professionals Group stock options are issued. (For purposes of
calculating such percentages, it was assumed that no additional shares of
Professionals Group Common Stock will have been issued except as contemplated by
the preceding sentence.)
Based upon the number of Professionals Group stock options and shares of
Professionals Group Common Stock issued and outstanding as of the Professionals
Group Record Date, and after giving effect to the issuance of an aggregate of
153,000 shares of Professionals Group Common Stock to trustees and officers of
PPTF pursuant to Section 1.28 of the Merger Agreement, at the INSCO Effective
Time Members of PPTF will own shares of Professionals Group Common Stock
representing approximately 53.8% of the then outstanding voting power of
Professionals Group. Such percentage would be approximately 52.8% if all of the
shares of Professionals Group Common Stock issuable upon exercise or vesting of
outstanding Professionals Group stock options are issued. (For purposes of
calculating such percentages, it was assumed that no additional shares of
Professionals Group Common Stock will have been issued except as contemplated by
the preceding sentence.)
BACKGROUND OF THE TRANSACTIONS
In recent years, Professionals Group has achieved growth and geographic
diversification in its medical malpractice business through acquisitions of
medical malpractice insurers in markets where Professionals Group already has or
expects to gain a significant market position. Professionals Group has also
achieved product diversification through a strategic alliance with Michigan
Educational Employees Mutual Insurance Company, a Michigan mutual insurance
company that writes personal automobile and homeowners coverages. Although it
may enter markets de novo or though acquisitions or other business combinations,
Professionals Group has concluded that acquisitions are generally a more
cost-effective means for entering a new market. In
48
<PAGE> 62
evaluating a transaction, Professionals Group typically considers a number of
factors, including the price and terms of the proposed transaction, the general
financial condition of the transaction candidate, the growth potential of the
transaction candidate's markets and earnings, and the quality of the transaction
candidate's management. However, there can be no assurance that any transactions
will be made or, if made, will be successful. See "RISK FACTORS -- Potential
Adverse Consequences of Acquisitions or Business Combinations." Prior to
entering into negotiations with PPTF, Professionals Group had not considered any
acquisitions in Florida. The Professionals Group Board has concluded that the
transactions with PPTF contemplated by the Merger Agreement represent a
continuation of Professionals Group's long-term strategy to achieve geographic
and product diversification. (From August 1996 to September 19, 1997, the
Professionals Group Board was comprised of ten members: Victor T. Adamo, Jerry
D. Campbell, John F. Dodge, Jr., H. Harvey Gass, W. Peter McCabe, John F.
McCaffrey, Isaac J. Powell, Ann F. Putallaz, William H. Woodhams and Donald S.
Young. From September 20, 1997 to the date of this Joint Proxy
Statement/Prospectus, the Professionals Group Board was comprised of the
foregoing ten members and R. Kevin Clinton.)
In 1994, and in connection with PPTF's long-term strategy to achieve
geographic and product diversification, the PPTF Board decided to explore the
possibility of converting PPTF from a medical malpractice self-insurance trust
fund to an insurance holding company, the shares of which would be publicly
traded. To that end, the PPTF Board investigated the process for converting PPTF
into such an insurance holding company. The purpose for such conversion would
have been to permit PPTF to expand its operations beyond the State of Florida
and to permit PPTF to write lines of insurance in addition to medical
malpractice insurance. However, the PPTF Board concluded that, in light of the
procedures, time and expenses associated with such a conversion, converting PPTF
into a publicly-held insurance holding company would be overly time-consuming
and not a cost-effective means for achieving geographic and product
diversification. Accordingly, in late 1995, the PPTF Board decided to explore
other alternatives for achieving such diversification, including a strategic
alliance with another medical malpractice insurance entity. (In connection with
its exploration of diversification alternatives, the PPTF Board retained
Donaldson, Lufkin & Jenrette in March 1995 to provide investment banking
services.) The PPTF Board has determined that the transactions contemplated by
the Merger Agreement represent a continuation of its long-term strategy to
achieve geographic and product diversification. (From January 1, 1994 to August
18, 1995, the PPTF Board was comprised of eight trustees: Dr. Eliot H. Berg, Dr.
Louis P. Brady, Dr. Joseph C. Cauthen, Dr. Henry C. Hardin, Dr. Hubert G.
Martinez, Dr. George A. Segal, Dr. Robert S. Tolmach and Dr. Edward S. Truppman.
From August 19, 1995 to February 23, 1996, the PPTF Board was comprised of seven
trustees: Dr. Eliot H. Berg, Dr. Louis P. Brady, Dr. Joseph C. Cauthen, Dr.
Hubert G. Martinez, Dr. George A. Segal, Dr. Robert S. Tolmach and Dr. Edward S.
Truppman. From February 24, 1996 to the date of this Joint Proxy
Statement/Prospectus, the PPTF Board was comprised of nine trustees: Dr. Richard
G. Alper, Dr. Eliot H. Berg, Dr. Louis P. Brady, Dr. Joseph C. Cauthen, Dr.
Hubert G. Martinez, Dr. Kerry M. Schwartz, Dr. George A. Segal, Dr. Robert S.
Tolmach and Dr. Edward S. Truppman.)
In January 1996, and as a result of an introduction by Donaldson, Lufkin &
Jenrette, Mr. Victor T. Adamo, the President and Chief Executive Officer of
PICOM (Professionals Group's predecessor-in-interest for these purposes) and Mr.
Roderick C. Dickinson, then the Executive Director of PPTF, met to discuss the
possibility of a strategic affiliation between PICOM and PPTF. At this meeting,
they reviewed the growth strategies, operating philosophies and performance of
PICOM and PPTF. Messrs. Adamo and Dickinson noted that each entity had been
created to provide doctors with an effective and reliable source of medical
malpractice insurance, was seeking geographic and product diversification, and
was committed to providing a high level of insurance protection, claims defense
and service to its insureds. Although this meeting did not result in any
understanding or agreement regarding an affiliation, Messrs. Adamo and Dickinson
decided that it would be worthwhile for PICOM and PPTF to explore further the
possibility of a strategic affiliation. On February 27, 1996, PICOM and PPTF
entered into a confidentiality agreement (the "Confidentiality Agreement") and
each entity commenced a limited due diligence investigation of the other entity.
Discussions between PICOM and PPTF regarding the possibility of affiliating
continued until June 1996. Discussions were terminated and abandoned at that
time when, among other issues, the entities were unable to concur on a structure
for combining the business and operations of PICOM and PPTF. These discussions
were
49
<PAGE> 63
preliminary in nature and did not result in an offer by one entity to merge with
or acquire the other entity. Moreover, at no time during these discussions was a
written merger or acquisition proposal submitted by one entity to the other
entity. Finally, when these discussions were terminated and abandoned, there was
no expectation or understanding that they would be renewed in the future.
In August 1996, PICOM and its subsidiaries were reorganized into an
insurance holding company system headed by a business corporation (Professionals
Group) rather than an insurance corporation (PICOM). This reorganization was
part of PICOM's long-term business plan and was not related to any discussions
with PPTF or any other person or entity.
In March 1997, Mr. Steven L. Salman (who became the President and Chief
Executive Officer of PPTF in October 1996) expressed to Mr. Adamo (the President
and Chief Executive Officer of Professionals Group and PICOM) that PPTF was once
again evaluating its long-term growth strategy and that, as part of that
process, PPTF would be considering possible strategic affiliations.
On April 4, 1997, Mr. Adamo and Mr. Salman met to discuss the growth
strategies, operating philosophies and financial performance of Professionals
Group and PPTF, recent developments affecting Professionals Group and PPTF, and
regional and national developments in the insurance industry, including
consolidation. While this meeting did not result in any understanding or
agreement regarding a business combination, Mr. Adamo and Mr. Salman both
concluded that a business combination between Professionals Group and PPTF would
present a unique opportunity to expand each entity's insurance operations and
that such a combination, by creating a combined entity that would be larger and
stronger than either Professionals Group or PPTF alone, would enhance
acquisition and other opportunities for growth and diversification and would
improve the competitive position of the combined entity in a consolidating
insurance industry. Accordingly, Messrs. Adamo and Salman decided that it would
be worthwhile to explore further the possibility of a strategic affiliation
between Professionals Group and PPTF.
Following the April 4, 1997 meeting, Mr. Adamo, on behalf of Professionals
Group, engaged Cochran, Caronia & Co. as Professionals Group's financial advisor
to advise Professionals Group regarding the possibility of combining
Professionals Group and PPTF.
During the months of April, May and June 1997, Messrs. Adamo and Salman met
and had telephone discussions on several occasions to explore the business and
operational compatibility of the two entities as well as the rationale and
potential value of a business combination between Professionals Group and PPTF.
These discussions were expanded to include Cochran, Caronia & Co. (Professionals
Group's financial advisor) and Donaldson, Lufkin & Jenrette (PPTF's financial
advisor) and to encompass the potential structure and the business and insurance
market implications of such a combination.
Beginning in May 1997, the PPTF Board and the PPTF Collaboration Committee
(a committee of the PPTF Board formed to guide management in effecting a
strategic affiliation) considered the preliminary discussions that had occurred
between PPTF and those insurers who were potential business combination
candidates (including, Professionals Group). On June 7, 1997 and June 21, 1997,
the Collaboration Committee (with all members present) considered the potential
benefits and terms of an arrangement with Professionals Group.
On June 11, 1997, the Confidentiality Agreement was amended to include
Professionals Group and make it applicable to the then ongoing discussions
between Professionals Group and PPTF.
On June 20, 1997, PPTF's retainer agreement with Donaldson, Lufkin &
Jenrette was revised to expand PPTF's engagement of Donaldson, Lufkin & Jenrette
to include advising PPTF regarding a strategic affiliation with either
Professionals Group or another insurer and rendering its opinion with respect to
the fairness, from a financial point of view, to PPTF Members of a transaction
with either Professionals Group or another insurer. Subsequently, Cochran,
Caronia & Co., on behalf of Professionals Group, and Donaldson, Lufkin &
Jenrette, on behalf of PPTF, began to explore the strategic, business and
operational compatibility of Professionals Group and PPTF, as well as the
rationale and potential value of a business combination between those entities.
50
<PAGE> 64
At meetings on June 27 and June 28, 1997, the PPTF Board (with all members
present other than Dr. Schwartz) discussed the insurers under consideration as
potential business combination candidates. Following detailed discussions at its
June 28, 1997 meeting, the PPTF Board unanimously voted (with eight trustees
present and one trustee, Dr. Schwartz, absent) to enter into a 45-day period of
exclusive negotiations with Professionals Group with the goal of reaching a
definitive merger agreement. The PPTF Board determined to negotiate exclusively
with Professionals Group because it perceived numerous similarities between the
corporate cultures, philosophies and strategies of PPTF and Professionals Group.
The PPTF Board also believed that a strategic alliance with Professionals Group
(i) could be structured as a "merger of equals" that would provide PPTF's
Members and the PPTF Board with the opportunity to influence the management and
policies of the combined entity, and (ii) would provide immediate and
significant opportunities for revenue enhancements, geographic and product
diversification and future acquisitions.
During July and August 1997, members of Professionals Group's senior
management team (Mr. Victor T. Adamo, Mr. R. Kevin Clinton and Ms. Annette E.
Flood, the President and Chief Executive Officer, the Vice President, Treasurer
and Chief Financial Officer, and the Secretary, respectively, of Professionals
Group), Cochran, Caronia & Co. (Professionals Group's financial advisor), and
Miller, Canfield, Paddock and Stone, P.L.C. (Professionals Group's legal
advisor), commenced a due diligence investigation of PPTF and its businesses. At
the same time, members of PPTF's senior management team (Mr. Steven L. Salman
and Mr. William D. Baxter, the President and Chief Executive Officer and the
Controller, respectively, of PPTF), Donaldson, Lufkin & Jenrette (PPTF's
financial advisor) and Steel Hector & Davis LLP (PPTF's legal advisor),
commenced a due diligence investigation of Professionals Group. Simultaneously
with these due diligence inquiries, Professionals Group, PPTF and their
respective financial and legal advisors discussed a business combination model
and general business combination issues. These discussions related to the number
of shares of Professionals Group Common Stock that might be issued in a
combination of Professionals Group and PPTF and the feasibility of structuring
the combination of Professionals Group and PPTF as a "tax-free" transaction for
Federal income tax purposes that would qualify as a "pooling-of-interests" for
accounting and financial reporting purposes. Such discussions also related to
the size and composition of the boards of directors of the combined entity and
its insurance operations, the composition of senior management of the combined
entity and its insurance operations, and the long-term strategy of the combined
entity with respect to geographic and product diversification. Following these
discussions, Professionals Group's legal advisor (Miller, Canfield, Paddock and
Stone, P.L.C.) and PPTF's legal advisor (Steel Hector & Davis LLP) began
drafting an agreement providing for a possible business combination of
Professionals Group and PPTF.
During the period beginning in early July 1997 and ending on July 24, 1997,
the type and aggregate amount of consideration to be issued to PPTF Members in
exchange for all Membership Rights was determined by the parties on the basis of
arm's-length negotiations between the parties. During these negotiations, the
parties focused on an exchange of shares for Professionals Group Common Stock
for all Membership Rights, the book value of Professionals Group, the book value
of PPTF, the value of PPTF in a business combination of Professionals Group and
PPTF, and the market-to-book multiple of Professionals Group Common Stock. From
these discussions the parties determined that the number of shares of
Professionals Group Common Stock should be based on the value of PPTF in a
business combination of PPTF with Professionals Group, which the parties then
estimated to be between $112.0 million and $127.0 million, and an "average
market price" for Professionals Group Common Stock (subject to a minimum average
market price and a maximum average market price). The range of average market
prices discussed by the parties was between $26 and $36. In the Initial Merger
Agreement that was executed on August 14, 1997, it was agreed that in the
business combination of Professionals Group and PPTF, Members of PPTF would,
subject to the exercise of dissenters' rights, exchange all Membership Rights
for an aggregate number of shares of Professionals Group Common Stock determined
by dividing $116,091,248 (which was the value that the parties had placed on
PPTF in a business combination of PPTF and Professionals Group) by 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 the closing date for such business
combination. However, the parties agreed that for purposes of such formula (the
"Stock Formula"), in no event would such average price be less than $27 per
share or more than $31 per share. Thus,
51
<PAGE> 65
depending on such average price per share for Professionals Group Common Stock,
the aggregate number of shares of Professionals Group Common Stock issuable to
PPTF Members would be not more than 4,299,676 and not less than 3,744,879. As of
July 24, 1997, the aggregate number of shares issuable to PPTF Members under the
Stock Formula would have been approximately 4,089,160. Throughout their
negotiations, and in agreeing to the Initial Merger Agreement, the parties
understood that the actual number and value of the shares of Professionals Group
Common Stock issued to Members of PPTF upon consummation of the contemplated
transactions would be a function of the market price of Professionals Group
Common Stock.
At meetings of the Professionals Group Board held on June 4, July 23, and
August 6, 1997, Mr. Adamo described to the Professionals Group Board the
discussions between the parties. The Professionals Group Board then considered
the reasons for, and the potential benefits to Professionals Group and its
stockholders from, a business combination of Professionals Group and PPTF. See
"-- Reasons for the Transactions." All members of the Professionals Group Board
were present at each of these meetings, except Dr. Powell and Mr. Campbell were
not present at the August 6, 1997 meeting.
At its July 26, 1997 meeting, the PPTF Board reviewed the terms of the
proposed Initial Merger Agreement. It also considered the reasons for, and the
potential benefits from, a business combination with Professionals Group. See
"-- Reasons for the Transactions." After discussion and consideration, the PPTF
Board (with all nine trustees present) unanimously authorized and directed Mr.
Salman and Dr. Berg to execute the Initial Merger Agreement on terms
substantially the same as those presented to the PPTF Board.
At its August 6, 1997 meeting, the Professionals Group Board (with all
members present except Dr. Powell and Mr. Campbell) reviewed the terms of the
proposed Initial Merger Agreement, which provided for a "tax-free"
"pooling-of-interests" of Professionals Group and PPTF through the conversion,
subject to dissenters' rights, of all Membership Rights into the number of
shares of Professionals Group Common Stock determined pursuant to the Stock
Formula. The proposed Initial Merger Agreement reviewed by the Professionals
Group Board also contained preliminary provisions regarding (i) the renaming and
location of the combined entity's insurance operations, (ii) the composition of
the boards of directors of the combined entity and its insurance operations,
(iii) the composition of senior management of the combined entity and its
insurance operations, (iv) the conversion of PPTF Policies into policies issued
by the combined entity's insurance operations and from assessable policies to
non-assessable policies, all without any endorsement or modification thereto,
(v) trustee, director and officer indemnification and insurance, (vi) employment
and employee benefits, (vii) the assumption by the combined entity of certain
employment and change in control agreements, and (viii) the issuance of an
aggregate of 153,000 shares of Professionals Group Common Stock to the PPTF
Trustee Participants and the PPTF Officers over a period of not more than five
years.
On August 7, 1997, Professionals Group formalized its retention of McDonald
& Company to render its opinion with respect to the fairness, from a financial
point of view, to Professionals Group stockholders of the consideration to be
paid to Members of PPTF in respect of their Membership Rights pursuant to the
Initial Merger Agreement. (Professionals Group had engaged Cochran, Caronia &
Co., a recently-formed investment banker, as a financial advisor because the
principals of Cochran, Caronia & Co. are nationally recognized specialists in
the insurance industry in general and in investment banking advisory services to
the insurance industry in particular. The principals of Cochran, Caronia & Co.
have been regularly engaged in evaluations of similar businesses and in advising
institutions with regard to mergers and acquisitions, as well as raising debt
and equity capital for such institutions. Professionals Group selected Cochran,
Caronia & Co. as its financial advisor based upon the qualifications, expertise
and reputation of the principals of Cochran, Caronia & Co. in such capacity, as
well as their existing relationship and familiarity with Professionals Group.
See "-- Opinion of Professionals Group Financial Advisor -- Cochran, Caronia &
Co." Given the fact that Cochran, Caronia & Co. had been formed fairly recently
and was relatively unknown to Professionals Group's stockholders, Professionals
Group elected to engage a second financial advisor that it considered would be
better known to its stockholders. The Professionals Group Board selected
McDonald & Company as a financial advisor because of McDonald & Company's
extensive experience with the valuation of financial institutions, its industry
expertise with respect to insurance companies and other financial institutions,
and its experience in transactions similar to the transactions contemplated by
the Merger Agreement. McDonald & Company, as part of its investment banking
business, is customarily engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of
52
<PAGE> 66
listed and unlisted securities, private placements and valuations for estate,
corporate and other purposes. See "-- Opinion of Professionals Group Financial
Advisor -- McDonald & Company.")
At a special meeting of the Professionals Group Board held on August 12,
1997, Mr. Adamo, the President and Chief Executive Officer of Professionals
Group, again reviewed the reasons for, and the potential benefits to
Professionals Group and its stockholders from, a business combination of
Professionals Group and PPTF. The terms of the Initial Merger Agreement were
also reviewed. After discussion and consideration of the factors discussed below
under "-- Reasons for the Transactions," the Professionals Group Board (with
eight directors present and two directors, Mr. Campbell and Dr. Woodhams,
absent) unanimously approved the Initial Merger Agreement and all of its terms.
In approving the Initial Merger Agreement and all of its terms, including
the provisions relating to the type and amount of consideration to be issued by
Professionals Group in a business combination with PPTF, the Professionals Group
Board considered the factors described below under "-- Reasons for the
Transactions." The Professionals Group Board did not assign any relative or
specific weights to any of such factors, and individual directors may have given
differing weights to different factors.
In regards to the type of consideration to be issued in a business
combination with PPTF, the Professionals Group Board noted that the issuance of
shares of Professionals Group Common Stock in exchange for the Membership Rights
would permit the transaction to qualify as a "tax-free" transaction for Federal
income tax purposes and as a "pooling-of-interests" for accounting and financial
reporting purposes. Conversely, the use of cash or other consideration would
have caused the transaction to be characterized as a taxable purchase. The
Professionals Group Board concluded that a "tax-free" "pooling-of-interests" was
an effective means of enhancing the benefits expected to be derived from a
business combination of Professionals Group and PPTF. See "-- Reasons for the
Transactions," "-- Anticipated Accounting Treatment" and "CERTAIN FEDERAL INCOME
TAX CONSEQUENCES."
In regards to the amount of consideration to be issued in a business
combination with PPTF, the Professionals Group Board noted that Professionals
Group and PPTF were two financially sound entities of comparable size with
complementary businesses and business strategies. It also noted that a business
combination of Professionals Group and PPTF would represent a strategic alliance
and that the stockholders of Professionals Group and the Members of PPTF could
expect to realize the anticipated long-term benefits of such an alliance
(including, but not limited to, the future stock value and earnings per share of
the combined entity, the combined entity's larger size and financial strength
and its consequently enhanced ability to invest in its existing businesses,
serve larger clients and develop new products and services, the cost savings
that might be realized over time through consolidation of operations, the
opportunity to diversify earnings, the business synergies that might be
realized, and the potential effect of those transactions on the perception of
the combined entity's operations by the financial markets).
The Professionals Group Board also considered (i) the effectiveness of the
transactions contemplated by the Merger Agreement in implementing and
accelerating Professionals Group's long-term external growth strategy; (ii) the
financial condition, businesses and prospects of Professionals Group and PPTF
and reviewed information with respect to the recent and historic stock and
earnings performance of Professionals Group, information with respect to the
recent and historic earnings performance of PPTF, and information with respect
to the credit position and capital markets access of each of Professionals Group
and PPTF; (iii) the detailed financial analyses, pro forma and other information
with respect to Professionals Group and PPTF discussed by Professionals Group's
financial advisors (Cochran, Caronia & Co. and McDonald & Company); (iv) its own
knowledge of Professionals Group, PPTF and their respective businesses, and the
results of Professionals Group's due diligence review of PPTF's business; (v)
the ability of the combined entity to achieve, over time, a loss ratio
comparable to that of PICOM and industry averages in light of recent changes in
PPTF's underwriting practices and rate structure and PICOM's marketing
experience; (vi) revenue enhancements and operating efficiencies that could
result over time from the combining of the insurance operations of PICOM and
PPTF; and (vii) the effect on Professionals Group stockholders' value of
Professionals Group's continuing as a stand-alone entity as compared to the
effect of Professionals Group's combining with PPTF in light of the factors
summarized above with respect to the financial condition and
53
<PAGE> 67
prospects of the entities on a stand-alone basis and of the combined entity. See
"-- Reasons for the Transactions."
As to the shares of Professionals Group Common Stock contemplated to be
issued to the PPTF Trustee Participants and PPTF Officers as contemplated by
Section 1.28 of the Merger Agreement (which provision was suggested by
Professionals Group and was also contained in the Initial Merger Agreement), the
Professionals Group Board focused on the desirability of facilitating and
expediting the consolidation and integration of the combined entity's insurance
operations within a reasonable time following the consummation of the proposed
business combination and on the need for the combined entity to maintain market
share in Florida. In evaluating the contemplated business combination, the
Professionals Group Board noted the critical importance of successfully
integrating, and building on the strengths of each entity's management and
management and operational practices and policies. It also noted the
uncertainties inherent in any combination of sizeable entities like
Professionals Group and PPTF. The Professionals Group Board then considered the
role that the PPTF Trustee Participants and PPTF Officers would have in the
consolidation and integration process. After examining the skills and experience
of the PPTF Trustee Participants and the PPTF Officers, and after giving due
consideration to their knowledge of the Florida insurance market in general and
the operations of PPTF in particular, the Professionals Group Board determined
that it would be desirable for the PPTF Trustee Participants and the PPTF
Officers to have a significant role in such consolidation and integration
process. Accordingly, and for the purposes of facilitating an expeditious
consolidation and integration of the combined entity's insurance operations, the
Professionals Group Board determined (i) to provide each of the PPTF Trustee
Participants and the PPTF Officers with a reasonable incentive to remain very
active participants in the operations of the combined entity following the
consummation of the transactions contemplated by the Merger Agreement and (ii)
that shares of Professionals Group Common Stock would be the most appropriate
form for such incentive because this form would align the interests of the
recipients to the long-term interests of Professionals Group's stockholders.
(The Professionals Group Board noted that such incentives might also discourage
the recipients of such shares from accepting offers of employment from
competitors.) The number of shares to be issued to each PPTF Trustee Participant
and each PPTF Officer was based on the recipient's position, experience,
expertise and expected role in the consolidation and integration process.
On August 14, 1997, the Initial Merger Agreement was executed. The Initial
Merger Agreement included the Stock Formula and provisions regarding (i) the
structure of the proposed business combination of Professionals Group and PPTF,
(ii) the renaming and location of the combined entity's insurance operations,
(iii) the size and composition of the boards of directors of the combined entity
and its insurance operations, (iv) the composition of senior management of the
combined entity and its insurance operations, (v) the conversion of PPTF
Policies into policies issued by the combined entity's insurance operations and
from assessable policies to non-assessable policies, all without any endorsement
or modification thereto, (vi) trustee, director and officer indemnification and
insurance, (vii) employment and employee benefits, (viii) the assumption by the
combined entity of certain employment and change in control agreements, and (ix)
the issuance of an aggregate of 153,000 shares of Professionals Group Common
Stock to the PPTF Trustee Participants and the PPTF Officers over a period of
four years. (The provisions of the Initial Merger Agreement described in clauses
(i) - (ix) were substantially similar to the provisions set forth in the Merger
Agreement.) See "-- Summary of the Merger Agreement."
On September 16, 1997, the PPTF Board received from FPIC Insurance Group,
Inc., a competing Florida-based medical malpractice insurer, a non-binding
written expression of interest which indicated that FPIC would be willing to
enter into a business combination with PPTF in which PPTF Members would exchange
all Membership Rights for shares of FPIC common stock. This writing also
indicated that the number and actual value of such shares would be determined by
dividing $170.0 million by the average of the daily closing prices per share for
the 20 business day period ending on the fifth business day prior to the closing
of FPIC's proposed business combination and that the aggregate number of shares
actually issued to PPTF Members in such business combination would be subject to
a satisfactory "floor and collar" based on FPIC's share price. In accordance
with the terms of the Initial Merger Agreement, PPTF gave Professionals Group
written notice of FPIC's expression of interest.
54
<PAGE> 68
On September 17, 1997, the PPTF Board held a special meeting to discuss the
FPIC inquiry and its impact on the transactions with Professionals Group
provided for in the Initial Merger Agreement. The PPTF Board noted that the
number of shares of FPIC common stock to be issued in FPIC's proposed
acquisition of PPTF would be determined by dividing $170.0 million by an
"average market price" for FPIC common stock. The PPTF Board also noted that due
to a substantial increase in the price of Professionals Group Common Stock that
had occurred since the signing of the Initial Merger Agreement, the number of
shares of Professionals Group Common Stock issuable to PPTF Members under the
Initial Merger Agreement had declined from approximately 4,089,160 to 3,744,879.
Consequently, based on the September 16, 1997 closing price per share of
Professionals Group Common Stock as reported on the Nasdaq National Market
($37.75), the aggregate value of the shares of Professionals Group Common Stock
then issuable to PPTF Members under the Initial Agreement was $141.4 million. On
the basis of its discussions at this meeting, the PPTF Board, in accordance with
its fiduciary obligations and as permitted under the Initial Merger Agreement,
determined to review and analyze (i) the non-binding FPIC inquiry based upon
publicly-available information and other information concerning FPIC acquired by
PPTF, (ii) the insurance operations of FPIC, (iii) the compatibility of the
corporate cultures, philosophies and strategies of FPIC and PPTF, (iv) the
impact on PPTF and its Members and employees of an acquisition of PPTF by FPIC,
(v) the anti-trust and regulatory issues posed by an acquisition of PPTF by
FPIC, and (vi) the claims handling policies and practices of FPIC in comparison
to the claims handling policies of PPTF.
On September 19, 1997, FPIC and PPTF executed a confidentiality agreement
(the "FPIC Confidentiality Agreement"). On September 23, 1997, Mr. Salman and
PPTF's legal advisor (Steel Hector & Davis LLP) and financial advisor
(Donaldson, Lufkin & Jenrette) met in Orlando, Florida with William R. Russell,
the President and Chief Executive Officer of FPIC, and FPIC's legal advisor and
financial advisor, to discuss the FPIC inquiry. On September 24 and 26, 1997,
FPIC delivered to PPTF unsigned drafts of a non-binding written expression of
interest to acquire PPTF in exchange for FPIC common stock. On September 26,
1997 at 4:20 p.m., PPTF received a signed non-binding written acquisition
proposal from FPIC by facsimile transmission. This non-binding proposal, which
was the non-binding Original FPIC Proposal and was not materially different from
either the expression of interest received on September 16, 1997 or the unsigned
drafts that had been received on September 24 and 26, 1997, contemplated FPIC's
acquiring PPTF in a transaction in which PPTF Members would exchange all
Membership Rights for shares of FPIC common stock. Immediately thereafter, and
in accordance with the Initial Merger Agreement and the FPIC Confidentiality
Agreement, PPTF provided a copy of the Original FPIC Proposal to Professionals
Group.
The Original FPIC Proposal cited the September 25, 1997 closing price per
share of FPIC common stock as reported on the Nasdaq National Market ($30) and
stated that the number of shares of FPIC common stock to be issued by FPIC in
its contemplated acquisition of PPTF would be determined by dividing $166.5
million by the average of the daily closing prices per share of FPIC common
stock as reported by the Nasdaq National Market for the period of 20 business
days ending on the fifth business day prior to the closing date for the proposed
acquisition, subject to a floor of $25 per share and a cap of $35 per share. The
Original FPIC Proposal also contemplated that following FPIC's acquisition of
PPTF, the board of directors of each of FPIC and Florida Physicians Insurance
Company, FPIC's wholly-owned insurance subsidiary, would be increased to 18
members and that six PPTF trustees would be appointed to each of those boards.
The Original FPIC Proposal, which contemplated "fiduciary out" provisions
substantially similar to those contained in the Initial Merger Agreement and a
break up fee equal to $4.5 million plus certain expenses, was subject to the
negotiation and execution of a definitive merger agreement and to obtaining
termination of the waiting period under the Hart-Scott-Rodino Anti-Trust
Improvements Act, as amended, and all requisite regulatory approvals. The
Original FPIC Proposal also provided for the issuance of shares of FPIC Common
Stock to PPTF trustees on terms substantially similar to those set forth in
Section 1.28 of the Merger Agreement.
Between September 16, 1997 and September 29, 1997, there were numerous
telephone discussions between Messrs. Adamo and Salman regarding the status of
the Original FPIC Proposal and the transactions provided for in the Initial
Merger Agreement, the duties of the PPTF Board in light of the Original FPIC
Proposal, and whether it would be appropriate or worthwhile for Professionals
Group and PPTF to reconsider the terms of the Initial Merger Agreement.
55
<PAGE> 69
At a meeting of the Professionals Group Board held on September 20, 1997,
the Professionals Group Board reviewed the terms of the Original FPIC Proposal
and the Initial Merger Agreement. It also considered the status of the
transactions provided for in the Initial Merger Agreement. The Professionals
Group Board then deliberated whether the benefits to be derived from a potential
business combination with PPTF warranted modifying the terms of the Initial
Merger Agreement, including adjusting the number of shares of Professionals
Group Common Stock to be issued in such a business combination. The
Professionals Group Board reviewed the factors that it had considered in
approving the Initial Merger Agreement (see "-- Reasons for the Transactions")
and noted that a substantial increase in the per share price of Professionals
Group Common Stock since the execution of the Initial Merger Agreement had
reduced the number of shares of Professionals Group Common Stock issuable under
the Initial Merger Agreement from approximately 4,089,160 to 3,744,879. Given
that the Stock Formula contained in the Initial Merger Agreement provided for
the issuance of up to 4,299,676 shares of Professionals Group Common Stock in a
business combination with PPTF, the Professionals Group Board determined that
the benefits expected to be derived from such a business combination could
justify the issuance of more than the 3,744,879 shares of Professionals Group
Common Stock then contemplated under the Initial Merger Agreement. The
Professionals Group Board (with all of its members present) then unanimously
directed Professionals Group's management to discuss with PPTF changes to the
transactions contemplated by the Initial Merger Agreement consistent with the
foregoing.
On September 27, 1997, at a special meeting of the PPTF Board, the
provisions of the Original FPIC Proposal were reviewed and discussed by the PPTF
Board. As part of this discussion and review, Mr. Salman informed the PPTF Board
of the closing prices per share for FPIC common stock and Professionals Group
Common Stock as of September 26, 1997 as reported on the Nasdaq National Market
($29.325 and $38, respectively). Mr. Salman then advised the PPTF Board that
based on the terms of the FPIC Proposal and his conversations with William R.
Russell, the President and Chief Executive Officer of FPIC, it appeared that
FPIC would be reluctant to rename the combined entity's insurance operations,
and that upon consummation of the transactions contemplated by the FPIC Proposal
(i) a substantial portion of PPTF's management and staff would be eliminated;
(ii) PPTF's vigorous claims practices and its loss adjustment expense reserves
would be reduced; and (iii) PPTF's Members and the PPTF Board would have only a
limited opportunity to influence the management and policies of the combined
entity. Mr. Salman also noted that publicly-available information filed with the
Florida Insurance Department by FPIC and PPTF regarding medical malpractice
cases handled by FPIC and PPTF suggested substantial differences in the claims
handling philosophies and practices of FPIC and PPTF. In contrast, information
obtained as part of PPTF's due diligence inquiry of Professionals Group and
PICOM suggested a substantial identity between the claims handling philosophies
and practices of PICOM and PPTF. Such information, which related to the
percentage of medical malpractice cases closed with no indemnity paid and to the
number of defendants taken to trial, indicated that FPIC did not litigate to
conclusion as high a percentage of claims as did PPTF and that PICOM litigated
to conclusion as high (if not marginally higher) a percentage of claims as did
PPTF. Finally, Mr. Salman noted that FPIC was essentially a single line, single
state insurer that had not shown meaningful growth in other lines of coverage or
in expanding to other states. In contrast, Professionals Group had taken
significant steps to achieve product and geographic diversification and had
lessened its dependence on medical malpractice premiums from a single state.
Steel Hector & Davis LLP, PPTF's legal advisor, then informed the PPTF
Board that an acquisition of PPTF by FPIC might raise anti-trust and regulatory
issues because the combined entity would have over 50% of the Florida medical
malpractice insurance market. Steel Hector & Davis LLP also informed the PPTF
Board that while anti-trust considerations would not necessarily preclude the
merger of PPTF into FPIC, they believed that the United States Department of
Justice would make inquiries into the potential for anti-competitive effects on
the Florida medical malpractice insurance market if FPIC and PPTF were to agree
to combine.
Donaldson, Lufkin & Jenrette, PPTF's financial advisor, then provided a
comparison of the financial terms of the Initial Merger Agreement and the
Original FPIC Proposal. Donaldson, Lufkin & Jenrette noted that based on the
last sales price per share for Professionals Group Common Stock on September 26,
1997 as
56
<PAGE> 70
reported on the Nasdaq National Market, the stock value of the transactions
provided for in the Initial Merger Agreement was $142.3 million, or 14.5% less
than the $166.5 million stated value of the Original FPIC Proposal. Donaldson,
Lufkin & Jenrette also stated that as of June 30, 1997, the book value per share
of Professionals Group Common Stock on a GAAP basis was $26.62 and that
Professionals Group's price/book multiple was 1.32x. In contrast, as of June 30,
1997, the book value per share of FPIC common stock on a GAAP basis was $11.60
and FPIC's price/book multiple was 2.53x.
Donaldson, Lufkin & Jenrette then advised the PPTF Board that the ratio of
Professionals Group's share price to 1998 estimated earnings per share was
11.9x, and the value of the transactions contemplated by the Merger Agreement as
of September 26, 1997 was 17.1x PPTF's GAAP estimated 1997 earnings and 13.9x
PPTF's GAAP estimated 1998 earnings. In contrast, the ratio of FPIC's share
price to 1998 estimated earnings per share was 11.2x, and the value of the
transactions contemplated by the Original FPIC Proposal as of September 26, 1997
was 20.0x PPTF's GAAP estimated 1997 earnings and 16.3x PPTF's GAAP estimated
1998 earnings. Donaldson, Lufkin & Jenrette also noted that, based on June 30,
1997 results, the price to book ratio of FPIC was 2.55x, and the price to book
ratio for Professionals Group was 1.43x. Finally, Donaldson, Lufkin & Jenrette
noted that its Public Market Comparable Company Analysis for medical malpractice
insurance companies showed that Professionals Group was in the middle of the
group of medical malpractice insurance companies as to price to earnings
multiples, price to book multiples and other ratios.
From the discussion and review that occurred at this meeting of the PPTF
Board, the PPTF Board determined that FPIC had claims handling philosophies and
practices that were substantially different from those of PPTF and PICOM and
that FPIC did not utilize as vigorous claims handling philosophies as PPTF and
PICOM. This factor, when coupled with FPIC's apparent lack of product and
geographic diversification, caused the PPTF Board to conclude that the corporate
cultures, philosophies and strategies of FPIC and PPTF were dissimilar in
certain fundamental respects. The PPTF Board also noted that a combination of
FPIC and PPTF would substantially increase the level of market concentration in
the Florida medical malpractice insurance market. In contrast, a combination
with Professionals Group was not expected to lessen competition in that market.
Finally, based on the levels of product and geographic diversification and
financial performance achieved by Professionals Group, the PPTF Board concluded
that there could be a greater opportunity for appreciation in value associated
with Professionals Group Common Stock.
At the September 27, 1997 meeting of the PPTF Board, Mr. Salman also stated
that late in the evening of September 26, 1997, PPTF had received from
Professionals Group a form of amendment to the Initial Merger Agreement. The
proposed amendment stated that on or before 5:00 p.m. Detroit, Michigan time on
October 3, 1997 Professionals Group would submit to PPTF a written proposal that
would amend the Initial Merger Agreement to "provide for enhanced consideration
of more than a nominal amount" for Members of PPTF upon consummation of a
business combination with Professionals Group. However, and in exchange for such
proposal, the proposed amendment would have restricted PPTF's ability to
continue discussions with FPIC and would have given Professionals Group the
right to terminate the Initial Merger Agreement if Professionals Group's written
proposal was not approved by the PPTF Board by 9:00 p.m. Detroit, Michigan time
on October 9, 1997. The PPTF Board determined that it would not enter into the
amendment to the Initial Merger Agreement as proposed by Professionals Group. It
did, however, instruct Mr. Salman to advise Professionals Group that the PPTF
Board would be willing to discuss and consider means of increasing the value to
PPTF Members of a business combination with Professionals Group. The PPTF Board
unanimously voted (with all nine trustees present) to authorize and direct
PPTF's management and legal advisors and financial advisors to continue
discussions with Professionals Group and FPIC so that the PPTF Board could
evaluate both proposals fully.
On September 30, 1997, PPTF formalized a revised agreement to retain
Donaldson, Lufkin & Jenrette to render its opinion with respect to the fairness,
from a financial point of view, to PPTF Members of a transaction with
Professionals Group or another entity. In addition, on that same day, Mr.
Salman, PPTF's legal advisor (Steel Hector & Davis LLP), and PPTF's financial
advisor (Donaldson, Lufkin & Jenrette), and Mr. Adamo, Mr. R. Kevin Clinton (the
Vice President, Treasurer and Chief Financial Officer of Professionals Group),
Professionals Group's legal advisor (Miller, Canfield, Paddock and Stone,
P.L.C.), and one of Professionals Group's financial advisors (Cochran, Caronia &
Co.), met in the New York offices of
57
<PAGE> 71
Donaldson, Lufkin & Jenrette to discuss the status of the Original FPIC Proposal
and the transactions provided for in the Initial Merger Agreement. At this
meeting, Messrs. Salman and Adamo discussed the shared management and operating
philosophies of PPTF and Professionals Group, the means of preserving for PPTF
the continuation of its vigorous claims handling practices, and whether the
value of a business combination of Professionals Group and PPTF could be
enhanced.
The discussions regarding enhancing the value of a business combination of
Professionals Group and PPTF focused primarily on the number of shares of
Professionals Group Common Stock to be issued upon the combination of
Professionals Group and PPTF. Messrs. Adamo and Salman both noted (i) that the
Initial Merger Agreement provided for the issuance of not less than 3,744,879
and not more than 4,299,676 shares of Professionals Group Common Stock
(depending on the average price of Professionals Group Common Stock under the
Stock Formula); (ii) that based on the Stock Formula and 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 the execution of the Initial Merger Agreement, the
number of shares that would have been issued under the Initial Merger Agreement
on the date it was executed would have been 4,089,160; and (iii) that due to the
substantial increase in the price of Professionals Group Common Stock that had
occurred after the signing of the Initial Merger Agreement, the aggregate number
of shares of Professionals Group Common Stock issuable to Members of PPTF under
the Initial Merger Agreement had dropped to 3,744,879. The financial advisors
for Professionals Group and PPTF (Cochran, Caronia & Co. and Donaldson, Lufkin &
Jenrette, respectively) then observed that, assuming the issuance of 4,089,160
shares of Professionals Group Common Stock (which was the number of shares of
Professionals Group Common Stock that would have been issuable under the Initial
Merger Agreement on the date it was executed) and based on the last sales price
per share of Professionals Group Common Stock on September 30, 1997 as reported
on the Nasdaq National Market ($39.00), the stock value of a transaction between
PPTF and Professionals Group would be approximately $159.5 million. See
"COMPARATIVE STOCK PRICES."
At the close of this meeting, Messrs. Adamo and Salman agreed to assess the
positions of each of Professionals Group and PPTF and to communicate the
substance of the discussions that had occurred to their respective Boards.
At a special meeting of the Professionals Group Board held on October 1,
1997, Messrs. Adamo and Clinton reviewed the terms of the Initial Merger
Agreement and the Original FPIC Proposal. They also informed the Professionals
Group Board of the discussions that had taken place at the September 30, 1997
meeting with representatives of PPTF. The Professionals Group Board then
reviewed the reasons for, and the potential benefits of, a business combination
between Professionals Group and PPTF and reconsidered the amount of
consideration to be issued by Professionals Group in a business combination with
PPTF. During these deliberations the Professionals Group Board considered the
same factors that it had considered at its meeting on August 12, 1997 when it
approved the Initial Merger Agreement. See "-- Reasons for the Transactions."
The Professionals Group Board also noted (i) that the Initial Merger Agreement
provided for the issuance of not less than 3,744,879 and not more than 4,299,676
shares of Professionals Group Common Stock (depending on the average price of
Professionals Group Common Stock under the Stock Formula); (ii) that based on
the Stock Formula and 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 the
execution of the Initial Merger Agreement, the number of shares that would have
been issued under the Initial Merger Agreement on the date it was executed would
have been 4,089,160; and (iii) that due to the substantial increase in the price
of Professionals Group Common Stock that had occurred after the signing of the
Initial Merger Agreement, the aggregate number of shares of Professionals Group
Common Stock issuable to Members of PPTF under the Initial Merger Agreement had
become 3,744,879. As a result of these deliberations, the Professionals Group
Board determined to increase to, and fix at, 4,089,160 the number of shares of
Professionals Group Common Stock to be issued in a business combination with
PPTF.
The Professionals Group Board then considered amending and restating the
Initial Merger Agreement to (i) eliminate the Stock Formula and fix the number
of shares of Professionals Group Common Stock to be issued in such a business
combination at 4,089,160, (ii) increase the amount of liquidated damages payable
58
<PAGE> 72
upon termination to $4.5 million plus all out-of-pocket expenses, and (iii)
restrict the ability of an unsolicited bidder to conduct a due diligence inquiry
of PPTF. In connection with these deliberations of the Professionals Group
Board, Miller, Canfield, Paddock and Stone, P.L.C. (Professionals Group's legal
advisor) described the modifications to the Initial Merger Agreement that would
have to be made to effect the changes under consideration. Both of Professionals
Group's financial advisors (Cochran, Caronia & Co. and McDonald & Company) then
opined that if the aggregate number of shares of Professionals Group Common
Stock to be issued to PPTF Members in respect of their Membership Rights was
fixed at 4,089,160, then, as of October 1, 1997, the consideration to be paid by
Professionals Group to Members of PPTF in respect of their Membership Rights was
fair, from a financial point of view, to the stockholders of Professionals
Group. The Professionals Group Board (with 11 directors present and no directors
absent) then unanimously approved and authorized the execution of the proposed
Restated Merger Agreement.
In connection with its approval of the Restated Merger Agreement, the oral
opinions of Cochran, Caronia & Co. and McDonald & Company were merely one of
many factors considered by the Professionals Group Board. Moreover, the
Professionals Group Board did not assign any relative or specific weights to any
of such factors, and individual directors may have given differing weights to
different factors. See "-- Reasons for the Transactions." For descriptions of
the presentations made to the Professionals Group Board by its financial
advisors and of the assumptions made by, the matters considered by, and the
limits of the reviews made by, its financial advisors, see "-- Opinion of
Professionals Group Financial Advisor -- Cochran, Caronia & Co." and "-- Opinion
of Professionals Group Financial Advisor -- McDonald & Company."
At a special meeting of the PPTF Board held on October 3, 1997, Mr. Salman
reviewed the terms of the Initial Merger Agreement and the FPIC Proposal. He
also advised the PPTF Board of the discussions that had taken place at the
September 30, 1997 meeting with representatives of Professionals Group. The PPTF
Board then evaluated the Original FPIC Proposal. During these deliberations, the
PPTF Board considered the same factors that it had considered at its meeting on
September 27, 1997. See "-- Reasons for the Transactions." In addition, Mr.
Salman reiterated to the PPTF Board that based on the terms of the Original FPIC
Proposal and his conversations with William R. Russell (the President and Chief
Executive Officer of FPIC), it appeared that upon consummation of the
transactions contemplated by the FPIC Proposal (i) a substantial portion of
PPTF's staff would be eliminated; (ii) PPTF's vigorous claims practices and its
loss adjustment expense reserves would be reduced; and (iii) PPTF's Members and
the PPTF Board would have only a limited opportunity to influence the management
and policies of the combined entity. Mr. Salman also reminded the PPTF Board
that publicly-available information filed with the Florida Insurance Department
by FPIC and PPTF regarding medical malpractice cases handled by FPIC and PPTF
showed substantial differences in the claims handling philosophies and practices
of FPIC and PPTF. In contrast, information obtained as part of PPTF's due
diligence inquiry of Professionals Group and PICOM demonstrated numerous
similarities between the claims handling philosophies and practices of PICOM and
PPTF. Such information, which related to the percentage of medical malpractice
cases closed with no indemnity paid and to the number of defendants taken to
trial, indicated (x) that FPIC did not litigate to conclusion as high a
percentage of claims as did PPTF and (y) that PICOM litigated to conclusion as
high (if not marginally higher) a percentage of claims as did PPTF. Finally, Mr.
Salman once again noted that FPIC was essentially a single line, single state
insurer that had not shown meaningful growth in other lines of coverage or in
expanding to other states. In contrast, Professionals Group had taken
significant steps to achieve product and geographic diversification and had
lessened its dependence on medical malpractice premiums from a single state.
Such information also caused the PPTF Board to express concern as to
whether the combined entity in a FPIC merger would continue to provide PPTF's
current level of insurance protection, claims defense and service. In this
regard, and as part of its analysis of FPIC's insurance operations and the
Original FPIC Proposal, the PPTF Board noted that, according to FPIC's
disclosures with the Florida Insurance Department, FPIC (like some other
insurers) had released reserves it considered redundant and that these releases
had significantly contributed to FPIC's reported earnings in recent years. It
was the opinion of PPTF's management (after consulting with independent
actuaries and PPTF's financial advisors) that FPIC might not have enough
redundancy in its current reserves to continue this practice over time.
Compounding the
59
<PAGE> 73
PPTF Board's concerns regarding FPIC's reserves was its determination that
combining PPTF with FPIC did not appear to provide significant opportunities for
geographic or product diversification or future acquisitions.
During its deliberations, the PPTF Board was concerned that the FPIC
Proposal was closer to being an "acquisition" of PPTF by FPIC as compared to the
"merger of equals" with Professionals Group contemplated by the Initial Merger
Agreement and the Merger Agreement. The PPTF Board preferred a "merger of
equals" because it believed that such a transaction, by assuring PPTF's
trustees, officers and Members a more significant role in the operations and
policies of the combined entity in a FPIC transaction, would facilitate the
preservation of PPTF's vigorous claims handling philosophies and practices.
Doubts as to whether the combined entity resulting from a transaction with FPIC
would preserve such philosophies and practices also arose after the PPTF Board
found that the corporate cultures, philosophies and strategies of FPIC and PPTF
were dissimilar in certain fundamental respects. In addition, the ability of
PPTF's trustees and senior managers to influence and participate in the
management of the combined entity in a FPIC transaction was questioned after the
PPTF Board noted that PPTF Members would own less than a majority of the
outstanding FPIC common stock, that a substantial portion of PPTF's management
and staff would be eliminated, and that FPIC's senior management was a cohesive
group that was small in number. The PPTF Board determined from these factors
that the acquisition of PPTF by FPIC would in all likelihood mean the eventual
erosion of PPTF's vigorous claims handling philosophies and practices.
During its deliberations, the PPTF Board was also advised by legal counsel
that an acquisition of PPTF by FPIC could raise anti-trust and regulatory issues
because the combined entity would have over 50% of the Florida medical
malpractice insurance market. The PPTF Board then discussed the fact that this
excessive market concentration could substantially increase the exposure of
PPTF's Members to the financial and insurance risks inherent in the historically
volatile Florida medical malpractice insurance market given the proposed
combined entity's likely lack of geographic and product diversification. From
this information, the PPTF Board concluded that a combination of FPIC and PPTF
would substantially increase the level of market concentration in the Florida
medical malpractice insurance market. In contrast, a combination with
Professionals Group was not expected to lessen competition in that market.
The PPTF Board then proceeded to review and discuss the reasons for and the
potential benefits of a strategic affiliation of Professionals Group and PPTF,
focusing on the achievability of revenue enhancing prospects, geographic and
product diversification, future acquisitions, the then current price of
Professionals Group Common Stock, and corporate governance. The PPTF Board noted
that a strategic alliance with Professionals Group would provide immediate and
significant opportunities for revenue enhancements, geographic and product
diversification, and future acquisitions. The PPTF Board concluded that the
levels of product and geographic diversification and financial performance
achieved by Professionals Group indicated that there could be a greater
opportunity for appreciation in value associated with Professionals Group Common
Stock. Moreover, after noting (i) the fact that PPTF Members would own a
majority of the outstanding shares of Professionals Group Common Stock and (ii)
the terms of the Initial Merger Agreement and the proposed Restated Merger
Agreement regarding the renaming and location of the combined entity's insurance
operations, and the composition of the board of directors of the combined entity
and its insurance operations, and the composition of senior management of the
combined entity and its insurance operations, the PPTF Board determined that
PPTF's trustees, senior managers and Members would have the ability to influence
and participate in the management of the combined entity in a meaningful way.
Finally, and after considering the compatibility of the corporate cultures,
philosophies and strategies of Professionals Group and PPTF, the PPTF Board
concluded that the combined entity resulting from a transaction with
Professionals Group could be expected to provide a strong defense of claims and
a level of insurance protection and service comparable to that of PPTF.
In connection with its comparison of the Original FPIC Proposal to a
business combination with Professionals Group, and based upon the advice of its
legal advisor (Steel Hector & Davis LLP), the PPTF Board concluded that, under
applicable law, the obligation of the PPTF Board was to determine which business
combination opportunity was in the over-all best interest of PPTF's Members.
Accordingly, and after discussion and consideration of the factors discussed
above and the factors discussed below under "-- Reasons for the Transactions,"
the PPTF Board concluded that the merger of PPTF into FPIC would not be a
strategic
60
<PAGE> 74
alliance but that a business combination with Professionals Group on the terms
provided in the proposed Restated Merger Agreement would be a strategic
alliance. The PPTF Board also concluded that a business combination with
Professionals Group provided the best opportunity for PPTF's Members to achieve
long-term value, to retain an interest in an insurer dedicated to providing a
strong defense of claims and a high level of insurance protection and service,
and to realize future opportunities in the insurance industry. From this, the
PPTF Board determined that a merger with Professionals Group, rather than a
merger with FPIC, was in the long-term best interests of PPTF and its Members.
The PPTF Board then considered amending and restating the Initial Merger
Agreement to (i) eliminate the Stock Formula and fix the number of shares of
Professionals Group Common Stock to be issued in such a business combination at
4,089,160, (ii) increase the amount of liquidated damages payable upon
termination to $4.5 million plus all out-of-pocket expenses, and (iii) restrict
the ability of an unsolicited bidder to conduct a due diligence inquiry of PPTF.
In connection with these deliberations of the PPTF Board, Steel Hector & Davis
LLP (PPTF's legal advisor) reviewed the proposed revisions to the Initial Merger
Agreement. PPTF's financial advisor (Donaldson, Lufkin & Jenrette) then opined
that if the aggregate number of shares of Professionals Group Common Stock to be
issued to PPTF Members in respect of their Membership Rights was fixed at
4,089,160, then, as of October 3, 1997 and based on and subject to the
assumptions, limitations and qualifications set forth in such opinion, the
number of Aggregate Merger Shares to be received by the Members of PPTF was fair
to those Members, as a group, from a financial point of view. Upon the
conclusion of its deliberations, the PPTF Board (with eight trustees present and
one trustee, Dr. Truppman, absent) unanimously approved and authorized the
execution of the proposed Restated Merger Agreement and directed PPTF's
management not to pursue further discussions with FPIC.
In connection with its approval of the Restated Merger Agreement the
opinion of Donaldson, Lufkin & Jenrette was merely one of many factors
considered by the PPTF Board. Moreover, the PPTF Board did not assign any
relative or specific weights to any of such factors, and individual trustees may
have given differing weights to different factors. See "-- Reasons for the
Transactions." For descriptions of the presentations made to the PPTF Board by
its financial advisors and of the assumptions made by, the matters considered
by, and the limits of the reviews made by, its financial advisors, see
"-- Opinion of PPTF Financial Advisor -- Donaldson, Lufkin & Jenrette."
On October 3, 1997, the First Amended and Restated Agreement and Plan of
Merger was executed. The terms of the Restated Merger Agreement are
substantially similar to the terms of the Initial Merger Agreement. However, in
amending and restating the Initial Merger Agreement, the Restated Merger
Agreement (i) eliminated the Stock Formula and fixed the number of shares of
Professionals Group Common Stock to be issued to PPTF Members at 4,089,160, (ii)
increased the amount of liquidated damages payable upon the termination of the
Restated Merger Agreement under the circumstances described in Section 8.5
thereof to $4.5 million plus all out-of-pocket expenses from $3.0 million plus
all out-of-pocket expenses, and (iii) restricted the ability of an unsolicited
bidder to conduct a due diligence inquiry of PPTF so long as the Restated Merger
Agreement is in effect.
On October 9, 1997, Mr. Salman was called by Mr. William R. Russell, the
President and Chief Executive Officer of FPIC, who stated that FPIC was planning
to submit another non-binding acquisition proposal to PPTF. He requested that
Mr. Salman meet with him personally so that he could present and explain the new
non-binding acquisition proposal. Mr. Salman agreed to meet with him on October
14, 1997, the earliest date that Mr. Russell was available.
On that date, Mr. Salman met with Mr. Russell and was told that some
aspects of the Original FPIC Proposal would be modified, but that final details
of the new non-binding acquisition proposal were not yet ready. Mr. Russell then
advised Mr. Salman that the revised non-binding acquisition proposal would be
submitted by October 17, 1997. He then discussed the potential role of Mr.
Salman in a merger of PPTF into FPIC and in the continuing operations of the
proposed combined entity.
Late on October 17, 1997, a new non-binding written acquisition proposal
was sent by FPIC by facsimile transmission to Mr. Salman's office. This
proposal, which was the October FPIC Proposal, changed none of the financial
terms relating to PPTF Members and presented only increased payments to the
trustees of PPTF
61
<PAGE> 75
and an offer to Mr. Salman that gave him the option to become employed by FPIC
or to accept a severance package. Under the first option, Mr. Salman was offered
a lucrative compensation package that involved a four year employment agreement
if he elected to assume the position of Chief Operating Officer of FPIC. The
other option was for Mr. Salman to accept a severance package even larger than
the one that Mr. Russell, the President and Chief Executive Officer of FPIC, had
verbally proposed in part to Mr. Salman at their October 14, 1997 meeting. This
larger severance package was valued at $6.675 million by FPIC. In addition, the
October FPIC Proposal contemplated changing the name of the combined entity upon
the closing of a transaction with FPIC rather than only considering changing the
name after closing as presented in the FPIC Proposal.
On October 25, 1997, the PPTF Board (with all trustees present) met to
review and discuss the October FPIC Proposal. The PPTF Board noted that the
October FPIC Proposal provided (i) for a change in the name of the combined
entity upon the closing of a transaction with FPIC rather than only considering
changing the name after closing as presented in the FPIC Proposal, (ii) that the
PPTF trustees elected to the Boards of Directors of FPIC or its insurance
subsidiary would receive annual director's fees of more than $26,000 plus stock
grants described in the October FPIC Proposal, and (iii) that Mr. Salman, the
President and Chief Executive Officer of PPTF, could choose between becoming
Chief Operating Officer of FPIC or accepting a severance package. The PPTF Board
also noted that the October FPIC Proposal did not change any of the financial
terms contained in the October FPIC Proposal to PPTF Members.
During this meeting, the PPTF Board considered (i) the anti-trust concerns
that were present in an acquisition by FPIC but were not present in the
transactions contemplated by the Restated Merger Agreement, (ii) the fact that
PPTF Members would own less than a majority of the outstanding FPIC voting stock
and that they would own in excess of a majority of Professionals Group Common
Stock, (iii) the fact that PPTF trustees would have substantially smaller Board
representation on the Boards of Directors of FPIC and its insurance subsidiary
than on the Boards of Directors of Professionals Group and PICOM, (iv) the
differences between the claims handling practices of FPIC and the claims
handling practices of PPTF and PICOM, and (v) the level of FPIC's insurance
reserves and the level of PICOM's insurance reserves.
In addition, Donaldson, Lufkin & Jenrette, PPTF's financial advisor,
provided for the PPTF Board's consideration certain financial analyses of FPIC
and Professionals Group. They noted that based on the last sales price per share
for Professionals Group Common Stock as reported by the Nasdaq National Market
on October 23, 1997 ($35.125), the stock value of the transactions provided for
in the Restated Merger Agreement was $143.6 million, or 13.8% less than the
$166.5 million value FPIC placed on the October FPIC Proposal. They also stated
that as of June 30, 1997, the book value per share of Professionals Group Common
Stock on a GAAP basis was $26.62 and that Professionals Group's price/book
multiple was 1.32x. In contrast, the book value per share of FPIC common stock
on a GAAP basis was $11.60 and FPIC's price/book multiple was 2.46x.
Donaldson, Lufkin & Jenrette then advised the PPTF Board that because the
transactions contemplated by the Restated Merger Agreement provide for issuance
of a fixed number of shares of Professionals Group Common Stock, the Members of
PPTF would own approximately 53.8% of the shares of Professionals Group Common
Stock upon consummation of the Mergers. However, under the terms of the October
FPIC Proposal, Members of PPTF would own a minority of the shares of FPIC common
stock outstanding upon consummation of the transactions contemplated by the
October FPIC Proposal. Donaldson, Lufkin & Jenrette also explained that the
ratio of Professionals Group's share price to 1998 estimated earnings per share
was 11.0x, and the value of the transactions contemplated by the Merger
Agreement as of October 23, 1997 was 17.3x PPTF's GAAP estimated 1997 earnings;
14.0x PPTF's GAAP estimated 1998 earnings; and 1.36x PPTF's GAAP book value at
June 30, 1997. In contrast, the ratio of FPIC's share price to 1998 estimated
earnings per share was 14.3x, and the value of the transactions contemplated by
the October FPIC Proposal as of October 23, 1997 was 20.0x PPTF's GAAP estimated
1997 earnings and 16.3x PPTF's GAAP estimated 1998 earnings. Donaldson, Lufkin &
Jenrette also noted that, based on June 30, 1997 results, the price to book
ratio of FPIC was 2.46x, and the price to book ratio for Professionals Group was
1.32x. Finally, Donaldson, Lufkin & Jenrette reiterated that its Public Market
Comparable Company Analysis for medical malpractice insurance companies showed
that Professionals Group was in the middle of the group of medical malpractice
62
<PAGE> 76
insurance companies as to price earnings multiples, price to book multiples and
other ratios. This information indicated to the PPTF Board once again that there
could be a greater opportunity for appreciation in value associated with
Professionals Group Common Stock.
Steel Hector & Davis LLP (PPTF's legal advisor) then confirmed to the PPTF
trustees that they must act for the over-all benefit of PPTF Members, and that
the PPTF Board might properly consider and weigh matters such as claims
handling, other management issues and the long-term prospects of both FPIC and
Professionals Group in making a decision whether to enter negotiations with FPIC
pursuant to the October FPIC Proposal or to complete the transactions
contemplated by the Restated Merger Agreement.
After a full discussion, the PPTF Board (with nine trustees present and no
trustees absent) unanimously reaffirmed the Restated Merger Agreement and
directed management not to enter negotiations with FPIC based on the October
FPIC Proposal.
At a special meeting of the PPTF Board held on November 19, 1997, the PPTF
Board (with all trustees present) considered another non-binding revised
acquisition proposal from FPIC dated November 7, 1997. The PPTF Board noted that
this proposal, which was the November FPIC Proposal, was substantially similar
to the October FPIC Proposal except that the November FPIC Proposal stated that
the number of shares of FPIC common stock to be issued by FPIC in its
contemplated acquisition of PPTF would be determined by dividing $180.0 million
by the average of the daily closing prices per share of FPIC common stock as
reported by the Nasdaq National Market for the period of 20 business days ending
on the fifth business day prior to the closing date for the proposed
acquisition, subject to a floor of $25 per share and a cap of $34 per share. It
was also noted that the November FPIC Proposal did not include any stock
compensation for the PPTF Board and did not include any provisions regarding the
continued service of senior management personnel or severance arrangements for
terminated personnel. During these deliberations the PPTF Board found that the
November FPIC Proposal did not address any of the PPTF Board's prior concerns as
it still appeared that following FPIC's acquisition of PPTF: (i) a substantial
portion of PPTF's management and staff would be eliminated; (ii) that PPTF's
claims practices would be significantly less vigorous and the loss adjustment
expense reserves of FPIC would be reduced; and (iii) that PPTF Members and the
PPTF Board would have only a limited opportunity to influence the combined
entity. Mr. Salman reiterated that publicly-available information filed with the
Florida Insurance Department by FPIC and PPTF regarding medical malpractice
cases handled by FPIC and PPTF showed substantial differences in the claims
handling philosophies and practices of FPIC and PPTF. In contrast, information
obtained as part of PPTF's due diligence inquiry of Professionals Group and
PICOM demonstrated numerous similarities between the claims handling
philosophies and practices of PICOM and PPTF. Such information, which related to
the percentage of medical malpractice cases closed with no indemnity paid and to
the number of defendants taken to trial, indicated that FPIC did not litigate to
conclusion as high a percentage of claims as did PPTF and that PICOM litigated
to conclusion as high (if not marginally higher) a percentage of claims as did
PPTF. Finally, Mr. Salman once again noted that FPIC was essentially a single
line, single state insurer that had not shown meaningful growth in other lines
of coverage or in expanding to other states. In contrast, Professionals Group
had taken significant steps to achieve product and geographic diversification
and had lessened its dependence on medical malpractice premiums from a single
state.
In addition, Donaldson, Lufkin & Jenrette (PPTF's financial advisor)
provided for the PPTF Board's consideration certain financial analysis of FPIC
and Professionals Group. Donaldson, Lufkin & Jenrette noted that based on the
last sales price for Professionals Group Common Stock on November 17, 1997 as
reported on the Nasdaq National Market ($35.75), the stock value of the
transactions contemplated by the Restated Merger Agreement was $146.2 million,
or 18.8% less than the $180.0 million value FPIC placed on the November FPIC
Proposal. Donaldson, Lufkin & Jenrette stated that the book value per share of
Professionals Group Common Stock on a GAAP basis was $28.05 and that
Professionals Group's price/book multiple was 1.27x. In contrast, the book value
per share of FPIC common stock on a GAAP basis was $12.26 and that FPIC's
price/book multiple was 2.32x. Donaldson, Lufkin & Jenrette also noted that
because the transactions contemplated by the Restated Merger Agreement provide
for issuance of a fixed number of shares of Professionals Group Common Stock,
the Members of PPTF would own approximately 53.8% of Professionals Group Common
Stock upon consummation of the Mergers. Donaldson, Lufkin & Jenrette stated that
the
63
<PAGE> 77
ratio of Professionals Group's share price to 1998 estimated earnings per share
was 11.2x, and the value of the transactions contemplated by the Restated Merger
Agreement as of November 17, 1997 was 17.6x PPTF's GAAP estimated 1997 earnings
and 14.3x PPTF's GAAP estimated 1998 earnings. Donaldson, Lufkin & Jenrette also
noted that, based on September 30, 1997 results, the price to book ratio of FPIC
was 2.32x, and the price to book ratio for Professionals Group was 1.27x.
From the information presented and discussed at this meeting of the PPTF
Board, the PPTF Board once again determined that FPIC had claims handling
philosophies and practices that were substantially different from those of PPTF
and PICOM. The PPTF Board concluded once again that FPIC did not utilize as
vigorous claims handling philosophies as PPTF and PICOM. This factor, when
coupled with FPIC's apparent lack of product and geographic diversification,
also reinforced the PPTF Board's conclusion that the corporate cultures,
philosophies and strategies of FPIC and PPTF were dissimilar in fundamental
respects. The PPTF Board again noted that a combination of FPIC and PPTF would
substantially increase the level of market concentration in the Florida medical
malpractice insurance market. In contrast, a combination with Professionals
Group would not reduce competition in that market. Finally, the levels of
product and geographic diversification and financial performance achieved by
Professionals Group, reaffirmed the conclusion of the PPTF Board that there
could be a greater opportunity for appreciation in value associated with
Professionals Group Common Stock. Accordingly, after a full discussion, the PPTF
Board (with nine trustees present and no trustees absent) unanimously reaffirmed
the Merger Agreement and directed management not to enter negotiations with FPIC
based on the November FPIC Proposal.
At its regular meeting held on January 24, 1998, the PPTF Board (with all
trustees present) discussed the manner in which the consideration to be received
by PPTF Members under the Restated Merger Agreement should be distributed to
those Members. The PPTF Board considered the provisions of the PPTF Charter
Documents and the Florida Insurance Code and concluded that the Aggregate Merger
Shares should be distributed to PPTF Members based on their earned premium
during the 12 months preceding the PPTF Record Date. The PPTF Board found that
allocating the Aggregate Merger Shares in this manner would be (i) in accordance
with the relative amounts contributed to PPTF by its Members, (ii) consistent
with the PPTF Charter Documents and the Florida Insurance Code, and (iii)
administratively feasible.
On April 3, 1998, the Professionals Group Board by unanimous written
consent approved the First Amendment. On April 13, 1998, the First Amendment was
executed. On April 14, 1998, the PPTF Board unanimously (with nine trustees
present and no trustees absent) ratified the First Amendment. The First
Amendment amended terms of the Restated Merger Agreement by adding the
Allocation Formula to the Restated Agreement.
REASONS FOR THE TRANSACTIONS
General. The transactions contemplated by the Merger Agreement are expected
to create a stronger, more competitive entity with the size and capabilities to
provide a broader array of insurance products and services, and to take
advantage of opportunities for geographic expansion, acquisitions, and internal
growth and diversification that would not be available to either Professionals
Group or PPTF on its own.
In reaching their decisions to approve the Merger Agreement and all of the
transactions contemplated thereby, the Professionals Group Board and PPTF Board
each determined that the transactions contemplated by the Merger Agreement are
in the best interests of their respective entities and stockholders (in the case
of Professionals Group) or members (in the case of PPTF) because of their belief
that a "merger of equals" uniting Professionals Group and PPTF (two financially
sound entities of comparable size with complementary businesses and business
strategies) will create a stronger combined entity with greater size,
flexibility, breadth of products and services, efficiency, capital strength and
profitability than either Professionals Group or PPTF possesses on a stand-alone
basis or would be able to achieve through internal growth or acquisitions of
smaller insurers in their respective market areas. The Professionals Group Board
and the PPTF Board each believes that each entity is currently well managed and
possesses management philosophies and a strategic focus compatible with that of
the other; that each entity will contribute complementary business strengths
resulting
64
<PAGE> 78
in a well-diversified combined entity; and that the enhanced capitalization of
the combined entity will allow it to take advantage of future acquisition
opportunities that might otherwise be unavailable to either entity. The
Professionals Group Board and PPTF Board believe that the transactions
contemplated by the Merger Agreement will further enhance the combined entity's
profitability and competitiveness.
The Professionals Group Board and the PPTF Board also considered that the
transactions contemplated by the Merger Agreement would represent a strategic
alliance of Professionals Group and PPTF and that stockholders of Professionals
Group and the Members of PPTF could realize the expected long-term benefits of
such alliance (including, but not limited to, the future stock value and
earnings per share of the combined entity, the combined entity's financial
strength and its consequent enhanced ability to invest in its existing
businesses as well as develop new products and services, the cost savings to be
realized through consolidation of operations, the opportunity to diversify
earnings, the business synergies that might be realized, and the potential
effect of those transactions on the perception of the combined entity's
businesses by the financial markets). In evaluating those transactions, each of
the Professionals Group Board and the PPTF Board and their respective
managements discussed the critical importance of successfully integrating, and
building on the strengths of, the management teams and management and
operational practices and policies of the combining entities, and considered the
uncertainties inherent in any such combination of sizable entities.
Professionals Group. In reaching its conclusion to approve the Merger
Agreement and all of the transactions contemplated thereby, the Professionals
Group Board consulted with Professionals Group management and with its financial
and legal advisors, and considered the factors described in this Joint Proxy
Statement/Prospectus. The Professionals Group Board did not assign any relative
or specific weights to such factors, and individual directors may have given
differing weights to different factors. The factors considered by the
Professionals Group Board consisted of the factors described above under
"-- General" and the factors that follow:
(i) The Professionals Group Board considered the effectiveness of the
transactions contemplated by the Merger Agreement in implementing and
accelerating Professionals Group's basic long-term external growth
strategy. Such transactions represent a continuation of Professionals
Group's acquisition strategy of combining with insurers in markets where
Professionals Group already has or expects to gain a significant market
position. By providing Professionals Group with immediate access to PPTF's
existing operations in Florida, such transactions are expected to provide
Professionals Group with a new market and a better opportunity to provide
insurance products and services in that market.
(ii) The Professionals Group Board analyzed the financial condition,
businesses and prospects of Professionals Group and PPTF (including, but
not limited to, information with respect to the recent and historic stock
and earnings performance of Professionals Group, information with respect
to the recent and historic earnings performance of PPTF, and information
with respect to the credit position and capital markets access of each of
Professionals Group and PPTF). The Professionals Group Board considered the
detailed financial analyses, pro forma and other information with respect
to Professionals Group and PPTF discussed by Cochran, Caronia & Co. and
McDonald & Company, its own knowledge of Professionals Group, PPTF and
their respective businesses, and the results of Professionals Group's due
diligence review of PPTF's business. The Professionals Group Board also
considered (A) the ability of the combined entity to achieve, over time, a
loss ratio comparable to that of PICOM and industry averages in light of
recent changes in PPTF's underwriting practices and rate structure and
PICOM's marketing experience, and (B) the revenue enhancements and
operating efficiencies that could result from the combining of the
insurance operations of PICOM and PPTF. The Professionals Group Board
concluded that a business combination of Professionals Group and PPTF would
create a stronger combined entity with greater size, flexibility, breadth
of products and services, efficiency, capital strength and profitability
than either Professionals Group or PPTF possesses on a stand-alone basis or
would be able to achieve through internal growth or acquisitions of smaller
insurers in their respective market areas.
(iii) The Professionals Group Board considered (A) the oral opinion of
Cochran, Caronia & Co. as of October 1, 1997, which opinion was
subsequently confirmed in writing, that as of October 1, 1997 the
65
<PAGE> 79
consideration to be paid by Professionals Group to the Members of PPTF in
respect of their Membership Rights was fair, from a financial point of
view, to Professionals Group stockholders, and (B) the oral opinion of
McDonald & Company as of October 1, 1997, which opinion was subsequently
confirmed in writing, that as of October 1, 1997 the consideration to be
paid by Professionals Group to the Members of PPTF in respect of their
Membership Rights was fair, from a financial point of view, to
Professionals Group stockholders. The determinations of the Professionals
Group Board were not affected by the fact that its financial advisors did
not address the fairness of the provisions in Section 1.28 of the Merger
Agreement. See "-- Opinion of Professionals Group Financial
Advisor -- Cochran, Caronia & Co." and "-- Opinion of Professionals Group
Financial Advisor -- McDonald & Company."
(iv) The Professionals Group Board considered (A) the terms of the
Merger Agreement and certain other information regarding the transactions
contemplated by the Merger Agreement (including the terms and structure of
those transactions, the proposed arrangements with respect to the board of
directors and management structure of the combined entity following those
transactions, and the issuance of shares of Professionals Group Common
Stock to the PPTF Trustee Participants and PPTF Officers as contemplated by
Section 1.28 of the Merger Agreement), (B) that the corporate headquarters
and principal executive offices of Professionals Group would be located in
Okemos, Michigan, and (C) that PICOM would conduct significant corporate
activities from regional executive offices located in Okemos, Michigan and
Coral Gables, Florida. The Professionals Group Board determined that each
entity is currently well managed and possesses management philosophies and
a strategic focus compatible with that of the other; that each entity will
contribute complementary business strengths resulting in a well-
diversified combined entity; and that Professionals Group's directors,
executives officers and stockholders would have the ability to influence
and participate in the management of the combined entity in a meaningful
way.
(v) The Professionals Group Board considered the effect on
Professionals Group stockholders' value of Professionals Group continuing
as a stand-alone entity compared to the effect of Professionals Group's
combining with PPTF in light of the factors summarized above with respect
to the financial condition and prospects of the entities on a stand-alone
basis and of the combined entity. In particular, the Professionals Group
Board believed that the combined entity would be in a better position to
participate in the consolidation process currently occurring in the
insurance industry and to generate revenue enhancements. The Professionals
Group Board also noted that the transactions contemplated by the Merger
Agreement would not preclude the acquisition of the combined entity in the
future by a larger entity.
(vi) The Professionals Group Board also considered the current and
prospective economic and competitive environment facing each entity and
other insurers, and the likelihood of the transactions contemplated by the
Merger Agreement being approved by the appropriate regulatory authorities.
The Professionals Group Board determined that the transactions contemplated
by the Merger Agreement present a unique opportunity to expand
Professionals Group's existing insurance operations and that such
transactions, by creating a combined entity that will be larger and
stronger than Professionals Group alone, will enhance acquisition and other
opportunities for growth and diversification and will improve the
competitive position of the combined entity in a consolidating insurance
industry.
(vii) The Professionals Group Board considered the anticipated revenue
enhancements available to the combined entity from the transactions
contemplated by the Merger Agreement. Given the substantial prior
experience of Professionals Group in effecting successful acquisitions
(including Professionals Group's 1995 acquisition of the book of business
of another medical malpractice insurer located in Illinois, its 1996
acquisition of American Insurance Management Corporation (attorney-in-fact
for American Medical Insurance Exchange, an Indiana interinsurance
reciprocal exchange) and its 1997 transactions with Michigan Educational
Employees Mutual Insurance Company, a Michigan mutual insurance company
that writes personal automobile and homeowners coverages), the
Professionals Group Board concluded that the operations of Professionals
Group and PPTF can be effectively consolidated and integrated within a
reasonable time following the consummation of the transactions contemplated
by the Merger Agreement.
66
<PAGE> 80
(viii) The Professionals Group Board considered the expectation that
the transactions contemplated by the Merger Agreement will be tax-free
transactions to Professionals Group and its stockholders.
(ix) The Professionals Group Board considered the effects of the
transactions contemplated by the Merger Agreement on Professionals Group's
other constituencies, including its senior management and other employees
and the communities and policyholders served by Professionals Group. The
Professionals Group Board determined that Professionals Group's directors,
executives officers and stockholders would have the ability to influence
and participate in the management of the combined entity in a meaningful
way.
In reaching its determination to approve the Merger Agreement and all of
the transactions contemplated thereby, the Professionals Group Board did not
assign any relative or specific weights to the foregoing factors, and individual
directors may have given differing weights to different factors. At a meeting
held on October 1, 1997, and after deliberating with respect to the transactions
contemplated by the Restated Merger Agreement and considering, among other
things, the matters discussed above, the Professionals Group Board unanimously
(with 11 directors present and no directors absent) approved and adopted the
Restated Merger Agreement and the transactions contemplated thereby as being in
the best interests of Professionals Group and its stockholders. On April 3,
1998, by unanimous written consent, the Professionals Group Board approved the
First Amendment. THE PROFESSIONALS GROUP BOARD IS UNANIMOUS IN ITS
RECOMMENDATION THAT HOLDERS OF PROFESSIONALS GROUP COMMON STOCK VOTE FOR THE
MERGER PROPOSAL.
PPTF. In reaching its conclusion to approve the Merger Agreement and all of
the transactions contemplated thereby, the PPTF Board consulted with PPTF
management and with its financial and legal advisors, and considered the factors
described in this Joint Proxy Statement/Prospectus. The PPTF Board did not
assign any relative or specific weights to such factors, and individual trustees
may have given differing weights to different factors. The factors considered by
the PPTF Board consisted of the factors described above under " -- General" and
the factors that follow:
(i) The PPTF Board considered the effectiveness of the transactions
contemplated by the Merger Agreement in implementing and accelerating
PPTF's basic long-term external growth strategy. Such transactions
represent an opportunity to offer medical malpractice insurance outside the
State of Florida, and to expand its business into other lines of insurance.
By expanding PPTF's existing operations and providing PPTF immediate access
to Professionals Group's existing and anticipated additional products and
operations in the Midwest, such transactions are expected to provide PPTF
with new markets and the opportunity to provide additional products and
services to doctors and other health care professionals in Florida.
(ii) The PPTF Board analyzed the financial condition, businesses and
prospects of Professionals Group and PPTF (including, but not limited to,
information with respect to the recent and historic stock and earnings
performance of Professionals Group, information with respect to the recent
and historic earnings performance of PPTF, and information with respect to
the credit position and capital markets access of each of Professionals
Group and PPTF). The PPTF Board considered the recent and historic stock
performance of Professionals Group, the detailed financial analyses, pro
forma and other information with respect to Professionals Group and PPTF
discussed by Donaldson, Lufkin & Jenrette, its own knowledge of PPTF,
Professionals Group and their respective businesses, and the results of
PPTF's due diligence review of Professionals Group's businesses. The PPTF
Board also considered (A) the ability of the combined entity to achieve,
over time, a loss ratio comparable to that of PICOM and industry averages
in light of recent changes in PPTF's underwriting practices and rate
structure and PICOM's marketing experience, (B) the revenue enhancements
and operating efficiencies that could result from the combining of the
insurance operations of PICOM and PPTF, and (C) the potential for
appreciation in the value of Professionals Group Common Stock and earnings
per share of Professionals Group Common Stock. The PPTF Board concluded
that a business combination of Professionals Group and PPTF would create a
stronger combined entity with greater size, flexibility, breadth of
products and services, efficiency, capital strength and profitability than
either Professionals Group or PPTF possesses
67
<PAGE> 81
on a stand-alone basis or would be able to achieve through internal growth
or acquisitions of smaller insurers in their respective market areas.
(iii) The PPTF Board considered the opinion of Donaldson, Lufkin &
Jenrette dated October 3, 1997 that as of such date and based on and
subject to the assumptions, limitations and qualifications set forth in
such opinion, the Aggregate Merger Shares to be received by the Members of
PPTF was fair to those Members, as a group, from a financial point of view.
The determinations of the PPTF Board were not affected by the fact that its
financial advisor did not address whether the consideration that individual
Members will receive is fair, or whether the allocation of the Aggregate
Merger Shares among the Members of PPTF is fair, or the FPIC Proposals, or
the fairness of the provisions in Section 1.28 of the Merger Agreement. See
"-- Opinion of PPTF Financial Advisor -- Donaldson, Lufkin & Jenrette."
(iv) The PPTF Board considered (A) the terms of the Merger Agreement
and certain other information regarding the transactions contemplated by
the Merger Agreement (including the terms and structure of the
transactions, the proposed arrangements with respect to the board of
directors and management structure of the combined entity following those
transactions, and the issuance of shares of Professionals Group Common
Stock to the PPTF Trustee Participants and PPTF Officers as contemplated by
Section 1.28 of the Merger Agreement), and (B) that the combined entity
would conduct significant corporate activities from regional executive
offices located in Okemos, Michigan and Coral Gables, Florida. The PPTF
Board determined that each entity is currently well managed and possesses
management philosophies and a strategic focus compatible with that of the
other; that each entity will contribute complementary business strengths
resulting in a well-diversified combined entity; and that PPTF's trustees,
senior managers and Members would have the ability to influence and
participate in the management of the combined entity in a meaningful way.
(v) The PPTF Board considered the effect on PPTF and its Members
continuing as a stand-alone entity compared to the effect of PPTF combining
with Professionals Group in a "merger of equals" in light of the factors
summarized above with respect to the financial condition and prospects of
the two entities on a stand-alone basis and of the combined entity. In
particular, the PPTF Board considered that while PPTF, as a self-insurance
trust fund, was not rated by A.M. Best, PICOM is rated by A.M. Best. The
PPTF Board also believed that the combined entity would be in a better
position to participate in the consolidation process currently occurring in
the insurance industry. The PPTF Board also noted that the transactions
contemplated by the Merger Agreement would not preclude the acquisition of
the combined entity in the future by a larger entity.
(vi) The PPTF Board also considered the current and prospective
economic and competitive environment facing each entity and other insurers,
and the likelihood of the transactions contemplated by the Merger Agreement
being approved by the appropriate regulatory authorities. Professionals
Group believes that the transactions contemplated by the Merger Agreement
present a unique opportunity to expand Professionals Group's existing
insurance operations and that such transactions, by creating a combined
entity that will be larger and stronger than Professionals Group alone,
will enhance acquisition and other opportunities for growth and
diversification and will improve the competitive position of the combined
entity in a consolidating insurance industry.
(vii) The PPTF Board considered the anticipated revenue enhancements
available to the combined entity from the transactions contemplated by the
Merger Agreement. Given the substantial prior experience of Professionals
Group in effecting successful acquisitions (including Professionals Group's
1995 acquisition of the book of business of another medical malpractice
insurer located in Illinois, its 1996 acquisition of American Insurance
Management Corporation (attorney-in-fact for American Medical Insurance
Exchange, an Indiana interinsurance reciprocal exchange) and its 1997
transactions with Michigan Educational Employees Mutual Insurance Company,
a Michigan mutual insurance company that writes personal automobile and
homeowners coverages), the PPTF Board concluded that the operations of
Professionals Group and PPTF can be effectively consolidated and integrated
within a reasonable time following the consummation of the transactions
contemplated by the Merger Agreement.
68
<PAGE> 82
(viii) The PPTF Board considered the expectation that the transactions
contemplated by the Merger Agreement will be a tax-free transaction to PPTF
and its Members.
(ix) The PPTF Board considered the effect of the transactions
contemplated by the Merger Agreement on PPTF's other constituencies,
including its senior management and other employees, and the communities
and Members served by PPTF. The PPTF Board determined that PPTF's trustees,
senior managers and Members would have the ability to influence and
participate in the management of the combined entity in a meaningful way,
and that, based on the compatibility of the corporate cultures,
philosophies and strategies of Professionals Group and PPTF, the combined
entity resulting from a transaction with Professionals Group could be
expected to provide a strong defense of claims and a level of insurance
protection and service comparable to that of PPTF.
(x) The PPTF Board considered that while Members of PPTF are currently
assessable for a deficiency in the event PPTF is unable to meet its
insurance obligations, following consummation of the transactions
contemplated by the Merger Agreement, and as stockholders of Professionals
Group, such Members will not be assessable in the event that Professionals
Group or the Professionals Group affiliate providing insurance to such
Members is unable to meet its insurance obligations.
(xi) The PPTF Board considered the Allocation Formula as expected to
be approved by the Florida Insurance Department.
(xii) The PPTF Board considered the effect of the transactions
contemplated by the Merger Agreement on PPTF's Members, including the
expectation that the combined entity would continue the philosophy of
vigorously defending claims against Members.
(xiii) The PPTF Board considered the percentage ownership of
Professionals Group Common Stock that would be held by Members of PPTF, as
a group, after consummation of the transactions contemplated by the Merger
Agreement.
In reaching its determination to approve the Merger Agreement and all of
the transactions contemplated thereby, the PPTF Board did not assign any
relative or specific weights to the foregoing factors, and individual trustees
may have given differing weights to different factors. At meetings held on
October 3, 1997, and after deliberating with respect to the transactions
contemplated by the Restated Merger Agreement and considering, among other
things, the matters discussed above, the PPTF Board unanimously (with eight
trustees present and one trustee absent) approved and adopted the Restated
Merger Agreement and the transactions contemplated thereby as being in the best
interests of PPTF and its Members. On April 14, 1998, the PPTF Board unanimously
(with nine trustees present and no trustees absent) ratified the First
Amendment. The provisions of Section 1.28 of the Merger Agreement did not affect
the determination by the PPTF Board that the transactions contemplated by the
Merger Agreement are in the best interests of PPTF and its Members. THE PPTF
BOARD IS UNANIMOUS IN ITS RECOMMENDATION THAT MEMBERS OF PPTF VOTE FOR THE
MERGER PROPOSAL.
BOARD RECOMMENDATIONS
Professionals Group. For the reasons described above, at the meeting held
on October 1, 1997, the Professionals Group Board unanimously (with 11 directors
present and no directors absent) approved and adopted the proposed Restated
Merger Agreement and all of the transactions contemplated thereby as being in
the best interests of Professionals Group and its stockholders. On December 5,
1997, the Professionals Group Board unanimously (with ten directors present and
one director absent) approved the Name Change Amendment. On February 25, 1998,
the Professionals Group Board unanimously (with all directors present and no
directors absent) nominated Mr. R. Kevin Clinton, John F. Dodge, Jr., Esq., H.
Harvey Gass, M.D. and Ann F. Putallaz, Ph.D. for election to the Professionals
Group Board at the Professionals Group Annual Meeting. On April 3, 1998, by
unanimous written consent, the Professionals Group Board approved the First
Amendment. THE PROFESSIONALS GROUP BOARD RECOMMENDS THAT PROFESSIONALS GROUP
STOCKHOLDERS VOTE FOR THE ELECTION OF ALL OF THE PROFESSIONALS
69
<PAGE> 83
GROUP BOARD NOMINEES TO THE PROFESSIONALS GROUP BOARD, FOR THE MERGER
PROPOSAL, AND FOR THE NAME CHANGE PROPOSAL.
PPTF. For the reasons described above, at meetings held on October 3, 1997,
the PPTF Board unanimously (with eight trustees present and one trustee absent)
approved and adopted the proposed Restated Merger Agreement and all of the
transactions contemplated thereby as being in the best interests of PPTF and its
policyholders. On April 14, 1998, the PPTF Board unanimously (with nine trustees
present and no trustees absent) ratified the First Amendment. The provisions of
Section 1.28 of the Merger Agreement did not affect the determination by the
PPTF Board that the transactions contemplated by the Merger Agreement are in the
best interests of PPTF and its Members. THE PPTF BOARD RECOMMENDS THAT MEMBERS
OF PPTF VOTE FOR THE MERGER PROPOSAL.
OPINION OF PROFESSIONALS GROUP FINANCIAL ADVISOR -- COCHRAN, CARONIA & CO.
General. Pursuant to an engagement letter dated August 8, 1997 between
Professionals Group and Cochran, Caronia & Co., Professionals Group retained
Cochran, Caronia & Co. to act as its financial advisor in connection with the
Mergers and related matters. As part of its engagement, Cochran, Caronia & Co.
agreed, if requested by Professionals Group, to render an opinion with respect
to the fairness from a financial point of view to Professionals Group
stockholders of the consideration to be paid by Professionals Group to the
Members of PPTF in respect of their Membership Rights. The principals of
Cochran, Caronia & Co. are nationally recognized specialists in the insurance
industry in general and in investment banking advisory services to the insurance
industry in particular. The principals of Cochran, Caronia & Co. have been
regularly engaged in evaluations of similar businesses and in advising
institutions with regard to mergers and acquisitions, as well as raising debt
and equity capital for such institutions. Professionals Group selected Cochran,
Caronia & Co. as its financial advisor based upon the qualifications, expertise
and reputation of the principals of Cochran, Caronia & Co. in such capacity, as
well as their existing relationship and familiarity with Professionals Group.
At the October 1, 1997 meeting of the Professionals Group Board, Cochran,
Caronia & Co. delivered to the Professionals Group Board its oral opinion, which
opinion was subsequently confirmed in writing, that as of October 1, 1997 the
consideration to be paid by Professionals Group to the Members of PPTF in
respect of their Membership Rights (the amount of which consideration was
determined by Professionals Group and PPTF on the basis of arm's length
negotiations between Professionals Group and PPTF) was fair, from a financial
point of view, to Professionals Group stockholders. No limitations were imposed
by Professionals Group on Cochran, Caronia & Co. with respect to the
investigations made or the procedures followed in rendering its opinion.
The full text of Cochran, Caronia & Co.'s written opinion to the
Professionals Group Board, as updated to April 27, 1998, which sets forth the
assumptions made, matters considered and limitations of review by Cochran,
Caronia & Co., is attached hereto as Annex D and is incorporated herein by
reference and should be read carefully and in its entirety in conjunction with
this Joint Proxy Statement/Prospectus. The following summary of Cochran, Caronia
& Co.'s opinion is qualified in its entirety by reference to the full text of
the opinion. Cochran, Caronia & Co.'s opinion is addressed to the Professionals
Group Board and does not constitute a recommendation to any stockholder of
Professionals Group or any Member of PPTF as to how such stockholder or Member
should vote at the Meetings.
In connection with its opinion, Cochran, Caronia & Co. has, among other
things: (i) reviewed the Merger Agreement and a draft of this Joint Proxy
Statement/Prospectus; (ii) reviewed certain historical business and financial
information relating to Professionals Group and PPTF; (iii) reviewed other
pertinent internally-generated reports with regard to the separate businesses
and prospects of Professionals Group and PPTF including, among other things, the
strategic objectives of each corporation and the potential benefits which might
be realized through consummation of the transactions contemplated by the Merger
Agreement; (iv) participated in senior management discussions of Professionals
Group and PPTF with regard to said strategic objectives which might be realized
through consummation of the transactions contemplated by the Merger Agreement;
(v) reviewed public information regarding other selected comparable
publicly-traded
70
<PAGE> 84
companies deemed relevant to the proposed business combination; (vi) reviewed
the financial terms and data of selected comparable business combinations
between insurance and insurance holding companies deemed relevant to the
proposed business combination; (vii) reviewed the historical market performance
and trading volume of Professionals Group Common Stock; (viii) reviewed certain
information pertaining to prospective cost savings and/or revenue enhancements
relative to the proposed business combination; (ix) reviewed and evaluated the
current stock distribution and ownership of Professionals Group Common Stock, as
well as the pro forma distribution and ownership following consummation of the
transactions contemplated by the Merger Agreement, based upon the contribution
of Professionals Group's assets, liabilities, stockholders' equity and earnings
to the combined entity; and (x) conducted such other financial studies, analyses
and investigations as Cochran, Caronia & Co. deemed appropriate. The oral and
written opinions provided by Cochran, Caronia & Co. to Professionals Group were
necessarily based upon economic, monetary, financial market and other relevant
conditions as of the dates thereof.
In connection with its review and arriving at its opinion, Cochran, Caronia
& Co. relied upon the accuracy and completeness of the financial information and
other pertinent information provided by Professionals Group and PPTF to Cochran,
Caronia & Co. for purposes of rendering its opinion. Cochran, Caronia & Co. did
not assume any obligation to independently verify any of the provided
information as being complete and accurate in all material respects. With regard
to the financial forecasts established and developed for Professionals Group and
PPTF and provided to Cochran, Caronia & Co. by the respective managements, as
well as projections of cost savings, revenue enhancements and operating
synergies, Cochran, Caronia & Co. assumed that these materials had been
reasonably prepared on bases reflecting the best available estimates and
judgments of Professionals Group and PPTF as to the future performance of the
separate and combined entities and that the projections provided a reasonable
basis upon which Cochran, Caronia & Co. could form its opinion. Neither
Professionals Group nor PPTF publicly discloses such internal management
projections of the type provided to Cochran, Caronia & Co. in connection with
Cochran, Caronia & Co.'s role as financial advisor to Professionals Group in
review of the transactions contemplated by the Merger Agreement. Therefore, such
projections cannot be assumed to have been prepared with a view towards public
disclosure. The projections were based upon numerous variables and assumptions
that are inherently uncertain, including, but notwithstanding, factors relative
to the general economic and competitive conditions facing Professionals Group
and PPTF. Accordingly, actual results could vary significantly from those set
forth in the respective projections.
Cochran, Caronia & Co. does not claim to be an expert in the evaluation of
insurance losses and loss costs and therefore assumes that such reserves for
Professionals Group and PPTF are adequate to cover such losses. In addition,
Cochran, Caronia & Co. does not assume responsibility for the review of
individual claims nor make an independent evaluation, appraisal or physical
inspection of the assets or individual properties of Professionals Group or
PPTF, nor was Cochran, Caronia & Co. provided with such appraisals. Furthermore,
Cochran, Caronia & Co. assumes that the transactions contemplated by the Merger
Agreement will be consummated in accordance with the terms set forth in the
Merger Agreement, without any waiver of any material terms or conditions by
Professionals Group and that obtaining the necessary regulatory approvals for
the transactions contemplated by the Merger Agreement will not have an adverse
effect on either separate entity or the combined entity. Moreover, in each
analysis that involves per share data for Professionals Group or the combined
entity, Cochran, Caronia & Co. adjusted the data to reflect full dilution (i.e.,
the exercise of all outstanding options and/or warrants). In particular,
Cochran, Caronia & Co. assumes that the transactions contemplated by the Merger
Agreement will be recorded as a "pooling-of-interests" in accordance with
generally accepted accounting principles.
In connection with rendering its opinion to the Professionals Group Board,
Cochran, Caronia & Co. performed a variety of financial and comparative analyses
which are briefly summarized below. Such summary of analyses does not purport to
be a complete description of the analyses performed by Cochran, Caronia & Co.
Moreover, Cochran, Caronia & Co. believes that these analyses must be considered
as a whole and that selecting portions of such analyses and the factors
considered by it, without considering all such analyses and factors, could
create an incomplete scope of the process underlying the analyses and, more
importantly, the opinion derived from them. The preparation of a financial
advisor's opinion is a complex process involving
71
<PAGE> 85
subjective judgments and is not necessarily susceptible to partial analyses or a
summary description of such analyses. In its full analysis, Cochran, Caronia &
Co. also accounted for the assessment of general economic, financial market and
other financial conditions. Furthermore, Cochran, Caronia & Co. drew from its
past experience in similar transactions, as well as its experience in the
valuation of securities and its knowledge of the insurance industry on a whole.
Any estimates contained in Cochran, Caronia & Co.'s analyses were not
necessarily indicative of future results or values which may significantly
diverge more or less favorably from such estimates. Estimates of company
valuations do not purport to be appraisals or necessarily reflect the prices at
which companies or their respective securities actually may be sold.
The following is a summary of the material financial and comparative
analyses considered by Cochran, Caronia & Co. in connection with the Cochran,
Caronia & Co. opinion of October 1, 1997.
Market Multiple Analysis. Cochran, Caronia & Co. reviewed and compared
actual closing price data of Professionals Group with corresponding data for the
following selected companies: FPIC Insurance Group, Inc.; Frontier Insurance
Group, Inc.; Medical Assurance, Inc.; MMI Companies, Inc.; and SCPIE Holdings,
Inc., which companies, including Professionals Group, comprise the "Selected
Peer Group." These companies were selected based on their underwriting of
medical malpractice and related lines of insurance, as well as the markets in
which they operate, their premium volume and other relevant criteria.
The analysis of the Selected Peer Group indicated, among other things, that
(i) the average multiple of price to respective last twelve months' earnings was
17.3 for the Selected Peer Group, (ii) the average multiple of price to 1997
estimated earnings was 13.8 for the Selected Peer Group (based on a published
consensus market estimate), and (iii) the average multiple of price to 1998
estimated earnings was 12.0 for the Selected Peer Group (based on a published
consensus market estimate), based on the market prices as of September 26, 1997
and financial data. The average ratio of price to GAAP book value was 184%. In
addition, Cochran, Caronia & Co. evaluated the statistical relationship between
the respective returns on equity and the respective ratios of market value to
book value for the Selected Peer Group companies. Selecting comparable multiples
for the referenced ratios and incorporating a control premium ranging from 25%
to 40% that is implicit in merger and acquisition transactions resulted in an
imputed reference range of $138 million to $214 million. Accordingly, the
consideration to be paid by Professionals Group to the Members of PPTF in
respect of their Membership Rights was within the range of values implied in the
above analysis.
Contribution Analysis. Cochran, Caronia & Co. analyzed the contribution of
each of PPTF and Professionals Group to the stockholders' equity and after-tax
net income of the pro forma combined company. This analysis showed that, among
other factors, PPTF would have contributed 54.8%, 49.4% and 53.7% of the net
premium earned, net income and GAAP book value of the pro forma combined entity
as of and for the year ended December 31, 1996, respectively. These percentages
were compared to a proposed ownership of 53.8% of the combined entity to be held
by Members of PPTF.
Accretion/Dilution Analysis. Cochran, Caronia & Co. analyzed the changes in
per share earnings and GAAP book value for Professionals Group Common Stock
after consummation of the transactions contemplated by the Merger Agreement. The
analysis was performed on the basis of estimated financial information for
Professionals Group and PPTF as of and for the year ending December 31, 1997.
The analysis indicated, among other things, that on a pro forma basis the
transactions contemplated by the Merger Agreement would result in a (3.8)%
decrease in earnings per share of Professionals Group Common Stock for the
twelve months ending December 31, 1997 (assuming certain estimated savings
identified by management relating to those transactions). From this analysis,
Cochran, Caronia & Co. concluded that, on a pro forma basis, the transaction
would be only slightly dilutive to holders of Professionals Group Common Stock.
Analysis of Selected Mergers and Acquisitions. Cochran, Caronia & Co.
reviewed seven pending and completed specialty property and casualty insurance
company acquisitions. Cochran, Caronia & Co. reviewed the transaction multiples
to GAAP book value and latest twelve months' earnings of the acquired company
and computed median ratios and multiples for the group and selected comparable
multiples for an imputed valuation range.
72
<PAGE> 86
The calculations yielded a median transaction multiple to GAAP book value
of 260%. The high transaction multiple to GAAP book value was 400% and the low
transaction multiple to GAAP book value was 100%. The median multiple of
earnings was 20.5. The high multiple of earnings was 31.9 and the low multiple
of earnings was 11.3. Applying the selected multiples for each of these ratios
to PPTF's actual financial data as of December 31, 1996 showed an imputed
reference range of $133 million to $255 million. Accordingly, the consideration
to be paid by Professionals Group to the Members of PPTF in respect of their
Membership Rights was within the range of values implied in the above analyses.
Discounted Cash Flow Analysis. Using a discounted cash flow analysis,
Cochran, Caronia & Co. estimated the present value of the future streams of
after-tax dividends that PPTF could distribute to Professionals Group based on a
historical financial analysis provided by PPTF's management. Cochran, Caronia &
Co. then estimated the terminal value of PPTF by applying market-based earnings
multiples to the estimated earnings in year five ranging from 8.0x to 12.0x. The
five-year cash flow streams and terminal values were then discounted to present
values using discount rates ranging between 12% and 16%, chosen to reflect
different assumptions regarding the required rates of return for PPTF's core
business. On the basis of such varying assumptions, this discounted cash flow
analysis indicated a reference range of $110 million to $168 million.
Accordingly, the consideration to be paid by Professionals Group to the Members
of PPTF in respect of their Membership Rights is within the range of values
implied in the above analysis.
Other Analysis. In addition to performing the analysis summarized above,
Cochran, Caronia & Co. also considered the general market for property and
casualty insurance company mergers, PPTF's relative share of the Florida medical
malpractice insurance market and the general economic conditions and prospects
of those markets. Cochran, Caronia & Co.'s accretion/dilution analysis and
discounted cash flow analysis were based upon Professionals Group's and PPTF's
management forecasts (including variations, assumptions and adjustments made by
Cochran, Caronia & Co. to reflect the anticipated effects of potential
merger-related synergies identified by the management of Professionals Group).
No comparable company or transaction used in Cochran, Caronia & Co.'s
market multiple analysis or selected merger and acquisition analyses is
identical to Professionals Group, PPTF, or the transactions contemplated by the
Merger Agreement. Accordingly, an analysis of the results of the foregoing
necessarily involves complex considerations and judgments concerning the
differences in financial and operating characteristics of the companies and
other factors that could affect the public trading values or acquisition values
of the companies to which they are being compared. Mathematical analysis (such
as determining the mean or median) is not, in itself, a meaningful method of
evaluating comparable company or comparable transaction data.
For its financial advisory services provided to date to Professionals Group
(including the rendering of a fairness opinion), Cochran, Caronia & Co. has been
paid $100,000. Additional fees equal to approximately $100,000 are payable to
Cochran, Caronia & Co. in connection with updating its analysis in connection
with this Joint Proxy Statement/Prospectus. Upon closing of the INSCO Merger,
Cochran, Caronia & Co. will be paid a fee of $300,000. In addition,
Professionals Group has agreed to reimburse Cochran, Caronia & Co. for all
reasonable out-of-pocket expenses incurred by it on Professionals Group's
behalf, as well as indemnify Cochran, Caronia & Co. against certain liabilities,
including any which may arise under the Federal securities laws.
OPINION OF PROFESSIONALS GROUP FINANCIAL ADVISOR -- MCDONALD & COMPANY
General. Pursuant to an engagement letter dated August 7, 1997 between
Professionals Group and McDonald & Company, Professionals Group retained
McDonald & Company as its financial advisor in connection with the Mergers and
related matters. Professionals Group has requested that McDonald & Company
render its opinion with respect to the fairness, from a financial point of view,
to Professionals Group stockholders of the financial consideration to be paid by
Professionals Group to the Members of PPTF in respect of their Membership
Rights. McDonald & Company rendered its oral opinion to the Board of Directors
of Professionals Group on October 1, 1997, which it subsequently confirmed in
writing, that as of the date of such opinion, the financial consideration to be
paid by Professionals Group to the Members of PPTF in
73
<PAGE> 87
respect of their Membership Rights was fair, from a financial point of view, to
the holders of Professionals Group Common Stock.
The full text of the opinion of McDonald & Company, updated as of April 27,
1998, which sets forth certain assumptions made, matters considered and
limitations on the reviews undertaken, is attached as Annex E to this Joint
Proxy Statement/Prospectus, and should be read in its entirety. The summary of
the opinion of McDonald & Company set forth in this Joint Proxy
Statement/Prospectus is qualified in its entirety by reference to the opinion.
McDonald & Company's opinion is addressed to the Professionals Group Board and
should not be construed by holders of Professionals Group Common Stock as a
recommendation as to how such holders should vote at the Professionals Group
Annual Meeting.
In arriving at its opinion, McDonald & Company reviewed, among other
things, the Merger Agreement together with the exhibits and schedules thereto,
certain publicly available information relating to the business, financial
condition and operations of Professionals Group and PPTF as well as certain
other non-public information, primarily financial in nature, furnished to it by
Professionals Group and PPTF relating to their respective businesses, earnings,
assets, financial forecasts and prospects. McDonald & Company also held
discussions with members of senior management of Professionals Group and PPTF
concerning their respective businesses, assets, financial forecasts and
prospects. McDonald & Company also reviewed certain publicly available
information concerning the trading of, and the trading market for, Professionals
Group Common Stock and certain publicly available information concerning
comparable companies and transactions, all as more fully set forth in McDonald &
Company's opinion.
McDonald & Company was not engaged to and did not conduct a physical
inspection of any of the assets, properties or facilities of either
Professionals Group or PPTF, and was not engaged to conduct and has not made,
obtained or been furnished with any independent evaluation or appraisal of any
such assets, properties or facilities or any of the liabilities of Professionals
Group or PPTF. McDonald & Company has assumed and relied, without independent
investigation, upon the accuracy and completeness of the financial and other
information provided to it or publicly available, has relied upon the
representations and warranties of Professionals Group and PPTF contained in the
Merger Agreement, and has not independently attempted to verify any such
information. McDonald & Company has also assumed that all of the conditions to
the Mergers as set forth in the Merger Agreement, including the tax-free
treatment of the Mergers to the Members of PPTF, would be satisfied on a timely
basis in the manner contemplated by the Merger Agreement. No limitations were
imposed by Professionals Group upon McDonald & Company with respect to the scope
of its investigation, nor were any specific instructions given to McDonald &
Company in connection with its opinion.
In connection with rendering its opinion dated October 1, 1997 to the
Professionals Group Board, McDonald & Company considered a variety of financial
analyses, which are summarized below. McDonald & Company believes that its
analyses must be considered as a whole and that selecting portions of such
analyses and of the factors considered by McDonald & Company without considering
all such analyses and factors may create an incomplete view of the analytical
process underlying McDonald & Company's opinion. In its analyses, McDonald &
Company made numerous assumptions with respect to industry performance, business
and economic conditions, and other matters. Any estimates contained in McDonald
& Company's analyses are not necessarily indicative of future results or values,
which may be significantly more or less favorable than such estimates.
The following is a summary of the material analyses considered by McDonald
& Company in connection with McDonald & Company's opinion dated October 1, 1997:
Comparison with Selected Companies. McDonald & Company compared the
financial performance and stock market valuation of Professionals Group and PPTF
with corresponding data for the following selected companies: FPIC Insurance
Group, Inc., Medical Assurance, Inc., MMI Companies, Inc. and SCPIE Holdings,
Inc. (the "Selected Companies"). These companies were selected based on their
underwriting of medical malpractice and related lines of insurance, as well as
the markets in which they operate, their sizes, and other relevant criteria. At
the time, none of the Selected Companies had announced a merger transaction or
disclosed a possible interest in pursuing a possible merger transaction which
would have significantly affected its stock market valuation.
74
<PAGE> 88
McDonald & Company's analysis of the Selected Companies indicated, among
other things, that, based on market prices as of September 30, 1997: (i) the
median multiple of share price to last twelve months operating earnings per
share for the Selected Companies was 12.3, with a high of 17.5 and a low of 8.8;
(ii) the median multiple of share price to estimated 1997 operating earnings per
share (based on published consensus estimates obtained from First Call) was
12.5, with a high of 17.3 and a low of 8.3; (iii) the median multiple of share
price to estimated 1998 operating earnings per share (based on published
consensus estimates obtained from First Call) was 11.2, with a high of 14.8 and
a low of 7.3; (iv) the median ratio of share price to GAAP book value per share
(based on financial data as of June 30, 1997) was 121%, with a high of 254% and
a low of 102%. Selecting comparable multiples for the referenced ratios and
incorporating an assumed control premium of 20% to 40% resulted in an imputed
reference range of $153.0 million to $199.0 million. Accordingly, the
consideration to be paid by Professionals Group to the Members of PPTF in
respect of their Membership Rights was within the range of values implied in the
above analysis.
Contribution Analysis. McDonald & Company analyzed the contribution of each
of PPTF and Professionals Group to, among other things, the stockholders' equity
and after-tax net income of the pro forma combined company. This analysis showed
that, among other factors, PPTF would have contributed 54.8%, 49.4% and 53.7% of
the net premium earned, net income and GAAP book value of the pro forma combined
company as of and for the year ended December 31, 1996, respectively. These
percentages were compared to a proposed ownership of 53.8% of the combined
company to be held by Members of PPTF.
Pro Forma Merger Analyses. McDonald & Company analyzed the changes in per
share amount of earnings and GAAP book value for Professionals Group Common
Stock after consummation of the Mergers. The analysis was performed on the basis
of estimated financial information provided by Professionals Group management
for both companies as of and for the years ended December 31, 1997 and 1998. The
analysis indicated, among other things, that on a pro forma basis the Mergers
would have resulted in a decrease in operating earnings per share of 9.6% and
6.5%, respectively, for Professionals Group Common Stock for the twelve months
ended December 31, 1997 and 1998 (assuming certain management estimates of
savings relating to the Mergers). The analysis also indicated that on a pro
forma basis the Mergers would have resulted in a 1.2% decrease in GAAP book
value per share for Professionals Group Common Stock as of December 31, 1997.
Analysis of Selected Merger Transactions. McDonald & Company reviewed 17
pending and recently completed specialty property and casualty insurance company
acquisitions having transaction values less than $1.0 billion. For each such
acquisition, McDonald & Company reviewed the ratio of the offer value to GAAP
book value and the multiple of the offer value to the last twelve months
earnings of the acquired company and computed median ratios and multiples for
the group.
The calculations yielded a median ratio of price to GAAP book value of
135%. The high ratio of price to GAAP book value was 400% and the low ratio of
price to GAAP book value was 90%. The median multiple of earnings was 16.9x.
Applying the medians for each of these ratios to PPTF's actual financial data as
of December 31, 1996 showed an imputed reference range of $138.0 million to
$214.4 million.
No company or transaction used in the above analyses as a comparison is
identical to Professionals Group, PPTF, or the Mergers. Accordingly, an analysis
of the results of the foregoing necessarily involves complex considerations and
judgments concerning the differences in financial and operating characteristics
of the companies and other factors that could affect the public trading values
or acquisition values of the companies to which they are being compared.
Mathematical analysis (such as determining the mean or median) is not, in
itself, a meaningful method of using comparable company or comparable
transaction data.
Discounted Cash Flow Analysis. Using a discounted cash flow analysis,
McDonald & Company estimated the present value of the future streams of
after-tax cash flows that PPTF could distribute to Professionals Group over a
five year period from 1998 through 2002, under various assumptions, based upon
Professionals Group's and PPTF's management forecasts. McDonald & Company then
estimated the terminal value of PPTF after the five year period by applying an
estimated perpetual growth rate of 5.0% to the terminal year's projected
after-tax cash flow and then applied to this multiples ranging from 7.7x to
11.1x. The five year cash flow streams and terminal values were then discounted
to present values using different discount rates of
75
<PAGE> 89
between 14% and 18%, which were chosen to reflect different assumptions
regarding the estimated required rates of return of prospective buyers of PPTF.
On the basis of such varying assumptions, this discounted cash flow analysis
indicated a reference range of $137.7 million to $200.6 million. This analysis
was based upon Professionals Group's and PPTF's management forecasts including
variations and assumptions made by McDonald & Company which included adjustments
to reflect the anticipated effects of potential merger-related cost savings
estimated by Professionals Group. Professionals Group's and PPTF's management
forecasts are based upon many factors and assumptions, many of which are beyond
the control of Professionals Group or PPTF.
Other Analysis. In addition to performing the analyses summarized above,
McDonald & Company also considered its analysis of the general market for
property and casualty insurance company mergers, PPTF's relative share of the
Florida medical malpractice insurance market and the general economic conditions
and prospects of those markets.
In performing its analyses, McDonald & Company made numerous assumptions
with respect to industry performance, general business and economic conditions
and other matters. The analyses performed by McDonald & Company are not
necessarily indicative of actual values, which may be significantly more or less
favorable than the values suggested by such analyses. Such analyses were
prepared solely as part of McDonald & Company's opinion.
The term "fair from a financial point of view" is a standard phrase
contained in investment banker fairness opinions and refers to the fact that
McDonald & Company's opinion as to the fairness of the financial consideration
to be paid by Professionals Group to the Members of PPTF in respect of their
Membership Rights is addressed solely to the financial attributes of such
consideration. The analyses do not purport to be appraisals or to reflect the
prices at which a company might actually be sold. In addition, as described
above, McDonald & Company's fairness opinion was only one of the factors taken
into consideration by the Professionals Group Board in making its determination
to approve the Merger Agreement. The Professionals Group Board did not assign
any relative or specific weights to such factors, and individual directors may
have given differing weights to different factors. See "THE
TRANSACTIONS -- Reasons for the Transactions." Consequently, the McDonald &
Company analyses described above, in and of themselves, should not be viewed as
determinative of the Professionals Group Board's conclusions with respect to the
value of PPTF or of the decision of the Professionals Group Board to agree to
the Mergers or the amount of financial consideration to be paid by Professionals
Group to the Members of PPTF in respect of their Membership Rights.
McDonald & Company's opinion is based on economic and market conditions and
other circumstances existing on, and information made available as of, the date
of such opinion. In addition, the opinion does not address Professionals Group's
underlying business decision to effect the Mergers or any other terms of the
Mergers. McDonald & Company is not rendering any opinion as to the value of
Professionals Group Common Stock or PPTF Membership Rights at the INSCO
Effective Time or the PICOM Effective Time. Furthermore, McDonald & Company has
not been engaged to and does not express an opinion with respect to any issuance
of stock, payments or other compensation that may be made to trustees or
officers of PPTF pursuant to Section 1.28 of the Merger Agreement or otherwise,
other than in respect of their Membership Rights.
In connection with its opinion dated as of the date of this Joint Proxy
Statement/Prospectus, McDonald & Company performed procedures to update certain
of its analyses and reviewed the assumptions on which such analyses were based
and the factors considered therewith.
McDonald & Company, as part of its investment banking business, is
customarily engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. McDonald & Company has
extensive experience with the valuation of financial institutions. The
Professionals Group Board selected McDonald & Company as its financial advisor
because of McDonald & Company's industry expertise with respect to insurance
companies and other financial
76
<PAGE> 90
institutions and because of McDonald & Company's experience in transactions
similar to the Mergers. McDonald & Company is not affiliated with either
Professionals Group or PPTF.
In the ordinary course of its business, McDonald & Company may trade the
securities of Professionals Group for its own account and for the accounts of
its customers. Accordingly, at any time McDonald & Company may hold a long or
short position in such securities.
For its services as financial advisor, Professionals Group has paid
McDonald & Company a retainer of $50,000 and a fee of $75,000 upon the rendering
of McDonald & Company's oral opinion to the Professionals Group Board.
Additional fees equal to approximately $75,000 are payable to McDonald & Company
in connection with updating its analysis in connection with this Joint Proxy
Statement/Prospectus. Professionals Group has also agreed to reimburse McDonald
& Company for its reasonable out-of-pocket expenses up to $15,000 and to
indemnify McDonald & Company against certain liabilities, including certain
liabilities under federal securities laws.
OPINION OF PPTF FINANCIAL ADVISOR -- DONALDSON, LUFKIN & JENRETTE
In its role as financial advisor to PPTF, Donaldson, Lufkin & Jenrette was
asked by PPTF to render its opinion as to the fairness, from a financial point
of view, to the Members of PPTF, as a group, of the consideration to be received
by such Members pursuant to the terms of the Merger Agreement. On October 3,
1997, Donaldson, Lufkin & Jenrette delivered its written opinion to the PPTF
Board to the effect that as of the date of such opinion and based upon and
subject to the assumptions, limitations and qualifications set forth in such
opinion, the Aggregate Merger Shares to be received by the Members, as a group,
was fair, from a financial point of view. Donaldson, Lufkin & Jenrette was
subsequently asked by PPTF to update its opinion and on April 27, 1998 such
opinion was rendered.
A COPY OF THE DLJ OPINION, AS UPDATED TO APRIL 27, 1998, IS ATTACHED TO
THIS JOINT PROXY STATEMENT/PROSPECTUS AS ANNEX G. MEMBERS OF PPTF ARE URGED TO
READ THE OPINION IN ITS ENTIRETY FOR ASSUMPTIONS MADE, PROCEDURES FOLLOWED,
OTHER MATTERS CONSIDERED AND LIMITS OF THE REVIEW BY DONALDSON, LUFKIN &
JENRETTE.
The DLJ Opinion was prepared for the PPTF Board and is directed only to the
fairness, from a financial point of view, of the Aggregate Merger Shares to be
received by the Members, as a group, and does not constitute a recommendation to
any Member as to how to vote at the PPTF Special Meeting. Donaldson, Lufkin &
Jenrette did not express any opinion as who is eligible to receive consideration
or the fairness of the proposed consideration to be paid to any individual
Member or any class of Members.
The DLJ Opinion does not constitute an opinion as to the price at which
Professionals Group Common Stock will actually trade at any time. The number of
Aggregate Merger Shares was determined in arm's length negotiations between PPTF
and Professionals Group, in which negotiations Donaldson, Lufkin & Jenrette
advised PPTF. Except as described below, no restrictions or limitations were
imposed by the PPTF Board upon Donaldson, Lufkin & Jenrette with respect to the
investigations made or the procedures followed by Donaldson, Lufkin & Jenrette
in rendering its opinion. Donaldson, Lufkin & Jenrette was not requested to, nor
did it, solicit the interests of any other party in acquiring PPTF.
In arriving at its opinion, Donaldson, Lufkin & Jenrette reviewed the
Merger Agreement and the exhibits and schedules thereto and the Amended Trust
Agreement dated January 1, 1987 of PPTF. Donaldson, Lufkin & Jenrette also
reviewed financial and other information that was publicly available or
furnished to it by PPTF and Professionals Group, including information provided
during discussion with their respective managements. Included in the information
provided during discussions with the respective managements were certain
financial projections of PPTF for the years ending December 31, 1997 through
December 31, 2000 prepared by the management of PPTF and certain financial
projections of Professionals Group, on a stand-alone basis, for the years ending
December 31, 1997 through December 31, 2001 prepared by the management of
Professionals Group. In addition, Donaldson, Lufkin & Jenrette compared certain
financial data of PPTF and financial and securities data of Professionals Group
with various other companies whose securities are traded
77
<PAGE> 91
in public markets, reviewed the historical stock prices and trading volumes of
Professionals Group Common Stock, reviewed prices and premiums paid in other
business combinations and conducted such other financial studies, analyses and
investigations as Donaldson, Lufkin & Jenrette deemed appropriate for purposes
of the DLJ Opinion.
Donaldson, Lufkin & Jenrette also reviewed the FPIC Proposals, but was
informed that, for the reasons described above, the PPTF Board determined not to
proceed with further discussions with FPIC regarding a possible transaction, and
therefore was instructed to evaluate the Mergers without taking into account any
of the FPIC Proposals. Accordingly, the DLJ Opinion does not address the
relative merits of the Mergers and the FPIC Proposals.
In rendering the DLJ Opinion, Donaldson, Lufkin & Jenrette relied upon and
assumed the accuracy and completeness of all of the financial and other
information that was available to it from public sources, that was provided to
it by PPTF and Professionals Group or their respective representatives, or that
was otherwise reviewed by it. With respect to the financial projections of PPTF
supplied to it, Donaldson, Lufkin & Jenrette assumed that they were reasonably
prepared on a basis reflecting the best currently available estimates and
judgments of the management of PPTF as to the future operating and financial
performance of PPTF. With respect to the financial projections of Professionals
Group supplied to it, Donaldson, Lufkin & Jenrette assumed that they were
reasonably prepared on a basis reflecting the best currently available estimates
and judgments of the management of Professionals Group as to the future
operating and financial performance of Professionals Group. Donaldson, Lufkin &
Jenrette did not assume any responsibility for making an independent evaluation
of PPTF's and Professionals Group's assets or liabilities or for making any
independent verification of any of the information reviewed by it. Donaldson,
Lufkin & Jenrette relied as to certain legal matters relating to PPTF as to
which it made inquiry on advice of counsel to PPTF.
The DLJ Opinion is necessarily based on economic, market, financial and
other conditions as they existed on, and on the information made available to
Donaldson, Lufkin & Jenrette as of, the date of the DLJ Opinion. It should be
understood that, although subsequent developments may affect the DLJ Opinion,
Donaldson, Lufkin & Jenrette does not have any obligation to update, revise or
reaffirm the DLJ Opinion. Donaldson, Lufkin & Jenrette is expressing no opinion
herein as to the prices at which Professionals Group Common Stock will actually
trade at any time. The following is a summary of the analysis provided to PPTF
by Donaldson, Lufkin & Jenrette in connection with the preparation of the DLJ
Opinion.
PPTF Public Market Valuation Analysis. To provide contextual data and
comparative market information, Donaldson, Lufkin & Jenrette compared selected
operating and financial data and ratios for PPTF to the corresponding data and
ratios of certain publicly traded medical malpractice insurance companies which
Donaldson, Lufkin & Jenrette deemed relevant. Such comparable companies
consisted of: MMI Companies, Inc., Medical Assurance, Inc. and SCPIE Holdings
Inc. (the "Publicly Traded Companies"). Such ratios included, among others, the
multiples of stock price to GAAP, operating earnings per share ("EPS") for the
year ended December 31, 1996, estimated GAAP operating EPS for 1997 and 1998 (as
estimated by research analysts and compiled by Institutional Brokers Estimating
Service) and stockholders' equity per share as of June 30, 1997, as well as the
ratios of the aggregate equity market capitalization plus the amount of debt and
preferred stock outstanding ("Enterprise Value") to statutory earnings for the
last fiscal year ("LFY") and Enterprise Value to statutory capital and surplus
as of the end of the LFY. Closing prices as of September 30, 1997 were used in
this analysis.
The range of stock price as a multiple of 1996 GAAP operating EPS for the
Publicly Traded Companies was 10.9x to 19.0x. The ranges of price as a multiple
of estimated GAAP operating earnings for 1997 and 1998 were 11.3x to 16.6x and
9.9x to 14.8x, respectively. The range of stock price as a multiple of LFY
stockholders' equity per share for the Publicly Traded Companies was 1.17x to
2.27x. The ranges of Enterprise Value as a multiple of LFY statutory earnings
and Enterprise Value as a multiple of LFY statutory capital and surplus were
11.2x to 18.8x and 1.54x to 3.15x, respectively. The average multiples of stock
price to 1996 GAAP operating EPS and estimated GAAP operating EPS for 1997 and
1998 for the Publicly Traded Companies were 14.9x, 14.0x and 12.5x,
respectively. The average multiples of stock price to stockholders' equity per
share, Enterprise Value to statutory earnings and Enterprise Value to statutory
capital and surplus
78
<PAGE> 92
for the Publicly Traded Companies were 1.54x, 14.0x and 2.10x, respectively. The
$159.5 million in consideration which Donaldson, Lufkin & Jenrette assumed would
be paid by Professionals Group would result in purchase price multiples to
PPTF's 1996 GAAP operating earnings, estimated GAAP operating earnings for 1997
and 1998 and stockholders' equity as of June 30, 1997 of 19.8x, 19.2x, 15.6x and
1.51x, respectively. The same consideration would result in Enterprise Value
multiples to PPTF's LFY statutory earnings and LFY statutory capital and surplus
of 12.5x and 1.52x, respectively. This analysis indicated that the total
consideration to be received by PPTF would result in multiples of total
consideration to 1996 GAAP operating earnings, estimated GAAP operating earnings
for 1997 and 1998 and stockholders' equity that fall within or above the ranges
detailed above. Multiples of Enterprise Value to statutory earnings would fall
within and Enterprise Value to statutory capital and surplus would fall below
the ranges of the Publicly Traded Companies.
Donaldson, Lufkin & Jenrette's Public Market Valuation Analysis shows that
only one transaction multiple fell below the range of the Publicly Traded
Companies. The $159.5 million in consideration which Donaldson, Lufkin &
Jenrette assumed would be paid by Professionals Group would result in an
Enterprise Value multiple to PPTF's LFY statutory capital and surplus of 1.52x.
This multiple fell just below the range of Enterprise Value to LFY statutory
capital and surplus of the Publicly Traded Companies of 1.54x to 3.15x.
In arriving at its opinion, Donaldson, Lufkin & Jenrette did not place
particular weight on any individual analysis, but instead examined the results
of all of the analyses taken as a whole. Accordingly, Donaldson, Lufkin &
Jenrette believes that its analyses must be considered as a whole and that
selecting portions of its analyses and the factors considered by it, without
considering all analyses and factors, creates an incomplete view of the
evaluation process underlying its opinion. As a result, although Donaldson,
Lufkin & Jenrette took into consideration the fact that one multiple did not
fall within the range of those of comparable companies, the results of all of
the analyses as a whole allowed Donaldson, Lufkin & Jenrette to support its
determination of fairness.
PPTF Merger Market Valuation Analysis. Donaldson, Lufkin & Jenrette
reviewed publicly available information for the following selected transactions
involving the acquisition of medical malpractice insurance companies since
December 1994 (the "Selected Medical Malpractice Insurance Transactions"): MMI
Companies, Inc. -- Health Providers Insurance Company (the "MMI Transaction")
and Michigan Physicians Mutual Liability Company -- Kentucky Medical Insurance
Company (the "MPMLC Transaction"). In reviewing these transactions, several
factors were considered, including: (i) the lack of publicly available
information for subsidiary and private company transactions which represent a
significant portion of merger and acquisition activity within the medical
malpractice insurance industry and (ii) the lack of directly comparable
transactions. The Selected Medical Malpractice Insurance Transactions were not
intended to represent the complete list of medical malpractice insurance company
transactions which have occurred over the period contemplated. Rather, such
transactions were used in this analysis because the companies involved were
broadly deemed by Donaldson, Lufkin & Jenrette to operate in similar businesses
or have similar financial characteristics to PPTF. Due to the scarcity of
precedent medical malpractice insurance acquisitions, Donaldson, Lufkin &
Jenrette also reviewed publicly available information involving 26 acquisitions
of property and casualty insurance companies since 1994 (the "Selected P&C
Transactions"). The Selected P&C Transactions include a broader set of
transactions not limited to the medical malpractice insurance industry.
Donaldson, Lufkin & Jenrette reviewed the consideration paid in the
Selected Medical Malpractice Insurance Transactions and the Selected P&C
Transactions in terms of the price paid for the common stock as a multiple of
GAAP operating EPS for the last twelve months ("LTM") or LFY ended prior to the
announcement of such transactions. Donaldson, Lufkin & Jenrette also reviewed
the consideration paid in such transactions in terms of the price paid for the
common stock plus the amount of debt and preferred stock assumed to be repaid or
redeemed in such transactions (the "Transaction Value") as a multiple of
statutory earnings for the LTM or LFY ended prior to the announcement of such
transactions and as a multiple of statutory capital and surplus as of the end of
the last fiscal quarter ("LFQ") or LFY ended prior to the announcement of such
transactions. In analyzing acquisitions of medical malpractice insurance
companies and, more broadly, property and casualty insurance companies, the
purchase price paid may be expressed as a
79
<PAGE> 93
multiple of equity purchase price to GAAP operating EPS and to stockholders'
equity per share and of Transaction Value to statutory earnings and to statutory
capital and surplus. Variances in multiples for different transactions may
reflect such considerations as the consistency, quality and growth of earnings
and the company's capitalization, asset quality and return on capital. Since
statutory earnings and statutory capital and surplus do not reflect the cost of
a company's debt or preferred stock financing, which are usually at the holding
company level rather than the insurance company level, multiples of statutory
earnings and statutory capital and surplus are appropriately based on a
Transaction Value which includes the cost of assuming, repaying or redeeming
such debt or preferred stock financing. Since GAAP operating EPS and
stockholders' equity per share already reflect the cost of a company's debt or
preferred stock financing, analyses of multiples of GAAP operating EPS or
stockholders' equity are based on the price paid for the company's common stock,
which excludes the cost of assuming, repaying or redeeming such debt or
preferred stock financing. Comparing the multiples of Transaction Value to the
statutory earnings and statutory capital and surplus of PPTF with the multiples
paid in other transactions indicates whether the valuation being placed on PPTF
is within the range of values for other medical malpractice insurance companies
or property and casualty insurance companies.
The ratio of price as a multiple of LTM GAAP operating EPS for the MMI
Transaction was 6.3x. The ratio of stock price as a multiple of LFQ
stockholders' equity per share for the MMI Transaction and the MPMLC Transaction
was 0.81x and 1.04x, respectively. For the MMI Transaction, the Transaction
Value as a multiple of LFY statutory earnings was 7.8x and as a multiple of LFY
statutory surplus was 1.07x. The Transaction Value as a multiple of LFY
statutory surplus for the MPMLC Transaction was 1.32x as of the end of the LFY
ended prior to the announcement of the transaction. The range of price as a
multiple of LTM GAAP operating EPS for the Selected P&C Transactions was 5.0x to
31.3x. The range of stock price as a multiple of LFQ stockholders' equity per
share for the Selected P&C Transaction was 0.83x to 3.92x. Donaldson, Lufkin &
Jenrette found ranges of Transaction Value as a multiple of LFY statutory
earnings and of LFY or LFQ statutory capital and surplus of 6.3x to 26.6x and
0.56x to 3.92x, respectively. The average multiple of stock price of LTM GAAP
operating EPS for the Selected P&C Transactions was 13.6x The average multiple
of stock price to LFQ stockholders' equity per share for the Selected P&C
Transactions was 1.93x. The average multiples of Transaction Value to LFY
statutory earnings and Transaction Value to LFY or LFQ statutory capital and
surplus were 15.9x and 1.85x, respectively. Based on the consideration which
Donaldson, Lufkin & Jenrette assumed would be paid by Professionals Group, the
implied multiple of the price paid for PPTF to LTM GAAP operating earnings was
19.8x. Based on the consideration which Donaldson, Lufkin & Jenrette assumed
would be paid by Professionals Group, the implied multiple of the price assumed
to be paid for PPTF's GAAP equity was 1.51x. Based on the consideration which
Donaldson, Lufkin & Jenrette assumed would be paid by Professionals Group, the
implied multiples of Transaction Value for PPTF's LFY statutory earnings and
Transaction Value to PPTF's LFY statutory capital and surplus were 12.5x and
1.52x, respectively. The total consideration to be received by holders of the
Membership Rights would result in multiples of equity purchase price to LTM GAAP
operating earnings and equity purchase price to LFQ stockholders' equity within
or above the ranges outlined above. This consideration would also result in
multiples of Transaction Value to LFY statutory earnings and Transaction Value
to LFY statutory capital and surplus within the applicable ranges outlined
above.
Effect of the Acquisition on Professionals Group's Historical and Projected
Financial Position and Earnings. Donaldson, Lufkin & Jenrette analyzed certain
pro forma financial effects resulting from the transactions contemplated by the
Merger Agreement. Donaldson, Lufkin & Jenrette analyzed the pro forma effect of
the transactions contemplated by the Merger Agreement on Professionals Group's
operating EPS, book value per share and leverage ratio. The results of the pro
forma merger analysis are not necessarily indicative of future operating results
or financial position. Based on this analysis, Professionals Group's
stockholders would realize EPS dilution in 1997 and 1998, respectively. Pro
forma for such transactions, Professionals Group's book value per share would
also realize dilution. Pro forma for such transactions, Professionals Group's
ratio of debt to total capitalization as of June 30, 1997 would have been 14.1%
as compared to 19.4% before the transactions contemplated by the Merger
Agreement.
80
<PAGE> 94
Because the consideration to be issued to Members of PPTF upon consummation
of the transactions contemplated by the Merger Agreement will be in the form of
Professionals Group Common Stock, to provide comparative market information,
Donaldson, Lufkin & Jenrette compared selected historical and projected
operating and financial ratios of Professionals Group to the corresponding data
and ratios of certain selected publicly traded medical malpractice insurance
companies which Donaldson, Lufkin & Jenrette deemed relevant. Such comparable
companies consisted of: MMI Companies, Inc., Medical Assurance, Inc. and SCPIE
Holdings, Inc. (the "Selected Medical Malpractice Insurance Companies").
Such analysis included, among other things, the multiples of stock price to
GAAP operating EPS for 1997 and 1998 (as estimated by research analysts and
compiled by Institutional Brokers Estimating Service for the Selected Medical
Malpractice Insurance Companies and management's projections for Professionals
Group) and stockholders' equity per share as of June 30, 1997. Comparing the
multiples of Professionals Group's stock price to estimated GAAP operating EPS
and stockholders' equity per share with the multiples at which the Selected
Medical Malpractice Insurance Companies trade indicates whether Professionals
Group's stock price is within the range of values at which the Selected Medical
Malpractice Insurance Companies trade.
The low, average and high multiples of stock price to estimated 1997 GAAP
operating EPS were 11.3x, 14.0x and 16.6x, respectively, for the Selected
Medical Malpractice Insurance Companies. The multiple of stock price to
Professionals Group's estimated 1997 GAAP operating EPS was 12.7x. This multiple
falls within the range of multiples of the Selected Medical Malpractice
Insurance Companies. The low, average and high multiples of stock price to
estimated 1998 GAAP operating EPS were 9.9x, 12.5x and 14.8x, respectively, for
the Selected Medical Malpractice Insurance Companies. The multiple of stock
price to Professionals Group's estimated 1998 GAAP operating EPS was 12.2x. This
multiple falls within the range of multiples of the Selected Medical Malpractice
Insurance Companies. The low, average and high multiples of stock price to
stockholders' equity per share of the Selected Medical Malpractice Insurance
Companies as of June 30, 1997 were 1.17x, 1.54x and 2.27x, respectively. The
multiple of stock price to Professionals Group's stockholders' equity per share
as of June 30, 1997 was 1.47x. This multiple falls within the range of multiples
of the Selected Medical Malpractice Insurance Companies.
Contribution Analysis. Donaldson, Lufkin & Jenrette also examined the
percent contribution by PPTF to Professionals Group's operating results and
financial position pro forma for the transactions contemplated by the Merger
Agreement. The results of the pro forma analysis are not necessarily indicative
of future operating earnings or financial position. Of Professionals Group's
1997 estimated operating earnings and 1998 estimated operating earnings pro
forma for such transactions, PPTF would contribute 43.7% and 47.7%,
respectively. Of the pro forma June 30, 1997 total assets and stockholders'
equity, PPTF would contribute 52.6% and 53.1%, respectively. On a pro forma
basis, following consummation of the transactions contemplated by the Merger
Agreement, the Members of PPTF, collectively, will hold approximately 53.8% of
the shares of Professionals Group Common Stock then outstanding.
Limitations of Opinion. The summary set forth above does not purport to be
a complete description of the analysis performed by Donaldson, Lufkin &
Jenrette, but describes, in summary form, the principal elements of the analysis
provided to PPTF. The preparation of a fairness opinion involves various
determinations as to the most appropriate and relevant methods of financial
analysis and the application of these methods to the particular circumstances
and, therefore, such opinions are not readily susceptible to summary
description. Each of the analyses conducted by Donaldson, Lufkin & Jenrette was
carried out in order to provide a different perspective on the transactions
contemplated by the Merger Agreement and to add to the total mix of information
available. Donaldson, Lufkin & Jenrette did not form a conclusion as to whether
any individual analysis, considered in isolation, supported or failed to support
an opinion as to fairness. Rather, in reaching its conclusion, Donaldson, Lufkin
& Jenrette considered the results of the analyses in light of each other and
ultimately reached its opinion based on the results of all analyses taken as a
whole. Donaldson, Lufkin & Jenrette did not place particular reliance or weight
on any individual analysis, but instead concluded that its analyses, taken as a
whole, supported its determination. Accordingly, notwithstanding the separate
factors summarized above, Donaldson, Lufkin & Jenrette believes that its
analyses must be considered as a whole and that selecting portions of its
analyses and the factors considered by it, without considering all
81
<PAGE> 95
analyses and factors, may create an incomplete view of the evaluation process
underlying its opinion. The analyses performed by Donaldson, Lufkin & Jenrette
are not necessarily indicative of actual values or future results, which may be
significantly more or less favorable than those suggested by such analyses.
Engagement and Fees Payable to Donaldson, Lufkin & Jenrette. PPTF selected
Donaldson, Lufkin & Jenrette as its financial advisor because it is a nationally
recognized investment banking firm that has substantial experience in
transactions similar to the transactions contemplated by the Merger Agreement
and is familiar with PPTF, its business and the insurance industry. Pursuant to
the terms of an engagement letter dated September 29, 1997, PPTF has paid
Donaldson, Lufkin & Jenrette $800,000 for its services to date, including the
delivery of the DLJ Opinion. In addition, PPTF has agreed to pay Donaldson,
Lufkin & Jenrette $650,000 upon completion of the transactions contemplated by
the Merger Agreement, as a financial advisory fee. PPTF also agreed to reimburse
Donaldson, Lufkin & Jenrette for all out-of-pocket expenses (including the
reasonable fees and out-of-pocket expenses of counsel) incurred by Donaldson,
Lufkin & Jenrette in connection with its engagement and to indemnify Donaldson,
Lufkin & Jenrette and certain related persons against certain liabilities in
connection with its engagement, including liabilities under the Federal
securities laws. The terms of the fee arrangement with Donaldson, Lufkin &
Jenrette, which Donaldson, Lufkin & Jenrette and PPTF believe are customary in
transactions of this nature, were negotiated at arm's length between PPTF and
Donaldson, Lufkin & Jenrette and the PPTF Board was aware of such arrangement,
including the fact that a significant portion of the aggregate fee payable to
Donaldson, Lufkin & Jenrette is contingent upon consummation of the transactions
contemplated by the Merger Agreement.
SUMMARY OF THE MERGER AGREEMENT
Effective Times. Pursuant to the Merger Agreement, and at the INSCO
Effective Time, PPTF will merge with and into INSCO, with INSCO being the
surviving corporation in the INSCO Merger. Pursuant to the Merger Agreement, and
immediately following the INSCO Merger, at the PICOM Effective Time, INSCO will
merge with and into PICOM, with PICOM continuing on as the surviving insurance
corporation. In order to comply with the requirements and provisions of the
Michigan Insurance Code and the Florida Insurance Code, the business combination
of Professionals Group and PPTF involves two mergers, the INSCO Merger and the
PICOM Merger (which is expected to occur promptly after the INSCO Merger). Upon
consummation of the transactions contemplated by the Merger Agreement, (i)
Professionals Group will be the parent of PICOM, PICOM will hold all of the
assets and liabilities of PPTF and INSCO, and PPTF and INSCO will cease to
exist, (ii) PICOM will be renamed to reflect the combined insurance operations
of PPTF and PICOM, (iii) PICOM will maintain regional executive offices in
Okemos, Michigan and Coral Gables, Florida and local sales and service offices
in Florida, Illinois, Indiana and Ohio; (iv) all Members of PPTF will cease 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); (v) subject to the exercise of
dissenters' rights, all Membership Rights will be converted into an aggregate of
4,089,160 shares of Professionals Group Common Stock and will cease to exist;
and (vi) PPTF Policies will become and be insurance policies issued by PICOM and
will be converted from assessable insurance policies to nonassessable insurance
policies, without any endorsement or modification thereto. In the event that the
parties contemplate an amendment to the terms of the Merger Agreement regarding
the conversion of PPTF Policies to insurance policies issued by PICOM, and such
an amendment to the Merger Agreement is of the type which by law or pursuant to
the Merger Agreement may not be made without stockholder or Member approval,
Professionals Group and/or PPTF, as the case may be, may resolicit proxies from
the stockholders of Professionals Group and/or the Members of PPTF, as the case
may be, to obtain such approval. The parties do not presently contemplate such
an amendment.
The Closing Date will occur on a date to be specified by the parties which
will be no later than the later of January 1, 1998 or five business days after
the satisfaction or waiver (subject to applicable law) of the latest to occur of
the conditions precedent to the Mergers set forth in the Merger Agreement.
Professionals Group and PPTF each anticipate that the Mergers will be
consummated prior to July 1, 1998. However, the consummation of the Mergers
could be delayed as a result of delays in obtaining necessary regulatory agency
or other governmental approvals required for the transactions contemplated by
the Merger Agreement. There
82
<PAGE> 96
can be no assurances as to whether or when such approvals will be obtained or
that the Mergers will be consummated. If the Mergers are not effected on or
before August 13, 1998, the Merger Agreement may be terminated by either
Professionals Group or PPTF, unless the failure to effect the Merger by such
date is due to the failure of the party seeking to terminate the Merger
Agreement to perform or observe the covenants and agreements of such party set
forth therein.
Conversion of Membership Rights. Upon consummation of the INSCO Merger, but
subject to the exercise of dissenters' rights, all Membership Rights will be
converted into an aggregate of 4,089,160 shares of Professionals Group Common
Stock. In consideration for all of the Membership Rights, the Aggregate Merger
Shares will be allocated and distributed to Members of PPTF in accordance with
the Allocation Formula, which provides as follows: Each Member of PPTF who does
not timely and properly exercise dissenters' rights will be 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 policy premium on
such Member's PPTF Policy for the 12 months ending on the PPTF Record Date (the
Earned PPTF Policy Premium) to $56,037,359 (which is the 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 the cash equivalent value thereof based
on 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 the closing date with
respect to the transactions contemplated by the Merger Agreement. Members of
PPTF who timely and properly exercise dissenters' rights will be paid the fair
value of their Membership Rights. The Allocation Formula was determined by the
PPTF Board. Earned premium is the prorated portion of an insurance premium which
is no longer considered prepaid as a result of the elapsed time the insurance
policy has been in force. For example, after six months, $12,000 of a prepaid
$24,000 annual premium is considered earned premium.
By way of example, under the Allocation Formula, and assuming he or she
does not exercise dissenters' rights, a Member of PPTF whose PPTF Policy has
$24,000 of Earned PPTF Policy Premium would be entitled to 1,754.16 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 1,754 whole shares of Professionals Group Common Stock and in lieu of
the fractional share of Professionals Group Common Stock would be paid cash in
an amount determined by multiplying the amount of such fractional share (in this
example .16) by the Average Price.
The PPTF Board determined, however, that consistent with the original
intent of Article 12, the Allocation Formula should be based on "earned premium"
during the 12 months prior to the Record Date, rather than the "last premium
paid" before the PPTF Record Date. The PPTF Board made this decision because
changes in the operating practices of PPTF since 1987 have made the use of the
"last premium paid" inappropriate. The operating changes that cause this result
are (i) the decision by PPTF on July 1, 1997 to cease writing calendar year
policies and begin writing anniversary date policies, and (ii) the fact that the
Members make premium payments based on a number of plans other than the single
payment on January 1 of each year (including prepayment plans). The PPTF Board
determined that the use of earned premium was more consistent with the original
intent of Article 12 and would result in a more equitable distribution of the
Aggregate Merger Shares.
Only Members of PPTF who do not exercise dissenters' rights will be
entitled to be allocated and to receive a portion of the Aggregate Merger
Shares. Except for the shares (and cash in lieu of any fractional share) issued
to such Members of PPTF and the shares issued or issuable pursuant to Section
1.28 of the Merger Agreement (which, subject to certain vesting requirements,
contemplates the issuance of an aggregate of 153,000 shares of Professionals
Group Common Stock to certain PPTF trustees and officers over a four year
period), no other shares of Professionals Group Common Stock (or cash in lieu of
any fractional share) will be issued or issuable upon consummation of the
transactions contemplated by the Merger Agreement.
83
<PAGE> 97
Notwithstanding anything express or implied to the contrary in the Merger
Agreement or the Allocation Formula: (i) the aggregate number of shares of
Professionals Group Common Stock issuable as a result of the INSCO Merger will
be not more than 4,089,160 shares of Professionals Group Common Stock; (ii) no
fractional shares of Professionals Group Common Stock will be issued to any
Member and, in lieu thereof, all of said fractional shares will be paid the cash
equivalent value thereof based on 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 the closing date with respect to the transactions contemplated by the Merger
Agreement; and (iii) except as otherwise expressly provided in Section 1.28 of
the Merger Agreement (which, subject to certain vesting requirements,
contemplates the issuance of an aggregate of 153,000 shares of Professionals
Group Common Stock to certain PPTF trustees and officers over a four year
period), no shares of Professionals Group Common Stock (or cash in lieu of any
fractional share) will be issuable or issued upon consummation of the
transactions contemplated by the Merger Agreement to any person or entity other
than a Member of PPTF who does not exercise dissenters' rights.
Each share of Professionals Group Common Stock outstanding immediately
prior to consummation of the transactions contemplated by the Merger Agreement
will remain outstanding and unchanged as a result of those transactions. Each
option granted by Professionals Group to purchase shares of Professionals Group
Common Stock which is outstanding and unexercised immediately prior to the
consummation of the transactions contemplated by the Merger Agreement (i) will
continue to represent a right to acquire shares of Professionals Group Common
Stock, (ii) will remain 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) will not be affected by the consummation of the
transactions contemplated by the Merger Agreement.
If, prior to the INSCO Effective Time, the outstanding shares of
Professionals Group Common Stock are increased, decreased, changed into or
exchanged for a different number or kind of shares or securities as a result of
a reorganization, recapitalization, reclassification, stock dividend, stock
split, reverse stock split, or other similar change in capitalization, then an
appropriate and proportionate adjustment will be made to the number of Aggregate
Merger Shares. For example, if such an event increased the number of shares of
Professionals Group Common Stock outstanding prior to the INSCO Effective Time
by 10%, then the number of Aggregate Merger Shares would correspondingly be
increased by 10%.
Membership Rights to which dissenters' rights are perfected under
applicable law will not be converted into or represent the right to receive any
shares, or any cash payment in lieu of any fractional shares, of Professionals
Group Common Stock; provided, however, that if any holder of the dissenting
Membership Rights timely withdraws the demand for payment of the fair value of
Membership Rights or fails to perfect the dissenters' rights in accordance with
applicable law, then such holder's dissenting Membership Rights will cease to be
dissenting Membership Rights and will, subject to the terms of the Merger
Agreement, be converted into and represent the right to receive a certificate
representing the number of whole shares of Professionals Group Common Stock and
cash in lieu of any fractional share of Professionals Group Common Stock into
which such Membership Rights have been converted pursuant to the Merger
Agreement.
Based upon the number of Professionals Group stock options and shares of
Professionals Group Common Stock issued and outstanding as of the Professionals
Group Record Date, and without giving effect to the issuance of any shares of
Professionals Group Common Stock to trustees and officers of PPTF pursuant to
Section 1.28 of the Merger Agreement, at the INSCO Effective Time, Members of
PPTF will own shares of Professionals Group Common Stock representing
approximately 53.8% of the then outstanding voting power of Professionals Group.
Such percentage would be approximately 52.8% if all of the shares of
Professionals Group Common Stock issuable upon exercise or vesting of
outstanding Professionals Group stock options are issued. (For purposes of
calculating such percentages, it was assumed that no additional shares of
Professionals Group Common Stock will have been issued except as contemplated by
the preceding sentence.)
84
<PAGE> 98
Based upon the number of Professionals Group stock options and shares of
Professionals Group Common Stock issued and outstanding as of the Professionals
Group Record Date, and after giving effect to the issuance of an aggregate of
153,000 shares of Professionals Group Common Stock to trustees and officers of
PPTF pursuant to Section 1.28 of the Merger Agreement, at the INSCO Effective
Time, Members of PPTF will own shares of Professionals Group Common Stock
representing approximately 53.8% of the then outstanding voting power of
Professionals Group. Such percentage would be approximately 52.8% if all of the
shares of Professionals Group Common Stock issuable upon exercise or vesting of
outstanding Professionals Group stock options are issued. (For purposes of
calculating such percentages, it was assumed that no additional shares of
Professionals Group Common Stock will have been issued except as contemplated by
the preceding sentence.)
Distributions to Stockholders and Members. The Merger Agreement provides
that neither Professionals Group nor PPTF shall make, declare or pay any
dividend or make any other distribution on, or directly or indirectly redeem,
purchase or otherwise acquire, any shares of its capital stock or any securities
or obligations convertible into or exchangeable for any shares of its capital
stock except, (i) in the case of Professionals Group, a stock dividend not
exceeding 10% of the shares of Professionals Group Common Stock outstanding as
of the date such stock dividend is declared may be made, declared or paid at any
time prior to the INSCO Effective Time, and (ii) for dividends paid by any
subsidiaries of each of Professionals Group and PPTF to Professionals Group or
PPTF or any of their subsidiaries, respectively. Professionals Group does not
currently intend to declare or pay a stock dividend at any time prior to the
INSCO Effective Time.
Representations and Warranties. The Merger Agreement contains
representations and warranties of Professionals Group and PPTF as to (i) the
organization and existence of each party and its subsidiaries; (ii) the
capitalization of each party and its subsidiaries; (iii) the power and authority
of each party and the compliance of the Merger Agreement with (a) the charter
and by-laws of each party, (b) applicable law, and (c) certain material
agreements; (iv) the ability of the parties to consummate the transactions
contemplated by the Merger Agreement without obtaining any governmental and
third-party approvals other than certain requisite regulatory approvals (see
"-- Regulatory Approvals Required"); (v) the timely filing of required
regulatory reports; (vi) the accuracy of each party's financial statements and,
in the case of Professionals Group, filings with the Commission; (vii) each
party's liability for brokers' fees in connection with the transactions
contemplated by the Merger Agreement; (viii) the absence of certain changes in
each party's business since December 31, 1996; (ix) the absence of material
legal proceedings; (x) the filing and accuracy of each party's tax returns; (xi)
the provisions and operation of each party's employee benefit plans and related
matters; (xii) in the case of Professionals Group, the material accuracy and
completeness of the filings made by Professionals Group with the Commission;
(xiii) each party's compliance with applicable law; (xiv) the absence of
material defaults under certain contracts; (xv) the absence of agreements
between each party and regulatory agencies; (xvi) the activities of the
subsidiaries of each party; (xvii) the ownership and status of each party's
investment securities; (xviii) the type and status of each party's interest rate
risk management instruments; (xix) the absence of undisclosed liabilities; (xx)
the ownership and status of each party's intellectual property; (xxi) each
party's real property interests and the absence of material environmental
liabilities; (xxii) in the case of Professionals Group, the inapplicability to
the transactions contemplated by the Merger Agreement of Chapter 7A of the MBCA
relating to certain business combinations specified in such statute; (xxiii) the
applicability of "pooling-of-interests" accounting treatment; and (xxiv) terms
and nature of the insurance operations, activities, reserves and reinsurance
treaties of each party. In the event the transactions contemplated by the Merger
Agreement are consummated, all representations and warranties of Professionals
Group and PPTF will expire with and be terminated as of the INSCO Effective
Time.
Conduct of Business Pending the Merger and Other Agreements. Pursuant to
the Merger Agreement, prior to the INSCO Effective Time, Professionals Group and
PPTF have each agreed to, and to cause their respective subsidiaries to, (i)
conduct its business in the usual, regular and ordinary course consistent with
past practice, (ii) use reasonable best efforts to maintain and preserve intact
its business organization, employees and advantageous business relationships and
retain the services of its key officers and key employees, and (iii) take no
action which would adversely affect or delay the ability of either Professionals
85
<PAGE> 99
Group or PPTF to obtain any requisite regulatory approvals or to perform its
covenants and agreements under the Merger Agreement.
Professionals Group and PPTF have also agreed to use their best efforts to
promptly prepare and file all necessary documentation to effect all
applications, notices, petitions and filings, and to obtain and to cooperate in
obtaining permits, consents, approvals and authorizations of all third parties
and governmental entities necessary or advisable to consummate the transactions
contemplated by the Merger Agreement and to comply with the terms and conditions
of all such permits, consents, approvals and authorizations. Professionals Group
and PPTF have each agreed upon request to furnish to the other party all
information concerning themselves and their respective subsidiaries, directors,
trustees, officers and stockholders and members and such other matters as may be
reasonably necessary or advisable in connection with the transactions
contemplated by the Merger Agreement. Professionals Group and PPTF have also
agreed, subject to the terms and conditions of the Merger Agreement, to use
their best efforts to take, or cause to be taken, all actions necessary, proper
or advisable to comply promptly with all legal requirements which may be imposed
on such party and its subsidiaries and to consummate the transactions
contemplated by the Merger Agreement. Professionals Group also agreed to cause
the shares of Professionals Group Common Stock to be issued in the INSCO Merger
to be listed for quotation on the Nasdaq National Market, subject to official
notice of issuance, prior to the INSCO Effective Time. Professionals Group and
PPTF also agreed that the employee benefit plans in place on the date the Merger
Agreement was entered into with respect to employees of Professionals Group and
PPTF, as the case may be, will remain in effect for such employees until such
time as the combined company adopts new benefit plans covering employees of both
parties who continue to be employed by the combined entity (the "New Benefit
Plans"). These New Benefit Plans will substantially conform to the benefit plans
of Professionals Group in effect as of the PICOM Effective Time. Professionals
Group and PPTF have stated their intention to develop the New Benefit Plans,
effective as of the PICOM Effective Time or as soon thereafter as practicable,
and to have the New Benefit Plans, among other things, treat similarly situated
employees on a substantially equivalent basis, taking into account all relevant
factors, including, without limitation, duties, geographic location, tenure,
qualifications and abilities. Moreover, the New Benefit Plans will not
discriminate between employees of the combined entity who were covered by the
benefit plans of Professionals Group, on the one hand, and those covered by the
benefit plans of PPTF, on the other hand, at the PICOM Effective Time. However,
the Merger Agreement expressly provides that the PICOM Insurance Company
Employee Retention Plan shall apply only to those persons who are employees of
PICOM and otherwise eligible under such plan immediately prior to the INSCO
Effective Time, and that such plan shall not apply to either employees of PICOM
hired after the INSCO Effective Time or employees of PPTF. Professionals Group
and PPTF also reached certain agreements with respect to directors' and
officers' indemnification and insurance, as well as compensation of PPTF
trustees continuing on as directors of Professionals Group or PICOM, or both.
See "INTERESTS OF CERTAIN PERSONS."
Each of Professionals Group and PPTF have further agreed to give the other
party access to all of its properties, books, contracts, commitments and records
and to furnish information concerning its businesses, properties and personnel,
subject to the restrictions set forth in the Merger Agreement.
In addition, except as expressly contemplated by the Merger Agreement or
specified in a schedule thereto, each of Professionals Group and PPTF has agreed
that, without the consent of the other party, it and its subsidiaries will not,
among other things:
(i) other than in the ordinary course of business consistent with past
practice, incur any indebtedness for borrowed money (other than
indebtedness incurred in connection with the incorporation of, and for the
purpose of, incorporating INSCO, and short-term indebtedness incurred to
refinance short-term indebtedness and indebtedness of Professionals Group
or any of its subsidiaries to Professionals Group or any of its
subsidiaries, on the one hand, or of PPTF or any of its subsidiaries to
PPTF or any of its subsidiaries, on the other hand), assume, guarantee,
endorse or otherwise as an accommodation become responsible for the
obligations of any other individual, corporation or other entity, or make
any loan or advance;
86
<PAGE> 100
(ii) redeem, repay, discharge or defease any surplus note, unless such
redemption, repayment, discharge or defeasance is an express condition of
any requisite regulatory approval;
(iii) adjust, split, combine or reclassify any capital stock; or make,
declare or pay any dividend or make any other distribution on, or directly
or indirectly redeem, purchase or otherwise acquire, any shares of its
capital stock or any securities or obligations convertible into or
exchangeable for any shares of its capital stock (except, (a) in the case
of Professionals Group, a stock dividend not exceeding 10% of the shares of
Professionals Group Common Stock outstanding as of the date such stock
dividend is declared may be made, declared or paid at any time prior to the
INSCO Effective Time, and (b) for dividends paid in the ordinary course of
business by any subsidiaries of each of PPTF and Professionals Group);
(iv) grant any stock appreciation rights or grant any individual,
corporation or other entity any right to acquire any shares of its capital
stock (except that at any time prior to the Closing Date, and pursuant to
the terms of the Professionals Insurance Company Management Group 1996 Long
Term Incentive Plan, Professionals Group may make Awards (as defined in
such long term incentive plan) to Participants (as defined in such long
term incentive plan) covering up to 150,000 shares of Professionals Group
Common Stock in the aggregate, and except as otherwise agreed in writing by
Professionals Group and PPTF), or issue any additional shares of capital
stock except pursuant to the exercise of stock options or warrants
outstanding as of the date of the Merger Agreement, or as otherwise
described herein;
(v) sell, transfer, mortgage, encumber or otherwise dispose of any of
its properties or assets to any individual, corporation or other entity
other than a subsidiary, or cancel, release or assign any indebtedness to
any such person or any claims held by any such person, except in the
ordinary course of business consistent with past practice or pursuant to
contracts or agreements in force at the date of the Merger Agreement;
(vi) except for transactions in the ordinary course of business
consistent with past practice, or in connection with the incorporation of,
and for the purpose of incorporating, INSCO, or pursuant to contracts or
agreements in force at the date of the Merger Agreement, make any material
investment either by purchase of stock or securities, contributions to
capital, property transfers, or purchase of any property or assets of any
other individual, corporation or other entity other than a subsidiary;
(vii) except for transactions in the ordinary course of business
consistent with past practice, enter into or terminate any material
contract or agreement, or make any change in any of its material leases or
contracts, other than renewals of contracts and leases without material
adverse changes of terms;
(viii) increase in any manner the compensation or fringe benefits of
any of its employees or pay any pension or retirement allowance not
required by any existing plan or agreement to any such employees or become
a party to, amend or commit itself to any pension, retirement,
profit-sharing or welfare benefit plan or agreement or employment agreement
with or for the benefit of any employee other than in the ordinary course
of business consistent with past practice or accelerate the vesting of any
stock options or other stock-based compensation;
(ix) solicit, encourage or authorize any individual, corporation or
other entity to solicit from any third party any inquiries or proposals
relating to the disposition of its business or assets, or the acquisition
of its voting securities, or the merger of it or any of its subsidiaries
with any corporation or other entity other than as provided by the Merger
Agreement (and each party will promptly notify the other of all of the
relevant details relating to all inquiries and proposals which it may
receive relating to any of such matters);
(x) settle any claim, action or proceeding involving money damages,
except in the ordinary course of business consistent with past practice;
(xi) take any action that would prevent or impede the Mergers from
qualifying (a) for "pooling-of-interests" accounting treatment or (b) as a
"reorganization" within the meaning of Section 368 of the Code;
(xii) amend its charter documents (i.e., trust agreement, articles of
incorporation or by-laws);
87
<PAGE> 101
(xiii) other than in prior consultation with the other party,
restructure or materially change its investment securities portfolio
through purchases, sales or otherwise, or the manner in which the portfolio
is classified or reported;
(xiv) take any action that is intended or may reasonably be expected
to result in any of its representations and warranties set forth in the
Merger Agreement being or becoming untrue in any material respect at any
time prior to the INSCO Effective Time, or in any of the conditions to the
Mergers set forth in the Merger Agreement not being satisfied or in a
violation of any provision of the Merger Agreement, except, in every case,
as may be required by applicable law; or
(xv) agree to, or make any commitment to, take any of the actions
listed above.
Conditions to Consummation. Each party's obligation to effect the Mergers
is subject to the satisfaction or waiver, where permissible, of the following
conditions at or prior to each of the INSCO Effective Time and the PICOM
Effective Time:
(i) the Merger Agreement and the transactions contemplated thereby
shall have been adopted and approved by the requisite affirmative vote of
the holders of Professionals Group Common Stock entitled to vote thereon;
(ii) the Merger Agreement and the transactions contemplated thereby
shall have been adopted and approved by the requisite affirmative vote of
the Members of PPTF;
(iii) the shares of Professionals Group Common Stock which are to be
issued to Members of PPTF upon consummation of the INSCO Merger shall have
been authorized for listing on the Nasdaq National Market, subject to
official notice of issuance;
(iv) the requisite regulatory approvals shall have been obtained and
remain in full force and effect and all statutory waiting periods with
respect to such approvals shall have expired;
(v) the Registration Statement of which this Joint Proxy
Statement/Prospectus forms a part shall have become effective and no stop
order suspending the effectiveness shall have been issued and no
proceedings for that purpose shall have been initiated or threatened by the
Commission;
(vi) no order, injunction or decree issued by any court or agency of
competent jurisdiction or other legal restraint or prohibition preventing
the consummation of the Mergers or any of the other transactions
contemplated by the Merger Agreement shall be in effect and no statute,
rule, regulation, order, injunction or decree shall have been enacted,
entered, promulgated or enforced by any court, administrative agency or
commission or other governmental authority or instrumentality which
prohibits or makes illegal consummation of the Mergers;
(vii) each party shall have received an opinion of its legal counsel
(Steel Hector & Davis LLP in the case of PPTF, and Miller, Canfield,
Paddock and Stone, P.L.C. in the case of Professionals Group), in form and
substance reasonably satisfactory to PPTF and Professionals Group, dated as
of the INSCO Effective Time, substantially to the effect that, on the basis
of facts, representations and assumptions set forth in such opinion which
are consistent with the state of facts existing at the INSCO Effective
Time: (A) the Mergers will constitute a tax-free reorganization under
Section 368(a)(1)(A) of the Code and PPTF and Professionals Group will each
be a party to the reorganization, (B) no gain or loss will be recognized by
PPTF or Professionals Group as a result of the Mergers, and (C) no gain or
loss will be recognized by the Members of PPTF who exchange their
Membership Rights solely for Professionals Group Common Stock pursuant to
the INSCO Merger (except with respect to cash received in lieu of a
fractional share interest or in satisfaction of dissenters' rights);
(viii) each party shall have received an opinion of the other party's
legal counsel in form and substance reasonably satisfactory to such party
and its legal counsel, dated as of the INSCO Effective Time, as to (A) the
organization and existence of the other party and its subsidiaries; (B) the
capitalization of the other party and its subsidiaries; (C) the power and
authority of the other party and the compliance of the Merger Agreement
with (1) the charter and by-laws of the other party,
88
<PAGE> 102
(2) applicable law, and (3) certain material agreements; (D) governmental
and third-party approvals; and (E) the absence of material legal
proceedings;
(ix) each party shall have received a letter from its independent
certified public accountants (KPMG Peat Marwick LLP in each case) addressed
to such party regarding the appropriateness of "pooling-of-interests"
accounting for the Mergers under generally accepted accounting principles
if closed and consummated in accordance with the Merger Agreement;
(x) each party shall have received a letter from the other party's
independent certified public accountants regarding certain financial
information of such other party included or incorporated by reference in
the Registration Statement of which this Joint Proxy Statement/Prospectus
is a part;
(xi) each party shall have received a letter from its financial
advisors (Donaldson, Lufkin & Jenrette in the case of PPTF, and Cochran,
Caronia & Co. and McDonald & Company in the case of Professionals Group)
addressed to PPTF or Professionals Group, as the case may be, to the effect
that consummation of the Mergers upon the terms and conditions of the
Merger Agreement is fair from a financial point of view to the Members of
PPTF, as a group, and the stockholders of Professionals Group, as the case
may be;
(xii) the representations and warranties of the other party to the
Merger Agreement shall be true and correct in all material respects as of
the date of the Merger Agreement and (except to the extent such
representations and warranties speak as of an earlier date and except for
any changes to a party's disclosure schedule delivered to the other party
as of the Closing Date) as of the Closing Date as though made on the
Closing Date;
(xiii) each party shall have performed in all material respects all
obligations required to be performed by it under the Merger Agreement at or
prior to the Closing Date;
(xiv) no event or circumstance shall have occurred which has, or is
likely to have a materially adverse effect on the other party or upon the
right of the other party or any of its subsidiaries to conduct their
businesses as presently conducted; and
(xv) the percentage interests of those Members of PPTF perfecting
dissenters' rights, when aggregated, shall not exceed 10% of the percentage
interests of all Members of PPTF, taken as a whole.
The conditions specified above in clauses (i), (ii), (iv), (vii), (ix) and
(xv) will not be waived by either Professionals Group or PPTF. Although the
remaining conditions to the consummation of the transactions contemplated by the
Merger Agreement may be waived by the party entitled to the benefit thereof,
neither Professionals Group nor PPTF intends to waive any such condition except
in those circumstances where the Professionals Group Board or the PPTF Board, as
the case may be, deems such waiver to be in the best interests of Professionals
Group and PPTF, as the case may be, and its respective stockholders or members.
There can be no assurances as to when and if such conditions will be satisfied
(or, where permissible, waived) or that the transactions contemplated by the
Merger Agreement will be consummated. Moreover, no assurance can be provided as
to whether or when the requisite regulatory approvals necessary to consummate
the Mergers will be obtained or whether all of the other conditions precedent to
the Mergers will be satisfied or waived by the party permitted to do so. If the
Mergers are not effected on or before August 13, 1998, the Merger Agreement may
be terminated by either Professionals Group or PPTF, unless the failure to
effect the Mergers by such date is due to the failure of the party seeking to
terminate the Merger Agreement to perform or observe covenants and agreements of
such party set forth therein.
Indemnification; Directors' and Officers' Insurance. The Merger Agreement
provides that the parties agree to cooperate and use their best efforts to
defend against and respond to a threatened or actual civil, criminal or
administrative claim, action, suit, proceeding or investigation (a "Proceeding")
against a former or current director, trustee, officer or employee of a party or
a subsidiary of a party to the Merger Agreement or an individual who becomes a
director, trustee, officer or employee of such party or a subsidiary of such
party (including any entity specified in the schedules to the Merger Agreement)
(the "Indemnified Parties") before the later of the INSCO Effective Time or the
PICOM Effective Time which arises as a result of the Merger
89
<PAGE> 103
Agreement or any of the transactions contemplated thereby or because the
Indemnified Party was a director, trustee, officer or employee of Professionals
Group or PPTF, or a subsidiary of Professionals Group or PPTF, or of an entity
specified in the schedules to the Merger Agreement.
The Merger Agreement also provides that after the INSCO Effective Time,
Professionals Group shall indemnify and hold harmless, to the fullest extent
permitted by law, each Indemnified Party against any losses, claims, damages,
liabilities, costs, expenses (including reasonable attorneys' fees and expenses
incurred in advance of the final disposition of a Proceeding), judgments, fines
and amounts paid in settlement in connection with any such threatened or actual
Proceeding. Professionals Group shall have the right to assume the defense of a
Proceeding under certain circumstances and, upon such assumption, not be liable
to an Indemnified Party for its legal expenses. Professionals Group will not be
obligated to an Indemnified Party (i) when and if a court of competent
jurisdiction determines (and such determination becomes final and nonappealable)
that indemnification is prohibited by applicable law and (ii) to the extent an
Indemnified Party receives payment under an insurance policy, another agreement
for indemnification or otherwise. Professionals Group's obligations with respect
to indemnification will continue for a period of six years from the later of the
INSCO Effective Time and the PICOM Effective Time or the applicable statute of
limitations, if longer.
The Merger Agreement also obligates Professionals Group to use its best
efforts to cover the individuals serving as PPTF officers and trustees
immediately before the INSCO Effective Time for a period of six years from the
later of the INSCO Effective Time or the PICOM Effective Time (or the applicable
statute of limitations, if longer) by the directors' and officers' liability
insurance policy maintained by PPTF (or may substitute policies of the same or
substantially similar coverage and amounts containing no less advantageous terms
and conditions) with respect to acts and omissions occurring before the INSCO
Effective Time committed by such officers and trustees in their capacity as
such; provided, however, that Professionals Group will not be required to expend
more than 200% of the amount currently expended by PPTF to procure such
insurance.
Expenses. The Merger Agreement provides that Professionals Group and PPTF
will each pay its own expenses in connection with the Merger Agreement and the
transactions contemplated thereby, except that Professionals Group and PPTF will
divide equally all printing costs, filing fees and registration fees in
connection with the Merger Agreement, this Joint Proxy Statement/Prospectus and
the Registration Statement of which this Joint Proxy Statement/Prospectus is a
part.
Extension and Waiver. At any time prior to the INSCO Effective Time,
Professionals Group and PPTF, by action taken or authorized by their respective
Boards, may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other party, (ii)
waive any inaccuracies in the representations and warranties contained in the
Merger Agreement or in any document delivered pursuant the Merger Agreement and
(iii) waive compliance with any of the agreements or conditions contained in the
Merger Agreement; except that after any approval of the transactions
contemplated by the Merger Agreement by the stockholders of Professionals Group
or the Members of PPTF, there may not be, without further approval of such
stockholders or Members, any extension or waiver of the Merger Agreement which
reduces the amount or changes the form of the consideration to be delivered to
Members of PPTF.
Amendment. Subject to compliance with applicable law, the Merger Agreement
may be amended by Professionals Group and PPTF, by action taken or authorized by
their respective Boards, at any time before or after approval of the matters
presented in connection with the Mergers by the stockholders of Professionals
Group or the Members of PPTF, except that after any approval of the transactions
contemplated by the Merger Agreement by the stockholders of Professionals Group
or the Members of PPTF, there may not be, without further approval of such
stockholders or Members, any amendment of the Merger Agreement which changes the
amount or the form of the consideration to be delivered to the Members of PPTF
under the Merger Agreement, other than as contemplated by the Merger Agreement.
In the event the parties contemplate an amendment to the Merger Agreement of the
type which by law or pursuant to the foregoing may not be made without
stockholder or Member approval, Professionals Group and/or PPTF, as the case
90
<PAGE> 104
may be, may resolicit proxies from the stockholders of Professionals Group
and/or the Members of PPTF, as the case may be, to obtain such approval.
The Merger Agreement provides that PPTF Policies will become and be
insurance policies issued by PICOM and will be converted from assessable
insurance policies to nonassessable insurance policies, without any endorsement
or modification thereto. In the event that parties contemplate an amendment to
the terms of the Merger Agreement regarding the conversion of PPTF Policies to
insurance policies issued by PICOM, and such an amendment to the Merger
Agreement is of the type which by law or pursuant to the Merger Agreement may
not be made without stockholder or Member approval, Professionals Group and/or
PPTF, as the case may be, may resolicit proxies from the stockholders of
Professionals Group and/or the Members of PPTF, as the case may be, to obtain
such approval. The parties do not presently contemplate such an amendment.
Termination; Liquidated Damages; Termination Fee. The Merger Agreement
provides that the Mergers may be terminated at any time prior to the INSCO
Effective Time, whether before or after approval by Professionals Group's
stockholders or PPTF's Members:
(i) by mutual consent of Professionals Group and PPTF in a written
instrument, if the Board of each determines to terminate the Merger
Agreement by a vote of a majority of the members of its entire Board;
(ii) by either the Professionals Group Board or the PPTF Board if (A)
any governmental entity which must grant a requisite regulatory approval
has denied approval of either one or both of the Mergers and such denial
has become final and non-appealable or any governmental entity of competent
jurisdiction has issued a final non-appealable order enjoining or otherwise
prohibiting the consummation of the transactions contemplated by the Merger
Agreement and (B) the Professionals Group or the PPTF Board, as the case
may be, determines to terminate the Merger Agreement by an affirmative vote
of a majority of the members of its entire Board;
(iii) by either the Professionals Group Board or the PPTF Board if (A)
the INSCO Merger is not consummated on or before August 13, 1998, unless
the failure of the closing to occur by such date is due to the failure of
the party seeking to terminate the Merger Agreement to perform or observe
the covenants and agreements of such party set forth therein and (B) the
Professionals Group Board or the PPTF Board, as the case may be, determines
to terminate the Merger Agreement by an affirmative vote of a majority of
the members of its entire Board;
(iv) by either the Professionals Group Board or PPTF Board (provided
that the terminating party is not then in material breach of any
representation, warranty, covenant or other agreement contained in the
Merger Agreement) if (A) there has been a material breach of any of the
covenants or agreements or any of the representations or warranties set
forth in the Merger Agreement on the part of the other party, which breach
is not cured within 45 days following written notice to the party
committing such breach, or which breach, by its nature, cannot be cured
prior to the Closing Date and (B) the Professionals Group or the PPTF
Board, as the case may be, determines to terminate the Merger Agreement by
an affirmative vote of a majority of the members of its entire Board;
(v) by Professionals Group upon written notice to PPTF if the PPTF
Board does not, or indicates to Professionals Group that it is unwilling or
unable to, publicly recommend in this Joint Proxy Statement/ Prospectus
that its Members approve and adopt the Merger Agreement, or if after
recommending in this Joint Proxy Statement/Prospectus that its Members
approve and adopt the Merger Agreement, the PPTF Board withdraws, modifies,
or amends such recommendation in any respect materially adverse to
Professionals Group, provided that any such notice of termination must be
given not later than 45 days after the later of the date Professionals
Group is advised by PPTF in writing that it is unable or unwilling to so
recommend in this Joint Proxy Statement/Prospectus or that it has
withdrawn, modified or amended such recommendation, or such later date as
may be agreed upon by Professionals Group and PPTF;
91
<PAGE> 105
(vi) by PPTF upon written notice to Professionals Group if the
Professionals Group Board does not, or indicates to PPTF that it is
unwilling or unable to, publicly recommend in this Joint Proxy Statement/
Prospectus that its stockholders approve and adopt the Merger Agreement, or
if after recommending in this Joint Proxy Statement/Prospectus that its
stockholders approve and adopt the Merger Agreement, the Professionals
Group Board withdraws, modifies, or amends such recommendation in any
respect materially adverse to PPTF, provided that any such notice of
termination must be given not later than 45 days after the later of the
date PPTF is advised by Professionals Group in writing that it is unable or
unwilling to so recommend in this Joint Proxy Statement/Prospectus or that
it has withdrawn, modified or amended such recommendation, or such later
date as may be agreed upon by Professionals Group and PPTF;
(vii) by Professionals Group upon written notice to PPTF if PPTF
authorizes, recommends, publicly proposes, or publicly announces an
intention to authorize, recommend or propose, or enters into an agreement
with any person or entity other than Professionals Group or PICOM to effect
an "acquisition proposal" or fails to publicly oppose a tender offer or
exchange offer by another person or entity based on an "acquisition
proposal";
(viii) by PPTF upon written notice to Professionals Group if
Professionals Group authorizes, recommends, publicly proposes, or publicly
announces an intention to authorize, recommend or propose, or enters into
an agreement with any person or entity other than PPTF to effect an
"acquisition proposal" or shall fail to publicly oppose a tender offer or
exchange offer by another person or entity based on an "acquisition
proposal";
(ix) by either Professionals Group or PPTF if required Professionals
Group stockholder or PPTF Member approvals have not been obtained by reason
of the failure to obtain the required vote at a duly held meeting of
stockholders or Members or any adjournment or postponement thereof;
(x) by either Professionals Group or PPTF if any of the conditions to
the consummation of the Mergers specified in Article VII of the Merger
Agreement to the obligation of the terminating party have not been
satisfied on the Closing Date; or
(xi) by Professionals Group if the disclosure schedule of PPTF
delivered to Professionals Group on the Closing Date discloses any change
from the disclosure schedule delivered to Professionals Group by PPTF in
connection with the execution of the Merger Agreement which has, or is
likely to have, a material adverse effect on PPTF; or by PPTF if the
disclosure schedule of Professionals Group delivered to PPTF on the Closing
Date discloses any change from the disclosure schedule delivered to PPTF by
Professionals Group in connection with the execution of the Merger
Agreement which has, or is likely to have, a material adverse effect on
Professionals Group.
Any termination pursuant to the foregoing shall be made by written notice
from the party seeking termination to the other party.
In the event of termination of the Merger Agreement, the Merger Agreement
will become void and have no effect except (i) for certain specified provisions
of the Merger Agreement dealing with confidentiality, the effect of termination,
liquidated damages, the nonsurvival of representations and warranties,
jurisdiction and service of process, third party beneficiaries, and expenses,
and (ii) that neither party will be relieved or released from any liabilities or
damages arising out of the willful breach by the other party of any provisions
of the Merger Agreement.
In the event that (i) at any time prior to termination of the Merger
Agreement PPTF authorizes, recommends, publicly proposes, or publicly announces
an intention to authorize, recommend or propose, or enters into an agreement
with any person (other than Professionals Group or PICOM) to effect an
"acquisition proposal," or fails to publicly oppose a tender offer or exchange
offer by another person based on an "acquisition proposal," or (ii) PPTF fails
to call and hold the PPTF Special Meeting, or (iii) the PPTF Board withdraws,
modifies or amends its recommendation that Members of PPTF approve and adopt the
Merger Agreement in any respect materially adverse to Professionals Group, then
PPTF must, within ten days
92
<PAGE> 106
after notice of the occurrence thereof by Professionals Group, pay to
Professionals Group the sum of $4.5 million plus all out-of-pocket expenses of
Professionals Group as liquidated damages.
In the event that (i) at any time prior to termination of the Merger
Agreement Professionals Group authorizes, recommends, publicly proposes, or
publicly announces an intention to authorize, recommend or propose, or enters
into an agreement with any person (other than PPTF) to effect an "acquisition
proposal," or fails to publicly oppose a tender offer or exchange offer by
another person based on an "acquisition proposal," or (ii) Professionals Group
fails to call and hold the Professionals Group Annual Meeting, or (iii) the
Professionals Group Board withdraws, modifies or amends its recommendation that
stockholders of Professionals Group approve and adopt the Merger Agreement in
any respect materially adverse to PPTF, then Professionals Group must, within
ten days after notice of the occurrence thereof by PPTF, pay to PPTF the sum of
$4.5 million plus all out-of-pocket expenses of PPTF as liquidated damages.
For purposes of the Merger Agreement and this Joint Proxy
Statement/Prospectus, an "acquisition proposal" is (i) any proposal pursuant to
which any corporation, partnership, person or other entity or group, other than
a party to the Merger Agreement, would acquire or participate in a merger or
other business combination involving Professionals Group or any of its
subsidiaries, on the one hand, or PPTF or its sole subsidiary, on the other
hand, directly or indirectly; (ii) any proposal by which any corporation,
partnership, person or other entity or group, other than a party to the Merger
Agreement, would acquire the right to vote 10% or more of the capital stock of
Professionals Group or any of its subsidiaries, on the one hand, or PPTF
Policies or the capital stock of PPTF's sole subsidiary entitled to vote thereon
for the election of directors; (iii) any acquisition of 10% or more of the
assets of Professionals Group or any of its subsidiaries, on the one hand, or
PPTF or its sole subsidiary, on the other hand; or (iv) any acquisition in
excess of 10% of the outstanding capital stock of Professionals Group or any of
its subsidiaries, on the one hand, or PPTF Policies or the capital stock of
PPTF's sole subsidiary, in each case other than as contemplated by the Merger
Agreement.
CAPITALIZATION OF INSCO
In connection with the transactions contemplated by the Merger Agreement,
PICOM loaned $7.5 million to Professionals Group for the purpose of enabling
Professionals Group to form, capitalize and license INSCO in accordance with the
Florida Insurance Code and the Michigan Insurance Code. Professionals Group
invested all of that sum in INSCO in exchange for all of the issued and
outstanding shares of capital stock of INSCO. INSCO invested the $7.5 million in
United States government obligations with maturities of less than one year. The
loan from PICOM to Professionals Group is evidenced by a short-term,
non-renewable, interest bearing promissory note having a stated principal amount
of $7.5 million and a stated maturity date that is the earlier of the INSCO
Effective Time or December 31, 1998. The Note is secured by a pledge of all of
the issued and outstanding shares of INSCO. Interest on the Note accrues at a
rate equivalent to the rate of interest paid on the INSCO Investment. Upon
consummation of the INSCO Merger, the INSCO Investment, and all interest accrued
thereon, will become and be the property of PICOM. Following consummation of the
INSCO Merger, PICOM will declare and pay to Professionals Group a dividend in an
amount equal to the amount then outstanding under the Note, and Professionals
Group will then pay the proceeds of such dividend to PICOM in full satisfaction
of the Note.
PROCEDURES FOR EXCHANGE OF MEMBERSHIP RIGHTS
At or prior to the INSCO Effective Time, Professionals Group shall deposit,
or shall cause to be deposited, with ChaseMellon Shareholder Services, L.L.C.,
or another bank or trust company reasonably acceptable to each of Professionals
Group and PPTF (the "Exchange Agent"), for the benefit of the Members of PPTF
and for exchange in accordance with Article II of the Merger Agreement,
certificates representing the whole shares of Professionals Group Common Stock
and cash for payment of consideration in lieu of fractional shares to be issued
and paid in exchange for the Membership Rights pursuant to the Merger Agreement.
93
<PAGE> 107
As soon as practicable prior to the INSCO Effective Time, and in no event
later than 30 days prior to the INSCO Effective Time, (i) PPTF will prepare a
list (which list will be certified to Professionals Group by the Chairman of the
PPTF Board and the President and Chief Executive Officer of PPTF) identifying
each Member of PPTF and setting forth the number of whole shares, and cash in
lieu of any fractional share, of Professionals Group Common Stock that each
Member of PPTF is entitled to receive by virtue of the consummation of the INSCO
Merger, and (ii) PPTF will deliver to Professionals Group such list, as
certified by the Chairman of the PPTF Board and the President and Chief
Executive Officer of PPTF, and such other information as shall enable
Professionals Group to verify the information contained in such list.
As soon as reasonably practicable after receiving from PPTF such list and
other information, Professionals Group will cause the Exchange Agent to send to
each Member of PPTF, by first class mail, a notice (the "Notice") that, among
other things, (i) sets forth the number of whole shares, and cash in lieu of any
fractional share, of Professionals Group Common Stock that such Member has been
credited with, and the calculation by which such numbers were obtained, and (ii)
states that the Membership Rights in PPTF of all Members were extinguished upon
consummation of the INSCO Merger. The Notice will be accompanied by a letter of
transmittal stating instructions for obtaining certificates representing the
whole shares of Professionals Group Common Stock and any cash in lieu of
fractional shares into which the Membership Rights shall have been converted
pursuant to the Merger Agreement. Upon receipt by the Exchange Agent of a copy
of the Notice (or such other document as the Exchange Agent may require) duly
executed by the Member, such Member will be entitled to receive in exchange
therefor a certificate representing that number of whole shares of Professionals
Group Common Stock, and a check representing the amount of cash in lieu of
fractional shares, to which such Member will have become entitled pursuant to
the Merger Agreement. No interest will be paid or accrued on any cash in lieu of
fractional shares or on any unpaid dividends and distributions payable with
respect to any Membership Rights.
No dividends or other distributions declared with respect to Professionals
Group Common Stock with a record date following the INSCO Effective Time will be
paid to any Member until such Member has returned the Notice (or such other
documentation as the Exchange Agent may reasonably require) to the Exchange
Agent.
After the INSCO Effective Time, and as Notices (or such other documentation
as the Exchange Agent may require) are presented to the Exchange Agent, the
Exchange Agent will issue certificates representing whole shares of
Professionals Group Common Stock and cash in lieu of fractional shares in
accordance with the Merger Agreement.
Fractional shares of Professionals Group Common Stock will not be issued to
any Member of PPTF upon consummation of the INSCO Merger. None of Professionals
Group, PPTF, the Exchange Agent or any other person will be liable to any Member
of PPTF for any amount delivered in good faith to a public official pursuant to
applicable abandoned property, escheat or similar laws.
For a description of Professionals Group Common Stock, see "DESCRIPTION OF
PROFESSIONALS GROUP COMMON STOCK." For a description of the differences between
the rights of holders of Professionals Group Common Stock and the rights of
Members of PPTF, see "COMPARISON OF STOCKHOLDER RIGHTS WITH MEMBERSHIP RIGHTS."
NO SOLICITATION OF TRANSACTIONS
The Merger Agreement prohibits Professionals Group, PPTF, and their
respective subsidiaries from, directly or indirectly, authorizing or permitting
any of their respective directors, trustees, officers, employees,
representatives or agents to entertain, solicit, encourage or take any other
action to facilitate any inquiries or the making of any proposal which
constitutes, or may lead to, any "acquisition proposal" for Professionals Group
or PPTF. However, the Professionals Group Board or the PPTF Board may consider
an unsolicited "acquisition proposal" if, among other things, it is advised by
its legal counsel and financial advisors that such action is required to
discharge its fiduciary duties to its stockholders or members.
94
<PAGE> 108
For purposes of the Merger Agreement and this Joint Proxy
Statement/Prospectus, an "acquisition proposal" is (i) any proposal pursuant to
which any corporation, partnership, person or other entity or group, other than
a party to the Merger Agreement, would acquire or participate in a merger or
other business combination involving Professionals Group or any of its
subsidiaries, on the one hand, or PPTF or its sole subsidiary, on the other
hand, directly or indirectly; (ii) any proposal by which any corporation,
partnership, person or other entity or group, other than a party to the Merger
Agreement, would acquire the right to vote 10% or more of the capital stock of
Professionals Group or any of its subsidiaries, on the one hand, or PPTF
Policies or the capital stock of PPTF's sole subsidiary entitled to vote thereon
for the election of directors; (iii) any acquisition of 10% or more of the
assets of Professionals Group or any of its subsidiaries, on the one hand, or
PPTF or its sole subsidiary, on the other hand; or (iv) any acquisition in
excess of 10% of the outstanding capital stock of Professionals Group or any of
its subsidiaries, on the one hand, or PPTF Policies or the capital stock of
PPTF's sole subsidiary, in each case other than as contemplated by the Merger
Agreement.
REGULATORY APPROVALS REQUIRED
Professionals Group and PPTF have agreed to use their best efforts to
obtain the requisite regulatory approvals for the transactions contemplated by
the Merger Agreement. The Merger Agreement and certain of the transactions
contemplated thereby are subject to certain regulatory reviews and approvals,
including review and approval by the Florida Insurance Department and the
Michigan Insurance Commissioner. The Florida Insurance Department has approved
an application to incorporate and license INSCO as a Florida property and
casualty insurance company for the purpose of effecting the Mergers. The Florida
Insurance Department has issued a consent order approving the transactions
contemplated by the Merger Agreement. The Michigan Insurance Commissioner, which
has issued an Order of Acquisition Exemption and Preliminary Approval of Merger,
must issue a final order approving the merger of INSCO with and into PICOM, with
PICOM being the surviving corporation. In addition, certain aspects of the
transactions contemplated by the Merger Agreement will also require
notifications to, and/or approvals from, certain Federal authorities (including
the Pre-Merger Notification Agencies). Professionals Group and PPTF have each
filed with the Pre-Merger Notification Agencies a notification and report form
pursuant to the Hart-Scott-Rodino Anti-Trust Improvements Act, as amended, and
the waiting period under the HSR Act has expired. As of the date of this Joint
Proxy Statement/Prospectus, all regulatory documents to be filed with
governmental authorities having jurisdiction have been filed. There can be no
assurances as to if or when any remaining necessary regulatory or governmental
approvals required for the transactions contemplated by the Merger Agreement
will be obtained. There can also be no assurances that any such approvals will
not contain a condition or requirement which causes such approvals to fail to
satisfy the conditions to the consummation of such transactions. There can be no
assurance that the Florida Insurance Department, the Michigan Insurance
Commissioner, the Pre-Merger Notification Agencies or any other governmental
authority will not challenge all or some of the transactions contemplated by the
Merger Agreement or as to the result of any such challenge, if made. See
"CERTAIN REGULATORY CONSIDERATIONS."
INTERESTS OF CERTAIN PERSONS
Certain members of Professionals Group's management and the Professionals
Group Board, and PPTF's management and the PPTF Board, respectively, have
certain interests in the transactions contemplated by the Merger Agreement that
are in addition to their interests as stockholders of Professionals Group or
Members of PPTF, as the case may be. These interests arise from provisions in
the Merger Agreement relating to (i) the appointment of PPTF Trustees to the
Boards of Directors of Professionals Group and PICOM, (ii) trustee, director and
officer indemnification and insurance, (iii) employment and employee benefits
after the INSCO Merger, (iv) the assumption by Professionals Group or PICOM of
certain employment and change in control agreements between PPTF and certain
PPTF officers, (v) the assumption by Professionals Group of Mr. Salman's
employment agreement with PPTF, and (vi) the issuance, as contemplated by
Section 1.28 of the Merger Agreement and subject to certain vesting
requirements, of an aggregate of 153,000 shares of Professionals Group Common
Stock to certain trustees and officers of PPTF over a four year period. They
also arise from certain employment agreements or plans of Professionals Group or
PPTF to which such persons are
95
<PAGE> 109
parties. The Professionals Group Board and the PPTF Board were aware of these
interests and considered them, among other matters, in approving the Merger
Agreement and the transactions contemplated thereby. See "INTERESTS OF CERTAIN
PERSONS."
ANTICIPATED ACCOUNTING TREATMENT
It is anticipated that the transactions contemplated by 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
the entire fiscal year in which the Mergers occur (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. The unaudited pro forma combined financial information
contained in this Joint Proxy Statement/Prospectus has been prepared using the
"pooling-of-interests" accounting method to account for the Mergers. See "PRO
FORMA CONDENSED COMBINED FINANCIAL INFORMATION."
The Merger Agreement provides that a condition to the consummation of the
Mergers is receipt by each of Professionals Group and PPTF of a letter from KPMG
Peat Marwick LLP to the effect that the transactions contemplated by the Merger
Agreement will qualify for "pooling-of-interests" accounting treatment under
generally accepted accounting principles if closed and consummated in accordance
with the Merger Agreement. The receipt of such letters from KPMG Peat Marwick
LLP is a condition to the consummation of the transactions contemplated by the
Merger Agreement that will not be waived by either Professionals Group or PPTF.
There can be no assurances as to when and if such condition will be satisfied or
that the transactions contemplated by the Merger Agreement will be consummated.
Commission guidelines regarding qualifying for the "pooling-of-interests"
method of accounting also limit sales of shares of the acquiring entity and the
acquired entity by Affiliates of either entity in a business combination.
Commission guidelines indicate further that the "pooling-of-interests" method of
accounting will generally not be challenged on the basis of sales by Affiliates
of the acquiring entity or the acquired entity of the shares of the entity they
own or shares of an entity they receive in connection with a business
combination during the period beginning 30 days before the business combination
is consummated and ending when financial results covering at least 30 days of
post-combination operations of the combined entity have been published, if those
sales are de minimis in amount. To be viewed as de minimis, (i) the sales by
such an Affiliate must not be greater than ten percent of such Affiliate's
pre-combination (or equivalent post-combination) shares, and (ii) the aggregate
sales by all Affiliates of an entity party to the business combination must not
exceed the equivalent of one percent of such entity's pre-combination
outstanding shares.
Each of PPTF and Professionals Group has agreed in the Merger Agreement to
use its best efforts to cause each person who is an Affiliate (for purposes of
Rule 145 and for purposes of qualifying the transactions contemplated by the
Merger Agreement for "pooling-of-interests" accounting treatment) of such party
to deliver to the other party a written agreement to agree to comply with the
Securities Act and preserve the ability to treat the transactions contemplated
by the Merger Agreement as a "pooling-of-interests." In addition, Professionals
Group, as the surviving entity, has agreed in the Merger Agreement to use its
best efforts to publish not later than 90 days after the end of the first month
after the effective time of the Mergers in which there are at least 30 days of
post-merger combined operations, combined sales and net income figures as
contemplated by and in accordance with the terms of the Commission's Accounting
Series Release No. 135.
96
<PAGE> 110
RESALE OF PROFESSIONALS GROUP COMMON STOCK; RESTRICTIONS ON TRANSFER
The Professionals Group Common Stock issued to Members of PPTF upon
consummation of the INSCO Merger will be freely transferable under the
Securities Act, except for shares issued to Members of PPTF who may be deemed to
be Affiliates of Professionals Group for purposes of Rule 144 promulgated under
the Securities Act or Affiliates of PPTF for purposes of Rule 145 promulgated
under the Securities Act. Affiliates will include persons (generally executive
officers, directors and 10% stockholders) who control, are controlled by, or are
under common control with (i) Professionals Group or PPTF at the time of the
Meetings, or (ii) the combined entity at or after the consummation of the
transactions contemplated by the Merger Agreement.
Rule 144 and Rule 145 will restrict the sale of Professionals Group Common
Stock received in the transactions contemplated by the Merger Agreement by
Affiliates and certain of their family members and related interests. Generally
speaking, during the one year following the consummation of the transactions
contemplated by the Merger Agreement, those persons who are Affiliates of PPTF
at the time of the Meetings, provided they are not Affiliates of Professionals
Group at or following the consummation of the transactions contemplated by the
Merger Agreement, may publicly resell any Professionals Group Common Stock
received by them in the transactions contemplated by the Merger Agreement,
subject to certain limitations as to, among other things, the amount of
Professionals Group Common Stock sold by them in any three-month period and as
to the manner of sale. After the one-year period, such Affiliates may resell
their shares without such restrictions so long as there is adequate current
public information with respect to the combined entity as required by Rule 144.
Persons who become Affiliates of Professionals Group prior to, or at or after
the consummation of the transactions contemplated by the Merger Agreement, may
publicly resell the Professionals Group Common Stock received by them in the
transactions contemplated by the Merger Agreement subject to similar limitations
and subject to certain filing requirements specified in Rule 144.
The ability of Affiliates to resell shares of Professionals Group Common
Stock received in the transactions contemplated by the Merger Agreement under
Rule 144 or Rule 145 as summarized in this Joint Proxy Statement/Prospectus
generally will be subject to Professionals Group's having satisfied its Exchange
Act reporting requirements for specified periods prior to the time of sale.
Affiliates also would be permitted to resell Professionals Group Common Stock
received in the transactions contemplated by the Merger Agreement pursuant to an
effective registration statement under the Securities Act or another available
exemption from the registration requirements of the Securities Act.
As indicated above, all shares of Professionals Group Common Stock issued
to Members of PPTF upon consummation of the INSCO Merger, except for shares
issued to any Member of PPTF who is deemed to be an Affiliate, will be freely
transferable under the Securities Act. However, this Joint Proxy Statement/
Prospectus does not cover any resales of Professionals Group Common Stock to be
received by Members of PPTF upon consummation of the transactions contemplated
by the Merger Agreement, and no person is authorized to make use of this Joint
Proxy Statement/Prospectus in connection with any such resale. This Joint Proxy
Statement/Prospectus also does not cover Professionals Group Common Stock to be
issued to trustees and officers of PPTF pursuant to Section 1.28 of the Merger
Agreement over a four year period. See "INTERESTS OF CERTAIN PERSONS -- Other
Matters."
Commission guidelines regarding qualifying for the "pooling-of-interests"
method of accounting also limit sales of shares of the acquiring entity and the
acquired entity by Affiliates of either entity in a business combination.
Commission guidelines indicate further that the "pooling-of-interests" method of
accounting will generally not be challenged on the basis of sales by Affiliates
of the acquiring entity or the acquired entity of the shares of the entity they
own or shares of an entity they receive in connection with a combination during
the period beginning 30 days before the combination and ending when financial
results covering at least 30 days of post-combination operations of the combined
entity have been published, if those sales are de minimis in amount. To be
viewed as de minimis, (i) the sales by such an Affiliate must not be greater
than ten percent of such Affiliate's pre-combination (or equivalent
post-combination) shares, and (ii) the aggregate sales by all Affiliates of an
entity party to the business combination must not exceed the equivalent of one
percent of such entity's pre-combination outstanding shares.
97
<PAGE> 111
Each of PPTF and Professionals Group has agreed in the Merger Agreement to
use its best efforts to cause each person who is an Affiliate (for purposes of
Rule 145 and for purposes of qualifying the transactions contemplated by the
Merger Agreement for "pooling-of-interests" accounting treatment) of such party
to deliver to the other party a written agreement intended to ensure compliance
with the Securities Act and preserve the ability to treat the transactions
contemplated by the Merger Agreement as a "pooling-of-interests." In addition,
Professionals Group, as the surviving entity, has agreed in the Merger Agreement
to use its best efforts to publish not later than 90 days after the end of the
first month after the effective time of the Mergers in which there are at least
30 days of post-merger combined operations, combined sales and net income
figures as contemplated by and in accordance with the terms of the Commission's
Accounting Series Release No. 135.
DISSENTERS' RIGHTS
Professionals Group. Holders of shares of Professionals Group Common Stock
will not have dissenters' rights under the MBCA in connection with, or as a
result of, the matters to be acted upon at the Professionals Group Annual
Meeting.
PPTF. Members who deliver to PPTF a notice of intent to demand payment for
their Membership Rights in PPTF before the vote of the Members is taken at the
PPTF Special Meeting and do not vote in favor of the Merger Proposal, and
further comply with the other provisions of the FBCA regarding the rights of
dissenting shareholders, will be paid the fair value for their Membership Rights
in PPTF. Under Florida law, if Professionals Group and a dissenting Member are
unable to agree upon the fair value of such Member's Membership Rights, then
such fair value will be determined in a judicial proceeding. None of
Professionals Group, PICOM and PPTF can make any representation as to the
outcome of such a proceeding and each dissenting Member of PPTF should recognize
that such a proceeding could result in a determination of fair value that is
lower than, higher than, or equivalent to, the value of the shares of
Professionals Group Common Stock otherwise issuable to such Member upon
consummation of the transactions contemplated by the Merger Agreement.
Consummation of the transactions contemplated by the Merger Agreement is subject
to, among other things, the condition that the percentage interests of those
Members perfecting their dissenters' rights, when aggregated, not exceed 10% of
the percentage interests of all Members taken as a whole. For information
regarding the procedures to be followed by Members to dissent from the
transactions contemplated by the Merger Agreement, see "THE
MEETINGS -- Dissenters' Rights" and "ANNEX H -- CERTAIN PROVISIONS OF THE
FLORIDA BUSINESS CORPORATION ACT, AS AMENDED, REGARDING DISSENTERS' RIGHTS."
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
AND PHYSICIANS PROTECTIVE TRUST FUND
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following Professionals Insurance Company Management Group and
Physicians Protective Trust Fund Unaudited Pro Forma Condensed Combined
Statements of Income combine the historical Consolidated Statements of Income of
Professionals Group and PPTF 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 as of the beginning of the earliest
period indicated and after giving effect to the pro forma adjustments described
in the Notes to Professionals Insurance Company Management Group and Physicians
Protective Trust Fund Unaudited Pro Forma Condensed Combined Financial
Statements. For a description of "pooling-of-interests" accounting with respect
to the transactions contemplated by the Merger Agreement, see "THE
TRANSACTIONS -- Anticipated Accounting Treatment." This information should be
read in conjunction with the historical consolidated financial statements of
Professionals Group, including the notes thereto, which are incorporated by
reference in this Joint Proxy Statement/Prospectus, the historical consolidated
financial statements of PPTF, including the notes thereto, which appear
elsewhere in this Joint
98
<PAGE> 112
Proxy Statement/Prospectus, and the condensed consolidated historical financial
data for Professionals Group and PPTF and the other pro forma financial
information, including the notes thereto, which appear elsewhere in this Joint
Proxy Statement/Prospectus. See "INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE," "INDEX TO FINANCIAL STATEMENTS OF PHYSICIANS PROTECTIVE TRUST FUND"
and "ANNEX A -- PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP ANNUAL REPORT
ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997." 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 the dates
indicated or the results that may be obtained in the future.
99
<PAGE> 113
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
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
Assuming dilution.......................... $ 3.14 $ -- $ 2.95
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.
100
<PAGE> 114
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
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 7,575,858
Assuming dilution.......................... 3,486,723 -- 4,089,160 7,575,883
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
101
<PAGE> 115
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
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.
102
<PAGE> 116
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
AND PHYSICIANS PROTECTIVE TRUST FUND
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
(IN THOUSANDS)
The following Professionals Insurance Company Management Group and
Physicians Protective Trust Fund Unaudited Pro Forma Condensed Combined Balance
Sheet combines the historical Consolidated Balance Sheets of Professionals Group
and PPTF 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 December 31, 1997 and after giving effect to
the pro forma adjustments described in the Notes to Professionals Insurance
Company Management Group and Physicians Protective Trust Fund Unaudited Pro
Forma Condensed Combined Financial Statements. For a description of
"pooling-of-interests" accounting with respect to the transactions contemplated
by the Merger Agreement, see "THE TRANSACTIONS -- Anticipated Accounting
Treatment." This information should be read in conjunction with the historical
consolidated financial statements of Professionals Group, including the notes
thereto, which are incorporated by reference in this Joint Proxy
Statement/Prospectus, the historical consolidated financial statements of PPTF,
including the notes thereto, which appear elsewhere in this Joint Proxy
Statement/Prospectus, and the condensed consolidated historical financial data
for Professionals Group and PPTF and the other pro forma financial information,
including the notes thereto, which appear elsewhere in this Joint Proxy
Statement/ Prospectus. See "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE,"
"INDEX TO FINANCIAL STATEMENTS OF PHYSICIANS PROTECTIVE TRUST FUND" and "ANNEX
A -- PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997." 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 December
31, 1997 or the results that may be obtained in the future.
103
<PAGE> 117
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
AND PHYSICIANS PROTECTIVE TRUST FUND
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
---------------------------------------------------------
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....................... $313,633 $289,790 $603,423
Equity securities available for sale,
at fair value....................... 2,831 25,609 28,440
Short-term investments, at cost....... 25,655 20,682 46,337
Real estate, at cost, net of
accumulated depreciation............ 442 -- 442
-------- -------- ------- --------
Total investments................ 342,561 336,081 678,642
Cash:
Unrestricted............................. 2,176 460 2,636
Restricted............................... -- 2,070 2,070
Premiums due from policyholders............ 7,051 30,309 37,360
Reinsurance balances....................... 24,257 51,069 75,326
Accrued investment income.................. 4,785 4,736 9,521
Deferred Federal income taxes.............. 15,003 6,445 21,448
Property and equipment, at cost, net of
accumulated depreciation................. 9,060 775 9,835
Deferred policy acquisition costs.......... 1,376 -- 1,376
Other assets............................... 6,926 2,850 9,776
-------- -------- ------- --------
Total assets..................... $413,195 $434,795 $ -- $847,990
======== ======== ======= ========
Liabilities and Stockholders' Equity:
Liabilities:
Loss and loss adjustment expense
reserves............................ $239,151 $250,056 $489,207
Reserve for extended reporting period
claims.............................. 15,300 10,328 25,628
Unearned premiums..................... 21,665 34,382 56,047
Long-term debt........................ 22,500 -- 22,500
Surplus contributions................. -- 10,094 10,094
Accrued expenses and other
liabilities......................... 12,653 11,981 $ 2,200 26,834
-------- -------- ------- --------
Total liabilities................ 311,269 316,841 2,200 630,310
-------- -------- ------- --------
Stockholders' 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........................ 80,671 110,964 (2,200) 189,435
Net unrealized appreciation on
investments........................... 3,180 6,990 10,170
-------- -------- ------- --------
Total stockholders' equity....... 101,926 117,954 (2,200) 217,680
-------- -------- ------- --------
Total liabilities and
stockholders' equity........... $413,195 $434,795 $ -- $847,970
======== ======== ======= ========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
104
<PAGE> 118
NOTES TO PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
AND PHYSICIANS PROTECTIVE TRUST FUND
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(1) Historical earnings per share for PPTF 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
Professionals Group Common Stock to be issued in conjunction with the INSCO
Merger. See "THE TRANSACTIONS -- Transaction Consideration."
(3) This adjustment reflects the transfer from additional paid-in capital to
common stock for the stated value of 4,089,160 shares of Professionals Group
Common Stock to be issued in conjunction with the INSCO Merger. See "THE
TRANSACTIONS -- Transaction Consideration."
(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 $2.5 million for the year ended December
31, 1997. An additional $2.2 million is expected to be incurred with respect
to the transactions contemplated by the Merger Agreement after December 31,
1997. Accordingly, $2.2 million of expenses have been reflected as an
adjustment to pro forma retained earnings as of December 31, 1997.
105
<PAGE> 119
INTERESTS OF CERTAIN PERSONS
Certain members of Professionals Group's management and the Professionals
Group Board, and PPTF's management and the PPTF Board, have interests in the
transactions contemplated by the Merger Agreement that are in addition to their
interests as stockholders of Professionals Group or Members of PPTF, as the case
may be. The Professionals Group Board and the PPTF Board were aware of these
interests and considered them, among other matters, in approving the Merger
Agreement and the transactions contemplated thereby.
The directors, trustees, officers and principal stockholders or Members of
each of Professionals Group and PPTF and their respective associates may have
had in the past, and expect to have in the future, transactions in the ordinary
course of business with each of Professionals Group, PPTF, and their respective
subsidiaries. Such transactions were, and are expected to be, on substantially
the same terms as those prevailing at the time for comparable transactions with
others.
DIRECTORS
Professionals Group. At each of the INSCO Effective Time and the PICOM
Effective Time, the Board of Directors of Professionals Group will consist of 16
persons, including all 11 of the persons who are currently directors of
Professionals Group (including W. Peter McCabe, M.D., Victor T. Adamo, and R.
Kevin Clinton, FCAS, MAAA, who is the President of Michigan Educational
Employees Mutual Insurance Company), and Eliot H. Berg, M.D., Steven L. Salman,
Richard G. Alper, M.D., Louis P. Brady, M.D., and Edward S. Truppman, M.D. The
PPTF Representatives will be divided as equally as practicable among the three
classes of directors of Professionals Group; provided, however, (i) that Dr.
McCabe will not be in the same class as Dr. Berg, (ii) that Mr. Adamo will not
be in the same class as either Mr. Salman or Mr. Clinton, and (iii) that Mr.
Salman will not be in the same class as Mr. Clinton. See "MANAGEMENT AND
OPERATIONS AFTER THE TRANSACTIONS -- Directors."
At each of the INSCO Effective Time and the PICOM Effective Time there will
be a committee of the Professionals Group Board known as the "Nominating
Committee." This committee (i) will be comprised of four members of the
Professionals Group Board, with two members being selected from the
Professionals Group Representatives and two members being selected from the PPTF
Representatives, and (ii) to the fullest extent permitted under the First
Amended and Restated Articles of Incorporation and the Bylaws of Professionals
Group, will be delegated and authorized to exercise the full power and authority
of the Professionals Group Board with respect to recommending nominees for
election to the Professionals Group Board. Action of the Nominating Committee
within the meaning of Section 523 of the MBCA will require the favorable vote of
at least 75% of the members of this committee. As of the date of this Joint
Proxy Statement/ Prospectus, no directors of Professionals Group have been
appointed to the Nominating Committee. See "MANAGEMENT AND OPERATIONS AFTER THE
TRANSACTIONS -- Directors."
PICOM. At the PICOM Effective Time, the Board of Directors of PICOM, as the
surviving corporation in the PICOM Merger, will consist of ten persons,
including Dr. McCabe, Mr. Adamo, and three other persons to be named as
directors of PICOM, as the surviving corporation in the PICOM Merger, by the
Professionals Group Board, and Dr. Berg and Mr. Salman, Joseph C. Cauthen, M.D.,
George A. Segal, M.D., and Jack Wolfsdorf, M.D. The PG PICOM Directors and the
PPTF PICOM Directors will be divided as equally as practicable among the three
classes of directors of PICOM, as the surviving corporation in the PICOM Merger,
in proportion to the aggregate representation set forth in the preceding
sentence; provided, however, (i) that Dr. McCabe will not be in the same class
of directors as Dr. Berg, (ii) that Mr. Adamo will not be in the same class of
directors as Mr. Salman, and (iii) that Mr. Salman will not be in the same class
of directors as Dr. Berg. As of the date of this Joint Proxy
Statement/Prospectus, no additional directors of the Board of Directors of PICOM
have been designated by the Professionals Group Board. See "MANAGEMENT AND
OPERATIONS AFTER THE TRANSACTIONS -- Directors."
EXECUTIVE OFFICERS
Professionals Group. At and after each of the INSCO Effective Time and the
PICOM Effective Time, Dr. McCabe will be the Chairman of the Board of
Professionals Group, Dr. Berg will be the Vice-Chairman of
106
<PAGE> 120
the Board of Professionals Group, Mr. Adamo will be the President and Chief
Executive Officer of Professionals Group, and Mr. Salman will be the Chief
Operating Officer of Professionals Group. See "MANAGEMENT AND OPERATIONS AFTER
THE TRANSACTIONS -- Executive Officers."
PICOM. At the PICOM Effective Time, Dr. Berg will be the Chairman of the
Board of PICOM, as the surviving corporation in the PICOM Merger; Dr. McCabe
will be the Vice-Chairman of the Board of PICOM, as the surviving corporation in
the PICOM Merger; and Mr. Salman will be the President and Chief Executive
Officer of PICOM, as the surviving corporation in the PICOM Merger. See
"MANAGEMENT AND OPERATIONS AFTER THE TRANSACTIONS -- Executive Officers."
OTHER MATTERS
Professionals Group Key Employee Retention Plan. Professionals Group has
established a Key Employee Retention Plan which provides each executive of
Professionals Group or any of its subsidiaries who is designated as a "key
employee" with a severance payment and certain insurance and other benefits in
the event that there is a change in control of Professionals Group that is
coupled with the actual involuntary or constructive termination (as defined in
the plan) of such executive within two years after such change in control. The
amount of the severance payment is equal to two times the executive's base
salary plus bonus (average of last three years).
Under this plan, a "change in control" is deemed to have occurred if (i)
any person or entity (other than the person or entity in control of
Professionals Group as of January 1, 1996, or other than a trustee or other
fiduciary holding securities under an employee benefit plan of Professionals
Group, or a corporation owned directly or indirectly by the stockholders of
Professionals Group in substantially the same proportions as their ownership of
stock of Professionals Group which adopts the plan) becomes the beneficial
owner, directly or indirectly, of securities of Professionals Group representing
more than 24.9% of the combined voting power of Professionals Group's then
outstanding securities; or (ii) during any period of two consecutive years (not
including any period prior to the effective date of the plan), the stockholders
of Professionals Group approve (A) a plan of complete liquidation of
Professionals Group; or (B) an agreement for the sale or disposition of all or
substantially all of Professionals Group's assets; or (C) the sale or
reinsurance of all or substantially all of the insurance business of
Professionals Group so as to cause Professionals Group to cease to function on a
going forward basis as a medical professional liability insurance company; or
(D) a merger, consolidation, or reorganization of Professionals Group with or
involving any other corporation, other than a merger, consolidation, or
reorganization that would result in the voting securities of Professionals Group
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of such
surviving entity at least 51% of the combined voting power of the voting
securities of Professionals Group (or such surviving entity) outstanding
immediately after such merger, consolidation, or reorganization. However, in no
event shall a change in control be deemed to have occurred, with respect to a
plan participant, if that participant is part of a purchasing group which
consummates the change in control transaction. A participant will be deemed
"part of a purchasing group" if the participant is an equity participant or has
agreed to become an equity participant in the purchasing company or group
(except for (i) passive ownership or less than five percent of the stock of the
purchasing company; or (ii) ownership of equity participation in the purchasing
company or group which is otherwise deemed not to be significant, as determined
prior to the change in control by a majority of the nonemployee continuing
Directors of Professionals Group).
The Professionals Group Key Employee Retention Plan covers Professionals
Group's five most highly compensated executives (Victor T. Adamo, John O.
Bashant, R. Kevin Clinton, Annette E. Flood and Darryl K. Thomas) and two
employees of PICOM (Valerie G. Purdy and John F. Lang). Although the
transactions contemplated by the Merger Agreement will constitute a "change of
control" under Professionals Group's Key Employee Retention Plan, no payments
will be made to a participant under that plan unless that participant's
employment is terminated for any reason other than "cause" within 24 months
after the consummation of the transactions contemplated by the Merger Agreement.
In the event that the employment of all persons currently entitled to benefits
under Professionals Group's Key Employee Retention Plan is so terminated within
such period, then, under such plan and as of December 31, 1997, the aggregate
amount
107
<PAGE> 121
payable would be $2,409,004. With respect to Professionals Group's five most
highly compensated executives, in the event that his or her employment is so
terminated within such period, then, under such plan and as of December 31,
1997, Messrs. Adamo, Bashant, Clinton and Thomas and Ms. Flood would be entitled
to payments of $558,410, $328,300, $517,790, $301,891 and $301,691,
respectively. There are no plans to so terminate the employment of any plan
participant during such period.
Professionals Group Employee Retention Plan. Professionals Group has
established an "Employee Retention Plan" covering certain full-time and regular
part-time employees. Under this plan Professionals Group will provide a covered
employee with the option to receive a lump sum severance payment equal to one
year's W-2 pay and certain other benefits upon the employee's termination of
employment due to (i) the elimination of the employee's position, (ii) a
reduction in the employee's base salary by 10% or more, (iii) the relocation of
the employee's job site following a change in control to a job site that is more
than fifty miles from such employee's job site at the time of the "change in
control", or (iv) an involuntary change in the employee's employment status from
regular full-time to regular part-time, any of which occur within one year after
the acquisition of Professionals Group by another organization, the merger of
Professionals Group with another organization where Professionals Group is not
the controlling entity after the merger, or liquidation of Professionals Group.
Additional benefits include one year of health insurance coverage, payment for
earned vacation and career assistance. For purposes of this plan, "change in
control" is defined as it is defined under Professionals Group's Key Employee
Retention Plan. The transactions contemplated by the Merger Agreement will
constitute a "change of control" for purposes of this plan. In the event that
the employment of all persons currently entitled to benefits under Professionals
Group's Employee Retention Plan is so terminated within such period, then, under
such plan and as of December 31, 1997, the aggregate amount payable would be
$3,965,139. There are no plans to so terminate the employment of any plan
participant during such period.
PPTF Change in Control Agreements. Each of PPTF's senior managers (namely,
Messrs. Baxter, Goss, Hanson, Hastie and White and Mrs. Schemenauer, but
excluding Mr. Salman) has executed an Executive Termination Following Change in
Control Agreement pursuant to which PPTF has agreed to make severance payments
equal to two times the senior manager's annual base salary and to provide
certain other benefits upon the occurrence of both (i) a change in control of
PPTF and (ii) termination of the senior manager (other than for cause) within
two years after the change in control. Pursuant to the PPTF Change in Control
Agreements, which were executed between June 1, 1997 and July 8, 1997, each
senior manager of PPTF also agreed, during the term of the PPTF Change in
Control Agreement and for two years after termination of the PPTF Change in
Control Agreement, not to compete with PPTF, not to solicit business from PPTF's
customers and not to disclose confidential information about PPTF to any other
person, business, corporation or other entity.
Under the PPTF Change in Control Agreements, a "change in control" is
deemed to have occurred if (i) as a result of, or in connection with, any cash
tender or exchange offer, merger or other business combination, sale of assets
or contested election, or any combination of the foregoing transactions, the
persons who are members of the PPTF Board before the transaction shall cease to
constitute a majority of the PPTF Board or any successor to PPTF, which
specifically includes any company which becomes the senior and/or controlling
managing company of PPTF, (ii) PPTF is merged into any other entity or (iii) all
or substantially all of the assets and business of PPTF are sold, transferred,
assigned to, or otherwise acquired by a third party. Although the transactions
contemplated by the Merger Agreement will constitute a "change in control" under
each PPTF Change in Control Agreement, no payments will be made to the senior
manager thereunder unless his or her employment is terminated "other than for
cause" within two years after the consummation of the transactions contemplated
by the Merger Agreement. In the event that the employment of all of such senior
managers is so terminated during such period, then, under such PPTF Change in
Control Agreements and as of December 31, 1997, the aggregate amount payable
would be $1,675,538. In the event that the employment of such a senior manager
is so terminated during such period, then, under his or her respective PPTF
Change in Control Agreement and as of December 31, 1997, Messrs. Baxter, Goss,
Hanson, Hastie and White and Mrs. Schemenauer would be entitled to payments of
$281,000, $138,000, $276,000, $245,104, $527,934 and $206,500, respectively.
There are no plans to so terminate the employment of any of such senior managers
during such period.
108
<PAGE> 122
Salman Employment Agreement. PPTF entered into an employment agreement with
Steven L. Salman for an initial term ending September 30, 2001, with automatic
two-year extensions thereafter unless either party elects not to extend or the
agreement is otherwise terminated. The employment agreement provides for, among
other things, (i) a base salary of $325,000 per year, (ii) an annual cash bonus
of up to 50% of Mr. Salman's base salary, (iii) a housing allowance of $45,000
per year during the term of the employment agreement, and (iv) a loan for a
portion of the purchase price of a home in the Miami, Florida area for up to six
months interest free. During 1996, Mr. Salman received a short-term interest
free bridge loan for $219,327 to fund the purchase of a new home in South
Florida. The loan will be repaid upon the sale of his former home in Kentucky.
If PPTF terminates Mr. Salman's employment without cause, he is entitled to
receive a lump sum payment of two years' base salary plus all other payments and
benefits accrued and payable to Mr. Salman prior to his termination. If PPTF
elects not to renew the employment agreement (i) at the end of the initial term,
Mr. Salman is entitled to receive a lump sum payment equal to 15 months' base
salary, (ii) at the end of the first renewal term, Mr. Salman is entitled to
receive a lump sum payment equal to 21 months' base salary and (iii) at the end
of the second or any subsequent renewal term, Mr. Salman is entitled to receive
a lump sum payment equal to 24 months' base salary. The employment agreement
also contains provisions prohibiting Mr. Salman, during the term of the
employment agreement and for two years after termination of the employment
agreement, from (i) engaging, participating or assisting in any business
organization whose activities or products are directly competitive with the
activities or products of PPTF and (ii) soliciting business from PPTF's
customers and employees or consultants.
Mr. Salman's employment agreement contains a "change in control" provision
which provides for a lump sum payment by PPTF to Mr. Salman equal to three times
Mr. Salman's average annualized compensation (defined to include salary, bonus
and amounts paid for group insurance plans and retirement plans) less $1 if,
after a "change in control" of PPTF, PPTF terminates Mr. Salman's employment
other than for cause within two years after the "change in control" or Mr.
Salman terminates his employment for the reasons described in the employment
agreement. Under Mr. Salman's employment agreement, a "change in control" is
defined as (i) a merger, consolidation, stock swap or other acquisition of
beneficial ownership, direct or indirect, of securities of PPTF by any person
(as that term is defined in Section 13(d) or 14(d) of the Exchange Act) which
(A) would have to be reported under the Exchange Act or the Florida Insurance
Code and (B) when combined with all other securities of PPTF beneficially owned,
directly or indirectly, by that person, equals or exceeds 33% of the combined
voting power of PPTF's then outstanding securities or (ii) during any period of
two consecutive years, individuals who at the beginning of the first year of the
period constitute the PPTF Board cease for any reason (other than resignation)
to constitute at least a majority of the PPTF Board unless the election of each
trustee who was not a trustee at the beginning of the period was approved by a
vote of the trustees then still in office who were trustees at the beginning of
the period. Although the transactions contemplated by the Merger Agreement
constitute a "change in control" for purposes of Mr. Salman's employment
agreement, no payments will be required to be made under his employment
agreement unless Mr. Salman's employment is terminated "other than for cause"
within two years after the consummation of the Mergers. (Mr. Salman has agreed
to waive his right to terminate the employment agreement under the "change in
control" provision.) Consequently, if his employment is so terminated during
such period, then, as of December 31, 1997 and under such employment agreement,
Mr. Salman would be entitled to a payment of $1,096,875.
Upon consummation of the Mergers, Professionals Group will assume the
obligations of PPTF under Mr. Salman's employment agreement. In addition, the
initial term of the employment agreement will be extended to January 31, 2002.
Section 1.28 Stock. Subject to the terms of the Merger Agreement and
certain Consulting, Confidentiality and Noncompetition Agreements to be executed
by and between Professionals Group and each of Drs. Alper, Berg, Brady, Cauthen,
Martinez, Segal, Schwartz, Tolmach, Truppman and 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,
109
<PAGE> 123
Dr. Segal, Dr. Tolmach, Dr. Cauthen, Dr. Truppman and Dr. Wolfsdorf,
respectively. On the date of the first meeting of the Professionals Group Board
following the INSCO Effective Time, Professionals Group will deliver 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 to be executed by and between
Professionals Group and each of Messrs. Baxter, Goss, Hanson, Hastie, Salman and
White and Mrs. 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, 7,496 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 the date of
the first meeting of the Professionals Group Board following the INSCO Effective
Time, Professionals Group will issue and deliver 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.
Notwithstanding the foregoing: (i) no shares of Professionals Group Common
Stock will be delivered to a PPTF Trustee Participant pursuant to Section 1.28
of the Merger Agreement unless such PPTF Trustee Participant has executed and
delivered to Professionals Group a Consulting Agreement; and (ii) no shares of
Professionals Group Common Stock will be delivered to a PPTF Officer pursuant to
Section 1.28 of the
110
<PAGE> 124
Merger Agreement unless such PPTF Officer has executed and delivered to
Professionals Group a Stock Grant Agreement.
Indemnification; Directors' and Officers' Insurance. The Merger Agreement
provides that the parties agree to cooperate and use their best efforts to
defend against and respond to a threatened or actual civil, criminal or
administrative claim, action, suit, proceeding or investigation against a former
or current director, trustee, officer or employee of a party or a subsidiary of
a party to the Merger Agreement or an individual who becomes a director,
trustee, officer or employee of such party or a subsidiary of such party
(including any entity specified in the schedules to the Merger Agreement) before
the later of the INSCO Effective Time or the PICOM Effective Time, which arises
as a result of the Merger Agreement or any of the transactions contemplated
thereby or because the Indemnified Party was a director, trustee, officer or
employee of Professionals Group or PPTF, or a subsidiary of Professionals Group
or PPTF, or of an entity specified in the schedules to the Merger Agreement.
The Merger Agreement also provides that after the INSCO Effective Time,
Professionals Group shall indemnify and hold harmless, to the fullest extent
permitted by law, each Indemnified Party against any losses, claims, damages,
liabilities, costs, expenses (including reasonable attorneys' fees and expenses
incurred in advance of the final disposition of a Proceeding), judgments, fines
and amounts paid in settlement in connection with any such threatened or actual
Proceeding. Professionals Group shall have the right to assume the defense of a
Proceeding under certain circumstances and, upon such assumption, not be liable
to an Indemnified Party for its legal expenses. Professionals Group will not be
obligated to an Indemnified Party (i) when and if a court of competent
jurisdiction determines (and such determination becomes final and nonappealable)
that indemnification is prohibited by applicable law and (ii) to the extent an
Indemnified Party receives payment under an insurance policy, another agreement
for indemnification or otherwise. Professionals Group's obligations with respect
to indemnification will continue for a period of six years from the later of the
INSCO Effective Time and the PICOM Effective Time or the applicable statute of
limitations, if longer.
The Merger Agreement also obligates Professionals Group to use its best
efforts to cover the individuals serving as PPTF trustees and officers
immediately before the INSCO Effective Time for a period of six years from the
later of the INSCO Effective Time or the PICOM Effective Time (or the applicable
statute of limitations, if longer) by the directors' and officers' liability
insurance policy maintained by PPTF (or may substitute policies of the same or
substantially similar coverage and amounts containing no less advantageous terms
and conditions) with respect to acts and omissions occurring before the INSCO
Effective Time committed by such trustees and officers in their capacity as
such; provided, however, that Professionals Group will not be required to expend
more than 200% of the annual insurance premium currently paid by PPTF to procure
such insurance.
Professionals Group Stock Options. Each option granted by Professionals
Group to purchase shares of Professionals Group Common Stock which is
outstanding and unexercised immediately prior to the consummation of the
transactions contemplated by the Merger Agreement (i) will continue to represent
a right to acquire shares of Professionals Group Common Stock, (ii) will remain
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) will
not be affected by the consummation of the transactions contemplated by the
Merger Agreement.
REINSURANCE CONTRACT
On October 28, 1997, PPTF and PICOM entered into an Adverse Development
Stop Loss Reinsurance Contract (the "Reinsurance Contract") effective February
1, 1998 as part of PPTF's overall reinsurance for years prior to January 1,
1997. Under the Reinsurance Contract, PICOM will reinsure PPTF for an aggregate
of $40 million of net losses paid on or after July 1, 1997 for claims made on
policies issued prior to January 1, 1997 in excess of $147 million. Based upon
an independent actuarial analysis, reserves for net losses covered by the
Reinsurance Contract approximated $179 million at June 30, 1997. This
Reinsurance Contract provides
111
<PAGE> 125
PPTF adverse development protection up to $187 million. To the extent net losses
under PPTF's reinsured policies for periods prior to January 1, 1997 exceed $187
million, such losses will be borne by PPTF. The premium for the Reinsurance
Contract was $30.645 million. The Reinsurance Contract provides that in the
event of a change in control of PPTF, PICOM may unilaterally terminate the
Reinsurance Contract. This provision is designed to protect PICOM from any
material adverse development in net losses that if control of PPTF is acquired
by an entity that has claims settlement philosophies and practices that vary
significantly from those of PPTF. This termination provision was included in the
Reinsurance Contract in lieu of a commutation provision because assuming
reinsurers customarily re-evaluate companies from whom they assume business,
including instances where there is a change in control of such companies. If
PICOM terminates the Reinsurance Contract, an amount equal to the difference
between the premium paid to PICOM and an amount equal to the net losses paid by
PICOM, plus 5% interest and less a servicing fee of $0.5 million, will be
refunded to PPTF. The Reinsurance Contract was an arms-length transaction
entered into in the regular course of business and neither PICOM nor PPTF
received any constructive ownership interest in the other. Both PICOM and PPTF
evaluated the merits of the Reinsurance Contract and independently concluded
that it contained terms favorable to it, including coverage and premium. The
Reinsurance Contract (like other reinsurance agreements of PPTF) preserves
PPTF's ability to continue its vigorous claims handling practices.
MANAGEMENT AND OPERATIONS AFTER THE TRANSACTIONS
There are no material relationships between Professionals Group or its
directors or executive officers and PICOM or its directors or executive officers
and PPTF or its trustees and executive officers except as contemplated by the
Merger Agreement or as described in this Joint Proxy Statement/Prospectus or in
the materials incorporated in this Joint Proxy Statement/Prospectus by
reference. In the ordinary course of business and from time to time each of
Professionals Group, PICOM and PPTF may do business with the other and their
respective subsidiaries may enter into transactions with certain executive
officers and Affiliates of each of them.
DIRECTORS
Professionals Group. At each of the INSCO Effective Time and the PICOM
Effective Time, the Board of Directors of Professionals Group will consist of 16
persons, including all 11 of the persons who are currently directors of
Professionals Group (including W. Peter McCabe, M.D., Victor T. Adamo, and R.
Kevin Clinton, FCAS, MAAA, who is the President of Michigan Educational
Employees Mutual Insurance Company), and Eliot H. Berg, M.D., Steven L. Salman,
Richard G. Alper, M.D., Louis P. Brady, M.D., and Edward S. Truppman, M.D. The
PPTF Representatives will be divided as equally as practicable among the three
classes of directors of Professionals Group; provided, however, (i) that Dr.
McCabe will not be in the same class as Dr. Berg, (ii) that Mr. Adamo will not
be in the same class as either Mr. Salman or Mr. Clinton, and (iii) that Mr.
Salman will not be in the same class as Mr. Clinton. As of the date of this
Joint Proxy Statement/Prospectus, no additional directors of the combined
operations have been designated by the Professionals Group Board.
At each of the INSCO Effective Time and the PICOM Effective Time there will
be a committee of the Professionals Group Board known as the "Nominating
Committee." This committee (i) will be comprised of four members of the
Professionals Group Board, with two members being selected from the
Professionals Group Representatives and two members being selected from the PPTF
Representatives, and (ii) to the fullest extent permitted under the First
Amended and Restated Articles of Incorporation and the Bylaws of Professionals
Group, will be delegated and authorized to exercise the full power and authority
of the Professionals Group Board with respect to recommending nominees for
election to the Professionals Group Board. Action of the Nominating Committee of
the Professionals Group Board within the meaning of Section 523 of the MBCA will
require the favorable vote of at least 75% of the members of this committee. As
of the date of this Joint Proxy Statement/Prospectus, no directors of
Professionals Group have been appointed to the Nominating Committee.
112
<PAGE> 126
Information with respect to the current directors of Professionals Group,
each of whom will be a director of Professionals Group following the
consummation of the transactions contemplated by the Merger Agreement (assuming
all of the Professionals Group Board Nominees are re-elected to the
Professionals Group Board at the Professionals Group Annual Meeting), which
information was provided by such persons, is set forth below.
<TABLE>
<CAPTION>
CLASS OF
NAME AGE DIRECTORS TERM ENDING
---- --- ----------- -----------
<S> <C> <C> <C>
Victor T. Adamo, Esq., CPCU 50 Class I 2000
John F. McCaffrey 60 Class I 2000
Isaac J. Powell, M.D. 57 Class I 2000
R. Kevin Clinton, FCAS, MAAA 43 Class II 2001
John F. Dodge, Jr., Esq. 70 Class II 2001
H. Harvey Gass, M.D. 82 Class II 2001
Ann F. Putallaz, Ph.D. 52 Class II 2001
Jerry D. Campbell 57 Class III 1999
W. Peter McCabe, M.D. 58 Class III 1999
William H. Woodhams, M.D. 60 Class III 1999
Donald S. Young, Esq. 61 Class III 1999
</TABLE>
VICTOR T. ADAMO, ESQ., has been the President and Chief Executive Officer
and a director of Professionals Group since 1996, the President and a director
of PICOM since 1990, and the Chief Executive Officer of PICOM since 1987. Mr.
Adamo also has been a director of Michigan Educational Employees Mutual
Insurance Company, a Michigan mutual insurance company that writes personal
automobile and homeowners coverages, since May 1997. Prior to joining PICOM, Mr.
Adamo was in private legal practice from 1975 to 1985 and represented PICOM in
corporate legal matters. Mr. Adamo is a graduate of The University of Michigan
and New York University School of Law and is a Chartered Property Casualty
Underwriter (CPCU). Mr. Adamo and Mr. R. Kevin Clinton are the only current
directors of Professionals Group who are also employees of Professionals Group
or a subsidiary of Professionals Group.
JERRY D. CAMPBELL has been a director of Professionals Group since 1996. He
has been a director, and the Chairman and Chief Executive Officer, of Republic
Bancorp Inc., a publicly held Michigan corporation and bank holding company,
since 1986. Mr. Campbell is also a director of Newcor, Inc., a publicly held
Delaware corporation, and Mercantile Bank of Naples, Florida. Mr. Campbell has a
B.S. degree in liberal arts from Central Michigan University, a M.B.A. degree
from Wayne State University and a M.B.A. degree from The University of Michigan.
The common stock of Republic Bancorp Inc. is listed on the Nasdaq National
Market under the symbol "RBNC", and the common stock of Newcor, Inc. is listed
on the Nasdaq National Market under the symbol "NEWC".
R. KEVIN CLINTON, FCAS, MAAA, has been the President and a director of
Michigan Educational Employees Mutual Insurance Company, a Michigan mutual
insurance company that writes personal automobile and homeowners coverages,
since May 1997. Mr. Clinton has been a Vice President and Chief Financial
Officer of Professionals Group since 1996 and a director of Professionals Group
since September 1997. Mr. Clinton served as a Vice President, Treasurer and
Actuary of PICOM from 1990 through June 1997. Prior to becoming an officer of
PICOM, Mr. Clinton was PICOM's consulting actuary from 1986 to 1990. He formerly
served as the Actuary for the Michigan Insurance Bureau and in the actuarial
department of Michigan Mutual Insurance Company. Mr. Clinton is a fellow of the
Casualty Actuarial Society and a member of the American Academy of Actuaries.
Mr. Clinton is a graduate of The University of Michigan where he received a B.A.
degree in business administration and a M.A. in actuarial science. Mr. Clinton
and Mr. Victor T. Adamo are the only current directors of Professionals Group
who are also employees of Professionals Group or a subsidiary of Professionals
Group.
JOHN F. DODGE, JR., ESQ., has been a director of Professionals Group since
1996. Mr. Dodge has been a director of PICOM since 1980. Mr. Dodge is currently
engaged in the private practice of law in Grosse Pointe, Michigan. Prior to
establishing his private practice, Mr. Dodge was a senior partner in the law
firm of
113
<PAGE> 127
Nederlander, Dodge & Rollins, P.C., Detroit, Michigan. Mr. Dodge has practiced
general business and corporate law since 1961. Mr. Dodge is a graduate of The
University of Michigan and The University of Michigan Law School. Mr. Dodge has
provided certain legal services to Professionals Group and its subsidiaries.
H. HARVEY GASS, M.D., has been a director of Professionals Group since
1996. Dr. Gass has been a director of PICOM since 1980. Dr. Gass is board
certified in Neurosurgery, and has practiced largely at Sinai Hospital, Detroit,
Michigan since 1953. He has also served as Clinical Professor of Neurosurgery,
Department of Neurosurgery, Wayne State University, School of Medicine, Detroit,
Michigan. Dr. Gass is a graduate of The University of Michigan School of
Medicine. Dr. Gass also serves as a claims medical consultant to PICOM.
W. PETER MCCABE, M.D., has been the Chairman of the Board and a director of
Professionals Group since 1996. Dr. McCabe has been Chairman of the Board and a
director of PICOM since 1994 and 1980, respectively. Dr. McCabe has been a
director of Michigan Educational Employees Mutual Insurance Company, a Michigan
mutual insurance company that writes personal automobile and homeowners
coverages, since May 1997. He is board certified in Plastic Surgery and a past
President of the Michigan State Medical Society. Dr. McCabe is engaged in
private practice and serves on the medical staff of Saint John Hospital,
Detroit, Michigan. Dr. McCabe is a graduate of Harvard College and Cornell
University Medical School.
JOHN F. MCCAFFREY has been a director of Professionals Group since 1996.
Mr. McCaffrey is the founder and President of Belle Meade Group, Inc., a
privately held brokerage development corporation headquartered in Chicago,
Illinois. Prior to founding Belle Meade Group in July 1993, and from March 1988
to September 1992, he was Senior Vice President of Aon Corporation and the
Vice-Chairman of Rollins Burdick Hunter Co. From June 1988 to September 1991, he
served as director of Life of Virginia and Director of Union Fidelity Life
Insurance Company. Mr. McCaffrey is a former member of the Board of Trustees of
the American Institute for Property and Liability Underwriters, Inc./Insurance
Institute of America, Inc. He is also a former director of the National
Association for Casualty & Surety Agents. He has served as a director of the
Board and member of the Executive Committee of the National Association of
Insurance Brokers. He attended the University of Virginia and The University of
Michigan.
ISAAC J. POWELL, M.D., has been a director of Professionals Group since
1996. Dr. Powell has been a director of PICOM since 1980. He is board certified
in Urology and has practiced medicine since 1969. Dr. Powell has been an
Assistant Professor in Urology in the Department of Urology, Wayne State
University, School of Medicine, Detroit, Michigan since 1986. Dr. Powell is also
Chief of Urology at Veterans Hospital, Allen Park, Michigan. Dr. Powell is a
graduate of the Indiana University Medical School.
ANN F. PUTALLAZ, PH.D., has been a director of Professionals Group since
1996. Since December 1994 she has been the Vice President and Director of
Fiduciary Services of Munder Capital Management, a privately held general
partnership and the investment advisor to The Munder Funds, a Maryland
corporation and an open-end investment company registered under the Investment
Company Act of 1940, as amended. From June 1992 to December 1994, she was the
Director of Client and Marketing Services and Mutual Fund Product Management of
Woodbridge Capital Management, a predecessor-in-interest to Munder Capital
Management. From July 1990 to June 1992, she was the Director of Marketing,
Economics and Quantitative Analysis of Comerica Capital Management, a
predecessor-in-interest to Woodbridge Capital Management. Ms. Putallaz has a
B.A. degree in economics from Smith College, and a M.A. degree and a Ph.D degree
in economics from The University of Michigan.
WILLIAM H. WOODHAMS, M.D., has been a director of Professionals Group since
1996. Dr. Woodhams has been a director of PICOM since 1980. Dr. Woodhams is
board certified in Family Practice and has been in private practice in
Kalamazoo, Michigan since 1964. Dr. Woodhams serves as an Assistant Clinical
Professor in the Department of Family Practice at Michigan State University,
College of Human Medicine. Dr. Woodhams is also a member of the Michigan Board
of Medicine Committee of Licensure and Discipline. Dr. Woodhams served as a
member of the Board of Directors of Physicians Insurance Company of Indiana from
1982 to 1994. Dr. Woodhams is a graduate of The University of Michigan School of
Medicine.
114
<PAGE> 128
DONALD S. YOUNG, ESQ., has been a director of Professionals Group since
1996. He has been a principal in Dykema Gossett PLLC, a law firm headquartered
in Detroit, Michigan since 1972. Mr. Young has a B.A. degree in economics from
The University of Michigan and an LL.B. degree from Harvard University. Mr.
Young has served as a director of Attorneys' Liability Assurance Society
(Bermuda) Ltd. and Attorneys' Liability Assurance Society Inc., which provide
professional liability insurance for large law firms, since 1992. Dykema Gossett
PLLC has in the past provided legal services to Professionals Group and its
subsidiaries and to certain directors of Professionals Group and its
subsidiaries.
Additional information about the directors of Professionals Group appears
elsewhere in this Joint Proxy Statement/Prospectus or is contained or
incorporated by reference in Professionals Group's Annual Report on Form 10-K
for the year ended December 31, 1997, which is incorporated by reference in this
Joint Proxy Statement/Prospectus. See "AVAILABLE INFORMATION," "INCORPORATION OF
CERTAIN DOCUMENTS BY REFERENCE" and "INFORMATION REGARDING THE PROFESSIONALS
GROUP ANNUAL MEETING."
As indicated above, Richard G. Alper, M.D., Eliot H. Berg, M.D., Louis P.
Brady, M.D., Steven L. Salman, and Edward S. Truppman, M.D. will be directors of
Professionals Group following consummation of the transactions contemplated by
the Merger Agreement. Information with respect to each of these individuals,
which information was provided by such individuals, is set forth below.
RICHARD G. ALPER, M.D., served as a Consultant to the PPTF Board from March
1993 until becoming a trustee in February 1996. He is board certified in
Internal Medicine, Hematology, and Medical Oncology and practices on behalf of
Melbourne Internal Medicine Associates in Melbourne, Florida. Prior to July
1994, he was in private practice in Coral Gables, Florida. Dr. Alper is a
graduate of the University of Miami School of Medicine.
ELIOT H. BERG, M.D., has been the Chairman of the PPTF Board since PPTF's
inception. He is also a director of PPP. He is board certified in Surgery,
practices on behalf of Segal and Berg, P.A. in Hialeah, Florida and serves on
the medical staffs of Palmetto General Hospital, Hialeah Hospital, Parkway
Regional Medical Center, and Parkway West Regional Medical Center. He is a
director and an officer of several corporations which provide surgical
assistants to hospitals in the South Florida area. He was a founder of Palmetto
General Hospital and Chairman of its Board from 1970 until August 1997. He
served as a director and an officer of Patient Care of America, a health
maintenance organization, from October 1985 until November 1990. He has been a
member of the Board of Overseers for the University of Miami School of Medicine
since 1983. He serves on the Board of Directors of the Dade County Medical
Association. Dr. Berg is a graduate of the State University of New York,
Downstate, Medical College.
LOUIS P. BRADY, M.D., has been a trustee of PPTF since PPTF's inception and
serves on the Claims Committee and as Chairman of the Underwriting Committee of
the PPTF Board. He practices Office Orthopaedics on behalf of Matthews
Orthopaedic Clinic in Orlando, Florida, serves on its Board of Directors, and
has been its Medical Director since July 1995. He serves on the medical staffs
of Florida Hospital and Winter Park Memorial Hospital. Dr. Brady is board
certified in Orthopaedic Surgery and is a graduate of Emory University School of
Medicine.
STEVEN L. SALMAN, ESQ., has been the President and Chief Executive Officer
of PPTF since October 1, 1996. Prior to joining PPTF, he was President, Chief
Executive Officer and Director of Kentucky Medical Insurance Company ("KMIC") in
Louisville, Kentucky, where he also served on the Board of Directors of three of
KMIC's subsidiaries. Prior to joining KMIC in August 1991, he was Senior Vice
President -- Corporate Affairs and General Counsel for Sisters of Charity Health
Care Systems, Inc. in Cincinnati, Ohio, where among other responsibilities, he
administered three insurance companies that were owned, or partially owned, by
this health care system. Prior to joining Sisters of Charity, he held positions
in two large hospitals as the Director of Risk Management/Risk Control. Mr.
Salman was a founder and the first President of the American Society for Health
Care Risk Management. He has previously served on the boards of two hospitals
and currently serves on the Board of Trustees of Franciscan Service Corporation,
a Catholic multi-hospital system operating hospitals in three states. Mr. Salman
received his undergraduate business degree from Indiana University and his law
degree from Capital University Law School.
115
<PAGE> 129
EDWARD S. TRUPPMAN, M.D., has been a trustee of PPTF and Secretary of the
PPTF Board since PPTF's inception. He also serves on the Claims Committee and as
co-Chairman of the Investment Committee of the PPTF Board. He is board certified
in Plastic Surgery, practices Plastic Surgery on behalf of Edward S. Truppman,
M.D., P.A. in Aventura, Florida, and serves on the medical staffs of Palmetto
General Hospital, Aventura Hospital and Medical Center, Parkway Medical Center,
Miami Heart Institute, and Jackson Memorial Hospital. He is a director and
officer of Surgical Assistants of Florida, which provides surgical assistants to
hospitals in the South Florida area. He was a founder of Palmetto General
Hospital and served as Vice Chairman from 1970 until August 1997. He is the
Vice-Chairman of the Steering Committee of Hialeah Miami Springs Medical Fund
II. He was the Founding President of the American Association for Accreditation
of Ambulatory Surgery Facilities, Inc. and continues to serve on its Board of
Directors. He serves as President of the Florida Society of Plastic and
Reconstructive Surgeons and serves on the Board of Governors of the Florida
Patient's Compensation Fund. He served as Chairman of the Board of Pan American
Bank from June 1989 until April 1994. Dr. Truppman is a graduate of the
University of Minnesota Medical School.
No director or executive officer of Professionals Group or PPTF is related
to any other director or to any executive officer of Professionals Group or PPTF
or of any of its subsidiaries by blood, marriage or adoption, and there are no
arrangements or understandings between a director or executive officer and any
other person pursuant to which such person was elected a director or executive
officer of Professionals Group or PPTF or any of their respective subsidiaries.
PICOM. At the PICOM Effective Time, the Board of Directors of PICOM, as the
surviving corporation in the PICOM Merger, will consist of ten persons,
including Dr. McCabe, Mr. Adamo, and three other persons to be named as
directors of PICOM, as the surviving corporation in the PICOM Merger, by the
Professionals Group Board, and Dr. Berg and Mr. Salman, Joseph C. Cauthen, M.D.,
George A. Segal, M.D., and Jack Wolfsdorf, M.D. The PG PICOM Directors and the
PPTF PICOM Directors will be divided as equally as practicable among the three
classes of directors of PICOM, as the surviving corporation in the PICOM Merger,
in proportion to the aggregate representation set forth in the preceding
sentence; provided, however, (i) that Dr. McCabe will not be in the same class
of directors as Dr. Berg, (ii) that Mr. Adamo will not be in the same class of
directors as Mr. Salman, and (iii) that Mr. Salman will not be in the same class
of directors as Dr. Berg. As of the date of this Joint Proxy
Statement/Prospectus, no additional directors of the Board of Directors of PICOM
have been designated by the Professionals Group Board.
EXECUTIVE OFFICERS
Professionals Group. Upon consummation of the transactions contemplated by
the Merger Agreement, the executive officers of Professionals Group will consist
of the persons set forth below. Executive officers are elected annually and
serve at the pleasure of the Professionals Group Board.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
W. Peter McCabe, M.D. 58 Chairman
Eliot H. Berg, M.D. 73 Vice Chairman
Victor T. Adamo, Esq., CPCU 50 President and Chief Executive Officer
Steven L. Salman, Esq. 50 Chief Operating Officer
R. Kevin Clinton, FCAS, MAAA 43 Vice President, Treasurer and Chief Financial Officer
Annette E. Flood, Esq., R.N. 39 Secretary
</TABLE>
For information with respect to Drs. McCabe and Berg, and Messrs. Adamo,
Salman and Clinton, see "-- Directors" above.
ANNETTE E. FLOOD, ESQ., R.N., has been the Secretary of Professionals Group
since 1996. Ms. Flood is Vice President, Corporate Secretary and Legal Counsel
of PICOM. Ms. Flood has been a director of Michigan Educational Employees Mutual
Insurance Company, a Michigan mutual insurance company that writes personal
automobile and homeowners coverages, since May 1997. Prior to joining PICOM in
1992, Ms. Flood was employed by Lansing General Hospital, Lansing, Michigan,
from 1986 to 1992, most recently
116
<PAGE> 130
in the capacity of Vice President, Legal Services and Quality Management. Prior
to joining the Lansing General Hospital staff, Ms. Flood was in the litigation
section of the law firm of Dykema Gossett PLLC, Lansing, Michigan. Ms. Flood has
a B.A. degree in nursing from The University of Michigan and a law degree from
Wayne State University Law School.
Additional information about the executive officers of Professionals Group
appears elsewhere in this Joint Proxy Statement/Prospectus or is contained or
incorporated by reference in Professionals Group's Annual Report on Form 10-K
for the year ended December 31, 1997, which is incorporated by reference in this
Joint Proxy Statement/Prospectus. See "AVAILABLE INFORMATION," "INCORPORATION OF
CERTAIN DOCUMENTS BY REFERENCE" and "INFORMATION REGARDING THE PROFESSIONALS
GROUP ANNUAL MEETING."
PICOM. At the PICOM Effective Time, Dr. Berg will be the Chairman of the
Board of PICOM, as the surviving corporation in the PICOM Merger; Dr. McCabe
will be the Vice-Chairman of the Board of PICOM, as the surviving corporation in
the PICOM Merger; and Mr. Salman will be the President and Chief Executive
Officer of PICOM, as the surviving corporation in the PICOM Merger.
DIVIDEND POLICY
The holders of Professionals Group Common Stock are entitled to receive
such dividends as may be declared from time to time by the Professionals Group
Board out of funds legally available therefor. Professionals Group is not
expected to declare cash dividends on Professionals Group Common Stock at any
time prior to the INSCO Effective Time or for the foreseeable future following
the consummation of the transactions contemplated by the Merger Agreement, as it
is expected that earnings of Professionals Group and its subsidiaries will be
retained and used for operations. However, following the consummation of such
transactions, the Professionals Group Board may consider developing a dividend
policy that could result in future cash dividends and, even in the absence of
any such policy, may consider declaring cash dividends in the future. Any future
dividends will depend upon, among other things, future financial results and
requirements and contractual restrictions applicable to Professionals Group and
its subsidiaries. The ability of Professionals Group to fund its operations and
to pay dividends on Professionals Group Common Stock following consummation of
the transactions contemplated by the Merger Agreement will be dependent upon its
receipt of dividends from PICOM. The ability of PICOM to pay dividends is
subject to regulatory restrictions. There can be no assurance as to any future
dividends by Professionals Group or PICOM. See "CERTAIN REGULATORY
CONSIDERATIONS."
The Merger Agreement provides that neither Professionals Group nor PPTF
shall make, declare or pay any dividend or make any other distribution on, or
directly or indirectly redeem, purchase or otherwise acquire, any shares of its
capital stock or any securities or obligations convertible into or exchangeable
for any shares of its capital stock except, (i) in the case of Professionals
Group, a stock dividend not exceeding 10% of the shares of Professionals Group
Common Stock outstanding as of the date such stock dividend is declared may be
made, declared or paid at any time prior to the INSCO Effective Time, and (ii)
for dividends paid by any subsidiaries of each of Professionals Group and PPTF
to Professionals Group or PPTF or any of their subsidiaries, respectively.
Professionals Group does not currently intend to declare or pay a stock dividend
at any time prior to the INSCO Effective Time.
117
<PAGE> 131
BENEFICIAL OWNERSHIP OF PROFESSIONALS GROUP COMMON STOCK
The following table sets forth information provided by the persons
indicated with respect to the beneficial ownership (as defined under applicable
rules of the Commission) of shares of Professionals Group Common Stock by (i)
each person known by Professionals Group who is, or upon consummation of the
transactions contemplated by the Merger Agreement will become, the owner of more
than 5% of the outstanding shares of Professionals Group Common Stock, (ii) each
person who is, or upon consummation of such transactions will become, a director
or an executive officer of Professionals Group, and (iii) all persons who are,
or upon consummation of such transactions will become, directors or executive
officers of Professionals Group as a group:
<TABLE>
<CAPTION>
PERCENTAGE OF BENEFICIAL
NUMBER OF SHARES OWNERSHIP
-------------------------------------- ------------------------------
PRE-MERGER(2) POST-MERGER(3) PRE-MERGER(2) POST-MERGER(3)
----------------- ------------------ ------------- --------------
<S> <C> <C> <C> <C>
PRINCIPAL STOCKHOLDERS(1)
Heartland Advisors, Inc........... 313,670 313,670 8.9 4.1
Franklin Resources, Inc........... 240,520 240,520 6.9 3.2
NAMED DIRECTORS AND
EXECUTIVE OFFICERS(1)
Victor T. Adamo................... 59,778(4) 59,778(4) 1.7 *
Richard G. Alper, M.D............. 0 400 * *
Eliot H. Berg, M.D................ 0 3,291(12) * *
Louis P. Brady, M.D............... 0 764(13) * *
Jerry D. Campbell................. 4,823(5) 4,823(5) * *
R. Kevin Clinton.................. 40,875(6) 40,875(6) 1.2 *
John F. Dodge, Jr................. 17,713(5)(7) 17,713(5)(7) * *
Annette E. Flood.................. 7,930(8) 7,930(8) * *
H. Harvey Gass, M.D............... 13,228(5)(9) 13,228(5)(9) * *
W. Peter McCabe, M.D.............. 35,495(5)(10) 35,495(5)(10) 1.0 *
John F. McCaffrey................. 1,408(5) 1,408(5) * *
Isaac J. Powell, M.D.............. 3,505(5) 3,505(5) * *
Ann F. Putallaz................... 1,765(5) 1,765(5) * *
Steven L. Salman.................. 3,000 3,000 * *
Edward S. Truppman, M.D........... 0 3,901(14) * *
William H. Woodhams, M.D.......... 5,796(5)(11) 5,796(5)(11) * *
Donald S. Young................... 1,092(5) 1,092(5) * *
All directors and executive
officers of Professionals Group
as a group (17 persons)(1)...... 196,258 204,657 5.6 2.6
</TABLE>
- ---------------
(1) Unless otherwise noted, Professionals Group believes that all persons named
in the table have, or will have, (i) sole voting and investment power with
respect to all shares of Professionals Group Common Stock owned by them,
except to the extent that authority is shared by spouses under applicable
law, and (ii) record and beneficial ownership of such shares. The address
of Heartland Advisors, Inc. is 790 North Milwaukee Street, Milwaukee,
Wisconsin 53202. The address of Franklin Resources, Inc. is 777 Mariners
Island Blvd., P.O. Box 7777, San Mateo California 94403-7777. The address
of each of Messrs. Adamo, Campbell, Clinton, Dodge, Gass, McCabe,
McCaffrey, Powell, Woodhams and Young, Ms. Flood and Ms. Putallaz is 2600
Professionals Drive, P.O. Box 150, Okemos, Michigan 48805-0150. The address
of each of Messrs. Alper, Berg, Brady, Salman and Truppman is 2121 Ponce de
Leon Boulevard, P.O. Box 149001, Coral Gables, Florida 33114-9001.
(2) Number of shares and percentages are based on ownership of Professionals
Group Common Stock as of the Professionals Group Record Date. There were
3,505,750 issued and outstanding shares of
118
<PAGE> 132
Professionals Group Common Stock as of the Professionals Group Record Date.
An asterisk indicates ownership of less than 1%.
(3) Number of shares and percentages are based on ownership of Professionals
Group Common Stock assuming 4,089,160 shares of Professionals Group Common
Stock are issued upon consummation of the INSCO Merger and without giving
effect to the issuance of 153,000 shares of Professionals Group Common
Stock to trustees and officers of PPTF pursuant to Section 1.28 of the
Merger Agreement over a period of four years. An asterisk indicates
ownership of less than 1%.
(4) Includes 12,000 shares of Professionals Group Common Stock issuable upon
exercise of options exercisable within 60 days, 45,247 shares of
Professionals Group Common Stock held jointly with spouse, and 1,900 shares
of Professionals Group Common Stock held for the benefit of minor children.
(5) Includes 550 shares of Professionals Group Common Stock issuable upon
exercise of options exercisable within 60 days.
(6) Includes 8,000 shares of Professionals Group Common Stock issuable upon
exercise of options exercisable within 60 days, and 7,085 shares of
Professionals Group Common Stock held jointly with spouse.
(7) Includes 1,100 shares of Professionals Group Common Stock held for the
benefit of a minor child.
(8) Includes 2,600 shares of Professionals Group Common Stock issuable upon
exercise of options exercisable within 60 days, and 1,545 shares of
Professionals Group Common Stock held jointly with spouse.
(9) Includes 1,100 shares of Professionals Group Common Stock held jointly with
spouse and 1,004 shares of Professionals Group Common Stock held in trust
and with respect to which he has the power to vote (or to direct the voting
of) or the power to dispose (or direct the disposition of).
(10) Includes 32,133 shares of Professionals Group Common Stock held jointly
with spouse and 600 shares of Professionals Group Common Stock held for the
benefit of a minor child.
(11) Includes 1,059 shares of Professionals Group Common Stock held for the
benefit of a minor child.
(12) Includes 482 shares of Professionals Group Common Stock held by an entity
controlled by him and with respect to which he has the power to vote.
(13) Includes 437 shares of Professionals Group Common Stock held by an entity
controlled by him and with respect to which he has the power to vote.
(14) Includes 1,848 shares of Professionals Group Common Stock held by entities
controlled by him and with respect to which he has the power to vote.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary description of the material Federal income tax
consequences of the Mergers. This summary is not a complete description of all
of the consequences of the Mergers and, in particular, may not address Federal
income tax considerations that may affect the treatment of a stockholder or
member which, at the effective time of each of the Mergers, already owns some
Professionals Group Common Stock, is not a U.S. person, is a tax-exempt entity,
or is an individual who exercises some form of control over PPTF. Further, this
summary does not address the Federal income tax consequences to persons
receiving Professionals Group Common Stock as compensation. In addition, no
information is provided herein with respect to the tax consequences of the
transactions contemplated by the Merger Agreement under applicable foreign,
state or local laws. Consequently, each stockholder of Professionals Group and
each Member of PPTF is advised to consult a tax advisor as to the specific tax
consequences of the transaction to him or her. The following discussion is based
on the Internal Revenue Code of 1986, as amended, as in effect on the date of
this Joint Proxy Statement/Prospectus, without consideration of the particular
facts or circumstances of any stockholder of Professionals Group or any Member
of PPTF.
Consummation of the transactions contemplated by the Merger Agreement is
conditioned upon the receipt by PPTF and Professionals Group of an opinion of
their respective tax counsel (Steel Hector & Davis
119
<PAGE> 133
LLP in the case of PPTF and Miller, Canfield, Paddock and Stone, P.L.C. in the
case of Professionals Group), dated as of the INSCO Effective Time,
substantially to the effect that, on the basis of facts, representations and
assumptions set forth in such opinions which are consistent with the state of
facts existing at the INSCO Effective Time, for Federal income tax purposes the
Mergers will constitute a reorganization within the meaning of Section
368(a)(1)(A) of the Code. The receipt of such opinions is a condition to the
consummation of the transactions contemplated by the Merger Agreement that will
not be waived by either Professionals Group or PPTF.
Based on such opinions, the material Federal income tax consequences of the
Mergers will be:
(i) no gain or loss will be recognized by Professionals Group or by
PPTF as a result of the Mergers;
(ii) no gain or loss will be recognized by Members of PPTF who
exchange their Membership Rights solely for Professionals Group Common
Stock pursuant to the INSCO Merger (except with respect to cash received in
lieu of a fractional share interest or in satisfaction of dissenters'
rights);
(iii) the tax basis of the Professionals Group Common Stock received
by an Member of PPTF who exchanges all Membership Rights solely for shares
of Professionals Group Common Stock will be zero; and
(iv) the holding period of the Professionals Group Common Stock
received by an Member of PPTF will include the period during which the
Membership Rights surrendered in exchange therefor were held (provided that
such Membership Rights were held by such Member as a capital asset at the
INSCO Effective Time).
Payments in respect of Membership Rights may be subject to information
reporting to the Internal Revenue Service and to a 31% backup withholding tax.
Backup withholding will not apply, however, to a payment to a Member of PPTF or
other payee if such Member or payee completes and signs the substitute Form W-9
that will be included as part of the Notice or otherwise proves to the combined
entity and the Exchange Agent that it is exempt from backup withholding.
THE DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY.
THE DISCUSSION DOES NOT ADDRESS THE STATE, LOCAL OR FOREIGN TAX ASPECTS OF THE
TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT. THE DISCUSSION IS BASED ON
CURRENTLY EXISTING PROVISIONS OF THE CODE, EXISTING AND PROPOSED TREASURY
REGULATIONS THEREUNDER AND CURRENT ADMINISTRATIVE RULINGS AND COURT DECISIONS.
ALL OF THE FOREGOING ARE SUBJECT TO CHANGE, WHICH CHANGE MAY BE RETROACTIVE, AND
ANY SUCH CHANGES COULD AFFECT THE CONTINUING VALIDITY OF THIS DISCUSSION. EACH
PROFESSIONALS GROUP STOCKHOLDER AND EACH PPTF MEMBER SHOULD CONSULT A TAX
ADVISOR WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF THE TRANSACTIONS
CONTEMPLATED BY THE MERGER AGREEMENT, INCLUDING THE APPLICATION AND EFFECT OF
STATE, LOCAL AND FOREIGN TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL
LAWS OR OTHER TAX LAWS.
120
<PAGE> 134
CERTAIN REGULATORY CONSIDERATIONS
The following discussion is a summary of certain statutes and regulations
affecting Professionals Group, PICOM, PPTF and their respective subsidiaries.
Although it describes and summarizes all material provisions of such statutes
and regulations, such discussion is necessarily incomplete. Consequently,
reference is made to and such discussion is qualified in its entirety by, such
statutes and regulations. A change in applicable laws or regulations may have a
material effect on Professionals Group, PICOM, PPTF, their respective
subsidiaries and the respective businesses of Professionals Group, PICOM, PPTF,
and their respective subsidiaries.
GENERAL
Insurance holding companies, insurance companies and self-insurance trust
funds are extensively regulated. Such regulation has had significant effect on
the operations of insurance holding companies, insurance companies and
self-insurance trust funds in the past and is expected to have significant
effects in the future. Periodically, legislation is considered and adopted which
has resulted in, or that could result in, further regulation or deregulation of
insurance holding companies, insurance companies and self-insurance trust funds.
No assurance can be given as to whether any additional legislation will be
adopted or as to the effect such legislation would have on the business of
Professionals Group, PICOM, PPTF and their respective subsidiaries.
Insurance companies are subject to regulation by government agencies in the
states in which they are licensed. PICOM is licensed as a property and casualty
insurer in Michigan, Florida, Illinois, Indiana, Iowa, Kentucky, Missouri, Ohio,
Pennsylvania and Wisconsin. ProNational Casualty Company, an Illinois stock
insurance corporation (formerly known as "PICOM Insurance Company of Illinois")
and a wholly-owned subsidiary of PICOM, is licensed as a property and casualty
insurer in Illinois. INSCO, which is a wholly-owned subsidiary of Professionals
Group, is licensed as a property and casualty insurer in Florida. PPTF is a
self-insurance medical malpractice trust in Florida. The nature and extent of
such regulation vary from jurisdiction to jurisdiction, but typically involve
prior approval of the acquisition of control of an insurance company or
self-insurance trust fund or of any company controlling an insurance company or
self-insurance trust fund, regulation of certain transactions entered into by an
insurance company or self-insurance trust fund with any of its affiliates,
approval of premium rates, forms and policies used for many lines of insurance,
standards of solvency and minimum amounts of capital and surplus which must be
maintained, establishment of reserves required to be maintained for unearned
premium, losses and loss expenses or for other purposes, limitations on types
and amounts of investments, restrictions on the size of risks which may be
insured by a single entity, licensing of insurers and agents, deposits of
securities for the benefit of policyholders, and the filing of periodic reports
with respect to financial condition and other matters. In addition, state
regulatory examiners perform periodic examinations of insurance companies and
self-insurance trust funds. Such regulation is generally intended for the
protection of policyholders rather than security holders.
PICOM, ProNational Casualty and PPTF principally write medical malpractice
insurance and additional requirements are placed upon them to report detailed
information with regard to the settlements or judgments against their respective
insureds. In addition to the reporting to the states of medical malpractice
settlements and judgments, payments must also be reported to the National
Practitioners Data Bank ("Data Bank"). Penalties attach if reports to the states
and to the Data Bank are not made.
Every insurance company and self-insurance trust fund is subject to a
periodic examination under the authority of the insurance commissioner of its
state of domicile. Any other state interested in participating in a periodic
examination may do so. The last periodic examination of PICOM was based on its
December 31, 1995 statutory financial statements and a report was issued on
October 15, 1996. As of December 31, 1997, ProNational Casualty had yet to
undergo a periodic examination. The last periodic examination of PPTF was based
on its December 31, 1994 statutory financial statements and a report was issued
on November 1, 1995. Various states also conduct "market conduct examinations"
which are periodic, unscheduled examinations designed to monitor the compliance
with state laws and regulations concerning the filing of rates and forms. PICOM
and ProNational Casualty have not undergone a market conduct examination. The
last "market conduct examination" of PPTF was conducted March 28, 1995 through
April 10, 1995 and a report was issued
121
<PAGE> 135
on July 6, 1995. PICOM, ProNational Casualty and PPTF were not required to make
any financial adjustments or change any market conduct procedures as a result of
any of these examinations.
Insurance companies and self-insurance trust funds are also affected by a
variety of state and Federal legislative and regulatory measures and judicial
decisions that define and extend the risks and benefits for which insurance is
sought and provided. In addition, individual state insurance departments may
prevent premium rates for some classes of insureds from reflecting the level of
risk assumed by the insurer for those classes. Such developments may adversely
affect the profitability of various lines of insurance.
Professionals Group is subject to regulation as an insurance holding
company because of its ownership of PICOM and is required to file information
relating to its capital structure, ownership, and financial condition and
general business operations of its insurance subsidiaries. Similarly, and in
addition to being regulated as an insurance company, PICOM is subject to
regulation as an insurance holding company because of its ownership of
ProNational Casualty and it is also required to file information relating to its
capital structure, ownership, and financial condition and general business
operations of its insurance subsidiaries. As insurance holding companies,
Professionals Group and PICOM are also subject to special reporting and prior
approval requirements with respect to transactions among affiliates.
CHANGE OR ACQUISITION OF CONTROL
PICOM is a Michigan stock, property and casualty insurance company
organized under the Michigan Insurance Code. ProNational Casualty is an Illinois
stock, property and casualty insurance company organized under the Illinois
Insurance Code. PPTF is a medical malpractice self-insurance trust fund
organized under Florida Statutes sec. 627.357. The Michigan Insurance Code, the
Illinois Insurance Code and the Florida Insurance Code all provide that the
acquisition or change of "control" of a domestic insurer or of any person that
controls a domestic insurer cannot be consummated without the prior approval of
the relevant insurance regulatory authority. A person seeking to acquire
control, directly or indirectly, of a domestic insurer or of any person
controlling a domestic insurer must generally file with the relevant insurance
regulatory authority an application for change of control (commonly known as a
"Form A") containing certain information required by statute and published
regulations and provide a copy of such Form A to the domestic insurer. In each
of Michigan, Illinois and Florida, control is generally presumed to exist if any
person, directly or indirectly, owns, controls, holds the power to vote or holds
proxies representing 10% or more of the voting securities of any other person.
In addition, many state insurance regulatory laws contain provisions that
require pre-notification to state agencies of a change in control of a
non-domestic admitted insurer in that state. While such pre-notification
statutes do not authorize the state agency to disapprove the change of control,
such statutes do authorize issuance of a cease and desist order with respect to
the non-domestic admitted insurer if certain conditions exist such as undue
market concentration.
Following consummation of the transactions contemplated by the Merger
Agreement, any future transactions that would constitute a change in control of
Professionals Group or PICOM would also generally require prior approval by the
Michigan Insurance Commissioner, the Illinois Insurance Director and the Florida
Insurance Department and would require reacquisition notification in those
states which have adopted reacquisition notification provisions and in which the
insurers are admitted. Such requirements may deter, delay or prevent certain
transactions that could be advantageous to the stockholders of Professionals
Group or PICOM.
INSOLVENCY FUNDS; MANDATORY POOLS
Most states require admitted property and casualty insurers to become
members of insolvency or guaranty funds or associations which generally protect
policyholders against the insolvency of such insurers. Members of the fund or
association must contribute to the payment of certain claims made against
insolvent insurers. Maximum contributions required by law in any one year vary
between 1% and 2% of annual premium written by a member in that state. No
assessments from guaranty funds were charged to the insurance
122
<PAGE> 136
subsidiaries of Professionals Group or to PPTF in 1997, 1996 or 1995.
Assessments from guaranty funds may, to a limited extent, be recovered through
future premium tax reductions.
Insurance companies are also required to participate in various mandatory
insurance facilities or in funding mandatory pools, which are generally designed
to provide insurance coverage for consumers who are unable to obtain insurance
in the voluntary insurance market. Pools are typically found in insurance lines
such as workers' compensation, homeowners and personal automobile insurance.
PICOM does not currently offer any of these insurance lines directly, but does
provide reinsurance to Michigan Educational Employees Mutual Insurance Company,
a Michigan mutual insurance company that provides homeowners and personal
automobile insurance. Moreover, PICOM could offer such insurance lines directly
in the future. Similarly, PPTF does not currently offer any of these insurance
lines, but could do so in the future. These pools typically require all
companies writing applicable lines of insurance in the state for which the pool
has been established to fund deficiencies experienced by the pool based upon
each company's relative premium writings in that state, with any excess funding
typically distributed to the participating companies on the same basis. To the
extent that these assessments are imposed on the insurance subsidiaries of
Professionals Group or PPTF, they could have an adverse effect on Professionals
Group, or such insurance subsidiaries of Professionals Group or PPTF.
As a self-insurance trust fund, PPTF is required to assess its Members for
losses it is unable to pay. However, PPTF has never levied an assessment.
Because of its ability to assess its Members, PPTF is exempt from participating
in the Florida Insurance Guaranty Association, which guarantees each stock
property and casualty company's payment of claims to its insureds in the event
of insolvency. PPTF has also been exempted from assessments made toward payment
of claims arising from Hurricane Andrew.
RESTRICTIONS ON DIVIDENDS
Insurance companies and self-insurance trust funds are subject to various
state and regulatory restrictions, generally applicable to each insurer in its
state of incorporation, which limit the amount of dividends or distributions by
an insurer to its stockholders or policyholders. The restrictions are generally
based on certain levels of surplus, investment income and operating income, as
determined under statutory accounting practices.
The Michigan Insurance Code, the Illinois Insurance Code and the Florida
Insurance Code regulate the distribution of dividends and other payments to a
holding company by its insurance subsidiaries. Under each of the Michigan
Insurance Code, the Illinois Insurance Code and the Florida Insurance Code, an
insurer may pay dividends or distribute cash or other property so long as such
dividends or distributions, together with all other dividends or distributions
made within the preceding year, do not exceed the greater of (i) 10% of the
insurer's policyholders' surplus as of December 31 of the preceding year or (ii)
the net income, not including realized capital gains, for the twelve-month
period ending December 31 of the preceding year, with larger dividends payable
only upon prior regulatory approval. Following consummation of the transactions
contemplated by the Merger Agreement, such restrictions or any additional
subsequently imposed restrictions may in the future affect Professionals Group's
ability to fund its operations, pay principal and interest on its debt, pay its
expenses and pay any cash dividends to its stockholders. Future dividends from
Professionals Group's subsidiaries may also be limited by business
considerations. See "MANAGEMENT AND OPERATIONS AFTER THE
REORGANIZATION -- Dividend Policy."
123
<PAGE> 137
RISK-BASED CAPITAL
The National Association of Insurance Commissioners has established
risk-based capital ("RBC") requirements to assist regulators in monitoring the
financial strength and stability of property and casualty insurers. Under the
NAIC requirements, regulatory compliance is determined by a ratio of an
insurer's regulatory total adjusted capital, as defined by the NAIC, to its
authorized control level of RBC, as defined by the NAIC. Insurers below specific
ratios are classified within certain levels, each of which requires specific
corrective action. The levels and ratios are as follows:
<TABLE>
<CAPTION>
RATIO OF TOTAL ADJUSTED
CAPITAL TO AUTHORIZED
CONTROL LEVEL RBC
(LESS THAN OR EQUAL
LEVEL TO)
----- -----------------------
<S> <C>
Company action level............. 2.0
Regulatory action level.......... 1.5
Authorized control level......... 1.0
Mandatory control level.......... 0.7
</TABLE>
PICOM and ProNational Casualty have calculated their ratios of total
adjusted capital to authorized control level RBC and each were in excess of 4:1
at December 31, 1997. At December 31, 1997, PICOM's total adjusted capital was
$99.7 million, and its authorized control level RBC was $23.1 million, and
ProNational Casualty's total adjusted capital was $10.2 million, and its
authorized control level RBC was less than $1.0 million.
PPTF has calculated its ratio of total adjusted capital to authorized
control level RBC and it was in excess of 4:1 at December 31, 1997. Although
PPTF is not subject to the NAIC's RBC requirements, at December 31, 1997, PPTF's
total adjusted capital was $113.3 million, and its authorized control level RBC
was $16.8 million.
At December 31, 1997, PICOM's and PPTF's pro forma combined total adjusted
capital would have been $223.2 million, and the pro forma combined authorized
control level RBC would have been $40.9 million.
NAIC-IRIS RATIOS
The NAIC's Insurance Regulatory Information System was developed by a
committee of state insurance regulators and is primarily intended to assist
state insurance departments in executing their statutory mandates to oversee the
financial condition of insurers operating in their respective states. IRIS
identifies 11 industry ratios and specifies "usual values" for each ratio.
Departure from the usual values on four or more ratios generally leads to
inquiries from individual state insurance commissioners.
In 1997, 1996 and 1995, PICOM did not have any ratios which varied from the
"usual value" range.
In 1995, ProNational Casualty had two ratios which varied from the "usual
value" range as follows:
<TABLE>
<CAPTION>
PRONATIONAL
RATIO USUAL RANGE CASUALTY VALUE
----- ------------ --------------
<S> <C> <C>
Two year over-all operating ratio up to 100% 125%
Change in surplus (10%) to 50% (26%)
</TABLE>
In 1996, ProNational Casualty had two ratios which varied from the "usual
value" range as follows:
<TABLE>
<CAPTION>
PRONATIONAL
RATIO USUAL RANGE CASUALTY VALUE
----- ------------ --------------
<S> <C> <C>
Two year over-all operating ratio up to 100% 122%
Change in net writings (33%) to 33% (99%)
</TABLE>
124
<PAGE> 138
In 1997, ProNational Casualty had two ratios which varied from the "usual
value" range as follows:
<TABLE>
<CAPTION>
PRONATIONAL
RATIO USUAL RANGE CASUALTY VALUE
----- ------------ --------------
<S> <C> <C>
Change in Surplus (10%) to 50% 69%
Change in net writings (33%) to 33% (99%)
</TABLE>
At present, no inquiries have been received from any state insurance
commissioner as a result of the "unusual values" for ProNational Casualty. In an
effort to remediate such "unusual values", and in order to allow ProNational
Casualty to assume PICOM's A.M. Best Rating, ProNational Casualty and PICOM
entered into a quota share reinsurance contract whereby not less than 90% of the
insurance risks written by ProNational Casualty are reinsured by PICOM. This
reinsurance mechanism, which will not affect the Company's consolidated results,
is expected to stabilize the underwriting results of ProNational Casualty.
In 1997, 1996 and 1995, PPTF did not have any ratios which varied from the
"usual value" range.
EFFECT OF FEDERAL LEGISLATION
Although the Federal government does not directly regulate the business of
insurance, Federal initiatives often affect the insurance business in a variety
of ways. Current and proposed Federal measures which may significantly affect
the insurance business include Federal government participation in health care
reform, product liability claims, environmental regulation, pension regulation
(ERISA), examination of the taxation of insurers and reinsurers, minimum levels
of liability insurance and safety regulations.
TORT REFORM
On a state level, several states, including Michigan and Florida, have
adopted tort reforms designed to moderate the risk of practice to health care
providers. Although such legislation is being subjected to numerous
constitutional challenges, it generally has a positive impact by reducing
malpractice losses. Such legislation also tends to result in increased
competition because it causes the particular state to be more attractive to
other insurance companies seeking to expand their markets. Professionals Group
has seen an increase in competition in its markets due, in part, to the passage
of tort reform.
On the Federal level, attempts to reform the delivery of medical care have
contained provisions that could, if adopted, have a material impact on
Professionals Group and its insurance products. An example of such a change is
the concept of "enterprise liability" that was contained in President Clinton's
health care proposal. Under the enterprise liability concept, doctors would not
bear individual liability for malpractice events with such liability being borne
by the hospital or other enterprise in which the doctor practices. If enterprise
liability or a similar concept were adopted, insurers such as PICOM and PPTF
could be at a competitive disadvantage since their business is concentrated in
individual physician risks and larger, more established, companies already
provide medical malpractice insurance for the enterprise risks.
125
<PAGE> 139
SELECTED CONSOLIDATED FINANCIAL DATA OF
PHYSICIANS PROTECTIVE TRUST FUND
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table presents certain selected consolidated historical
financial and operating data of PPTF for each of the years in the five year
period ended December 31, 1997. All information is presented in accordance with
GAAP except for statutory data, which are presented in accordance with SAP. The
selected consolidated financial data set forth below should be read in
conjunction with the historical consolidated financial statements of PPTF, and
the notes thereto, which appear elsewhere in this Joint Proxy Statement/
Prospectus under "INDEX TO FINANCIAL STATEMENTS OF PHYSICIANS PROTECTIVE TRUST
FUND;" and with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF PHYSICIANS PROTECTIVE TRUST FUND" which also appears
elsewhere in this Joint Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Gross premiums written.......................... $ 99,480 $ 89,968 $103,686 $103,307 $ 97,953
Premiums ceded.................................. 7,612 21,249 3,179 4,004 25,412
Net premiums written............................ 91,868 68,719 100,507 99,303 72,541
Net premiums earned............................. 60,058 68,719 100,507 99,303 72,541
Net investment income........................... 20,802 23,310 23,050 20,018 18,359
Net realized investment gains................... 4,120 2,004 4,511 161 3,447
Reinsurance experience refunds.................. 4,236 3,325 401 8,189 6,430
Other income.................................... 677 506 311 345 345
Total revenues and other income................. 89,893 97,864 128,780 128,016 101,122
Losses and loss adjustment expenses............. 67,109 76,393 120,596 112,027 79,187
Increase (decrease) in reserve for extended
reporting period claims....................... 1,703 690 746 (196) (161)
Other underwriting and operating expenses....... 4,719 6,741 6,202 5,409 4,918
Dividend credits................................ -- -- -- 3,785 7,242
Total expenses.................................. 73,531 83,824 127,544 121,025 91,186
Income before Federal income taxes.............. 16,362 14,040 1,236 6,991 9,936
Federal income taxes (benefit).................. 4,960 4,664 (1,600) 612 2,004
-------- -------- -------- -------- --------
Net income...................................... $ 11,402 $ 9,376 $ 2,836 $ 6,379 $ 7,932
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total investments............................... $336,081 $344,860 $384,049 $317,286 $299,223
Total assets.................................... 434,795 417,522 438,116 399,049 372,974
Loss and loss adjustment expense reserves....... 250,056 281,593 302,085 277,027 236,034
Reserve for extended reporting period claims.... 10,328 8,625 7,935 7,189 7,386
Unearned premiums(1)............................ 34,382 -- -- -- --
Advance premiums................................ 1,828 9,057 10,705 14,290 14,397
Surplus contributions........................... 10,094 10,094 10,094 10,094 10,094
Fund balance.................................... 117,954 102,199 101,916 78,910 93,958
SELECTED STATUTORY DATA:
Loss ratio(2)................................... 115.0% 112.3% 119.0% 112.2% 107.8%
Combined ratio(2)(3)............................ 122.6% 121.2% 125.0% 118.1% 115.3%
Statutory surplus............................... $113,309 $105,076 $ 92,370 $ 87,086 $ 78,258
Net premiums written to policyholders'
surplus....................................... .81x .65x 1.09x 1.14x .93x
SELECTED GAAP DATA:
GAAP combined ratio(2)(3)......................... 122.4% 122.0% 126.9% 118.1% 115.7%
</TABLE>
- ---------------
(1) Policies written between January 1, 1992 and June 30, 1997 were written on a
calendar year basis. Thus, there are no unearned premiums at year end.
(2) The ratio for 1997 includes non-recurring premium tax refunds totaling $2.57
million.
(3) The ratio includes the increase in reserve for extended reporting period
claims, but does not include the dividend credits issued in 1994 and 1993.
126
<PAGE> 140
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
PHYSICIANS PROTECTIVE TRUST FUND
The following discussion provides additional information regarding the
financial condition and the results of operations for PPTF for each of the years
ended December 31, 1997, 1996 and 1995. This discussion should be read in
conjunction with the consolidated financial statements of PPTF, and the notes
thereto, which appear elsewhere in this Joint Proxy Statement/Prospectus.
OVERVIEW
PPTF is a medical malpractice self-insurance trust fund domiciled in the
State of Florida. PPTF writes medical professional liability insurance for
physicians, surgeons and other health care providers in Florida. The
accompanying financial results for PPTF are reported on a consolidated basis.
FINANCIAL POSITION
Assets. Total assets were $434.8 million at December 31, 1997, as compared
with total assets of $417.5 million at December 31, 1996. Invested assets of
$336.1 million represented approximately 77% of PPTF's total assets at December
31, 1997. Invested assets of $344.9 million represented approximately 83% of
PPTF's total assets at year end 1996. Amounts due from reinsurers represented
approximately 12% and 13% of PPTF's total assets at December 31, 1997 and 1996,
respectively.
As of December 31, 1997, 92% of PPTF's investment portfolio was invested in
fixed maturity securities (including short-term investments), consisting
primarily of U.S. government and agency bonds, high-quality corporate bonds, and
tax-exempt U.S. municipal bonds, and the remaining 8% was invested in common
equity securities. As of December 31, 1997 and 1996, approximately 99% of the
fixed maturity securities held by PPTF were rated "A" or better. As of December
31, 1997 and 1996, all fixed maturity securities were classified as
available-for-sale and carried at fair value. PPTF's fixed maturity investment
portfolio is sensitive to interest rate changes. As of December 31, 1997 and
1996, this portfolio had a modified duration of approximately five years. A one
hundred basis point increase in market interest rates would decrease the value
of the fixed maturity portfolio by approximately 5%, whereas a one hundred basis
point decrease in market interest rates would increase the value of this
portfolio by approximately 5%.
Premium Receivable. Premium receivable was $30.3 million at December 31,
1997, as compared with $0.4 million at December 31, 1996. Premium receivable at
the end of each year-end prior to 1997 was minimal because until July 1, 1997
all policies issued by PPTF were written on a calendar year basis and had a
common renewal date of January 1 of each year.
Deferred Income Taxes. Net deferred Federal income taxes decreased from
$10.3 million at December 31, 1996 to $6.4 million at December 31, 1997, due
primarily to an increase in the unrealized gain on PPTF's investment portfolio
and a reduction in the discount applied to loss reserves. Such discount, which
is used only for tax purposes, declined as PPTF ceded more of its losses to
reinsurers.
Reinsurance. PPTF uses an excess of loss reinsurance arrangement to limit
its exposure to maximum losses under a single policy and to protect the
policyholders' fund balance. Amounts due from reinsurers is reported net and
includes reinsurance experience refunds, reinsurance recoverables on paid and
unpaid losses, and reinsurance premiums payable. Amounts due from reinsurers
decreased by $1.8 million from $52.9 million at December 31, 1996 to $51.1
million at December 31, 1997.
PPTF's prior reinsurance arrangements included provisions for a return of
profits to PPTF after five years. Because claims experience under such
reinsurance arrangements has developed favorably, the profits returned to PPTF
have generally exceeded the amount recognized as profit on PPTF's income
statement, resulting in the establishment of a deferred credit (reinsurance
experience refunds deferred) for the difference. Reinsurance experience refunds
deferred at December 31, 1997 were $3.0 million compared to $3.4 million at
December 31, 1996.
127
<PAGE> 141
Reinsurance recoverable on paid and unpaid losses represented 48.2% of
policyholders' fund balance at December 31, 1997, compared to 56.3% of
policyholders' fund balance at December 31, 1996. Because the ceding of
reinsurance does not discharge the primary liability of the original insurer,
PPTF places reinsurance with other insurers only after a thorough review of each
reinsurer's credit quality. At present, 100% of PPTF's excess of loss
reinsurance is with General Reinsurance Corporation ("GenRe"). On October 28,
1997, PPTF and PICOM entered into an Adverse Development Stop Loss Reinsurance
Contract effective February 1, 1998 as part of PPTF's over-all reinsurance for
years prior to January 1, 1997. See "REINSURANCE CONTRACT."
PPTF has not experienced any difficulty in obtaining payment from
reinsurers, and PPTF has concluded there is no significant exposure to
uncollectible reinsurance balances recoverable at December 31, 1997.
Liabilities. Loss and LAE reserves represented 79% of PPTF's consolidated
liabilities as of December 31, 1997 and 89% of PPTF's consolidated liabilities
as of December 31, 1996. Loss and LAE reserves at December 31, 1996 were a
larger percentage of total liabilities because PPTF reported no unearned
premiums associated with calendar year policies at that year end. Unearned
premiums are a larger component, percentage wise, of PPTF's total liabilities at
December 31, 1997 because PPTF began issuing anniversary date policies in July
of 1997 that were not fully earned as of December 31, 1997. Loss and LAE
reserves are determined on the basis of individual claims and actuarially
determined estimates of future losses based on PPTF'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 relies heavily on judgment and involves many uncertainties. As a
result, reserve estimates may vary significantly from the eventual outcome. The
assumptions used in establishing PPTF's reserves are reviewed and updated as new
data becomes available. Loss and LAE reserves have been established on an
undiscounted basis. The amount of loss reserves needed is determined by
management after evaluating the projected ultimate losses developed by PPTF's
independent consulting actuary. PPTF has consistently set loss reserves based on
the reserve amount recommended by such actuary.
Loss and LAE reserves decreased 11.2% during 1997 to $250.1 million at
December 31, 1997 from $281.6 million at December 31, 1996. Such decrease in
reserves was due to fewer claims outstanding during 1997.
Advance and Unearned Premiums. Unearned premiums at December 31, 1997 were
$34.4 million. There were no unearned premiums at December 31, 1996 because all
policies were written on a calendar year basis. Advance premiums at December 31,
1997 and 1996 were $1.8 million and $9.1 million, respectively. Advance premiums
were much lower at December 31, 1997, because most policies were issued on an
anniversary date basis by December 31, 1997.
Income Taxes Payable. Income taxes payable at December 31, 1997 were $5.7
million compared to $4.6 million at December 31, 1996. The payable in 1997 and
1996 resulted from a cash payment timing difference in special estimated tax
payments applied under Section 847 of the Code.
Surplus Contributions. From 1984 through 1990, named insureds of PPTF were
required to make a contribution to the surplus of PPTF. This contribution was
required during a high growth period and strengthened PPTF's statutory premium
to surplus ratio and protected the residual interests of named insureds who
produced a surplus in prior years through the profitability of PPTF. Under the
terms of each surplus note, repayment of principal and payment of interest are
at the sole discretion of the PPTF Board. If the PPTF Board were to decide to
pay any or all of the surplus note contributions, the Florida Insurance
Department would be required to approve such payment in advance. Generally,
surplus contributions are non-refundable. Under SAP, the notes are classified as
an addition to surplus.
Policyholders' Fund Balance. Policyholders' fund balance was $118.0 million
at December 31, 1997 as compared to a policyholders' fund balance of $102.2
million at December 31, 1996. The 1997 increase in policyholders' fund balance
was due to net income of $11.4 million during the year ended 1997 and a $4.4
million increase in net unrealized appreciation on investments, net of deferred
Federal income taxes.
128
<PAGE> 142
RESULTS OF OPERATIONS -- YEAR ENDED DECEMBER 31, 1997 VERSUS YEAR ENDED DECEMBER
31, 1996.
Premiums. Net earned premiums for the year ended December 31, 1997 were
$60.1 million, a decrease of 12.6% from net earned premiums of $68.7 million for
the year ended December 31, 1996. This decrease in net earned premiums was the
result of an average rate reduction of 8.9% combined with a 9.5% decline in the
number of policies issued by PPTF. The decrease in net earned premiums was
partially offset by a reduction in the amount of premiums ceded to reinsurers in
1997. Of the net earned premiums in 1997, approximately 90.6% were for
individual coverage. PPTF writes claims made coverage only.
Investment Income and Capital Gains/Losses. Investment income, net was
$20.8 million (net of $855,000 in investment fees and expenses) for 1997,
compared to $23.3 million (net of $701,000 in investment fees and expenses) for
1996. Investment income was $2.5 million lower for the year ended December 31,
1997 when compared to investment income for the year ended December 31, 1996 due
to a lower overall portfolio balance, lower prevailing interest rates and PPTF's
allocation of $25.0 million to equities. Investment gains were $4.1 million for
the year ended December 31, 1997 and $2.0 million for the year ended December
31, 1996.
Reinsurance Experience Refunds. PPTF recognized reinsurance experience
refunds of $4.2 million and $3.3 million during 1997 and 1996, respectively.
Through 1993, PPTF's reinsurance arrangements included provisions for a return
of profits to PPTF after five years. Claims experience under these reinsurance
arrangements have been lower than projected, resulting in reinsurance experience
refunds to PPTF. See "-- Financial Position."
Losses and Loss Adjustment Expenses. Net incurred losses and LAE, including
the increase in reserve for extended reporting period claims, decreased 10.7% to
$68.8 million in 1997 from $77.1 million in 1996. Such decrease resulted from
the 12.6% decrease in net earned premiums in 1997. As a percentage of premiums
earned, the incurred loss and LAE ratio increased 2.4 percentage points for 1997
compared to 1996.
Other Underwriting and Operating Expenses. Underwriting expenses were $4.7
million in 1997, a 30.0% decrease compared to underwriting expenses of $6.7
million in 1996. As a percentage of premiums earned, the underwriting expense
ratio was 7.9% for 1997, a decrease from the underwriting expense ratio of 9.8%
for 1996. During 1997, PPTF received $0.8 million in reinsurance ceding
commissions, and received none in 1996. PPTF also received a one-time premium
tax refund of $2.6 million that reduced expenses in 1997. These decreases in
expenses were offset by $1.5 million in merger expenses incurred in 1997. After
eliminating these items, the expense ratio would have been 10.9% for 1997. The
increase in the expense ratio, after eliminating these items, is attributable to
the decrease in earned premiums for 1997.
Federal Income Taxes. PPTF recorded $5.0 million in Federal income tax
expense as of December 31, 1997 compared to $4.7 million at December 31, 1996.
PPTF's effective Federal income tax rate was 30.3% for 1997 and 33.8% for 1996.
Net Income. Net income for 1997 was $11.4 million on revenues of $89.9
million. This compares to net income for 1996 of $9.4 million on revenues of
$97.9 million.
RESULTS OF OPERATIONS -- YEAR ENDED DECEMBER 31, 1996 VERSUS YEAR ENDED DECEMBER
31, 1995
Premiums. Net earned premiums in 1996 were $68.7 million, a decrease of
31.6% from 1995's net earned premiums of $100.5 million. The decrease in net
earned premiums was primarily the result of an increase in the amount of
premiums ceded to reinsurers in 1996 combined with a decrease in gross premiums
written. In 1996, ceded premiums were $21.2 million. In 1995, ceded premiums
were $3.2 million.
During 1996, PPTF was more selective in its underwriting and implemented a
22% average rate increase. The increase in gross premium volume associated with
such rate increase was offset by a decrease in premium volume associated with
(i) PPTF's implementation of a "claims-free" discount program (which provided
discounts ranging from 3% to 15% to Members whose experience showed no
malpractice claims had been made against them for more than three years) and
(ii) a renewal rate of 78%. PPTF estimates that its average
129
<PAGE> 143
rate increase increased gross premium volume in 1996 by approximately $15.0
million, that its "claims free" discount program reduced gross premium volume in
1996 by approximately $7.0 million, and that non-renewals reduced gross premium
volume in 1996 by approximately $22.0 million. Overall, the increase in average
rates, when combined with a renewal rate of 78%, resulted in an overall
reduction in gross premium volume for 1996 of 13.2%.
Gross earned premium in 1995 was $100.5 million and approximately 17% of
the premium volume was from specialties with higher loss ratios. Rates from
these specialties were raised on average by more than 35% in 1996, and 58%
renewed their coverage with PPTF at these higher rates. During 1996, the premium
volume from these specialties represented 16% of the total premium volume.
During 1996, the rates on all other specialties were raised on average
approximately 12%, and 79% of the Members renewed their coverage at the higher
rates. During 1996, these specialties represented 84% of the total premium
volume.
Although PPTF has maintained over-all profitability and is endeavoring to
offset lower premium volume through more selective underwriting practices, there
can be no assurance that these practices will be successful in the long run.
Investment Income and Capital Gains/Losses. Investment income, net was
$23.3 million (net of $701,000 in investment fees and expenses) for 1996,
compared to $23.1 million (net of $577,000 in investment fees and expenses) for
1995. Net realized investment gains were $2.0 million in 1996 and $4.5 million
in 1995.
Losses and Loss Adjustment Expenses. Net incurred losses and LAE, including
the reserve for extended reporting period claims, totaled $77.1 million in 1996,
down 36.5% as compared to net incurred losses and LAE of $121.3 million for
1995. As a percentage of premiums earned, the incurred loss and LAE ratio
decreased 8.5 percentage points from 120.7% in 1995 to 112.2% in 1996. The
higher incurred loss and LAE ratio for 1995 resulted from a larger than expected
increase in prior years' losses that required a reserve supplement equivalent to
8.4% of the current year's premium. In 1996, the incurred loss and LAE ratio was
affected by a rate increase of 16% (on average), allowing PPTF to reserve a
smaller percentage of its current year's premium. The cap on legal fees
implemented by PPTF in 1995 also began to affect the rate of increase reported
in historical loss development schedules. For these reasons, in 1996, the
supplement to prior year's reserves was 5.9%, or 2.5 percentage points lower
than the percentage supplement in 1995, and the amount reserved for the current
year was 106.3%, which was 6 percentage points lower than the percentage
reserved in 1995. The combined effect of these reserve reductions was 8.5
percentage points. The 1996 results include an addition to the reserve for prior
years' losses of $4.0 million compared to an addition to the reserve for prior
years' losses of $8.5 million in 1995.
Other Underwriting and Operating Expenses. Underwriting expenses were $6.7
million in 1996, an 8.7% increase over underwriting expenses of $6.2 million in
1995. As a percentage of premiums earned, the underwriting expense ratio was
9.8% in 1996, up from the underwriting expense ratio of 6.2% in 1995. An
increase in premiums ceded to reinsurers in 1996 reduced net earned premiums.
This resulted in a higher expense ratio.
Federal Income Taxes. PPTF recorded a $4.7 million Federal income tax
expense in 1996 compared to $1.6 million tax benefit in 1995. The tax benefit in
1995 resulted from a taxable loss carry back arising from the inclusion of $4.8
million of tax exempt interest income in income before taxes. This taxable loss
carry back, combined with a state income tax benefit and other permanent
differences in computing taxable income, resulted in a total tax benefit of $1.6
million. PPTF's effective Federal income tax rate approximated 33.2% in 1996.
Net Income. Net income for 1996 was $9.4 million on revenues of $97.9
million. This compares to net income of $2.8 million on revenues of $128.8
million in 1995. The increase in 1996 earnings was primarily attributable to the
reduction in the amount added to prior years' reserves in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity describes the ability to generate sufficient cash flows to meet
the cash requirements of continuing operations. There are typically two distinct
operations in an insurance company -- underwriting and investing. Net cash flows
from underwriting operations are used to build an investment portfolio, which in
130
<PAGE> 144
turn produces future cash from investment income. PPTF 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, LAE and operating expenses in the ordinary course of
business remains PPTF's principal need for liquid funds. Payments for loss and
LAE are distributed relatively evenly throughout the year. Payments for
reinsurance are made within 30 days after the end of each month. Cash used to
pay these items has been provided by operations. PPTF did not borrow any funds
in the years ended December 31, 1997 and 1996, and currently has no requirements
indicating a need to borrow funds in the foreseeable future. As of December 31,
1997, PPTF did not have any material commitments for capital expenditures.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles which
require the measurement of financial position and operating results in terms of
historical dollars without considering changes in the relative purchasing power
of money over time due to inflation. The primary assets and liabilities of PPTF
are monetary in nature. As a result, interest rates have a more significant
impact on PPTF's performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or magnitude as the
cost of paying losses and LAE.
Insurance premiums are established before PPTF knows the amount of loss and
LAE, and the extent to which inflation may affect such expenses. Consequently,
PPTF attempts to anticipate the future impact of inflation when establishing
rate levels. While PPTF attempts to charge adequate rates, PPTF may be limited
in raising its premium levels for competitive and regulatory reasons. Inflation
also affects the market value of PPTF's investment portfolio and the investment
rate of return. Future economic changes which result in prolonged and increasing
levels of inflation could cause increases in the dollar amount of loss and LAE
reserves and thereby adversely affect future reserve development. To minimize
such risk, PPTF maintains what management considers to be strong and adequate
reinsurance, conducts regular actuarial reviews of reserves and maintains
adequate asset liquidity.
BUSINESS AND PROPERTIES OF PHYSICIANS PROTECTIVE TRUST FUND
OVERVIEW
PPTF is a medical malpractice self-insurance trust fund formed under the
Florida Insurance Code. PPTF was organized in 1975 in response to the limited
availability of medical malpractice insurance for Florida physicians. PPTF has
limited itself to providing professional liability coverage to health care
providers in the State of Florida. Since 1976, PPTF has covered all specialties
of physicians and the entities through which they practice. PPTF began to write
coverage for podiatrists in 1994, for physician hospital organizations in 1995,
and for chiropractors in 1997. Of the $99.5 million in premiums written as of
December 31, 1997, approximately 91% were attributable to individuals and the
balance of premiums was attributable to professional associations, partnerships,
and corporations formed by health care providers.
The executive office of PPTF is located at 2121 Ponce de Leon Boulevard,
Suite 350, Coral Gables, FL 33134, and its telephone number is (305) 442-8119.
Regional offices are located in Ft. Lauderdale, Jacksonville, Orlando, and
Tampa.
PPTF has one wholly-owned subsidiary, Physicians Protective Plan, Inc. From
1975 through 1996, PPP acted as a Service Agent to PPTF by employing the
personnel to staff all departmental functions of PPTF other than claims. During
1996, PPP formed an insurance agency to do business under the name "The PPTF
Agency." Effective January 1, 1997, PPP transferred to PPTF those employees who
perform functions for PPTF, and retained only those employees who perform work
for PPP.
131
<PAGE> 145
PRODUCTS AND SERVICES
PPTF provides insurance coverage primarily to allopathic and osteopathic
physicians to protect them from legal liability for damages arising from bodily
or selected personal injury to patients caused by the rendering or failure to
render professional services. The policy also provides defense of investigations
made by the Florida Board of Medicine regarding issues based on incidents that
would be covered under the policy. In addition, Members are covered for the
legal liability arising from service on a committee of a state or local
professional society of health care providers or of a medical staff of a
licensed hospital or nursing home, which committee is formed to evaluate and
improve the quality of health care rendered by providers of health services.
PPTF provides coverage to professional associations, partnerships, and
corporations for their direct liability and vicarious liability arising from
health care services provided by employees on their behalf. Since 1995, coverage
has also been available to managed care organizations for damages arising from
bodily or personal injury caused by credentialing or utilization review
activities and vicarious liability arising from professional services performed
on their behalf by health care providers. As of December 31, 1997, one managed
care organization was insured by PPTF.
PPTF writes all coverage on a claims made basis. Although limits are
available up to $2 million for each claim with a $4 million annual aggregate,
approximately 36.1% of PPTF's members at December 31, 1997 selected limits of
$250,000 for each claim with a $750,000 annual aggregate, the amounts required
to satisfy Florida's financial responsibility statute. PPTF retains up to
$500,000 for each claim, retains a $750,000 annual aggregate per insured, and
reinsures losses exceeding $500,000 and up to $2 million. PPTF provides coverage
above $2 million through facultative reinsurance.
Through its Specialty Society Service Program (the "SSSP"), PPTF provides
administrative services to state medical societies from an office in
Jacksonville, Florida. The SSSP provides a home office for a state medical
specialty society and performs services such as membership recruitment, planning
and execution of meetings, bookkeeping, production of non-dues income, and
publication of directories and newsletters.
MARKETING
PPTF only sells its medical malpractice insurance to health care providers
who practice in the State of Florida. Since its inception, PPTF has been a
direct writer gaining new business primarily from referrals of existing
policyholders. PPTF uses insurance agents on a very limited basis and pays its
insurance agents a finder's fee for new business written. During 1996, PPTF
decided to increase its sales efforts by employing its own sales force. As of
December 31, 1997, PPTF's Director of Sales supervised six account executives
who are located throughout Florida and sell PPTF's medical malpractice insurance
as well as complementary products available through PPP. The use of independent
agents continues to be limited, but they may be involved in obtaining or
retaining key accounts.
PPTF's Marketing Department manages PPTF's communications, which involves
production of written presentation materials, advertisements, articles for the
media, and a risk management oriented newsletter. It also provides research
services to all departments, but focuses on maintenance of a comprehensive data
base on competitors and prospective insureds. PPTF's Marketing and sales
personnel also attend numerous conventions and meetings on PPTF's behalf to
market its products.
UNDERWRITING
PPTF's Underwriting Department manages the issuance of new and renewal
insurance policies and establishes and implements underwriting procedures for
the coverages written by PPTF.
PPTF adheres to an underwriting approach that selects insureds by
evaluating information submitted on a comprehensive application which
encompasses professional credentials, practice experience and environment, and
claims experience. Those applicants who meet specific criteria are issued a
30-day binder evidencing coverage until final approval is granted by the full
PPTF Board. The underwriting staff's recommendation to
132
<PAGE> 146
accept or decline the applicant is subject to review by the Underwriting
Committee of the PPTF Board, which consists of six members of the PPTF Board,
and ratification by the full PPTF Board.
The Underwriting Department re-underwrites insureds on a regular basis.
Members are required to submit application updates on a periodic basis and
whenever they have a change in their practice. Members who exhibit an unusual
loss pattern or reveal adverse characteristics during the investigation of a
claim are re-underwritten to determine their eligibility for continued coverage.
The Underwriting Committee and the PPTF Board act upon the staff's
recommendation to retain or terminate coverage. Maintenance of coverage may
depend on acceptance and implementation of risk management measures or increased
premium rates. If a Member is part of an otherwise insurable group, or should be
charged a higher premium instead of being canceled, PPTF may decide to provide
insurance coverage to the Member at a higher (surcharge) rate and/or through a
separate quota share reinsurance treaty designed for non-standard business.
Since PPTF is a direct writer, its Underwriting Department also functions
as a customer service unit. The underwriters, assistant underwriters, and
support staff work in teams assigned to service specific geographic territories.
This enables them to develop in-depth knowledge of the accounts in their area,
and this results in enhanced service. With the exception of questions related to
claims, the staff field and answer questions on a variety of subjects, including
premium invoicing, practice environment, rating, and coverage issues.
PPTF's rates are established through consultation with outside actuarial
firms. The rates are then filed with the Florida Insurance Department which has
the authority to disapprove the rates if the expense factors associated with the
rates are not justified and reasonable for the benefits and services provided.
Effective January 1, 1996, PPTF implemented an over-all rate increase of
16%. This increase resulted in the desired effect of improving PPTF's mix of
business. Premiums for specialties which had higher loss ratios were raised
significantly, and discounts were granted to Members with at least three years
of favorable claims experience. Most of those insureds who elected not to
maintain their coverage with PPTF either had little or no claims-free discount
or were in specialties which were unprofitable to PPTF. However, some desirable
business was also lost to competing insurers offering very low rates. Rate
decreases and further rate adjustments on January 1, 1997 and June 1, 1997 have
continued to improve the over-all quality of the insurance issued by PPTF by
retaining and attracting desirable business.
As of December 31, 1997, the number of Members and premium volume was
distributed among the three geographical rating territories as follows:
<TABLE>
<CAPTION>
TERRITORY % OF MEMBERS % OF PREMIUM VOLUME
--------- ------------ -------------------
<S> <C> <C>
Dade and Broward Counties................. 32.8% 36.5%
Palm Beach County......................... 6.7% 7.6%
Remainder of the State.................... 60.5% 55.9%
</TABLE>
Since its inception in 1976, PPTF has written all policies on a calendar
year basis with common expiration dates of December 31 each year. Beginning June
1, 1997, PPTF began issuing twelve-month polices to new members. During the
period beginning July 1, 1997 and ending December 31, 1997, PPTF completed its
redistribution of policy expiration dates of existing members.
CLAIMS MANAGEMENT
PPTF's claims philosophy is to identify meritorious claims quickly so that
they may be settled as promptly and economically as possible and to vigorously
defend non-meritorious claims. A case's merit is identified through the Claims
Review and Consultation Program, a peer review process involving an insured
physician with knowledge and experience dealing with the medical issue involved
in the case. This physician is present for the review session along with the
defendant physician, a PPTF claims representative, and in some cases, a defense
attorney. The session allows PPTF to identify strengths and weaknesses of the
case and whether the defendant physician will be an effective witness.
Additionally, it provides PPTF an opportunity to prepare the physician for
testifying at deposition and trial and to provide counsel regarding steps to
take in the future to reduce future exposure to loss.
133
<PAGE> 147
In the face of rising legal expenses which are associated with a strong
defense position, PPTF implemented a program in 1995 that placed defense
attorneys on an annual fixed fee retainer system regardless of the number of
cases handled (subject to adjustments as needed) rather than compensating them
on an hourly basis. This retainer system has realized significant cost savings
because of the efficiencies created within the law firms. PPTF regularly
monitors the quality of the legal services rendered under these agreements with
defense attorneys and periodically renegotiates these agreements.
Although PPTF's vigorous defense of claims has resulted in higher than
average loss adjustment expenses, PPTF believes that these higher loss
adjustment expenses have been offset by savings associated with lower indemnity
payments. The success of PPTF's philosophy of taking a strong defense position
is evidenced in statistics maintained on insurers by the Florida Insurance
Department. As indicated in the following table, during the past three years
PPTF has resolved a higher percentage of claims without making indemnity
payments than has its competitors:
PERCENTAGE OF CLAIMS WITH NO INDEMNITY PAID
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
PPTF.................................................... 53% 62% 62%
All Others.............................................. 39% 39% 40%
</TABLE>
Source: Florida Insurance Department Closed Claims data as reported in the
years specified.
The lower percentage in 1996 is attributable to a decision by PPTF to
resolve meritorious claims more rapidly. This resulted in the resolution in 1996
of a larger number of pending claims, while PPTF continued to defend
non-meritorious claims vigorously. Year end data from the Florida Insurance
Department is not available for 1997, however, PPTF's records show that PPTF
resolved 60% of its claims with no indemnity payment in 1997.
RESERVES AND LOSSES
PPTF establishes balance sheet reserves based on its estimates of the
future amounts necessary to pay claims and expenses associated with
investigation and settlement of claims. These estimates include two components:
case reserves and bulk reserves. Case reserves are estimates of future losses
and LAE for reported claims and are established by PPTF's Claims Department.
Bulk reserves, which include a provision for losses that have occurred but have
not yet been reported to PPTF and development on reported claims, are the
difference between (i) the sum of case reserves and paid losses and (ii)
actuarially estimated ultimate incurred losses. Ultimate incurred losses are an
actuarially determined estimate of total losses and LAE necessary for the
ultimate settlement of all reported claims and incurred but not reported claims
including amounts already paid. The assumptions used by PPTF in establishing
reserves are reviewed and updated semi-annually based on the then current
circumstances and the recommendations of PPTF's independent consulting actuary.
Because the process of estimating reserves is inherently uncertain and
involves an evaluation of many variables (including social and economic
conditions) and the fact that a significant period of time may elapse between
the reporting of a claim and the ultimate settlement of the claim, reserve
estimates may differ significantly from the eventual outcome of a claim. The
uncertainty inherent in establishing reserves is relatively greater for
companies writing long-tail casualty insurance, including medical malpractice
insurance, because of the longer time it takes to discover the claims, handle
the claims (because of their relative complexity) and to resolve the claims.
There can be no assurance that the ultimate liability of any claim or group of
claims will not exceed the amounts reserved for them in the aggregate.
134
<PAGE> 148
The following table sets forth a reconciliation of beginning and ending
loss and LAE reserves as shown in PPTF's consolidated financial statements for
the years indicated. See also Note 5 to PPTF's consolidated financial
statements. Net reserves rose significantly during 1995 due to PPTF's decision
to raise its retention level from $250,000 in 1993 to $1,000,000 in 1994 and
1995. Net reserves decreased during 1996 because of PPTF's decision to reduce
its retention level to $500,000 in 1996. Gross reserves decreased during 1996
and 1997 in correlation with a reduction in claims outstanding.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of years................................ $281,593 $302,085 $277,027
Less reinsurance balances recoverable...................... (54,649) (39,078) (46,105)
-------- -------- --------
Net balance, beginning of year............................. 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, end of year................................... 193,465 226,944 263,007
Plus reinsurance balances recoverable...................... 56,591 54,649 39,078
-------- -------- --------
Balance, end of year....................................... $250,056 $281,593 $302,085
======== ======== ========
</TABLE>
The following table presents the development of the net liability for
undiscounted loss and LAE reserves for the calendar years 1988 through 1997 for
PPTF. (The losses and LAE reserves as originally reported are presented net of
reinsurance recoverables relating to unpaid losses through 1991 and gross of
such amounts thereafter.) The amounts shown for each year on the top line of the
table present PPTF's estimates of its losses and LAE as originally reported. The
net liability-end of year line represents the undiscounted estimated amount of
unpaid losses and LAE for claims arising in all prior years that were unpaid at
the balance sheet date, including losses incurred but not yet reported, net of
reinsurance ceded. The portion of the table labeled "cumulative paid as of"
shows the net cumulative payments for losses and LAE made in succeeding years
for losses incurred prior to the balance sheet date. The next portion of the
table shows the re-estimated amount of
135
<PAGE> 149
the previously recorded reserves based on experience as of the end of each
succeeding year, followed by a line indicating the change from the original
estimate to the most current re-estimate.
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE RESERVE DEVELOPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------------------------------------------
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loss & LAE Reserves
as originally
reported........... $115,427 $148,092 $147,990 $153,304 $216,790 $236,034 $277,027 $302,085 $281,593 $250,056
Less reinsurance
recoverable........ -- -- -- -- 42,824 45,976 46,105 39,078 54,649 56,591
Net liability -- end
of year............ $115,427 $148,092 $147,990 $153,304 $173,966 $190,058 $230,922 $263,007 $226,944 $193,465
Cumulative paid as
of:
One year later....... 24,884 33,664 39,968 50,368 59,267 63,066 80,464 100,241 91,421
Two years later...... 50,039 63,532 76,031 93,282 101,940 114,260 149,458 167,197
Three years later.... 67,522 83,593 101,170 117,993 131,598 151,449 180,350
Four years later..... 78,123 95,503 113,032 131,819 151,620 163,333
Five years later..... 83,138 101,870 119,598 141,618 157,573
Six years later...... 85,339 104,985 123,998 144,350
Seven years later.... 86,685 107,738 124,378
Eight years later.... 88,508 108,110
Nine years later..... 88,446
Re-estimated net
liability as of:
End of year.......... 115,427 148,092 147,990 153,304 173,966 190,058 230,922 263,007 226,944 193,465
One year later....... 116,365 128,451 139,217 151,874 173,660 195,218 239,397 267,032 221,924
Two years later...... 101,033 121,230 134,319 150,193 174,748 199,872 236,297 258,370
Three years later.... 96,303 113,983 131,405 148,841 177,653 195,117 230,624
Four years later..... 91,380 111,187 126,630 152,837 175,229 188,450
Five years later..... 89,726 107,550 130,386 153,042 171,014
Six years later...... 87,555 111,801 129,345 149,961
Seven years later.... 90,764 110,955 127,027
Eight years later.... 90,295 109,387
Nine years later..... 88,777
Net cumulative
(deficiency)
redundancy......... 26,650 38,705 20,963 3,343 2,952 1,608 298 4,637 5,020
</TABLE>
In evaluating the information in the table above, it should be noted (i)
that each column includes the effects of changes in amounts for prior periods
and (ii) that PPTF's retained loss per claim increased from $150,000 to $250,000
in 1992, increased from $250,000 to $1,000,000 in 1994, and decreased from
$1,000,000 to $500,000 in 1996. The table does not present accident year or
policy year development data. Conditions and trends that have affected the
development of liabilities in the past may not necessarily occur in the future.
Accordingly, it is not appropriate to extrapolate future redundancies or
deficiencies based on this table.
As shown in the reserve development table, positive reserve development
exists for each of the years 1988 through 1997. The redundancies for 1988
through 1990 are attributable to tort reform legislation enacted in Florida in
1986 and 1988. Such tort reform legislation required claims to be substantiated
by an expert's affidavit, placed a contingent cap on non-economic damages,
instituted periodic payments for future damages in jury awards, and eliminated
joint and several liability for non-economic damages. The redundancies for 1991
through 1994 decreased due to higher than expected increases in loss adjustment
expenses. To reduce and control the increase in loss adjustment expenses, PPTF
implemented a legal fees retainer system in 1995.
136
<PAGE> 150
The following table presents a reconciliation of PPTF's reserves prepared
in accordance with SAP with reserves reflected in the consolidated financial
statements prepared in accordance with generally accepted accounting principles
as of December 31, 1997, 1996 and 1995.
RECONCILIATION OF SAP RESERVES WITH GAAP RESERVES
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Loss and LAE reserves -- SAP basis
(unaudited)............................. $193,465 $226,944 $263,007
Provision for reinsurance on unpaid
losses.................................. 56,591 54,649 39,078
-------- -------- --------
Loss and LAE reserves -- GAAP basis....... $250,056 $281,593 $302,085
======== ======== ========
</TABLE>
Under SAP, loss and LAE reserves are presented net of the provision for
reinsurance, whereas under GAAP, loss and LAE reserves are presented gross of
reinsurance and amounts due from reinsurers are presented as an asset. PPTF does
not discount its loss reserves.
INVESTMENTS
PPTF invests principally in debt securities such as United States
government obligations, agency mortgage-backed securities, investment grade
corporate bonds and tax-free municipal bonds. Investment policy and the
performance of the investment managers are reviewed monthly by or on behalf of
the PPTF Board. The current investment policy establishes certain limitations,
consistent with Florida Insurance Department guidelines, which (i) require that
all bonds be ranked in the top three nationally recognized statistical rating
organization investment grades at time of purchase, and (ii) provide that,
cumulatively, corporate bonds, common stocks and preferred stocks may not exceed
PPTF's surplus. PPTF's investment managers select specific bond issues within
these guidelines.
In general, the investment policy of PPTF is to maximize after-tax
investment yield, subject to constraints on investment quality, maturity and
liquidity. PPTF's investment policy establishes a range for the appropriate
allocation among asset classes. Currently, PPTF's investment portfolio is being
managed with emphasis on United States government agency, corporate and
municipal bonds. As of December 31, 1997, the securities in PPTF's fixed income
portfolio had an average rating of "Aa2" as rated by Moody's and "AA" as rated
by Standard & Poor's for securities not rated by Moody's. None of the rated
securities in PPTF's fixed income portfolio were rated below investment grade.
As of December 31, 1997 and 1996, all fixed maturity securities were
classified as available-for-sale and carried at estimated fair value. For these
securities, temporary unrealized gains and losses, net of tax, are reported
directly through policyholders' fund balance, and have no effect on net income.
As of December 31, 1997, aggregate fair value of fixed maturity securities
exceeded the estimated amortized cost by $9.5 million and policyholders' fund
balance was increased by that amount less $3.2 million in deferred Federal
income taxes. As of December 31, 1996, estimated fair value of fixed maturity
securities exceeded the aggregate amortized cost by $4.0 million and
policyholders' fund balance was increased by that amount less $1.4 million in
deferred Federal income taxes. See Notes 2 and 6 to PPTF's consolidated
financial statements.
PPTF's fixed maturity investment portfolio is sensitive to interest rate
changes. As of December 31, 1997 and 1996, a one hundred basis point increase in
market interest rates would decrease the value of this portfolio by
approximately 5%, whereas a one hundred basis point decrease in market interest
rates would increase the value of this portfolio by approximately 5%.
To assure continued consistent investment performance in future years, in
1996 PPTF retained an independent investment advisor to (i) review the
historical performance of PPTF's sole portfolio manager; (ii) evaluate new
prospective investment managers; (iii) review and recommend a revised set of
investment guidelines to incorporate an equity component; and (iv) monitor the
results of PPTF's investment managers going forward.
137
<PAGE> 151
The reports of the independent investment advisor showed that PPTF's sole
portfolio manager had consistently outperformed the benchmarks established by
PPTF and outperformed other active investment managers. In light of the
findings, PPTF continued its relationship with its investment manager. Other
investment managers were recommended to management, and two were selected to
manage a percentage of PPTF's portfolio. PPTF's fixed income portfolio was then
split equally among the two new managers so selected and PPTF's existing
manager. Having more than one investment manager is expected to result in a more
diversified investment management philosophy and provide greater motivation to
the investment managers to render superior performance. After PPTF determined
that owning a limited amount of equities could create more diversification and
enhance returns, effective July 1997, $24.5 million (7% of the portfolio) was
invested in equity securities. These equity securities have been classified as
"available-for-sale" securities.
CEDED 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 indemnify the insured.
PPTF cedes a material amount of its business to reinsurers to spread risk
and limit loss per exposure and to protect policyholders' fund balances from
large or unusual loss activity. At the present time, PPTF has (i) excess of loss
reinsurance (i.e., reinsurance in which PPTF 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), (ii)
extra contractual obligations ("ECO") reinsurance (i.e., reinsurance which
protects PPTF from potential claims asserted by its insureds for negligence in
handling claims) and (iii) losses in excess of policy limits ("LEPL")
reinsurance (i.e., reinsurance which protects PPTF against losses in excess of
policy limits).
PPTF's per claim retention has been $500,000 from January 1, 1996 to
present and its excess of loss reinsurance contract provides coverage above that
amount. The contract also provides ECO coverage and LEPL coverage at 80% up to a
maximum limit of $2 million per claim above PPTF's retention or the policy limit
whichever is higher. There is no aggregate limit on this contract.
Loss ratio coverage was also purchased for calendar year 1996 to assist in
achieving a targeted premium to surplus leverage ratio. The loss ratio contract
covered 43% of the losses above an agreed-upon attachment point up to a maximum
of $16.9 million. This contract was not renewed in 1997 because the net premium
to surplus ratio was commensurate with medical malpractice insurers without this
coverage.
The following table identifies PPTF's most significant reinsurers, their
respective A.M. Best ratings as of December 31, 1997, the total amounts due from
each such reinsurer, and the respective participation of each such reinsurer in
PPTF's aggregate reinsured risk based upon premiums ceded by PPTF.
<TABLE>
<CAPTION>
AMOUNTS CEDED % OF TOTAL
A.M. BEST DUE FROM PREMIUMS CEDED PREMIUMS
REINSURER RATING REINSURERS WRITTEN WRITTEN
--------- ---------- ---------- -------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
General Reinsurance Corporation A++ $40,171 $7,613 100%
Continental Casualty Company A 7,321 0 0%
TIG Reinsurance Company A 1,372 0 0%
Lloyds of London Not Rated 709 0 0%
Other 1,491 0 0%
------- ------ ---
$51,069 $7,613 100%
======= ====== ===
</TABLE>
In 1996, PPTF reduced its per claim retention from $1,000,000 to $500,000
under an "Excess of Loss" reinsurance contract and reduced its aggregate net
loss retention under a "Loss Ratio" reinsurance contract.
138
<PAGE> 152
These changes had the effect of substantially increasing the reinsurance
recoverable on unpaid losses at the end of 1996. Under the "Excess of Loss"
reinsurance contract with GenRe, GenRe agreed to reinsure PPTF for losses in
excess of PPTF's retention of $500,000 per claim not to exceed an annual
aggregate amount of $750,000 per insured per year subject to individual policy
limits. Under this contract, PPTF's highest policy limit is $2 million per claim
with a $4 million annual aggregate limit. GenRe also provides additional
reinsurance for ECO and LEPL coverage up to 80% of the loss that exceeds PPTF's
policy limits or retention, whichever is greater, up to $2 million. This
contract was renewed in 1997 for a term of three years. Under the Loss Ratio
reinsurance contract, GenRe agreed to reinsure 43% of the aggregate net losses
above $53 million not to exceed $16.9 million. The "Loss Ratio" coverage was not
renewed in 1997.
PPTF periodically reviews the financial stability of its reinsurers. On the
basis of such review, as of December 31, 1997 and December 31, 1996, PPTF
concluded that there was no material exposure to uncollectible reinsurance
balances payable to PPTF by its reinsurers. PPTF has not experienced any
difficulties in collecting amounts due from its reinsurers and believes (i) that
its reinsurance is maintained with financially stable reinsurers and (ii) that
any reinsurance security maintained is adequate to protect PPTF's interests.
However, the inability of PPTF to collect on its aggregate reinsurance
recoverable or the inability of PPTF's reinsurers to make payments under the
terms of reinsurance treaties (due to insolvency or otherwise) could have a
material adverse effect on PPTF's future results of operations and financial
condition.
COMPETITION
PPTF has had numerous competitors throughout it history. Historically,
there have been a number of small mono-line companies and trusts that have
served particular geographic areas or medical society niches in Florida. Other
insurers have periodically offered coverage in the Florida market and engaged in
aggressive pricing to attract insureds, but subsequently stopped writing
insurance in Florida after experiencing poor financial results. In recent years,
large national and regional insurers have again entered the Florida market
offering low rates and discounts on those rates. PPTF believes that matching
such rates would not be consistent with its goal of long term viability.
Although premium rates in Florida remain highly competitive, a few insurers have
begun to raise rates as their books of business have matured and the claims
under their policies have exceeded their expectations.
Based on public information filed with the Florida Insurance Department,
PPTF is a market leader in the volume of premium written on physicians and
surgeons in Florida. Florida Physicians Insurance Company, Frontier Insurance
Company and The Medical Protective Company ("Medical Protective") are the next
largest insurers in terms of the volume of premiums written in medical
malpractice.
Florida Physicians Insurance Company, which is headquartered in Florida,
has been a long-standing competitor of PPTF. Florida Physicians Insurance
Company began operations as a physician-controlled insurer in 1976 but is now a
wholly-owned subsidiary of FPIC, a publicly-owned stock insurance holding
company. Florida Physicians Insurance Company primarily insures physicians and
dentists.
Frontier Insurance Company, a subsidiary of Frontier Insurance Group, Inc.
("Frontier"), a publicly owned stock insurance holding company headquartered in
New York, began writing professional liability insurance for Florida physicians
in 1987 by marketing to those physicians who practiced in non-surgical
specialties. In recent years, Frontier increased its reserves, raised its
premium rates and reduced its presence in Florida. Such reduced presence
resulted from an agreement between Frontier and FPIC to combine their Florida
medical professional liability businesses. Under such agreement, and as of
December 1, 1997, FPIC assumed underwriting of Frontier's Florida book of
business, and Frontier reinsured for FPIC certain Florida business. In addition,
the two companies set up a jointly owned claims entity which includes two
offices Frontier operated in Florida. It is not known what impact the
arrangement will have on PPTF.
Medical Protective, which is headquartered in Indiana, began writing
professional liability insurance for Florida physicians in 1993. After
attempting to attract market share by offering low premium rates, Medical
Protective has increased its rates in response to losses.
139
<PAGE> 153
REGULATION
PPTF is subject to supervision and regulation by the Florida Insurance
Department under the Florida Insurance Code for the primary purpose of
protecting PPTF's policyholders. This supervision and regulation relate to most
aspects of PPTF's business, including authorized lines of business, underwriting
standards, financial condition standards, investment standards, premium level,
policy provisions, dividends, establishment and maintenance of reserves for
unearned premium, losses and LAE, and other financial and non-financial matters.
PPTF is also required to file annual and quarterly financial statements, policy
forms, and premium rates with the Florida Insurance Department.
Regulation of the insurance industry is undergoing continuous change and
the ultimate effect of such changes cannot be predicted. Regulations now
affecting PPTF may be modified at any time and new regulations affecting PPTF
may be enacted. There is no assurance that such modifications will not adversely
affect the business of PPTF. See "CERTAIN REGULATORY CONSIDERATIONS."
As a self-insurance trust fund, PPTF is required to assess its Members for
losses it is unable to pay. PPTF has never levied an assessment. However, this
assessment requirement exempts PPTF from participating in the Florida Insurance
Guaranty Association, which guarantees each licensed property and casualty
company's payment of claims to its insureds in the event of insolvency. PPTF has
also been exempted from assessments made toward payment of claims arising from
Hurricane Andrew. In addition, from time to time, states may make special
assessments in response to extraordinary circumstances. No assurance can be
given that there will not be such assessments in the future.
SUBSIDIARIES
PPTF has one wholly-owned subsidiary, Physicians Protective Plan, Inc., a
Florida corporation doing business as "The PPTF Agency."
EMPLOYEES
As of December 31, 1997, PPTF had 89 full-time employees and 4 part-time
employees and PPP had 4 full-time employees and 1 part-time employee.
PROPERTIES
PPTF leases office space in Coral Gables, Ft. Lauderdale, Jacksonville, and
Tampa, Florida. PPP leases office space in Orlando, Florida.
LEGAL PROCEEDINGS
There are no material legal proceedings to which PPTF or its subsidiary is
a party or to which any of their property is subject, other than claims against
PPTF's insureds arising in the ordinary course of business.
140
<PAGE> 154
MANAGEMENT OF PHYSICIANS PROTECTIVE TRUST FUND
TRUSTEES
The trustees of PPTF are Richard G. Alper, M.D., Eliot H. Berg, M.D., Louis
P. Brady, M.D., Joseph P. Cauthen, M.D., Hubert G. Martinez, M.D., Kerry M.
Schwartz, M.D., George A. Segal, M.D., Robert S. Tolmach, M.D., and Edward S.
Truppman, M.D. Jack Wolfsdorf, M.D. is a Consultant to the PPTF Board and
attends the monthly meetings of the PPTF Board.
EXECUTIVE OFFICERS
The executive officers of PPTF are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Steven L. Salman 50 President and Chief Executive Officer
William D. Baxter 40 Controller
David R. Goss 57 Director of Sales
Gregg L. Hanson 43 Director of Underwriting
John Hastie 41 Director of Marketing
Peggy Schemenauer 48 Administrative Manager
Robert E. White, Jr. 51 Director of Claims and Loss Prevention
</TABLE>
No trustee or executive officer of PPTF is related to any other trustee or
to any executive officer of PPTF or to any director or executive officer of its
subsidiary by blood, marriage or adoption, and there are no arrangements or
understandings between a trustee or executive officer and any other person
pursuant to which such person was elected a trustee or executive officer of PPTF
or a director or executive officer of its subsidiary.
TRUSTEE REMUNERATION
The nine trustees and the consultant each receive $2,500 per month for
participation on the PPTF Board and attending the monthly meetings. Additional
fees ranging from $600 to $1,800 are paid monthly for participation on various
committees. Those who close their office for at least half a day to travel to
the PPTF Board meetings are provided an additional $500 per meeting. The
Chairman, Vice Chairman, and Secretary receive additional annual fees of $5,000,
$1,200, and $1,200, respectively for their duties as officers of the PPTF Board.
The aggregate fees paid for all trustees and the consultant as a group equaled
$683,400 during 1997.
141
<PAGE> 155
MANAGEMENT REMUNERATION
Summary Compensation Table. The following table sets forth information
concerning compensation for services in all capacities awarded to, earned by or
paid to each of the five most highly compensated executive officers and/or
employees of PPTF and its subsidiary (the "Named PPTF Executives") for the last
three completed fiscal years whose salary and bonus exceeded $100,000 in 1997.
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-------------------------------
ANNUAL COMPENSATION AWARDS PAYOUT
- ------------------------------------------------------------------ --------------------- ------
RESTRICTED
OTHER ANNUAL STOCK OPTIONS LTIP ALL OTHER
NAME AND SALARY BONUS COMPENSATION AWARD(S) /SARS PAYOUT COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($) ($)(A)
------------------ ---- ------- ------ ------------ ---------- ------- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Steven L. Salman 1997 336,962 83,063(b) 45,000(c) -- -- -- 576
President and CEO 1996 73,421(d) 20,765(b) 72,109(e) -- -- -- 88
1995 -- -- -- -- -- -- --
Robert E. White, Jr. 1997 220,821 75,000(b) -- -- -- -- 19,576
Director of Claims and 1996 197,491 72,070(b) -- -- -- -- 19,584
Loss Prevention 1995 201,694 59,500(b) -- -- -- -- 19,348
William D. Baxter 1997 111,317 35,000(b) -- -- -- -- 13,716
Controller 1996 98,294 33,000 -- -- -- -- 17,148
1995 88,301 30,000 -- -- -- -- 14,913
Gregg L. Hanson 1997 120,994 17,500(b) -- -- -- -- 14,907
Director of 1996 113,868 16,500 -- -- -- -- 16,325
Underwriting 1995 99,650(f) 15,000 10,000(g) -- -- -- 14,196
John Hastie 1997 110,849 13,000(b) -- -- -- -- 13,021
Director of Marketing 1996 101,898 13,000 -- -- -- -- 14,412
1995 94,063 12,500 -- -- -- -- 54
</TABLE>
- ---------------
(a) Amounts shown for all Named PPTF Executives consist of PPTF contributions to
each employee's Simplified Employee Pension Plan, life insurance over
$50,000 and, when applicable, non-taxable moving expenses. Amounts shown for
1997 for all Named PPTF Executives consist of the following: (i) Mr. Salman:
life insurance of $576; (ii) Mr. White: life insurance of $576 and pension
plan contribution of $19,000; (iii) Mr. Baxter: life insurance of $116 and
pension plan contribution of $13,601; (iv) Mr. Hanson: life insurance of
$147 and pension plan contribution of $14,760; and (v) Mr. Hastie: life
insurance of $117 and pension plan contribution of $12,904. Amounts shown
for 1996 for all Named PPTF Executives consist of the following: (i) Mr.
Salman: life insurance of $88; (ii) Mr. White: life insurance of $584 and
pension plan contribution of $19,000; (iii) Mr. Baxter: life insurance of
$64 and pension plan contribution of $17,084; (iv) Mr. Hanson: life
insurance of $131 and pension plan contribution of $16,194; and (v) Mr.
Hastie: life insurance of $69 and pension plan contribution of $14,343.
Amounts shown for 1995 consist of the following: (i) Mr. White: life
insurance of $348 and pension plan contribution of $19,000; (ii) Mr. Baxter:
life insurance of $48 and pension plan contribution of $14,865; (iii) Mr.
Hanson: life insurance of $113 and non-taxable moving expenses of $14,083;
and (iv) Mr. Hastie: life insurance of $54.
(b) Amounts shown reflect bonuses granted in year listed but all were deferred
until the following calendar year.
(c) Amount shown reflects annual housing allowance of $45,000 pursuant to Mr.
Salman's employment agreement. See "INTERESTS OF CERTAIN PERSONS -- Other
Matters."
(d) Amount shown reflects annualized salary of $325,000. Mr. Salman was hired on
October 1, 1996 as President and CEO of PPTF.
(e) Amount shown reflects housing allowance of $10,385, taxable relocation
expenses of $51,527, and foregone interest of $10,197 on the $219,327
short-term bridge loan from PPTF to Mr. Salman to fund his purchase of a new
home in South Florida. The loan was interest free for the first six months
and thereafter accrues interest at the prime rate.
(f) Amount shown reflects annualized salary of $105,707. Mr. Hanson was hired on
January 16, 1995.
(g) Reflects taxable relocation expenses of $10,000.
142
<PAGE> 156
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The PPTF Board does not have a compensation committee. The PPTF Board sets
compensation for the President and Chief Executive Officer of PPTF. The
President and Chief Executive Officer of PPTF sets compensation for all other
officers and employees of PPTF. The only members of the PPTF Board during 1997
were Richard G. Alper, M.D., Eliot H. Berg, M.D., Louis P. Brady, M.D., Joseph
P. Cauthen, M.D., Hubert G. Martinez, M.D., Kerry M. Schwartz, M.D., George A.
Segal, M.D., Robert S. Tolmach, M.D., and Edward S. Truppman, M.D. During 1997
none of the foregoing members of the PPTF Board held any position at PPTF other
than the position of trustee.
No trustee or executive officer of PPTF holds any position at Professionals
Group or PICOM. No executive officer of PPTF served as a member of the
compensation committee (or other board committee performing equivalent functions
or, in the absence of any such committee, the entire board of trustees or board
of directors) of another entity, one of whose executive officers served on the
PPTF Board. No executive officer of PPTF served as a director of another entity,
one of whose executive officers served on the PPTF Board.
BENEFICIAL OWNERSHIP OF
PHYSICIANS PROTECTIVE TRUST FUND MEMBERSHIP RIGHTS
As of the record date for the PPTF Special Meeting, no PPTF Officer was a
Member of PPTF. To the knowledge of management of PPTF no Member of PPTF, solely
by virtue of being a Member of PPTF, was entitled to cast more than five percent
of the votes eligible to be cast at the PPTF Special Meeting. The following
table sets forth information provided by the persons indicated with respect to
(i) the number of PPTF Policies for which each PPTF Trustee and all of the PPTF
Trustees and PPTF Officers as a group is the named insured, (ii) the number of
PPTF Policies with respect to which each PPTF Trustee and all of the PPTF
Trustees and PPTF Officers as a group may be deemed to have beneficial ownership
(as defined under applicable rules of the Commission), and (iii) the number of
votes each PPTF Trustee and all of the PPTF Trustees and PPTF Officers as a
group may cast at the PPTF Special Meeting solely by virtue of such PPTF
Policies.
<TABLE>
<CAPTION>
PPTF TRUSTEE(1) NUMBER OF PPTF POLICIES NUMBER OF VOTES
--------------- ----------------------- ---------------
<S> <C> <C>
Richard G. Alper, M.D. ................. 1 1
Eliot H. Berg, M.D. .................... 2(2) 2(2)
Louis P. Brady, M.D. ................... 2(2) 2(2)
Joseph P. Cauthen, M.D. ................ 2(2) 2(2)
Hubert G. Martinez, M.D. ............... 1 1
Kerry M. Schwartz, M.D. ................ 2(2) 2(2)
George A. Segal, M.D. .................. 1 1
Robert S. Tolmach, M.D. ................ 1 1
Edward S. Truppman, M.D. ............... 12(3) 12(3)
All PPTF Trustees and PPTF Officers as a
group (16 persons)(1)................. 24 24
</TABLE>
- ---------------
(1) The address of each of the PPTF Trustees and each of the PPTF Officers is
2121 Ponce de Leon Boulevard, P.O. Box 149001, Coral Gables, Florida
33114-9001.
(2) Includes one PPTF Policy for which the named insured is an entity controlled
by such PPTF Trustee and with respect to which such PPTF Trustee has the
power to vote.
(3) Includes eleven PPTF Policies for which the named insured is an entity
controlled by such PPTF Trustee and with respect to which such PPTF Trustee
has the power to vote.
143
<PAGE> 157
RELATED PARTY TRANSACTIONS OF
PHYSICIANS PROTECTIVE TRUST FUND
Other than the short-term bridge loan from PPTF to Mr. Salman that is
disclosed in the Summary Compensation Table, there are no related party
transactions of PPTF.
AMENDMENT TO PROFESSIONALS GROUP'S
FIRST AMENDED AND RESTATED ARTICLES OF INCORPORATION
On December 5, 1997, the Professionals Group Board (with ten directors
present and one director absent) unanimously approved the Name Change Amendment.
The Name Change Amendment, if approved by the stockholders of Professionals
Group, will amend Article I of Professionals Group's First Amended and Restated
Articles of Incorporation and change the name of Professionals Group from
"Professionals Insurance Company Management Group" to "Professionals Group,
Inc." The Name Change Amendment, which is attached to this Joint Proxy
Statement/Prospectus as Annex D and is incorporated herein by reference, was
approved by the Professionals Group Board because it believes that the shorter
name will facilitate the name recognition of the combined entity in the
marketplace.
THE PROFESSIONALS GROUP BOARD RECOMMENDS THAT PROFESSIONALS GROUP
STOCKHOLDERS VOTE FOR THE NAME CHANGE PROPOSAL.
Approval of the Merger Proposal by the requisite votes of the stockholders
of Professionals Group and the Members of PPTF is a condition to, and is
required for, consummation of the transactions contemplated by the Merger
Agreement (including, without limitation, the merger of PPTF with and into INSCO
followed immediately by the merger of INSCO with and into PICOM, with PICOM
continuing on as the surviving insurance corporation). Approval of the Name
Change Proposal by the requisite vote of Professionals Group stockholders is not
a condition to, and is not required for, the consummation of the transactions
contemplated by the Merger Agreement. Assuming its approval by the stockholders
of Professionals Group, the Name Change Proposal and the Name Change Amendment
will become effective regardless of whether the Merger Proposal is approved.
144
<PAGE> 158
DESCRIPTION OF PROFESSIONALS GROUP CAPITAL STOCK
The following description of the capital stock of Professionals Group does
not purport to be complete and is subject to and qualified in its entirety by
reference to the Professionals Group Charter Documents, which are exhibits to
the Registration Statement of which this Joint Proxy Statement/Prospectus forms
a part and are incorporated herein by reference. The following description
should be read carefully by non-dissenting Members of PPTF since, upon
consummation of the transactions contemplated by the Merger Agreement, they will
become stockholders of Professionals Group. SEE ALSO "COMPARISON OF STOCKHOLDER
RIGHTS WITH MEMBERSHIP RIGHTS."
GENERAL
Professionals Group's total authorized capital stock currently consists of
(i) 5,000,000 shares of preferred stock, no par value per share ("Professionals
Group Preferred Stock"), and (ii) 25,000,000 shares of common stock, no par
value per share.
As of the record date for the Professionals Group Annual Meeting, no shares
of Professionals Group Preferred Stock were issued or outstanding, 3,505,750
shares of Professionals Group Common Stock were issued and outstanding, an
aggregate of 503,000 shares of Professionals Group Common Stock were reserved
for issuance pursuant to the 1996 Non-Employee Directors Stock Option Plan of
Professionals Group, the 1996 Long Term Incentive Plan of Professionals Group,
and Section 1.28 of the Merger Agreement. Upon consummation of the transactions
contemplated by the Merger Agreement, it is expected that approximately
7,594,910 shares of Professionals Group Common Stock will be issued and
outstanding and 503,000 shares of Professionals Group Common Stock will be
reserved for issuance pursuant to the 1996 Non-Employee Directors Stock Option
Plan of Professionals Group, the 1996 Long Term Incentive Plan of Professionals
Group, and Section 1.28 of the Merger Agreement.
PREFERRED STOCK
The Professionals Group Preferred Stock may be issued in one or more series
at such time or times and for such consideration or considerations as the
Professionals Group Board may determine. The Professionals Group Board is
expressly authorized at any time, and from time to time, to provide for the
issuance of Professionals Group Preferred Stock with such voting powers, full or
limited, or without voting powers, and with such designations, preferences and
relative, participating, optional or other special rights, and qualifications,
limitations or restrictions thereof, as shall be stated and expressed in the
First Amended and Restated Articles of Incorporation of Professionals Group or
in the resolutions of the Professionals Group Board providing for the issuance
thereof. The Professionals Group Board is authorized to, among other things,
designate the series and the number of shares comprising such series, the
dividend rate or rates on the shares of such series, the redemption rights, if
any, any purchase, retirement or sinking fund, any conversion rights and any
special voting rights. Shares of Professionals Group Preferred Stock redeemed or
acquired by Professionals Group return to the status of authorized and unissued
shares of Professionals Group Preferred Stock, without designation as to series,
and may be reissued by the Professionals Group Board.
COMMON STOCK
Subject to the rights of any outstanding shares of Professionals Group
Preferred Stock, the holders of Professionals Group Common Stock are entitled to
receive such dividends as may from time to time be declared by the Professionals
Group Board. With respect to every issue submitted to them as Professionals
Group stockholders at a meeting of stockholders or otherwise (including, without
limitation, the election of directors), they are entitled to one vote per share
of Professionals Group Common Stock. In the event of dissolution they are
generally entitled, after provision for Professionals Group's debts, obligations
and liabilities and payment in full of the liquidation preference of any
outstanding Professionals Group Preferred Stock, to share ratably in all assets
of Professionals Group available for distribution to holders of shares of
Professionals Group Common Stock. Holders of shares of Professionals Group
Common Stock do not have
145
<PAGE> 159
preemptive rights. All shares of Professionals Group Common Stock now issued and
outstanding are fully paid and nonassessable.
TRANSFER AGENT
The registrar and transfer agent for the Professionals Group Common Stock
is ChaseMellon Stockholders Services, L.L.C.
AUTHORIZED BUT UNISSUED SHARES
The Professionals Group Board believes that the availability of shares of
Professionals Group Common Stock is advisable to provide Professionals Group
with the flexibility to take advantage of opportunities to issue such stock in
order to obtain capital, as consideration for possible acquisitions or for other
purposes (including, without limitation, the issuance of additional shares of
Professionals Group Common Stock through stock splits and stock dividends in
appropriate circumstances). There are, at present, no plans, understandings,
agreements or arrangements concerning the issuance of additional shares of
Professionals Group Common Stock, except for (i) the shares of Professionals
Group Common Stock to be issued pursuant to the Merger Agreement, and (ii)
shares of Professionals Group Common Stock presently reserved for issuance.
Uncommitted authorized but unissued shares of Professionals Group Common
Stock may be issued from time to time to such persons and for such consideration
as the Professionals Group Board may determine and holders of the then
outstanding shares of Professionals Group Common Stock may or may not be given
the opportunity to vote thereon, depending upon the nature of any such
transactions, applicable law, the rules and policies of the National Association
of Securities Dealers, Inc. and the judgment of the Professionals Group Board
regarding the submission of such issuance to Professionals Group's stockholders.
Professionals Group stockholders have no preemptive rights to subscribe to newly
issued shares.
Moreover, it is possible that additional shares of Professionals Group
Common Stock could be issued for the purpose of making an acquisition by an
unwanted suitor of a controlling interest in Professionals Group more difficult,
time-consuming or costly or to otherwise discourage an attempt to acquire
control of Professionals Group. Under such circumstances the availability of
authorized and unissued shares of Professionals Group Common Stock may make it
more difficult for stockholders to obtain a premium for their shares. Such
authorized and unissued shares could be used to create voting or other
impediments or to frustrate a person seeking to obtain control of Professionals
Group by means of a merger, tender offer, proxy contest or other means. Such
shares could be privately placed with purchasers who might cooperate with the
Professionals Group Board in opposing such an attempt by a third party to gain
control of Professionals Group. The issuance of new shares of Professionals
Group Common Stock could also be used to dilute ownership of a person or entity
seeking to obtain control of Professionals Group. Although Professionals Group
does not currently contemplate taking such action, shares of Professionals Group
Common Stock could be issued for the purposes and effects described above and
the Professionals Group Board reserves its rights (if consistent with its
fiduciary responsibilities) to issue such stock for such purposes.
COMPARISON OF STOCKHOLDER RIGHTS WITH MEMBERSHIP RIGHTS
Certain material differences between the rights of holders of Professionals
Group Common Stock and the rights of members of PPTF are described and
summarized below. The following discussion is not meant to be relied upon as an
exhaustive list or a detailed description of such differences and is not
intended to constitute a detailed comparison or description of the provisions of
the First Amended and Restated Articles of Incorporation and By-laws of
Professionals Group, the Michigan Business Corporation Act, as amended, the
Amended Trust Agreement dated January 1, 1987 and By-laws of PPTF, the Florida
Insurance Code, or the Florida Business Corporation Act, as amended. The
following discussion is qualified in its entirety by reference to the
Professionals Group Charter Documents, the PPTF Charter Documents, the laws of
the State of Michigan and the laws of the State of Florida, and the stockholders
of Professionals Group and the Members of PPTF are referred to the complete text
of such documents, agreements and laws.
146
<PAGE> 160
GENERAL
There are significant differences between the rights of PPTF Members and
the rights of Professionals Group stockholders. PPTF is a medical malpractice
self-insurance trust in Florida that is managed by a board of trustees and whose
Members are persons and entities who are named insureds on PPTF Policies.
Professionals Group is a business corporation organized under the MBCA that is
managed by a board of directors and has stockholders. The Membership Rights of a
Member of PPTF are governed by PPTF's Amended Trust Agreement dated January 1,
1987 and By-laws and the laws of the State of Florida (including the Florida
Insurance Code and, in some respects, the FBCA), and are evidenced by the PPTF
Charter Documents and such Member's PPTF Policy. In contrast, the rights of a
stockholder of Professionals Group are governed by the provisions of
Professionals Group's First Amended and Restated Articles of Incorporation and
By-laws and the MBCA and are evidenced by a stock certificate. Upon consummation
of the transactions contemplated by the Merger Agreement, (i) all Members of
PPTF will cease 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); (ii) subject to the
exercise of dissenters' rights, all Membership Rights will be converted into an
aggregate of 4,089,160 shares of Professionals Group Common Stock and will cease
to exist; (iii) Members of PPTF who do not exercise dissenters' rights and who
receive shares of Professionals Group Common Stock in the INSCO Merger will
become stockholders of Professionals Group, and their rights will be governed by
the Professionals Group Charter Documents and the MBCA; and (iv) PPTF Policies
will become and be insurance policies issued by PICOM and will be converted from
assessable insurance policies to nonassessable insurance policies, without any
endorsement or modification thereto. In the absence of the consummation of the
transactions contemplated by the Merger Agreement, the Membership Rights of a
PPTF Member would terminate upon the earlier of the termination of such Member's
PPTF Policy and the dissolution of PPTF.
Insurance holding companies, insurance companies and self-insurance trust
funds are extensively regulated. While the nature and extent of such regulation
vary from jurisdiction to jurisdiction, such regulation typically involves (i)
prior approval of the acquisition of control of an insurance company or
self-insurance trust fund or of any company controlling an insurance company or
self-insurance trust fund, (ii) regulation of certain transactions entered into
by an insurance company or self-insurance trust fund with any of its affiliates,
(iii) approval of premium rates, forms and policies used for many lines of
insurance, (iv) standards of solvency and minimum amounts of capital and surplus
which must be maintained, (v) establishment of reserves required to be
maintained for unearned premium, losses and loss expenses or for other purposes,
(vi) limitations on types and amounts of investments, (vii) restrictions on the
size of risks which may be insured by a single entity, (viii) licensing of
insurers and agents, (ix) deposits of securities for the benefit of
policyholders, and (x) the filing of periodic reports with respect to financial
condition and other matters. Such regulation, which has had significant effect
on the operating results of insurance holding companies, insurance companies and
self-insurance trust funds in the past and is expected to have significant
effects in the future, is generally intended for the protection of policyholders
rather than security holders. See "RISK FACTORS" and "CERTAIN REGULATORY
CONSIDERATIONS."
It is to be noted that Professionals Group is a legal entity separate and
distinct from its various subsidiaries. As a holding company with no significant
operations of its own, the principal sources of its funds are dividends and
other distributions from its subsidiaries, borrowings and sales of equity. The
rights of Professionals Group, and consequently its stockholders, to participate
in any distribution of assets of any of its subsidiaries is subject to prior
claims of policyholders, creditors and preferred stockholders, if any, of
Professionals Group's subsidiaries (except to the extent claims of Professionals
Group in its capacity as a creditor are recognized), and to certain regulatory
restrictions. Consequently, Professionals Group's ability to fund its
operations, and to pay debts, expenses and cash dividends to its stockholders
may be limited. See "RISK FACTORS" and "CERTAIN REGULATORY CONSIDERATIONS."
There are differences between the Professionals Group Charter Documents and
the PPTF Charter Documents which will affect the rights of Members of PPTF.
Moreover, although the MBCA, the Florida Insurance Code and the FBCA are similar
in some respects, there are differences between those statutes which may affect
the rights of Members of PPTF. Certain of such differences are summarized below.
147
<PAGE> 161
Upon consummation of the transactions contemplated by the Merger Agreement,
it is expected that approximately 7,594,910 shares of Professionals Group Common
Stock will be issued and outstanding and 503,000 shares of Professionals Group
Common Stock will be reserved for issuance pursuant to the 1996 Non-Employee
Directors Stock Option Plan of Professionals Group, the 1996 Long Term Incentive
Plan of Professionals Group, and Section 1.28 of the Merger Agreement.
Members of PPTF are assessable for a deficiency in the event PPTF is unable
to meet its insurance obligations fully. However, after the Mergers, as
stockholders of Professionals Group, Members of PPTF will not be assessable in
the event that Professionals Group or the affiliate providing insurance to the
PPTF policyholders is unable to fulfill its insurance obligations. While PPTF
has never made an assessment on its Members, the fact of this assessability
exempted PPTF from making contributions to the Florida Insurance Guaranty
Association, a fund that exists to make up all or part of shortfalls by bankrupt
insurance companies. Upon consummation of the transactions contemplated by the
Merger Agreement, PICOM will be required to make contributions to the Florida
Insurance Guaranty Association.
PPTF Policies are not transferable by Members of PPTF. The shares of
Professionals Group Common Stock issued to Members of PPTF will be freely
tradeable by those Members who are not Affiliates. Upon consummation of the
transactions contemplated by the Merger Agreement PPTF Policies will become and
be insurance policies issued by PICOM and will be converted from assessable
insurance policies to nonassessable insurance policies, without any endorsement
or modification thereto.
BOARD OF DIRECTORS/TRUSTEES; VOTING FOR DIRECTORS/TRUSTEES; REMOVAL OF
DIRECTORS/TRUSTEES
The size of the whole Professionals Group Board may not be less than nine
or more than 18. The Professionals Group Board currently consists of 11 members
and the directors are divided into three classes with the term of office of one
of such classes expiring in each year. At each annual meeting of Professionals
Group stockholders, the successors to the directors of the class whose term is
expiring at that time are elected to hold office for a term of three years. With
respect to an election of directors, a Professionals Group stockholder is
entitled to one vote for each share of Professionals Group Common Stock held,
but does not have the right to cumulate votes. Upon consummation of the
transactions contemplated by the Merger Agreement, the Professionals Group Board
will have 16 members, including all 11 of the persons who are currently
directors of Professionals Group (including W. Peter McCabe, M.D., Victor T.
Adamo, and R. Kevin Clinton, FCAS, MAAA, who is the President of Michigan
Educational Employees Mutual Insurance Company), and Eliot H. Berg, M.D., Steven
L. Salman, Richard G. Alper, M.D., Louis P. Brady, M.D., and Edward S. Truppman,
M.D. Representatives will be divided as equally as practicable among the three
classes of directors of Professionals Group; provided, however, (i) that Dr.
McCabe will not be in the same class as Dr. Berg, (ii) that Mr. Adamo will not
be in the same class as either Mr. Salman or Mr. Clinton, and (iii) that Mr.
Salman will not be in the same class as Mr. Clinton. As of the date of this
Joint Proxy Statement/Prospectus, no additional directors of Professionals Group
have been designated by the Professionals Group Board. See "MANAGEMENT AND
OPERATIONS AFTER THE TRANSACTIONS -- Directors."
The size of the whole PPTF Board may not be more than nine. The PPTF Board
currently consists of nine trustees who are divided into three classes with the
term of office of one of such classes expiring in each year. Each year the
successors to the trustees of the class whose term is expiring at that time are
elected by the Members of PPTF to hold office for a term of three years. With
respect to an election of trustees, each indemnity agreement issued by PPTF that
is in effect on the applicable record date is entitled to one vote. Such vote
may only be cast, in person or by proxy, by the named insured on such indemnity
agreement and there is only one named insured for each such indemnity agreement.
Votes may not be cumulated.
Under the MBCA, directors may be removed with or without cause unless the
corporation's articles of incorporation provide otherwise. Since Professionals
Group's First Amended and Restated Articles of Incorporation provide otherwise,
Professionals Group directors are subject to removal by stockholders only for
cause and only upon the affirmative vote of the holders of a majority of the
outstanding shares of Professionals Group Common Stock. A trustee may be removed
by a two-thirds vote of the PPTF Board for cause (which
148
<PAGE> 162
includes gross negligence, fraud, willful misconduct, conviction of a felony,
loss of medical license, malfeasance in office, or non-attendance for any reason
other than certified illness or Board approved PPTF business at more than 25% of
the meetings of the PPTF Board in any fiscal year).
DIRECTOR/TRUSTEE NOMINATIONS
Professionals Group. Only persons who are nominated in accordance with the
procedures set forth in Article XI of Professionals Group's First Amended and
Restated Articles of Incorporation are eligible for election as directors of
Professionals Group. Nominations of persons for election to the Professionals
Group Board may be made at a meeting of stockholders by or at the direction of
the Professionals Group Board or by any Professionals Group stockholder entitled
to vote for the election of directors at the meeting who gives timely written
notice to Professionals Group's corporate secretary. To be timely, a
stockholder's notice must be delivered to and received at the principal
executive offices of Professionals Group not later than (i) 120 days prior to
the date one year from the date of the immediately preceding annual meeting of
stockholders, and (ii) with respect to an election to be held at a special
meeting of stockholders, 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 stockholders.
The stockholder's notice required by Article XI of the Professionals
Group's First Amended and Restated Articles of Incorporation must set forth (i)
as to each person whom the stockholder proposes to nominate for election or
re-election as a director of Professionals Group, (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 Exchange
Act (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
Professionals Group if elected); and (ii) as to the stockholder giving the
notice (A) the name and address, as they appear on Professionals Group's books,
of such stockholder, (B) a representation that the stockholder is a holder of
record of shares of Professionals Group 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 stockholder 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 stockholder, (D) such other
information regarding each nominee proposed by such stockholder as would be
required to be included in a proxy statement filed pursuant to Regulation 14A
under the Exchange Act had the nominee been nominated, or intended to be
nominated by the Professionals Group Board, and (E) a consent signed by each
such nominee to serve as a director of Professionals Group if so elected. At the
request of the Professionals Group Board any person nominated by the
Professionals Group Board for election as a director of Professionals Group must
furnish to Professionals Group's corporate secretary the information required to
be set forth in a stockholder's notice of nomination which pertains to the
nominee. The chairman of the meeting of Professionals Group stockholders at
which directors are to be elected must, if the facts warrant, determine and
declare to the meeting that a nomination was not made in accordance with the
procedures outlined above, and if the chairman so determines, he must so declare
to the meeting and the defective nomination must be disregarded.
At each of the INSCO Effective Time and the PICOM Effective Time there will
be a committee of the Professionals Group Board known as the "Nominating
Committee." This committee (i) will be comprised of four members of the
Professionals Group Board, with two members being selected from the
Professionals Group Representatives and two members being selected from the PPTF
Representatives, and (ii) to the fullest extent permitted under the First
Amended and Restated Articles of Incorporation and the Bylaws of Professionals
Group, will be delegated and authorized to exercise the full power and authority
of the Professionals Group Board with respect to recommending nominees for
election to the Professionals Group Board. Action of the Nominating Committee of
the Professionals Group Board within the meaning of
149
<PAGE> 163
Section 523 of the MBCA will require the favorable vote of at least 75% of the
members of this committee. As of the date of this Joint Proxy
Statement/Prospectus, no directors of Professionals Group have been appointed to
the Nominating Committee.
PPTF. None of the PPTF Charter Documents, the Florida Insurance Code and
the FBCA contain any provisions analogous to the provisions of Article XI of
Professionals Group's First Amended and Restated Articles of Incorporation.
VOTING REQUIREMENTS
General. Pursuant to the MBCA, all matters submitted to a vote of
Professionals Group stockholders, other than the election of directors (for
which the affirmative vote of a plurality of the votes cast at an election is
required), the amendment of Professionals Group's bylaws and certain provisions
of Professionals Group's First Amended and Restated Articles of Incorporation,
and certain business combination transactions involving a 10% stockholder or an
affiliate thereof, are determined by a vote of the holders of shares entitling
them to exercise a majority of the voting power of Professionals Group.
Pursuant to the Florida Insurance Code, all matters submitted to a vote of
the Members of PPTF, other than the election of trustees (for which the
affirmative vote of a plurality of the votes cast at an election is required)
and extraordinary corporate transactions, are determined by the Members of PPTF
entitled to exercise a majority of the total voting power of PPTF.
The MBCA and the FBCA provide similar voting rights with respect to
mergers, sales of substantially all of the assets of a corporation and other
extraordinary corporate transactions. The Florida Insurance Code also provides
voting rights with respect to such extraordinary corporate transactions, but the
vote required to approve such transactions is generally greater than that
required under either the MBCA or the FBCA.
Professionals Group. On each matter submitted to the stockholders of
Professionals Group, each outstanding share of Professionals Group Common Stock
is entitled to one vote. Approval of the Merger Proposal by the stockholders of
Professionals Group requires the affirmative vote of a majority of the
outstanding shares of Professionals Group Common Stock. Approval of the Name
Change Proposal by the stockholders of Professionals Group requires the
affirmative vote of a majority of the outstanding shares of Professionals Group
Common Stock. In all matters other than the Merger Proposal and the Name Change
Proposal, the affirmative vote of the majority of shares present in person or
represented by proxy at the Professionals Group Annual Meeting and entitled to
vote on the matter will be the act of Professionals Group's stockholders. The
record date for the Professionals Group Annual Meeting is April 6, 1998. Only
Professionals Group stockholders at the close of business on the Professionals
Group Record Date are entitled to notice of, and to vote at, the Professionals
Group Annual Meeting. As of the Professionals Group Record Date, Professionals
Group had issued and outstanding approximately 3,505,750 shares of Professionals
Group Common Stock. See "THE MEETINGS -- Votes Required," and "-- Record Dates;
Voting Rights; Quorums."
PPTF. Each indemnity agreement issued by PPTF that is in effect on the
applicable record date is entitled to one vote. Such vote may only be cast, in
person or by proxy, by the named insured on such indemnity agreement and there
is only one named insured for each such indemnity agreement. Votes may not be
cumulated. Approval of the Merger Proposal requires the affirmative vote of
two-thirds of the number of votes eligible to be cast. (This percentage was
fixed by the PPTF Board with the approval of the Florida Insurance Department.)
In all matters other than the Merger Proposal, the affirmative vote of a
majority of the votes present in person or represented by proxy at the PPTF
Special Meeting and entitled to vote on the matter will be the act of PPTF's
Members. The record date for the PPTF Special Meeting is April 1, 1998. Only
Members of PPTF at the close of business on the PPTF Record Date are entitled to
receive notice of, and to vote at, the PPTF Special Meeting. As of the PPTF
Record Date, the number of PPTF Policies, and the maximum number of votes
entitled to be cast on each matter submitted to a vote of PPTF Members at the
PPTF Special Meeting, is 3,586. See "THE MEETINGS -- Votes Required," and
"-- Record Dates; Voting Rights; Quorums."
150
<PAGE> 164
Professionals Group Supermajority Voting Provisions. Article XII of
Professionals Group's First Amended and Restated Articles of Incorporation
provide that Professionals Group's Bylaws shall not be adopted, amended or
repealed by the stockholders of Professionals Group except by the vote of the
holders of not less than three-quarters of the outstanding shares of capital
stock of Professionals Group 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, the affirmative vote of
not 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 or repeal recommended to stockholders
by the affirmative vote of not less than two-thirds of the Professionals Group
Board, in which case such adoption, amendment or repeal requires only the vote,
if any, required under the MBCA.
Article XVII of Professionals Group's First Amended and Restated Articles
of Incorporation provides that none of Articles VII (limitations on director
liability), VIII (quorum requirement), IX (stockholder action by unanimous
written consent), X (stockholder proposal and notification requirements), XI
(director nomination and notification requirements), XII (by-law amendments),
XIII (size and classification of board of directors), XIV (control share
acquisition) or XVII (supermajority vote requirement) thereof shall be amended,
or repealed in any respect, nor shall any provision which will either (i) have
the effect of modifying or permitting circumvention of any of those provisions
of Professionals Group's First Amended and Restated Articles of Incorporation,
or (ii) establish cumulative voting in the election of directors of
Professionals Group be adopted and added to Professionals Group's First Amended
and Restated Articles of Incorporation, except upon the affirmative vote of not
less than three-quarters of the shares of capital stock of Professionals Group
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.
PPTF. The PPTF Charter Documents do not contain any supermajority voting
provisions analogous to the provisions of Article XII or Article XVII of
Professionals Group's First Amended and Restated Articles of Incorporation.
ANTI-TAKEOVER LAWS AND CHARTER PROVISIONS
Professionals Group. Professionals Group is subject to the Michigan "Fair
Price" statute (Chapter 7A of the MBCA), which applies to certain "business
combinations" such as mergers, substantial sales of assets or securities
issuances and liquidation, recapitalization or reorganization plans. Generally,
the statute requires that prior to entering into a business combination with an
"interested stockholder" (generally, the holder of 10% or more of a class of a
corporation's voting stock), a corporation must receive (i) an advisory
statement from the corporation's board of directors, the approval of holders of
90% of each class of the corporation's outstanding voting stock and the approval
of two-thirds of the holders of each such class other than the interested
stockholder. The supermajority voting requirements do not apply where the
interested stockholder's offer meets certain price, form of consideration and
procedural requirements designed to make such offers fair to all stockholders or
where the board of directors has approved the transaction with respect to a
particular interested stockholder prior to the interested stockholder becoming
an interested stockholder.
Professionals Group is also subject to the Michigan "Control Share
Acquisition" statute (Chapter 7B of the MBCA). Generally, the statute provides
that an entity that acquires "control shares" may vote the control shares on any
matter only if a majority of all shares, and of all non-"interested shares,"
entitled to vote thereon and of each class of stock entitled to vote as a class,
approve such voting rights. "Interested shares" are defined generally as those
shares owned by officers of the corporation, employee directors of the
corporation and the entity making the control share acquisition. "Control
shares" are defined generally as shares that when added to shares already owned
by an entity, would give the entity voting power in the election of directors
within any of three thresholds: one-fifth, one-third and a majority. The effect
of the statute is to condition the acquisition of voting control of a Michigan
corporation on the approval of a majority of its pre-existing disinterested
stockholders. The requirements of Chapter 7B of the MBCA do not apply to a
merger if the corporation issuing shares in the merger is a party to the
agreement of merger.
151
<PAGE> 165
The provisions of the Michigan "Fair Price" statute do not apply to the
transactions contemplated by the Merger Agreement because none of those
transactions will alter the contract rights of the Professionals Group Common
Stock as set forth in Professionals Group's First Amended and Restated Articles
of Incorporation. The provisions of the Michigan "Control Share Acquisition"
statute do not apply to the transactions contemplated by the Merger Agreement
because, among other things, Professionals Group is a party to the Merger
Agreement and the Mergers will be effected in compliance with the applicable
provisions of Chapter 7B of the MBCA.
PPTF. PPTF is not subject to any statute analogous to the Michigan "Fair
Price" statute or the Michigan "Control Share Acquisition" statute because PPTF
Policies and Membership Rights are not transferable. However, under the Florida
Insurance Code the acquisition or change of "control" of a domestic insurer
(such as PPTF) or of any person or entity that controls a domestic insurer
cannot be consummated without the prior approval of the Florida Insurance
Department. See "CERTAIN REGULATORY CONSIDERATIONS."
MEETINGS
Professionals Group. At any annual or special meeting of Professionals
Group's stockholders, only such business shall be conducted as shall have been
properly brought before such meeting. To be properly brought before such meeting
business must be (i) specified in the notice of meeting (or any supplement
thereto) given by or at the direction of the Professionals Group Board, (ii)
otherwise properly brought before the meeting by or at the direction of the
Professionals Group Board, or (iii) otherwise properly brought before the
meeting by a Professionals Group stockholder. For business to be properly
brought before such meeting by a Professionals Group stockholder, the
stockholder must have given timely notice thereof in writing to Professionals
Group's corporate secretary. To be timely, a stockholder's notice must be
delivered to and received at the principal executive offices of Professionals
Group, (x) in the case of an annual meeting of stockholders, not later than 120
days prior to the date one year from the date of the immediately preceding
annual meeting of stockholders, or (y) in the case of a special meeting of
stockholders, not later than the close of business on the 10th day following
that date that is the earlier of (1) the date on which public disclosure of such
special meeting is made and (2) the date on which formal notice of such special
meeting is first given to stockholders.
The stockholder's notice must set forth as to each matter the stockholder
proposes to bring before the 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 conducting such
business at the meeting, (ii) the name and address, as they appear on
Professionals Group's books, of the stockholder proposing such business, (iii) a
representation that the stockholder is a holder of record of shares of
Professionals Group 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 stockholder and any other person or persons (naming
such person or persons) with respect to shares of the capital stock of
Professionals Group or each matter specified in the notice, (v) the class and
number of shares of capital stock of Professionals Group which are beneficially
owned by the stockholder, and (vi) any material interest of the stockholder in
each matter specified in the notice. The chairman of the meeting of
Professionals Group stockholders must, if the facts warrant, determine and
declare to the meeting that business was not properly brought before the meeting
in accordance with the procedures outlined above, and if the chairman so
determines, he must so declare to the meeting and any such business not properly
brought before the meeting must not be transacted.
A special meeting of Professionals Group stockholders may be called at any
time by the chairman of the board or the president of Professionals Group, or by
a majority of the members of the Professionals Group Board then in office, or by
stockholders owning, in the aggregate, not less than 25% of all the shares
entitled 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 Professionals Group, or by a majority
of the members of the Professionals Group Board then in office, or by
stockholders as above provided, Professionals Group's corporate secretary must
prepare, sign and mail the notices requisite to such meeting.
152
<PAGE> 166
Notwithstanding the foregoing provisions of Professionals Group's First
Amended and Restated Articles of Incorporation, the MBCA entitles the holders of
not less than 10% of the shares of Professionals Group Common Stock entitled to
vote at a meeting to apply to the circuit court of Ingham County, Michigan and,
upon good cause shown, to obtain a court order that a special meeting of
stockholders be held.
Professionals Group's Charter Documents do not permit a stockholder to
participate in an annual meeting or special meeting of Professionals Group
stockholders by a conference telephone or by other similar communications
equipment.
PPTF. No proposals have ever been submitted for consideration at any
meeting of Members of PPTF. The PPTF Charter Documents do not contain any
meeting provisions analogous to the provisions of Professionals Group's First
Amended and Restated Articles of Incorporation that are described above. Unlike
the MBCA, the Florida Insurance Code does not provide Members of PPTF with the
right to apply to a court to cause a special meeting of Members of PPTF to be
held.
DIRECTOR/TRUSTEE LIABILITY AND INDEMNIFICATION
As permitted by the MBCA, Professionals Group's First Amended and Restated
Articles of Incorporation provide that a director of Professionals Group will
not be personally liable for monetary damages for breach of the director's
fiduciary duty as a director. Under the MBCA, a limitation on a director's
liability such as that contained in Professionals Group's First Amended and
Restated Articles of Incorporation does not eliminate or limit the director's
liability for breaches of the duty of loyalty, for acts or omissions not made in
good faith or which involve intentional misconduct or a knowing violation of
law, or for any transaction in which the director derived an improper personal
benefit. The PPTF Charter Documents and the Florida Insurance Code do not
contain provisions analogous to the foregoing provisions.
The MBCA and the PPTF Charter Documents provide similar rights to indemnity
and expense advancement. Accordingly, the rights to indemnity and expense
advancement provided to the directors of Professionals Group and the trustees of
PPTF are substantially similar. Both Professionals Group and PPTF maintain
directors and officers' liability insurance with an unrelated insurance company.
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES ACT
MAY BE PERMITTED TO DIRECTORS, OFFICERS OR PERSONS CONTROLLING PROFESSIONALS
GROUP PURSUANT TO THE FOREGOING PROVISIONS, PROFESSIONALS GROUP HAS BEEN
INFORMED THAT IN THE OPINION OF THE COMMISSION SUCH INDEMNIFICATION IS AGAINST
PUBLIC POLICY AS EXPRESSED IN THE SECURITIES ACT AND IS THEREFORE UNENFORCEABLE.
IN THE EVENT A CLAIM FOR INDEMNIFICATION AGAINST SUCH LIABILITIES (OTHER THAN
THE PAYMENT BY PROFESSIONALS GROUP OF EXPENSES INCURRED OR PAID BY A DIRECTOR,
OFFICER OR CONTROLLING PERSON OF PROFESSIONALS GROUP IN A SUCCESSFUL DEFENSE OF
ANY ACTION, SUIT OR PROCEEDING) IS ASSERTED BY SUCH DIRECTOR, OFFICER OR
CONTROLLING PERSON IN CONNECTION WITH THE SECURITIES BEING REGISTERED PURSUANT
TO THE REGISTRATION STATEMENT, PROFESSIONALS GROUP WILL, UNLESS IN THE OPINION
OF ITS COUNSEL THE MATTER HAS BEEN SETTLED BY CONTROLLING PRECEDENT, SUBMIT TO A
COURT OF APPROPRIATE JURISDICTION THE QUESTION OF WHETHER SUCH INDEMNIFICATION
IS AGAINST PUBLIC POLICY AS EXPRESSED IN THE SECURITIES ACT AND WILL BE GOVERNED
BY THE FINAL ADJUDICATION OF SUCH ISSUE.
DIVIDENDS
Professionals Group. Under the MBCA, Professionals Group may not make
distributions to its stockholders if, after giving effect to the distribution,
it would not be able to pay its debts as they become due in the usual course of
business, or its total assets would be less than the sum of its total
liabilities plus, unless its articles of incorporation permit otherwise, the
amount that would be needed, if Professionals Group were to be dissolved at the
time of the distribution, to satisfy the preferential rights upon dissolution of
stockholders whose preferential rights are superior to those receiving the
distribution.
153
<PAGE> 167
PPTF. PPTF's ability to declare and pay dividends is regulated under the
Florida Insurance Code. Historically, PPTF has not paid cash dividends to its
Members. See "CERTAIN REGULATORY CONSIDERATIONS."
CHARTER AMENDMENTS
Generally speaking, under the MBCA, a corporation's charter may be amended
by the affirmative vote of a majority of the outstanding stock entitled to vote
thereon, and a majority of the outstanding stock entitled to vote thereon as a
class, subject to such supermajority vote requirements as may be provided for in
the corporation's charter. Except for certain provisions thereof which are
subject to supermajority vote requirements as described above, Professionals
Group's First Amended and Restated Articles of Incorporation may be amended by
the affirmative vote of a majority of the outstanding shares of Professionals
Group Common Stock. Similarly, PPTF's Amended Trust Agreement dated January 1,
1987 may be amended by the affirmative vote of a majority of the Members of
PPTF.
Professionals Group. Under the MBCA, the stockholders or the board of
directors of the corporation may adopt, amend or repeal the bylaws unless the
articles of incorporation or bylaws of the corporation provide that the power to
adopt new bylaws is reserved exclusively to the stockholders or that the bylaws
or any particular bylaw shall not be altered or repealed by the board of
directors. Professionals Group's First Amended and Restated Articles of
Incorporation provide that Professionals Group's bylaws may be amended or
repealed by a majority vote of the Professionals Group Board. As indicated
above, the adoption, amendment or repeal of Professionals Group's bylaws by its
stockholders requires the affirmative vote of the holders of not less than
three-quarters of the outstanding shares of capital stock of Professionals Group
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, the affirmative vote of not 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 or repeal recommended to stockholders by the affirmative vote of not
less than two-thirds of the Professionals Group Board, in which case such
adoption, amendment or repeal requires only the vote, if any, required under the
MBCA.
PPTF. PPTF's By-laws provide that such By-laws may be altered, amended,
repealed or added to by a two-thirds vote of the PPTF Board. Proposed changes
are to be voted at the next regular meeting after the proposed change, but not
earlier than 30 days after the proposed change.
DISSOLUTION
Professionals Group. Under the MBCA, the voluntary dissolution of
Professionals Group must be approved by the Professionals Group Board and
Professionals Group's stockholders. Dissolution, as such, does not terminate the
corporation's existence but prohibits the continuation of business except for
the purpose of the liquidation or "winding up" of the corporation and the final
distribution of its assets. The basic rule governing liquidating distributions
under the MBCA is that the corporation must pay or make provision for its debts,
obligations and liabilities before making any such distributions to
stockholders. Generally speaking, after the payment of or provision for such
claims, the corporation's remaining assets will be distributed, usually in cash
but possibly in kind, first to any holders of preferred stock according to the
liquidation preferences and rights of such preferred stock, then to any holders
of equity securities with prior than normal liquidation rights, and then pro
rata among the holders of shares of common stock.
PPTF. PPTF's Amended Trust Agreement dated January 1, 1987 provides that in
the event of the dissolution of PPTF, whether voluntary or involuntary, the PPTF
Board shall distribute the assets of PPTF for the benefit of the Members in that
proportion that the Members of PPTF paid premiums to PPTF at the last date upon
which such premiums were collected from each Member. Such payments may be made
after the PPTF Board has satisfied the requirements of all applicable Florida
laws or rules or regulations of the Florida Insurance Department in providing
the appropriate reserves and other funds necessary to comply with such laws,
rules and regulations.
154
<PAGE> 168
OTHER MATTERS
Although the MBCA contains a provision permitting stockholder action by
less than unanimous written consent, it requires a provision to that effect to
be included in a corporation's articles of incorporation. Because Professionals
Group's First Amended and Restated Articles of Incorporation do not contain a
provision authorizing stockholder action by less than unanimous written consent,
stockholders of Professionals Group, and Members of PPTF who become stockholders
of Professionals Group subsequent to the INSCO Merger, will not have this right.
There are no comparable provisions in the Florida Insurance Code or the PPTF
Charter Documents governing consents by Members of PPTF.
The MBCA provides dissenters' rights of appraisal that are similar to those
provided under the Florida Insurance Code and the FBCA. The MBCA expressly
authorizes stockholders of a Michigan corporation to exercise dissenters' rights
with respect to certain amendments to the articles of incorporation of such
Michigan corporation which adversely affect the rights of the class of shares
held by them. The MBCA also expressly permits stockholders to exercise
dissenters' rights of appraisal in connection with the sale or exchange of all
or substantially all of the property of a Michigan corporation if the
stockholder is entitled to vote thereon. However, holders of shares of
Professionals Group Common Stock will not have dissenters' rights under the MBCA
in connection with, or as a result of, the matters to be acted upon at the
Professionals Group Annual Meeting. See "THE MEETINGS -- Dissenters' Rights" and
"THE TRANSACTIONS -- Dissenters' Rights."
Members of PPTF who deliver to PPTF a notice of intent to demand payment
for their Membership Rights before the vote of Members is taken at the PPTF
Special Meeting and who do not vote in favor of the Merger Proposal, and further
comply with the other provisions of the Florida Insurance Code and the FBCA,
regarding the rights of dissenting Members, will be paid the fair value for
their Membership Rights. Under Florida law, if Professionals Group and a
dissenting Member are unable to agree upon the fair value of such Member's
Membership Rights, then such fair value will be determined in a judicial
proceeding. None of Professionals Group, PICOM and PPTF can make any
representation as to the outcome of such a proceeding and each dissenting Member
of PPTF should recognize that such a proceeding could result in a determination
of fair value that is lower than, higher than, or equivalent to, the value of
the shares of Professionals Group Common Stock otherwise issuable to such Member
upon consummation of the transactions contemplated by the Merger Agreement.
Consummation of the transactions contemplated by the Merger Agreement is subject
to, among other things, the condition that the percentage interests of those
Members of PPTF perfecting their dissenters' rights, when aggregated, not exceed
10% of the percentage interests of all Members of PPTF taken as a whole. For
information regarding the procedures to be followed by Members of PPTF to
dissent from the Merger Proposal, see "THE MEETINGS -- Dissenters' Rights," "THE
TRANSACTIONS -- Dissenters' Rights," and "ANNEX H -- CERTAIN PROVISIONS OF THE
FLORIDA BUSINESS CORPORATION ACT, AS AMENDED, REGARDING DISSENTERS' RIGHTS."
The MBCA and the FBCA provide similar voting rights with respect to
mergers, sales of substantially all of the assets of a corporation and other
extraordinary corporate transactions. The Florida Insurance Code also provides
voting rights with respect to such extraordinary corporate transactions, but the
vote required to approve such transactions is generally greater than that
required under either the MBCA or the FBCA.
INFORMATION REGARDING THE PROFESSIONALS GROUP ANNUAL MEETING
ELECTION OF DIRECTORS
The First Amended and Restated Articles of Incorporation of Professionals
Group provide that the Professionals Group Board shall consist of not less than
nine directors and not more than 18 directors, with the number of directors to
be determined from time to time by the Professionals Group Board. Currently, the
number of directors is 11. The Professionals Group Board is divided into three
classes with each class of directors elected to a three year term of office on a
rotating basis. At each annual meeting of stockholders, a class of directors is
elected to succeed the class of directors whose term of office expires at that
meeting. The term of office of four directors expires at the Professionals Group
Annual Meeting and the Professionals
155
<PAGE> 169
Group Board has nominated Mr. R. Kevin Clinton, John F. Dodge, Jr., Esq., H.
Harvey Gass, M.D., and Ann F. Putallaz, Ph.D., for election as directors of
Professionals Group at the Professionals Group Annual Meeting. The individuals
who are elected as directors at the Professionals Group Annual Meeting will hold
office for a term expiring at the Annual Meeting of Stockholders to be held in
the year 2001 and upon the election and qualification of their respective
successors or upon their earlier resignation or removal.
THE PROFESSIONALS GROUP BOARD RECOMMENDS THAT PROFESSIONALS GROUP
STOCKHOLDERS VOTE FOR THE ELECTION OF 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 AT THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD IN THE YEAR 2001 AND UPON THE ELECTION AND QUALIFICATION OF THEIR
SUCCESSORS OR UPON THEIR EARLIER RESIGNATION OR REMOVAL.
It is intended that the proxies solicited on behalf of the Professionals
Group Board (other than proxies in which the vote is withheld as to one or more
nominees) will be voted at the Professionals Group Annual Meeting for the
election of 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. If any
Professionals Group Board Nominee is unable to serve, the shares represented by
all such proxies will be voted for the election of such substitute as the
Professionals Group Board may recommend. At this time, the Professionals Group
Board knows of no reason why any of the Professionals Group Board Nominees might
be unable to serve, if elected.
The table below sets forth certain information regarding the composition of
the Professionals Group Board.
NOMINEES
<TABLE>
<CAPTION>
POSITIONS HELD DIRECTOR TERM
NAME AGE IN PROFESSIONALS GROUP SINCE EXPIRES
---- --- -------------------------------- -------- -------
<S> <C> <C> <C> <C>
R. Kevin Clinton, FCAS, MAAA 43 Director, Vice President, 1997 1998
Treasurer and Chief Financial
Officer
John F. Dodge, Jr., Esq 70 Director 1996 1998
H. Harvey Gass, M.D. 82 Director 1996 1998
Ann F. Putallaz, Ph.D. 52 Director 1996 1998
</TABLE>
DIRECTORS CONTINUING IN OFFICE
<TABLE>
<CAPTION>
POSITIONS HELD DIRECTOR TERM
NAME AGE IN PROFESSIONALS GROUP SINCE EXPIRES
---- --- -------------------------------- -------- -------
<S> <C> <C> <C> <C>
Jerry D. Campbell 57 Director 1996 1999
W. Peter McCabe, M.D. 58 Director, Chairman 1996 1999
William H. Woodhams, M.D. 60 Director 1996 1999
Donald S. Young, Esq. 61 Director 1996 1999
Victor T. Adamo, Esq. 50 Director, President and Chief 1996 2000
Executive Officer
John F. McCaffrey 60 Director 1996 2000
Isaac J. Powell, M.D. 57 Director 1996 2000
</TABLE>
See "MANAGEMENT AND OPERATIONS AFTER THE TRANSACTIONS -- Directors" for the
business experience of each of the directors of Professionals Group for at least
the past five years.
The executive officers of Professionals Group, who are elected annually by,
and serve at the pleasure of, the Professionals Group Board, consist of W. Peter
McCabe, M.D., Chairman; Victor T. Adamo, Esq., President and Chief Executive
Officer; Mr. R. Kevin Clinton, Vice President, Treasurer and Chief Financial
Officer; and Annette E. Flood, Esq., Secretary. See "MANAGEMENT AND OPERATIONS
AFTER THE TRANSACTIONS -- Directors" for the business experience of each of Dr.
McCabe and Messrs. Adamo
156
<PAGE> 170
and Clinton for at least the past five years. See "MANAGEMENT AND OPERATIONS
AFTER THE TRANSACTIONS -- Executive Officers" for the business experience of Ms.
Flood for at least the past five years.
No nominee or director or executive officer of Professionals Group is
related to any other nominee or director or executive officer of Professionals
Group (or of any of its subsidiaries) by blood, marriage or adoption, and there
are no arrangements or understandings between any nominee or director or
executive officer and any other person pursuant to which such nominee or
director or executive officer was nominated or elected a director or elected an
executive officer of Professionals Group or any of its subsidiaries.
BOARD OF DIRECTORS MEETINGS AND COMMITTEES
Meetings of the Professionals Group Board are generally held as required.
During 1997, the Professionals Group Board held 10 meetings. No director
attended fewer than 75% of the total number of meetings of the Professionals
Group Board held during 1997 and no director attended fewer than 75% of the
total number of meetings held by all Professionals Group Board committees on
which any such director served during 1997.
The Professionals Group Board has standing Executive, Audit and
Compensation Committees, the function and composition of which are set forth
below. The Professionals Group Board does not have a standing nominating
committee or a committee performing similar functions.
The Executive Committee is authorized to exercise the powers and authority
of the Professionals Group Board in the management and affairs of Professionals
Group, if the Professionals Group Board is not meeting, except as limited by the
MBCA and the Professionals Group Charter Documents. The members of this
committee are W. Peter McCabe, M.D., Victor T. Adamo, Esq., John F. Dodge, Jr.,
Esq., H. Harvey Gass, M.D. and Donald S. Young, Esq. During 1997, this committee
met two times.
The Audit Committee of the Professionals Group Board is authorized to
confer with the auditors and financial officers of Professionals Group and its
subsidiaries, review reports submitted by the auditors, establish or review, and
monitor compliance with, codes of conduct of Professionals Group and its
subsidiaries, inquire about procedures for compliance with laws and regulations
relating to the management of Professionals Group and its subsidiaries, and
report and make recommendations to the Professionals Group Board. The members of
this committee are Isaac J. Powell, M.D., William H. Woodhams, M.D., and Donald
S. Young, Esq. During 1997, this committee met two times.
The Compensation Committee of the Professionals Group Board is responsible
for recommending to the Professionals Group Board policies and levels of
compensation with respect to compensation and benefits of all executive officers
of Professionals Group and all key employees of Professionals Group and its
subsidiaries. Except as otherwise described in this Joint Proxy
Statement/Prospectus or the applicable plan document, the Compensation Committee
also serves as the administrative committee under the Professionals Group 1996
Long-Term Incentive Plan and the Professionals Group 1996 Non-Employee Directors
Stock Option Plan, and is responsible for administering such plans, including
designating employees to be granted options, prescribing the terms and
conditions of options granted under the plans, interpreting the plans and making
all other determinations deemed necessary for the administration of the plans.
The members of this committee are H. Harvey Gass, M.D., Mr. Jerry D. Campbell,
John F. Dodge, Jr., Esq., W. Peter McCabe, M.D., and Mr. John F. McCaffrey.
During 1997, this committee met three times.
DIRECTORS COMPENSATION AND BENEFITS
Directors who are not also employees of Professionals Group or a subsidiary
receive an annual retainer of $10,000 and an additional $1,000 for each meeting
of the Professionals Group Board or a committee attended plus reimbursement for
reasonable expenses in connection with attending such meetings. Such directors
also receive, annually, an option to purchase up to 500 shares of Professionals
Group Common Stock pursuant to the Professionals Group 1996 Non-Employee
Directors Stock Option Plan and are eligible to participate in Professionals
Group's Stock Purchase Plan.
157
<PAGE> 171
The general purposes of the Professionals Group 1996 Non-Employee Directors
Stock Option Plan are (i) to encourage non-employee directors of Professionals
Group to own Professionals Group Common Stock and (ii) to provide a means for
tying a portion of the compensation paid to non-employee Directors for their
service on the Professionals Group Board to the value of Professionals Group
Common Stock, thus more closely aligning the interests of such directors with
those of the stockholders of Professionals Group. Although the Professionals
Group Board is designated as the administrator of the Professionals Group 1996
Non-Employee Directors Stock Option Plan, neither the Professionals Group Board
nor any other person or body has any discretion to select the persons who
receive awards under the Professionals Group 1996 Non-Employee Directors Stock
Option Plan, the times at which awards are granted, or the terms and conditions
of such awards. Instead, all such matters are determined entirely by the terms
of the Professionals Group 1996 Non-Employee Directors Stock Option Plan itself.
So long as the Professionals Group 1996 Non-Employee Directors Stock Option
Plan remains in effect, and to the extent shares remain available, at the
adjournment of each organizational meeting of the Professionals Group Board
following an annual meeting of stockholders of Professionals Group, each person
who is then a non-employee Director of Professionals Group is automatically
granted a plan option covering 500 shares of Professionals Group Common Stock
(subject to adjustment as contemplated by the Professionals Group 1996
Non-Employee Directors Stock Option Plan) or, if less, the maximum number of
shares then permissible for that Director under the Professionals Group 1996
Non-Employee Directors Stock Option Plan. Subject to adjustment as contemplated
by the Professionals Group 1996 Non-Employee Directors Stock Option Plan, the
per share exercise price of each option granted under the Professionals Group
1996 Non-Employee Directors Stock Option Plan is the "fair market value" of a
share of Professionals Group Common Stock at the date the option is granted.
Ordinarily, each option granted under the Professionals Group 1996
Non-Employee Directors Stock Option Plan becomes exercisable on the first
anniversary of the option's grant date. However, upon the occurrence of a change
in control (as defined in the Professionals Group 1996 Non-Employee Directors
Stock Option Plan), all outstanding plan options that were not then otherwise
exercisable would be deemed to have become fully exercisable immediately prior
to such change in control. Each outstanding option terminates at the earlier of:
(i) the first anniversary of the date the grantee ceases to be a director of
Professionals Group and (ii) its expiration date (that is, the seventh
anniversary of the option's grant date). Each plan option is nontransferable,
except by will or the laws of descent and distribution, and is exercisable only
for cash and, during the lifetime of the grantee, only by the grantee.
Shares used for options granted under the Professionals Group 1996
Non-Employee Directors Stock Option Plan may be either treasury shares or new
issuances. Subject to adjustment as contemplated by the Professionals Group 1996
Non-Employee Directors Stock Option Plan, the aggregate maximum number of shares
that are available for settlement of plan options is 50,000 and the maximum
number available for any given individual is 5,000. If a plan option terminates
or expires without having been exercised in full, the shares subject to the
option immediately before such termination or expiration become available for
future awards under the Professionals Group 1996 Non-Employee Directors Stock
Option Plan. Pursuant to the Professionals Group 1996 Non-Employee Directors
Plan, in June, 1997 directors Campbell, Dodge, Gass, McCabe, McCaffrey, Powell,
Putallaz, Woodhams, and Young each received an option to purchase 500 shares of
Common Stock at an exercise price of $25.38 per share.
158
<PAGE> 172
MANAGEMENT REMUNERATION
Summary Compensation Table. The following table sets forth information
concerning compensation for services in all capacities awarded to, earned by or
paid to each of the five most highly compensated executive officers and/or
employees of Professionals Group and its subsidiaries (the "Named Professionals
Group Executives") for the last three completed fiscal years whose salary and
bonus exceeded $100,000 in 1997.
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
---------------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUT
--------------------------------------- --------------------------- ------
OTHER ANNUAL RESTRICTED STOCK OPTIONS/ LTIP ALL OTHER
NAME AND SALARY BONUS COMPENSATION AWARD(S) SARS PAYOUT COMPENSATION
PRINCIPLE POSITION YEAR ($) ($) ($)(1) ($) (#) ($) ($)(2)
------------------ ---- ------- ------- ------------ ---------------- -------- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Victor T. Adamo 1997 238,526 200,000 6,000 -- 60,000 -- 30,848
President and CEO 1996 223,751 19,186 12,000 66,150 -- -- 29,368
1995 214,731 20,765 10,500 10,624 -- -- 21,229
R. Kevin Clinton 1997 222,021 150,000 -- -- 40,000 -- 30,848
Vice President and 1996 217,861 18,906 -- 57,820 -- -- 29,368
Treasurer 1995 209,080 18,229 -- 10,445 -- -- 21,116
John O. Bashant 1997 135,460 75,000 -- -- 13,000 -- 27,163
Vice President 1996 130,250 14,540 -- 45,693 -- -- 26,583
Marketing and Sales 1995 125,000 14,392 -- 7,663 -- -- 21,902
Annette E. Flood 1997 124,620 125,000 -- -- 13,000 -- 25,533
Vice President, 1996 114,620 13,739 -- 40,915 -- -- 24,767
Secretary 1995 110,000 12,967 -- 7,363 -- -- 19,681
Darryl K. Thomas 1997 124,620 125,000 -- -- 13,000 -- 25,533
Vice President, 1996 114,620 13,739 -- 17,150 -- -- 24,220
Claims 1995 -- -- -- -- -- -- --
</TABLE>
- ---------------
(1) Amounts shown consist of director fees paid by PICOM Insurance Company.
(2) Amounts shown for 1997 consist of the following: (i) Mr. Adamo: matching
contribution to purchases of Professionals Group Common Stock under the
Professionals Group Stock Purchase Plan of $7,500 and contributions under
the PICOM Insurance Company Pension Plan and the PICOM Insurance Company
Employees' Savings and Retirement Plan (the "PICOM pension plans") for the
benefit of Mr. Adamo of $23,348; (ii) Mr. Clinton: matching contribution to
purchases of Professionals Group Common Stock under the Professionals Group
Stock Purchase Plan of $7,500 and contributions under the PICOM pension
plans for the benefit of Mr. Clinton of $23,348; (iii) Mr. Bashant: matching
contribution to purchase of Professionals Group Common Stock under the
Professionals Group Stock Purchase Plan of $7,500 and contributions under
the PICOM pension plans for the benefit of Mr. Bashant of $19,663; and (iv)
Ms. Flood: matching contribution to purchases of Professionals Group Common
Stock under the Professionals Group Stock Purchase Plan of $7,500 and
contributions under the PICOM pension plans for the benefit of Ms. Flood of
$18,033. Amounts shown for 1996 consist of the following: (i) Mr. Adamo:
matching contribution to purchases of Professionals Group Common Stock under
the Professionals Group Stock Purchase Plan of $7,500 and contributions
under the PICOM pension plans for the benefit of Mr. Adamo of $21,868; (ii)
Mr. Clinton: matching contribution to purchases of Professionals Group
Common Stock under the Professionals Group Stock Purchase Plan of $7,500 and
contributions under the PICOM pension plans for the benefit of Mr. Clinton
of $21,868; (iii) Mr. Bashant: matching contribution to purchases of
Professionals Group Common Stock under the Professionals Group Stock
Purchase Plan of $7,500 and contributions under the PICOM pension plans for
the benefit of Mr. Bashant of $19,083; (iv) Ms. Flood: matching contribution
to purchases of Professionals Group Common Stock under the Professionals
Group Stock Purchase Plan of $7,500 and contributions under the PICOM
pension plans for the benefit of Ms. Flood of $17,267; and (v) Mr. Thomas:
matching contribution to purchases of Professionals Group Common Stock under
the Professionals Group Stock Purchase Plan of $7,500 and contributions
under the PICOM pension plans for the benefit of Mr. Thomas of $16,720.
Amounts shown for 1995 consist of the following: (i) Mr. Adamo: matching
contribution to purchases of Professionals Group Common Stock under the
Professionals Group Stock Purchase Plan of $2,500 and contributions under
the PICOM pension plans for the benefit of Mr. Adamo of $18,729; (ii) Mr.
Clinton: matching contribution to purchases of
159
<PAGE> 173
Professionals Group Common Stock under the Professionals Group Stock
Purchase Plan of $2,500 and contributions under the PICOM pension plans
for the benefit of Mr. Clinton of $18,616; (iii) Mr. Bashant: matching
contribution to purchases of Professionals Group Common Stock under the
Professionals Group Stock Purchase Plan of $2,500 and contributions under
the PICOM pension plans for the benefit of Mr. Bashant of $19,402; and
(iv) Ms. Flood: matching contribution to purchases of Professionals Group
Common Stock under the Professionals Group Stock Purchase Plan of $2,500
and contributions under the PICOM pension plans for the benefit of Ms.
Flood of $17,181.
Aggregate Option/SAR Grants in Last Fiscal Year. The following table sets
forth certain information concerning stock options/SARs granted during 1997 to
the Named Professionals Group Executives.
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE GRANT DATE
GRANT OPTIONS/SARS EMPLOYEES IN OF BASE EXPIRATION PRESENT
NAME DATE GRANTED FISCAL YEAR PRICE ($/SH) DATE VALUE**
---- -------- ------------ ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Victor T. Adamo........ 09/20/97 60,000* 40.95 $37.00 02/12/07 $1,268,400
R. Kevin Clinton....... 09/20/97 40,000* 27.30 $37.00 02/12/07 $ 845,600
John O. Bashant........ 09/20/97 13,000* 8.87 $37.00 02/12/07 $ 274,820
Annette E. Flood....... 09/20/97 13,000* 8.87 $37.00 02/12/07 $ 274,820
Darryl K. Thomas....... 09/20/97 13,000* 8.87 $37.00 02/12/07 $ 274,820
</TABLE>
- ---------------
* A total of 146,500 options were issued in 1997 under the 1996 Professionals
Group Long Term Incentive Plan. All of these options are non-qualified stock
options, are subject to vesting in annual increments of 20% commencing
February 12, 1998 and expire at 5:00 p.m. on February 12, 2007.
** Based on the Black-Scholes Option Pricing Model adopted for use in valuing
executive stock options. The actual value, if any, an executive may realize
will depend upon the excess of the stock price over the exercise price on the
date the option is exercised, so that there is no assurance that the value
realized by an executive will be at or near the value estimated by the
Black-Scholes Model. The assumptions used in calculating the Black-Scholes
value of the options were expected volatility of .357, risk-free return to
6.29% and a dividend value of 0%, and nine years before exercise.
Aggregate Option/SAR Exercises and Fiscal Year-End Option/SAR Value
Table. The following table sets forth certain information concerning stock
options/SARs granted to the Named Professionals Group Executives.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
SHARES VALUE FISCAL YEAR-END(#) FISCAL YEAR-END($)
ACQUIRED ON REALIZED EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) ($) UNEXERCISABLE UNEXERCISABLE
---- ----------- -------- ------------------ ------------------
<S> <C> <C> <C> <C>
Victor T. Adamo..................... 0 0 0/60,000 * 0/360,000
R. Kevin Clinton.................... 0 0 0/40,000 * 0/240,000
John O. Bashant..................... 0 0 0/13,000 * 0/78,000
Annette E. Flood.................... 0 0 0/13,000 * 0/78,000
Darryl K. Thomas.................... 0 0 0/13,000 * 0/78,000
</TABLE>
- ---------------
* A total of 146,500 options were issued in 1997 under the 1996 Professionals
Group Long Term Incentive Plan. All of these options are non-qualified stock
options, are subject to vesting in annual increments of 20% commencing
February 12, 1998 and expire at 5:00 p.m. on February 12, 2007.
The above listed stock options were granted pursuant to the Professionals
Group 1996 Long-Term Incentive Plan, which is administered by the Compensation
Committee of the Professionals Group Board. Under the Professionals Insurance
Company Management Group 1996 Long Term Stock Incentive Plan, eligible
participants may be granted options to purchase shares of Professionals Group
Common Stock; shares
160
<PAGE> 174
of such stock or units denominated in such shares that are nontransferable and
subject to forfeiture for a designated restricted period; awards of the right to
receive the excess of the fair market value at time of exercise of a share of
Professionals Group Common Stock over a designated price determined at time of
grant; awards denominated in and/or which may be settled in such shares subject
to satisfaction of designated performance criteria during a designated
performance period; rights to receive the equivalent of dividends or other
distributions upon Professionals Group Common Stock; and other types of awards
denominated or payable in shares of Professionals Group Common Stock.
STOCK PURCHASE PLAN
Professionals Group has implemented a stock purchase plan (the
"Professionals Group Stock Purchase Plan") which permits employees and directors
of Professionals Group and its subsidiaries to purchase Professionals Group
Common Stock by means of payroll deduction. Under this plan, Professionals Group
may elect to match participant purchases. During 1997 Professionals Group
matched participant purchases at the rate of $1.25 (of which $1.00 was used to
purchase Professionals Group Common Stock and $.25 was applied to income taxes)
for each $1.00 of participant purchases up to a maximum participant purchase of
$6,000. (In the event that Professionals Group was not the direct employer of a
participant, the match amount was charged to the subsidiary that was the
employer of the participant.) Participants in this plan exercise all rights of
ownership with respect to shares of Professionals Group Common Stock purchased
for their respective accounts.
EMPLOYMENT SEVERANCE COMPENSATION PLANS
Professionals Group has established a Key Employee Retention Plan which
provides each executive of Professionals Group or any of its subsidiaries who is
designated as a "key employee" with a severance payment and certain insurance
and other benefits in the event that there is a change in control of
Professionals Group that is coupled with the actual involuntary or constructive
termination (as defined in the plan) of such executive within two years after
such change in control. The amount of the severance payment is equal to two-
times the executive's base salary plus bonus (average of last three years). For
a more complete description of this plan, see "INTERESTS OF CERTAIN
PERSONS -- Other Matters."
Professionals Group has established an "Employee Retention Plan" covering
certain full-time and regular part-time employees. Under this plan Professionals
Group will provide a covered employee with the option to receive a lump sum
severance payment equal to one year's W-2 pay and certain other benefits upon
the employee's termination of employment due to (i) the elimination of the
employee's position, (ii) a reduction in the employee's base salary by 10% or
more, (iii) the relocation of the employee's job site following a change in
control to a job site that is more than fifty miles from such employee's job
site at the time of the "change in control", or (iv) an involuntary change in
the employee's employment status from regular full-time to regular part-time,
any of which occur within one year after the acquisition of Professionals Group
by another organization, the merger of Professionals Group with another
organization where Professionals Group is not the controlling entity after the
merger, or liquidation of Professionals Group. Additional benefits include one
year of health insurance coverage, payment for earned vacation and career
assistance. For a more complete description of this plan, see "INTERESTS OF
CERTAIN PERSONS -- Other Matters."
COMPENSATION COMMITTEE REPORT
The Compensation Committee has responsibility for Professionals Group's
executive compensation policies and practices. The Compensation Committee
approves all elements of compensation for corporate officers and administers the
1996 Professionals Insurance Company Management Group Long-Term Incentive Plan,
which was approved by Professionals Group's stockholders in 1996 and provides
for certain incentive awards to officers, other executives and selected key
employees. (See "-- Management Remuneration" for a description of such plan and
the types of awards that may be made thereunder.) The Compensation Committee
regularly reports on its activities to the Professionals Group Board. The
Compensation Committee also obtains ratification by the non-employee members of
the Professionals Group Board of all items of compensation for the five
highest-paid executives. The Compensation Committee is comprised of five outside
161
<PAGE> 175
directors who are not officers or employees of Professionals Group or its
subsidiaries and who are not eligible to participate in any of the plans or
programs that the Compensation Committee administers. The Professionals Group
Compensation Committee's report on executive compensation follows:
The officers of Professionals Group and its subsidiaries, including
the Chief Executive Officer, are compensated through a combination of
salary and incentive compensation. The primary purposes of Professionals
Group's compensation program are to attract and retain qualified
individuals and to motivate and reward individuals based on performance.
Salary and annual incentive compensation awards reward senior executives
for their current performance and contributions. Awards under the 1996
Professionals Insurance Company Management Group Long-Term Incentive Plan
are provided to reward senior executives for taking action that contributes
to Professionals Group's long-term growth and success, and to link the
interests of such senior executives to those of Professionals Group's
stockholders. The Compensation Committee believes that making portions of
executive compensation subject to short-term and long-term performance will
further focus senior executives on the importance of balancing short-term
and long-term corporate interests, will provide an incentive for increasing
stockholder value over the long term, and will more closely align the
interest of senior executives with those of stockholders.
It is the goal of the Compensation Committee to establish salaries
that are competitive in comparison to market practices and reflect a senior
executive's scope of responsibilities, level of experience, individual
performance and contribution to the business. In establishing salaries, the
Compensation Committee reviews executive compensation survey data for
insurance companies of similar size and product lines. It also considers,
among other factors, job responsibilities and job performance, education,
training and market opportunities.
The Compensation Committee awards annual incentive compensation to
each senior executive based upon the Compensation Committee's assessment of
Professionals Group's performance against (i) certain pre-established
corporate goals during the prior year (including growth and financial
results), (ii) competitive factors, (iii) the market performance of
Professionals Group Common Stock, (iv) the contribution made by such senior
executive to Professionals Group's future performance, and (v) whether such
compensation will provide an appropriate reward and incentive for such
senior executive to sustain and enhance Professionals Group's long-term
performance.
The Compensation Committee encourages stock ownership by senior
executives. Prior to 1997, grants of restricted stock were made to senior
executives in recognition of Professionals Group's significant financial
progress and growth as well as the increased value of Professionals Group's
Common Stock during 1996 and prior years. In 1997, and in lieu of grants of
restricted stock, a total of 146,500 options to purchase shares of
Professionals Group Common Stock were awarded under the Professionals
Insurance Company Management Group 1996 Long Term Stock Incentive Plan (the
"1997 Stock Options").
The 1997 Stock Options were granted with an exercise price equal to
the fair market value of Professionals Group Common Stock on the date of
grant. All of the 1997 Stock Options are non-qualified stock options,
expire at 5:00 p.m. on February 12, 2007, and are subject to vesting in
annual increments of 20% over five years commencing February 12, 1998;
provided, however, that if the grantee is then in the employ of
Professionals Group or any affiliate, all of the 1997 Stock Options awarded
to such grantee will automatically vest upon a change in control of
Professionals Group. (It is to be noted that the transactions contemplated
by the Merger Agreement will not constitute a change in control of
Professionals Group for such purposes.) No 1997 Stock Option may be
exercised unless it has vested, and all of the 1997 Stock Options are
subject to termination and/or forfeiture under certain circumstances
(including death, retirement and termination of employment).
The Compensation Committee believes that the 1997 Stock Options will
provide an incentive for the creation of stockholder value over the long
term since the benefits to be derived from the 1997 Stock Options are
dependent upon an appreciation in the price of Professionals Group Common
Stock over a specified number of years. The Option/SAR Grants in Last
Fiscal Year Table appearing under "-- Management Remuneration" contains
additional information regarding the amounts and type of
162
<PAGE> 176
options issued under the 1996 Professionals Insurance Company Management
Group Long-Term Incentive Plan in 1997.
Professionals Group's executive officers are also eligible to
participate in compensation and benefit programs generally available to
other employees, such as the Professionals Group Stock Purchase Plan, the
PICOM Insurance Company Pension Plan, the PICOM Insurance Company
Employees' Savings and Retirement Plan, and supplemental life and
disability insurance programs.
For 1997, Professionals Group's most highly compensated executive
officer was Victor T. Adamo, President and Chief Executive Officer. With
respect to 1997, Mr. Adamo was paid $238,526 in salary, was awarded a
$200,000 bonus, and was granted 60,000 options to purchase shares of
Professionals Group Common Stock. (The options granted to Mr. Adamo were
issued under the 1996 Professionals Insurance Company Management Group
Long-Term Incentive Plan and represented 40.95% of the options granted
under such plan in 1997.) The Summary Compensation Table appearing under
"-- Management Remuneration" shows the amounts and type of compensation
paid to Mr. Adamo with respect to 1997, 1996 and 1995. The Option/SAR
Grants in Last Fiscal Year Table appearing under "-- Management
Remuneration" provides additional information with respect to the options
issued under the 1996 Professionals Insurance Company Management Group
Long-Term Incentive Plan in 1997.
The bases for the Compensation Committee's determinations regarding
Mr. Adamo's compensation for 1997 included the outstanding financial
results of the Company, taking into consideration Professionals Group's
strong performance in prior periods, the compensation factors described
above (including survey data on salary movements indicating an increase in
peer executives' salaries), and the success of Mr. Adamo's leadership in
improving Professionals Group's business position, his decisive management
of operational and strategic issues, the improved overall competitive
position of Professionals Group, and his drive to reinforce a corporate
culture of integrity and quality. Evidence of this success can be found in
the last sales price for Professionals Group Common Stock as reported on
the Nasdaq National Market (which increased approximately 95%, from $22.00
at December 31, 1996 to $43.00 at December 31, 1997) and the increased
market capitalization of Professionals Group (which also increased
approximately 95%, from $77.1 million at December 31, 1996 to $150.7
million at December 31, 1997). Further evidence of such success can be
found in Professionals Group's stronger balance sheet, increased revenues
and earnings, improved claims-paying-ability ratings, increased product and
geographical diversification, successful acquisitions prior to 1997, and
1997 transactions with MEEMIC. As in prior years, the key judgment the
Compensation Committee made in determining Mr. Adamo's 1997 compensation
was its assessment of his ability and dedication to enhance the long-term
value of Professionals Group for its stockholders by continuing to provide
the leadership and vision that he has provided throughout his tenure as
Professionals Group's President and Chief Executive Officer. For these
reasons, the Compensation Committee deems Mr. Adamo's compensation package
to be appropriate. The Compensation Committee's decisions relating to Mr.
Adamo's compensation were ratified by the Professionals Group Board.
In mid-1993, a new Section 162(m) was added to the Internal Revenue
Code of 1986, as amended. Subject to certain exceptions (including
exceptions relating to stock options and for "performance-based"
compensation if certain conditions are met), Section 162(m) of the Code
prohibits the deduction of compensation in excess of $1 million paid in any
year beginning with 1994 by a publicly-held corporation to any executive
named in such corporation's Summary Compensation Table for the year. For
1997, the compensation paid to each of the executive officers named in the
Company's Summary Compensation Table for 1997 was well below $1 million,
and the Compensation Committee expects the same will be true for the
current year. Consequently, for the present the Compensation Committee has
decided to defer consideration of any compensation policies relating to
Section 162(m) of the Code.
<TABLE>
<S> <C>
H. Harvey Gass, M.D., Chairman Jerry D. Campbell
John F. Dodge, Jr. W. Peter McCabe, M.D.
John F. McCaffrey
</TABLE>
163
<PAGE> 177
The Compensation Committee Report shall not be deemed incorporated by
reference into any filings by Professionals Group under the Securities Act or
the Exchange Act, except to the extent that Professionals Group specifically
incorporates this information by reference, and shall not otherwise be deemed
filed under the Securities Act or the Exchange Act.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee in 1997 were H. Harvey Gass,
M.D., Chairman, Jerry D. Campbell, John F. Dodge, Jr., W. Peter McCabe, M.D.,
and John F. McCaffrey.
Mr. Dodge performs certain legal services for Professional Group and its
subsidiaries. Mr. Dodge was paid $16,407 in 1997 for legal services and expenses
in connection with his representation of PICOM. Dr. H. Harvey Gass serves as
PICOM's Claims Medical Consultant. Dr. Gass was paid $32,800 in 1997 with
respect to consulting services rendered to PICOM.
No executive officer of Professionals Group served as a member of the
compensation committee (or other board committee performing equivalent functions
or, in the absence of any such committee, the entire board of directors) of
another entity, one of whose executive officers served on the compensation
committee of Professionals Group. No executive officer of Professionals Group
served as a director of another entity, one of whose executive officers served
on the compensation committee of Professionals Group. No executive officer of
Professionals Group served as a member of the compensation committee (or other
board committee performing equivalent functions or, in the absence of any such
committee, the entire board of directors) of another entity, one of whose
executive officers served as a director of Professionals Group.
164
<PAGE> 178
STOCK PERFORMANCE GRAPH
Set forth below is a line graph comparing the yearly percentage change in
the cumulative total shareholder return on Professionals Group Common Stock
against the cumulative total return of stock market index (Nasdaq Stock Market)
and Professional Group's peer group index (Nasdaq Insurance Stocks) for the
period of five years commencing January 1, 1993 and ended December 31, 1997. The
graph assumes a $100 investment on January 1, 1993 and the reinvestment of
dividends.
[GRAPH]
<TABLE>
<CAPTION>
Nasdaq Stock
Measurement Period Professionals Nasdaq Insurance Market (U.S.
(Fiscal Year Covered) Group Stocks Companies)
<S> <C> <C> <C>
1992 100.00 100.00 100.00
1993 102.67 103.13 114.80
1994 88.73 99.29 112.21
1995 175.45 140.78 158.70
1996 195.21 153.42 195.20
1997 381.55 229.73 239.53
</TABLE>
The Stock Performance Graph shall not be deemed incorporated by reference
into any filings by Professionals Group under the Securities Act or the Exchange
Act, except to the extent that Professionals Group specifically incorporates
this information by reference, and shall not otherwise be deemed filed under the
Securities Act and the Exchange Act.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires Professionals Group's directors
and executive officers, and persons who own more than 10% of a registered class
of Professionals Group's equity securities, to file with the Commission initial
reports of ownership and reports of changes in ownership of Professionals Group
Common Stock and other equity securities of Professionals Group. Officers,
directors and greater than 10% stockholders are required by the Commission
regulation to furnish Professionals Group with copies of all Section 16(a) forms
they file.
To Professionals Group's knowledge, based solely on a review of the copies
of such reports furnished to Professionals Group and written representations
that no other reports were required, all Section 16(a) filing requirements
applicable to its officers, directors and greater than 10 percent beneficial
owners were complied with during the year ended December 31, 1997, except for
Isaac J. Powell, M.D., who inadvertently failed to file on a timely basis a Form
4 in September reporting his purchase of Professionals Group Common Stock on
August 25, 1997. A Form 5 was subsequently filed in February 1998 reporting the
purchase of such shares.
165
<PAGE> 179
RELATED PARTY TRANSACTIONS
There are no related party transactions of Professionals Group except as
follows: John F. Dodge, Jr., Esq. performs certain legal services for
Professional Group and its subsidiaries. Mr. Dodge was paid $16,407 in 1997 for
legal services and expenses in connection with his representation of PICOM. Dr.
H. Harvey Gass serves as PICOM's Claims Medical Consultant. Dr. Gass was paid
$32,800 in 1997 with respect to consulting services rendered to PICOM.
In April 1997, Professionals Group and PICOM (a wholly-owned subsidiary of
Professionals Group) completed an agreement with Michigan Educational Employees
Mutual Insurance Company, a Michigan-domiciled specialty writer of personal
automobile and homeowners coverages for teachers and other members of the
educational community in Michigan ("MEEMIC"), whereby: (i) PICOM purchased from
MEEMIC a twelve-year, $21.5 million surplus note bearing interest at 8.5% per
annum (the "Surplus Note"); (ii) PICOM began reinsuring, on a quota-share basis,
40% of MEEMIC's net premiums effective July 1, 1997; (iii) Professionals Group
began providing MEEMIC with information systems services and certain consulting
services under a management services agreement for a base fee of $2.0 million
per year; and (iv) Professionals Group nominees were elected to all positions on
the Board of Directors of MEEMIC. (The election of Professionals Group nominees
to all positions on the Board of Directors of MEEMIC was a condition to PICOM's
purchase of the Surplus Note and to the Michigan Insurance Commissioner's
approval of such transactions.) Professionals Group also agreed to assist MEEMIC
in acquiring the net assets of Michigan Educators Insurance Agency, Inc.
("MEIA"), the exclusive distributor of MEEMIC insurance products.
On September 22, 1997, MEEMIC Insurance Services Corporation ("Services
Corp."), a newly formed subsidiary of MEEMIC, purchased the net assets of MEIA.
The purchase price equaled 3.75% of premiums written by Services Corp. through
July 2004, subject to a guaranteed minimum purchase price of $43.0 million. To
fund this purchase, Services Corp. paid cash of $22.5 million (utilizing the
proceeds of the Surplus Note), and agreed to pay $20.5 million to MEIA as
additional consideration through 2004, as provided for in the purchase
agreement. MEEMIC guaranteed payment of the first $3.0 million and Professionals
Group guaranteed payment of the final $17.5 million (payable in years 2001-2004)
of the purchase price. Professionals Group believes the likelihood that its
guarantee will become payable is minimal.
Professionals Group assisted MEEMIC in MEEMIC's acquisition of the net
assets of MEIA because of its belief that such acquisition enabled MEEMIC to
acquire greater control over the distribution and pricing of its insurance
products. Professionals Group anticipates that such control will enable MEEMIC
to increase the volume of its insurance business. Given the terms of PICOM's
reinsurance agreement with MEEMIC, an increase in the volume of MEEMIC's
insurance business will increase the amounts of insurance and insurance premiums
ceded to PICOM.
At a future date, Professionals Group and MEEMIC expect to pursue
demutualization of MEEMIC. It is anticipated that such demutualization will,
among other things, provide each entity with opportunities for product
diversification, and growth. It is also anticipated that demutualization will
enhance MEEMIC's access to capital by enabling it to utilize capital available
to and through Professionals Group. It is to be noted that such demutualization
would be subject to, among other approvals, approval by the Michigan
Commissioner of Insurance and the policyholders of MEEMIC. No specific timetable
or plan for demutualization has been established yet and there can be no
assurances that MEEMIC will be demutualized.
OTHER MATTERS
The Professionals Group Board is not aware of any business to come before
the Professionals Group Annual Meeting other than the matters described above in
this Joint Proxy Statement/Prospectus. However, if any other matters should
properly come before the Professionals Group Annual Meeting, it is intended that
holders of the proxies will act in accordance with their best judgment.
The consolidated financial statements of Professionals Group at December
31, 1997 and for each of the three years in the period ended December 31, 1997
have been audited by KPMG Peat Marwick LLP, independent certified public
accountants, as indicated in their report with respect thereto. As noted in KPMG
166
<PAGE> 180
Peat Marwick LLP's report, Professionals Group changed its method of accounting
for loss and loss adjustment expense reserves by eliminating discounting of such
reserves in 1995. A representative of KPMG Peat Marwick LLP is expected to
attend the Professionals Group Annual Meeting to respond to appropriate
questions and will have an opportunity to make a statement if he or she so
desires. The Professionals Group Board has yet to select its independent
auditors for the fiscal year ending December 31, 1998.
No person is authorized to give any information or to make any
representation other than that contained in this Joint Proxy
Statement/Prospectus, and if given or made, such information may not be relied
upon as having been authorized.
A copy of Professional Group's Annual Report on Form 10-K for the year
ended December 31, 1997 (without exhibits) is attached to this Joint Proxy
Statement/Prospectus as Annex A and will be furnished without charge to any
shareholder upon written request. Copies of such Form 10-K and other filings of
Professionals Group may also be obtained through Professionals Group's web site
at http://www.picm.com. All written requests should be directed to: Annette E.
Flood, Secretary, Professionals Insurance Company Management Group, 2600
Professionals Drive, Box 150, Okemos, Michigan 48805-0150.
LEGAL MATTERS
The legality of the Professionals Group Common Stock to be issued in
connection with the INSCO Merger, and certain other legal matters, will be
passed upon by Miller, Canfield, Paddock and Stone, P.L.C., 1400 North Woodward
Avenue, Suite 100, Bloomfield Hills, Michigan 48304. Certain legal matters will
be passed upon for PPTF by Steel Hector & Davis LLP, 1900 Phillips Point West,
777 South Flagler Drive, West Palm Beach, Florida 33401.
EXPERTS
The consolidated financial statements of Professionals Group as of December
31, 1997 and 1996, and for each of the years in the three year period ended
December 31, 1997, included in Professionals Group's Annual Report on Form 10-K
for the year ended December 31, 1997 and incorporated by reference in this Joint
Proxy Statement/Prospectus, which are referred to and made a part of this Joint
Proxy Statement/Prospectus and Registration Statement, have been audited by KPMG
Peat Marwick LLP, independent auditors, as set forth in their report thereon
included therein and incorporated by reference in this Joint Proxy Statement/
Prospectus and the Registration Statement. Such consolidated financial
statements are incorporated by reference in this Joint Proxy
Statement/Prospectus and in the Registration Statement upon such report given
upon the authority of such firm as experts in accounting and auditing. As noted
in KPMG Peat Marwick LLP's report, Professionals Group changed its method of
accounting for loss and LAE reserves by eliminating discounting of such reserves
in 1995. See "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE."
The consolidated financial statements of PPTF and subsidiary as of December
31, 1997, and 1996, and for each of the years in the three-year period ended
December 31, 1997, have been included herein and in the Registration Statement
in reliance upon the report of KPMG Peat Marwick LLP, independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing.
Representatives of KPMG Peat Marwick LLP are expected to be present at each
of the Meetings. These representatives will have an opportunity to make
statements if they so desire and will be available to respond to appropriate
questions.
STOCKHOLDER PROPOSALS
Any Professionals Group stockholder who wishes to submit, pursuant to Rule
14a-8 of the Commission's rules and regulations, a security holder proposal for
presentation to Professionals Group's 1999 Annual Meeting of Stockholders, and
for inclusion, if appropriate, in Professionals Group's proxy statement and the
167
<PAGE> 181
form of proxy relating to such annual meeting, must comply with the rules and
regulations of the Commission then in effect and must transmit such proposal via
registered or certified mail to Annette E. Flood, Secretary, Professionals
Insurance Company Management Group, 2600 Professionals Drive, P.O. Box 150,
Okemos, Michigan 48805-0150. Any such security holder proposal must be received
by the Secretary of Professionals Group not later than December 31, 1998.
GLOSSARY OF SELECTED MERGER RELATED TERMS
"Aggregate Earned Premium" is $56,037,359 (which is the aggregate of all
Earned PPTF Policy Premiums for the 12 months ending on the PPTF Record Date).
See also "GLOSSARY OF SELECTED INSURANCE TERMS" for an explanation of "earned
premium."
"Aggregate Merger Shares" means the 4,089,160 shares of Professionals Group
Common Stock into which, subject to the exercise of dissenters' rights, all
Membership Rights will be converted upon consummation of the transactions
contemplated by the Merger Agreement.
"Average Price" means 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 the
closing date with respect to the transactions contemplated by the Merger
Agreement.
"Earned PPTF Policy Premium" means the earned premium on a Member's PPTF
Policy for the 12 months ending on the PPTF Record Date. See also "GLOSSARY OF
SELECTED INSURANCE TERMS" for an explanation of "earned premium."
"Member" means the individual or entity who is the named insured on a PPTF
Policy.
"Membership Rights" means all of the rights of each Member under the laws
of the State of Florida, the PPTF Charter Documents, and each PPTF Policy with
respect to which such Member is a named insured.
"PPTF Policy" means an indemnity agreement issued by PPTF that is in effect
on the PPTF Record Date.
GLOSSARY OF SELECTED INSURANCE TERMS
A.M. Best Rating. A.M. Best Ratings are divided into "Secure" and
"Vulnerable" rating groups as follows. Secure Ratings: A++, A+ (Superior); A, A-
(Excellent); and B++, B+ (Very Good). Vulnerable Ratings: B, B- (Adequate); C++,
C+ (Fair); C, C- (Marginal); D (Very Vulnerable); E (Under State Supervision);
and F (In Liquidation).
Cede. To transfer to another insurer (the reinsurer) all or part of the
insurance risk underwritten by an insurer.
Claims-made policy. An insurance policy covering only those claims which
are reported during the policy period.
Combined ratio. The sum of the expense ratio and the loss and LAE ratio.
Earned premium. The prorated portion of an insurance premium which is no
longer considered prepaid as a result of the elapsed time the insurance policy
has been in force. For example, after six months, $12,000 of a prepaid $24,000
annual premium is considered earned premium.
Excess of loss reinsurance. A form of reinsurance in which the insurer
cedes to a reinsurer, and such reinsurer assumes, all or a portion of losses in
excess of a specified retention level up to a predetermined limit.
Expense ratio. The ratio of underwriting expenses to net premiums earned.
Incurred but not reported (IBNR). The liability for future payments on
losses which have occurred but have not yet been reported.
Loss adjustment expenses (LAE). The expenses of settling claims, including
legal and other fees.
168
<PAGE> 182
Loss and LAE ratio. The ratio of incurred losses and loss adjustment
expenses to premiums earned. Losses include increases in reserves for extended
reporting period claims.
Net premiums written. Premiums retained by an insurer after deducting
premiums on business ceded to others.
Occurrence Policy. An insurance policy covering losses occurring during the
policy period, without regard to when the claim is reported to the insurer.
Quota Share Reinsurance. A form of treaty or facultative reinsurance in
which the insurer cedes and the reinsurer assumes an agreed-upon percentage of
risks. Also known as proportional reinsurance.
Reinsurance. A procedure whereby an insurer remits or cedes a portion of
the premium to a reinsurer as payment to the reinsurer for assuming a portion of
the risk or liability under the policy. Reinsurance can be effected by
"treaties" under which all risks of a defined category, amount and type for a
primary insurer are covered, or on a "facultative" basis under which risks are
covered on an individual, contract-by-contract basis.
Reserves. Liability established by an insurer to reflect the estimated cost
of claim payments and related expenses that the insurer will ultimately be
required to pay with respect to the insurance it has underwritten.
Reserve redundancy. The amount by which the reserves currently established
by an insurer exceed the currently estimated cost of claim payments and related
expenses that the insurer will ultimately be required to pay.
Standard & Poor's ratings. Standard & Poor's Claims-Paying Ability Ratings
are divided into "Secure Range" and "Vulnerable Range" groupings as follows.
Secure Range: AAA (Superior); AA (Excellent); A (Good); and BBB (Adequate).
Vulnerable Range: BB (May be Adequate); B (Vulnerable); CCC (Extremely
Vulnerable); and R (Regulatory Action).
Statutory Accounting Practices (SAP). Those principles required by state
law which must be followed by insurers in submitting their financial statements
to state insurance departments.
Statutory surplus. The amount remaining after all liabilities of an
insurance company are subtracted from all of its admitted assets, applying
statutory accounting principles.
169
<PAGE> 183
INDEX TO FINANCIAL STATEMENTS OF
PHYSICIANS PROTECTIVE TRUST FUND
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditor's Report -- KPMG Peat Marwick LLP....... FS-2
Consolidated Balance Sheet as of December 31, 1997 and
December 31, 1996......................................... FS-3
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996 and 1995.......................... FS-4
Consolidated Statements of Changes in Fund Balance for the
Years Ended December 31, 1997, 1996 and 1995.............. FS-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996
and 1995.................................................. FS-6
Notes to Consolidated Financial Statements.................. FS-7
</TABLE>
FS-1
<PAGE> 184
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
FS-2
<PAGE> 185
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.
FS-3
<PAGE> 186
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.
FS-4
<PAGE> 187
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.
FS-5
<PAGE> 188
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.
FS-6
<PAGE> 189
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.
FS-7
<PAGE> 190
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).
FS-8
<PAGE> 191
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.
FS-9
<PAGE> 192
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>
FS-10
<PAGE> 193
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.
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
FS-11
<PAGE> 194
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>
FS-12
<PAGE> 195
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.
FS-13
<PAGE> 196
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>
FS-14
<PAGE> 197
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.
FS-15
<PAGE> 198
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>
FS-16
<PAGE> 199
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.
FS-17
<PAGE> 200
ANNEX A
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
ANNUAL REPORT ON FORM 10-K FOR THE
YEAR ENDED DECEMBER 31, 1997
(WITHOUT EXHIBITS)
A-1
<PAGE> 201
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM
--------------- TO
---------------
COMMISSION FILE NUMBER 0-21223
PROFESSIONALS INSURANCE COMPANY
MANAGEMENT GROUP
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
MICHIGAN 38-3273911
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
2600 PROFESSIONALS DRIVE 48864
OKEMOS, MICHIGAN (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (517) 349-6500
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, NO PAR VALUE PER SHARE
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The number of the registrant's shares of common stock, no par value per
share, outstanding as of March 16, 1998 was 3,505,750.
Based on the closing price of shares of the registrant's common stock as
reported on the Nasdaq National Market on March 16, 1998 ($41.50) the aggregate
market value of the shares of the registrant's common stock held by
non-affiliates of the registrant as of March 16, 1998 was $137,003,162.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Notice of Annual Meeting of Stockholders and
Proxy Statement for its 1998 Annual Meeting of Stockholders are incorporated by
reference in Part III hereof.
================================================================================
A-2
<PAGE> 202
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I
Item 1. Business.................................................... A-4
General..................................................... A-4
Products and Services....................................... A-4
Marketing................................................... A-4
Underwriting................................................ A-5
Claims Management........................................... A-6
Reserves and Losses......................................... A-6
Investments................................................. A-9
Reinsurance................................................. A-10
Competition................................................. A-11
Regulation.................................................. A-11
Subsidiaries................................................ A-15
Employees................................................... A-15
Forward-Looking Statements.................................. A-15
Glossary of Selected Insurance Terms........................ A-18
Item 2. Properties.................................................. A-19
Item 3. Legal Proceedings........................................... A-19
Item 4. Submission of Matters to a Vote of Security Holders......... A-19
Executive Officers of Registrant............................ A-20
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... A-21
Item 6. Selected Financial Data..................................... A-22
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. A-24
Financial Condition......................................... A-24
Results of Operations....................................... A-25
Liquidity and Capital Resources............................. A-27
Impact of Inflation and Changing Prices..................... A-30
Reinsurance................................................. A-30
Regulation.................................................. A-31
Effects of New Accounting Pronouncements.................... A-31
Year 2000 Compliance........................................ A-32
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk...................................................... A-32
Item 8. Financial Statements and Supplementary Data................. A-33
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. A-62
PART III
Item 10. Directors and Executive Officers of the Registrant.......... A-62
Item 11. Executive Compensation...................................... A-62
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ A-62
Item 13. Certain Relationships and Related Transactions.............. A-62
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... A-63
Signatures.............................................................. A-66
</TABLE>
A-3
<PAGE> 203
PART I
ITEM 1. BUSINESS
GENERAL:
Professionals Insurance Company Management Group ("Professionals Group,"
and together with its direct and indirect subsidiaries, the "Company") is a
Michigan business corporation that functions as an insurance holding company.
The Company had consolidated assets of $413.2 million and $357.4 million at
December 31, 1997 and 1996, respectively. Professionals Group was incorporated
on January 31, 1996 under the laws of the State of Michigan, its principal
executive offices are located at 2600 Professionals Drive, Okemos, Michigan
48864, and its telephone number is (517) 349-6500.
PRODUCTS AND SERVICES:
The principal product currently offered by the Company is medical
professional liability insurance for physicians, surgeons, dentists, hospitals
and other health care providers. Such insurance is primarily offered through
PICOM Insurance Company, a stock insurance company incorporated under Michigan
law in 1980 and a wholly owned subsidiary of Professionals Group ("PICOM").
Medical professional liability insurance provides insurance against the legal
liability of an insured (and against loss, damage or expense incident to a claim
of such liability) arising out of bodily injury, sickness, disease or death
sustained by a patient arising from an act or omission occurring in the
furnishing of health care services to a patient. PICOM is licensed to provide
such insurance in Florida, Kentucky, Indiana, Illinois, Iowa, Michigan,
Missouri, Ohio, Pennsylvania and Wisconsin and operates primarily in Michigan,
Illinois, Indiana and Ohio. ProNational Casualty Company, a stock insurance
company incorporated under the laws of Illinois in 1994 and a wholly owned
subsidiary of PICOM ("ProNational Casualty"), is licensed to provide such
insurance in Illinois.
In 1994, the Company expanded into other professional liability lines by
providing professional liability coverage to lawyers and law firms through
PICOM. The Company currently provides reinsurance to an unaffiliated lawyers
professional liability insurance company. See "Reinsurance."
Effective July 1, 1997, PICOM began reinsuring, on a quota-share basis, 40%
of the net personal lines insurance business of Michigan Educational Employees
Mutual Insurance Company, a Michigan domiciled specialty writer of personal
automobile and homeowners coverages for teachers and other members of the
educational community in Michigan ("MEEMIC"). See "Reinsurance" and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
PICOM and ProNational Casualty Company are rated A- by A.M. Best Company,
Inc. ("A.M. Best") and A- by Standard & Poor's Corporation ("Standard &
Poor's"). See "Glossary of Selected Insurance Terms" for descriptions of the
rating continuums utilized by A.M. Best and Standard & Poor's. In developing
their respective ratings, A.M. Best and Standard & Poor's each evaluate an
insurer's financial and operating performance including a quantitative
evaluation of profitability, leverage and liquidity and a qualitative evaluation
of spread of risk, appropriateness of reinsurance, quality and diversification
of assets, adequacy of reserves and surplus, and management experience. These
ratings are based on factors of concern to policyholders, agents and
intermediaries and are not directed towards the protection of investors.
MARKETING:
The Company is licensed to write its insurance products in ten states. The
Company currently markets its insurance products in Michigan, Illinois, Indiana,
Iowa and Ohio and intends to begin marketing its insurance products in Florida
and Pennsylvania in 1998. The Company has applied for licenses in Alabama,
Delaware, Georgia, Kansas, Maryland, Minnesota, New Jersey, North Carolina,
South Carolina, Tennessee, Virginia and West Virginia. There can be no
assurances as to whether or when such licenses will be granted.
The marketing and sales of the Company's insurance products is carried out
by the Company through its offices in Okemos, Michigan, Lisle, Illinois,
Indianapolis, Indiana and Columbus, Ohio, and in cooperation
A-4
<PAGE> 204
with local independent insurance agencies. The Company is primarily responsible
for general marketing activities such as advertising, product information,
convention participation and relationships with various professional
associations of which the Company's insureds are members. Such independent
insurance agencies are primarily responsible for the sale of the Company's
insurance products by pursuing leads generated by the Company's marketing
activities and through agency-generated leads in their local communities. For
the years ended December 31, 1997, 1996 and 1995, the Company wrote
approximately 85% of its premiums through independent agencies and approximately
15% of its premiums directly. For the years ended December 31, 1997, 1996 and
1995, the Company's top ten independent insurance agencies accounted for
approximately 55%, 58% and 55%, respectively, of the Company's direct written
premiums. In 1997, 1996 and 1995, one independent insurance agency individually
produced approximately 10% of the Company's direct written premiums.
The Company typically enters into written agreements with those independent
insurance agencies offering the Company's insurance products. These agreements
typically authorize the insurance agency to act as the Company's agent for the
sale and service of specified insurance products in a specific state. Such
agreements are for a stated duration (typically from one year to five years) and
are terminable only upon prior written notice. Each insurance agency executing
such an agreement acts as an independent contractor and is responsible for all
expenses incurred by it. These agreements also (i) provide for direct billing
and collection of all premiums by the Company, (ii) provide for specific
commissions payable to the insurance agency, (iii) provide for arbitration in
the event of disputes, and (iv) prohibit assignment by the insurance agency
without the prior written consent of the Company.
UNDERWRITING:
All underwriting decisions are made by the Company through its underwriting
staff. Each prospective insured is required to submit an application for
coverage that, among other things, reviews the professional training, area and
scope of practice and claims history of the prospective insured. Through its
underwriting process, which involves an evaluation of the application and, in
certain situations, may include supplemental on-site risk management
evaluations, the Company will assess the quality and pricing of the risk. In
making such assessment, the Company's underwriting process typically emphasizes
loss history, practice specialty and location.
The Company's insurance policy premiums are based upon several factors, the
most important of which are loss history, practice specialty and location of
practice. Generally, physicians practicing in surgical specialties (such as
neurosurgery, obstetrics, general surgery, orthopedic surgery and plastic
surgery) are assessed higher premiums than non-surgeons; and, practices located
in larger metropolitan areas are assessed higher premiums than practices located
in smaller urban areas and rural areas. For the years ended December 31, 1997,
1996 and 1995, approximately 60%, 63% and 68%, respectively, of the Company's
direct medical malpractice written premiums were generated from insureds
practicing in non-surgical risk groups and 40%, 37% and 32%, respectively, were
generated from insureds practicing in surgical risk groups. For the years ended
December 31, 1997, 1996 and 1995, approximately 50%, 51% and 52%, respectively,
of such written premiums were generated from insureds practicing in larger
metropolitan areas (such as metropolitan Detroit, Michigan and metropolitan
Chicago, Illinois) and 50%, 49% and 48%, respectively, of such written premiums
were generated from insureds practicing in smaller urban areas and rural areas.
Currently, the majority of medical professional liability policies issued
by the Company are "claims-made" policies, although approximately 18%, 13% and
13% of the Company's direct medical professional liability premiums during 1997,
1996 and 1995, respectively, were derived from "occurrence" policies. (A
claims-made policy is an insurance policy covering only those claims which occur
and are reported during the policy period. An occurrence policy is an insurance
policy covering losses occurring during the policy period, without regard to
when the claim is reported to the insurer. See "Glossary of Selected Insurance
Terms.")
A-5
<PAGE> 205
CLAIMS MANAGEMENT:
The Company emphasizes early evaluation and aggressive management of
claims. A claim is generally reported directly to the Company by the insured
after the insured has received a court summons or a pre-suit notice of claim.
The reported claim is logged in to a computerized data base by the Company's
claims staff, which then determines whether the potential loss is covered by an
insurance policy issued by the Company. If the claim is covered, it is then
assigned a claims professional for investigation and analysis. If the claim is
in litigation, the claim is also assigned to outside legal counsel selected by
the Company and specializing in professional liability claims. During 1997,
approximately 72% of the Company's claims were litigated and ultimately resolved
through settlement, dismissal or trial, and approximately 28% of the Company's
claims were resolved outside of the litigation process through settlement or the
abandonment of the claim by the plaintiff.
The Company's claims staff evaluates and establishes an initial reserve for
each claim within the first 90 days after notification of a claim. During the
life of a claim, the reserve for such claim is systematically monitored and
revised as new information about the claim develops. For litigated claims, the
Company's claims staff works closely with outside legal counsel to develop case
strategies and to foster full communications with the insured. Medical and/or
other professional experts are retained to assist in the analysis and defense of
claims. A claims committee comprised of experienced Company representatives and
outside medical specialists meets regularly to provide medical insights and
input for cases involving complex claims. The Company's claims staff meets on a
weekly basis to review cases scheduled for trial. The Company's claims staff
frequently attends court settlement conferences along with outside legal counsel
and monitors cases during trial.
RESERVES AND LOSSES:
The Company establishes balance sheet reserves based on its estimates of
the future amounts necessary to pay claims and expenses associated with
investigation and settlement of claims. These estimates include two components:
case reserves and bulk reserves. Case reserves are estimates of future losses
and loss adjustment expenses ("losses and LAE") for reported claims and are
established by the Company's claims department. Bulk reserves, which include a
provision for losses that have occurred but have not been reported to the
Company as well as development on reported claims, are the difference between
(i) the sum of case reserves and paid losses and (ii) an actuarially determined
estimate of the total losses and LAE necessary for the ultimate settlement of
all reported claims and incurred but not reported claims, including amounts
already paid.
Loss and loss adjustment expense 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. The assumptions used in
establishing the Company's reserves are regularly reviewed and updated by
management as new data becomes available. Any adjustments necessary are
generally reflected in current operations.
The following table sets forth a reconciliation of beginning and ending
reserves for losses and LAE as shown in the Company's consolidated financial
statements for the years indicated. See also Note 9 to the Company's
consolidated financial statements.
A-6
<PAGE> 206
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year................. $219,919 $199,605 $188,544
Less reinsurance balances recoverable...... (19,206) (14,186) (3,760)
-------- -------- --------
Net balance, beginning of year............. 200,713 185,419 184,784
-------- -------- --------
Incurred related to:
Current year............................. 83,466 65,986 63,027
Prior years.............................. (26,341) (17,618) (27,469)
-------- -------- --------
Total incurred........................ 57,125 48,368 35,558
-------- -------- --------
Effect of change in accounting method...... -- -- 12,310
Loss and loss adjustment expense reserves
assumed.................................. -- 4,119 --
-------- -------- --------
Paid related to:
Current year............................. 10,512 4,352 3,053
Prior years.............................. 32,015 32,841 44,180
-------- -------- --------
Total paid............................ 42,527 37,193 47,233
-------- -------- --------
Net balance, end of year................... 215,311 200,713 185,419
Plus reinsurance balances recoverable...... 23,840 19,206 14,186
-------- -------- --------
Balance, end of year....................... $239,151 $219,919 $199,605
======== ======== ========
</TABLE>
The following table presents the development of the net liability of
undiscounted reserves for losses and LAE for the calendar years 1988 through
1997. (Through 1994, the Company's losses and LAE reserves were discounted.
Effective January 1, 1995, this practice was discontinued). The amounts shown
for each year on the top line of the table present the Company's estimate of its
losses and LAE reserves as originally reported to stockholders. (The losses and
LAE reserves as originally reported are presented net of reinsurance
recoverables relating to unpaid losses through 1991, net of losses and LAE
reserve discount through 1994, and gross of such amounts thereafter). The net
liability-end of year line represents the undiscounted estimated amount of
unpaid losses and LAE for claims arising in all prior years that were unpaid at
the balance sheet date, including losses that had been incurred but not yet
reported, net of reinsurance ceded. The portion of the table labeled "cumulative
paid as of" shows the net cumulative payments for losses and LAE made in
succeeding years for losses incurred prior to the balance sheet date. The next
portion of the table shows the re-estimated amount of the previously recorded
loss and LAE reserves based on experience as of the end of each
A-7
<PAGE> 207
succeeding year, followed by a line indicating the change from the original
estimate to the most current re-estimate.
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE RESERVE DEVELOPMENT
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------------------------------------------
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loss & LAE Reserves
as originally
reported........... $150,745 $162,509 $167,982 $183,603 $184,758 $191,220 $188,544 $199,605 $219,919 $239,151
Less reinsurance
recoverable........ (2,403) (4,040) (3,760) (14,186) (19,206) (23,840)
Add pro forma change
to reflect
elimination of
discount........... 43,637 41,161 32,781 27,839 16,568 12,616 12,310 -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net liability -- end
of year............ $194,382 $203,670 $200,763 $211,442 $198,923 $199,796 $197,094 $185,419 $200,713 $215,311
Cumulative paid as
of:
One year later....... 44,596 42,611 35,703 43,300 36,220 42,816 44,180 32,841 32,015
Two years later...... 84,376 73,226 69,720 68,512 65,570 73,183 70,008 55,856
Three years later.... 108,547 99,872 87,375 88,126 84,334 88,507 83,165
Four years later..... 126,619 110,475 99,051 99,732 92,666 94,909
Five years later..... 134,396 118,884 107,379 104,815 96,447
Six years later...... 141,288 125,012 111,347 107,631
Seven years later.... 146,704 128,772 113,718
Eight years later.... 150,016 130,914
Nine years later..... 151,368
Re-estimated net
liability as of:
End of year.......... 194,382 203,670 200,763 211,442 198,923 199,796 197,094 185,419 200,713 215,311
One year later....... 206,473 198,911 192,046 183,353 171,318 173,013 169,625 167,778 174,372
Two years later...... 202,528 191,402 172,650 167,450 152,998 158,403 158,756 141,779
Three years later.... 191,995 173,376 161,494 151,492 145,128 149,654 143,556
Four years later..... 180,919 165,398 146,942 147,193 136,749 139,493
Five years later..... 175,759 155,570 144,384 140,589 132,043
Six years later...... 169,167 154,533 138,998 137,978
Seven years later.... 170,139 151,591 134,584
Eight years later.... 168,731 153,135
Nine years later..... 170,428
Net cumulative
redundancy......... 23,954 50,535 61,179 73,464 66,880 60,303 53,538 43,640 26,341
</TABLE>
In evaluating the information in the table above, it should be noted that
each column includes the effects of changes in amounts for prior periods. The
table does not present accident year or policy year development data. Conditions
and trends that have affected the development of liabilities in the past may not
necessarily occur in the future. Accordingly, it may not be appropriate to
extrapolate future redundancies or deficiencies based on this table.
As shown in the reserve development table, positive reserve development
exists for each of the years 1988 through 1996. Such positive reserve
development is mainly attributable to (i) the Company's practice of establishing
its loss and loss adjustment expense reserves conservatively, as it relates to
immaturely developed accident years, to minimize potential uncertainties, and
(ii) lower than expected claims costs associated in part with tort reform
legislation enacted in Michigan between 1986 and 1994. Such tort reform
legislation shortened the statute of limitations, introduced a statute of repose
with a six year limitation for adults, modified expert witness rules to require
more qualified expert witnesses and capped non-economic damages.
A-8
<PAGE> 208
The following table presents a reconciliation of reserves of the Company in
accordance with statutory accounting practices ("SAP") with reserves reflected
in the consolidated financial statements prepared in accordance with generally
accepted accounting principles ("GAAP") as of December 31, 1997 and 1996.
RECONCILIATION OF SAP RESERVES WITH GAAP RESERVES
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Loss and LAE reserves -- SAP basis..................... $204,653 $190,055
Add:
Discount............................................. 10,658 10,658
Provision for reinsurance on unpaid losses........... 23,840 19,206
-------- --------
Loss and LAE reserves -- GAAP basis.................... $239,151 $219,919
======== ========
</TABLE>
For SAP reporting, loss reserves are discounted at a three percent discount
rate, as permitted by insurance regulatory authorities. For GAAP reporting, the
Company does not discount reserves. Under SAP, loss and LAE reserves are
presented net of the provision for reinsurance, whereas under GAAP, loss and LAE
reserves are presented gross of reinsurance and amounts due from reinsurers are
presented as an asset.
INVESTMENTS:
The Company invests principally in debt securities such as United States
government obligations, U.S. government agency mortgage-backed securities,
tax-exempt municipal bonds, redeemable preferred stocks and investment grade
corporate bonds. Investment policy and the performance of independent investment
managers are reviewed quarterly by or on behalf of Professionals Group's Board
of Directors. The current investment policy establishes a target duration and
limits fixed income purchases (absent specific authorization of Professionals
Group's Board of Directors) to securities rated BBB/Baa or better by Moody's
Investor Services, Inc. ("Moody's"), Standard & Poor's, Duff & Phelps Inc. or
Fitch Investors Service Inc. The Company's independent investment manager
selects specific bond issues within these guidelines. The Company's investment
policy limits holdings in common stocks and preferred stocks, cumulatively, to
twenty percent of the Company's statutory surplus.
In general, the investment policy of the Company is to maximize after tax
investment yield, subject to constraints on investment quality, maturity and
liquidity. The Company's investment policy establishes a range of appropriate
allocation among various asset classes. The precise allocation varies depending
on an evaluation of the economic environment and on the Company's tax position.
Currently, the Company's investment portfolio consists primarily of United
States government agency, corporate and municipal bonds. As of December 31,
1997, only one of the rated securities in the Company's fixed income portfolio
was rated below investment grade (carrying value was $816,000). See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
As of December 31, 1997 and 1996, all fixed maturity securities were
classified as available-for-sale and carried at estimated fair value. For these
securities, temporary unrealized gains and losses, net of deferred federal
income taxes, are reported directly through stockholders' equity, and have no
effect on net income. As of December 31, 1997 and 1996, the estimated fair value
of fixed maturity securities exceeded the aggregate amortized cost by $4.7
million and $298,000, respectively, and stockholders' equity was increased by
those amounts, reduced by $1.6 million and $101,000, respectively, in deferred
federal income taxes. The increase in net unrealized gains was due to slightly
lower interest rates at year end 1997 as compared to year end 1996. See also
Notes 4 and 6 to the Company's consolidated financial statements. The Company's
fixed maturity investment portfolio is sensitive to interest rate changes. As of
December 31, 1997, a one hundred basis point increase in market interest rates
would decrease the value of this portfolio by approximately three and one-half
percent, whereas a one hundred basis point decrease in market interest rates
would increase the value of this portfolio by approximately three percent.
A-9
<PAGE> 209
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 Company cedes a material amount of its business to reinsurers to spread
risk and limit loss per exposure and to protect stockholders' equity from large
or unusual loss activity. As of December 31, 1997, the Company had both excess
of loss reinsurance (i.e., reinsurance in which the Company 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) and "errors and omissions" insurance (i.e., insurance which
protects the Company against losses in excess of policy limits claims).
The Company has various excess of loss and quota share reinsurance
agreements. As of December 31, 1997, the maximum current net retention on
business generated by Professionals Group's insurance subsidiaries, subject to
certain adjustments of risk on any single coverage per claim after reinsurance,
was $300,000. Effective January 1, 1998, the Company's net retention was
increased to $500,000 on all business. Individual losses are covered by the
excess of loss reinsurance on a per incident basis up to $5 million. The "errors
and omissions" insurance protects the Company against losses in excess of policy
limits claims up to $10 million, subject to a $500,000 retention for each claim.
See also Note 5 to the Company's consolidated financial statements.
The following table identifies the Company's most significant reinsurers,
their percentage participation in the Company's aggregate reinsured risk based
upon premiums paid by the Company during 1997 and their respective A.M. Best
ratings as of December 31, 1997. No other single reinsurer's percentage
participation in 1997 exceeded 3% of total ceded reinsurance premiums:
<TABLE>
<CAPTION>
1997 TOTAL % OF 1997
A.M. CEDED CEDED TOTAL CEDED
BEST REINSURANCE PREMIUMS PREMIUMS
RATING(1) BALANCES WRITTEN WRITTEN
--------- ----------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Underwriters Reinsurance Company.............. A+ $ 4,125 $ -- --
TIG Reinsurance............................... A 7,299 3,858 36.6%
PMA Reinsurance Corporation................... A+ 3,445 1,936 18.4%
Continental Casualty Company.................. A 3,014 1,708 16.2%
Odyssey Reinsurance Company................... A- 1,347 869 8.2%
Other......................................... -- 2,422 2,173 20.6%
------- ------- -----
$21,652 $10,544 100.0%
======= ======= =====
</TABLE>
- ---------------
(1) See "Glossary of Selected Insurance Terms" for a description of the rating
continuum utilized by A.M. Best. See also Note 5 to the Company's
consolidated financial statements.
The Company, through its reinsurance intermediary, annually reviews the
financial stability of all of its reinsurers. This review includes a ratings
analysis of each reinsurer participating in a reinsurance contract. On the basis
of such review, as of December 31, 1997 and 1996, the Company concluded that
there was no material exposure to uncollectible reinsurance balances payable to
the Company by its reinsurers. The Company has not experienced any material
difficulties in collecting amounts due from reinsurers (ceded reinsurance
balances) 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 Company to collect on
its aggregate reinsurance recoverables, or the inability of the Company's
reinsurers to make payments under the terms of reinsurance treaties (due to
insolvency or otherwise), could have a material adverse effect on the Company's
future results of operations and financial condition.
A-10
<PAGE> 210
Prior to 1996, the Company did not assume business from other insurance
companies except as follows: In an effort to remediate the variances in certain
regulatory ratios of ProNational Casualty, and in order to allow ProNational
Casualty to assume PICOM's A.M. Best Rating, ProNational Casualty and PICOM
entered into a quota share reinsurance contract whereby not less than 90% of the
insurance risks written by ProNational Casualty are reinsured by PICOM. This
reinsurance mechanism, which will not affect the Company's consolidated results,
is expected to stabilize the underwriting results of ProNational Casualty. See
"Regulation." In addition, on December 31, 1996, the Company assumed all of the
loss and loss adjustment expense reserves and unearned premiums of American
Medical Insurance Exchange. See "Subsidiaries."
During 1997, PICOM entered into an agreement with Michigan Lawyers Mutual
Insurance Company ("MLM") whereby PICOM ceded all of its Michigan lawyers
professional liability insurance policies in-force to MLM and reinsured 35% of
MLM's net premiums. As part of this arrangement MLM will provide certain
insurance support services to enable PICOM to introduce its lawyers professional
liability product into Illinois, Ohio and Indiana during 1998. The assumed
premiums earned and the assumed losses and loss adjustment expenses incurred in
connection with the MLM reinsurance agreement were $548,000 and $494,000,
respectively, for the year ended December 31, 1997.
Effective July 1, 1997, PICOM began assuming, on a quota-share basis, 40%
of the net personal automobile and homeowners insurance risks of MEEMIC. See
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources." The assumed premiums earned
and the assumed losses and loss adjustment expenses incurred in connection with
the MEEMIC reinsurance agreement were $20.1 million and $13.1 million,
respectively, for the year ended December 31, 1997.
COMPETITION:
The Company competes with numerous insurance companies as well as various
self-insurance mechanisms. Principal competitors in the Midwest consist of three
customer-owned local insurance companies (Michigan Physicians Mutual Liability
Company, Illinois State Medical Inter-Insurance Exchange and Michigan Hospital
Association Insurance Company) and several national companies (including The St.
Paul Companies, The Medical Protective Company, American International Group,
MMI Companies, Cincinnati Insurance Company, and CNA Insurance Companies). The
majority of these competitors have substantially greater financial resources
than does the Company.
Competition in the medical malpractice insurance industry may take several
forms, including pricing, service quality, breadth and flexibility of coverages,
method of sale, and insurance carrier financial stability and ratings. The
Company competes through name recognition and reputation, especially in its
Midwest markets, by emphasizing a high level of customer service to insureds,
and by using local insurance agencies to sell and distribute its insurance
products. The Company has attempted to balance its need for rate adjustments
with the goal of maintaining market share in a very competitive insurance
market. 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
term.
The success of the Company may also be influenced by general economic
conditions in the geographic markets served by it. No assurance can be given
that favorable economic conditions will exist in such markets.
REGULATION:
General. Insurance holding companies and insurance companies are
extensively regulated. Such regulation has had significant effect on the
operations of insurance holding companies and insurance companies in the past
and is expected to have significant effects in the future. Periodically,
legislation is considered and adopted which has resulted in, or that could
result in, further regulation or deregulation of insurance holding companies and
insurance companies. No assurance can be given as to whether any additional
legislation will be adopted or as to the effect such legislation would have on
the business of the Company.
A-11
<PAGE> 211
Insurance companies are subject to regulation by government agencies in the
states in which they are licensed. PICOM is licensed as a property and casualty
insurer in Michigan, Florida, Illinois, Indiana, Iowa, Kentucky, Missouri, Ohio,
Pennsylvania and Wisconsin. ProNational Casualty is licensed as a property and
casualty insurer in Illinois. The nature and extent of such regulation vary from
jurisdiction to jurisdiction, but typically involve prior approval of the
acquisition of control of an insurance company or of any company controlling an
insurance company, regulation of certain transactions entered into by an
insurance company with any of its affiliates, approval of premium rates, forms
and policies used for many lines of insurance, standards of solvency and minimum
amounts of capital and surplus which must be maintained, establishment of
reserves required to be maintained for unearned premium, losses and loss
adjustment expenses or for other purposes, limitations on types and amounts of
investments, restrictions on the size of risks which may be insured by a single
entity, licensing of insurers and agents, deposits of securities for the benefit
of policyholders, and the filing of periodic reports with respect to financial
condition and other matters. In addition, state regulatory examiners perform
periodic examinations of insurance companies. Such regulation is generally
intended for the protection of policyholders rather than security holders.
PICOM and ProNational Casualty principally write medical malpractice
insurance and additional requirements are placed upon them to report detailed
information with regard to the settlements or judgments against their respective
insureds. In addition to the reporting to the states of medical malpractice
settlements and judgments, payments must also be reported to the National
Practitioners Data Bank ("Data Bank"). Penalties attach if reports to the states
and to the Data Bank are not made.
Every insurance company is subject to a periodic examination under the
authority of the insurance commissioner of its state of domicile. Any other
state interested in participating in a periodic examination may do so. The last
periodic examination of PICOM was based on its December 31, 1995 statutory
financial statements and a report was issued on October 15, 1996. As of December
31, 1997, ProNational Casualty had yet to undergo a periodic examination.
Various states also conduct "market conduct examinations" which are periodic,
unscheduled examinations designed to monitor the compliance with state laws and
regulations concerning the filing of rates and forms. PICOM and ProNational
Casualty have not undergone a market conduct examination. Neither PICOM nor
ProNational Casualty was required to make any financial adjustments or change
any market conduct procedures as a result of any of these examinations.
Insurance companies are also affected by a variety of state and Federal
legislative and regulatory measures and judicial decisions that define and
extend the risks and benefits for which insurance is sought and provided. In
addition, individual state insurance departments may prevent premium rates for
some classes of insureds from reflecting the level of risk assumed by the
insurer for those classes. Such developments may adversely affect the
profitability of various lines of insurance.
Professionals Group is subject to regulation as an insurance holding
company because of its ownership of PICOM and is required to file information
relating to its capital structure, ownership, and financial condition and
general business operations of its insurance subsidiaries. Similarly, and in
addition to being regulated as an insurance company, PICOM is subject to
regulation as an insurance holding company because of its ownership of
ProNational Casualty and it is also required to file information relating to its
capital structure, ownership, and financial condition and general business
operations of its insurance subsidiaries. As insurance holding companies,
Professionals Group and PICOM are also subject to special reporting and prior
approval requirements with respect to transactions among affiliates.
Regulation of the insurance industry is undergoing continuous change and
the ultimate effect of such changes cannot be predicted. Regulations now
affecting the Company may be modified at any time and new regulations affecting
the Company may be enacted. There is no assurance that such modifications will
not adversely affect the business of the Company. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Regulation."
Change or Acquisition of Control. PICOM is a Michigan stock, property and
casualty insurance company organized under the Michigan Insurance Code of 1956,
as amended (the "Michigan Insurance Code"). ProNational Casualty is an Illinois
stock, property and casualty insurance company organized under the Illinois
Insurance Code. The Michigan Insurance Code and the Illinois Insurance Code all
provide that
A-12
<PAGE> 212
the acquisition or change of "control" of a domestic insurer or of any person
that controls a domestic insurer cannot be consummated without the prior
approval of the relevant insurance regulatory authority. A person seeking to
acquire control, directly or indirectly, of a domestic insurer or of any person
controlling a domestic insurer must generally file with the relevant insurance
regulatory authority an application for change of control (commonly known as a
"Form A") containing certain information required by statute and published
regulations and provide a copy of such Form A to the domestic insurer. In each
of Michigan and Illinois, control is generally presumed to exist if any person,
directly or indirectly, owns, controls, holds the power to vote or holds proxies
representing 10% or more of the voting securities of any other person.
In addition, many state insurance regulatory laws contain provisions that
require pre-notification to state agencies of a change in control of a
non-domestic admitted insurer in that state. While such pre-notification
statutes do not authorize the state agency to disapprove the change of control,
such statutes do authorize issuance of a cease and desist order with respect to
the non-domestic admitted insurer if certain conditions exist such as undue
market concentration.
Insolvency Funds; Mandatory Pools. Most states require admitted property
and casualty insurers to become members of insolvency or guaranty funds or
associations which generally protect policyholders against the insolvency of
such insurers. Members of the fund or association must contribute to the payment
of certain claims made against insolvent insurers. Maximum contributions
required by law in any one year vary between 1% and 2% of annual premium written
by a member in that state. No assessments from guaranty funds were charged to
the insurance subsidiaries of Professionals Group in 1997, 1996 or 1995.
Assessments from guaranty funds may, to a limited extent, be recovered through
future premium tax reductions.
Insurance companies are also required to participate in various mandatory
insurance facilities or in funding mandatory pools, which are generally designed
to provide insurance coverage for consumers who are unable to obtain insurance
in the voluntary insurance market. Pools are typically found in insurance lines
such as workers' compensation, homeowners and personal automobile insurance.
PICOM does not currently offer any of these insurance lines directly, but does
provide reinsurance to MEEMIC. Moreover, PICOM could offer such insurance lines
directly in the future. These pools typically require all companies writing
applicable lines of insurance in the state for which the pool has been
established to fund deficiencies experienced by the pool based upon each
company's relative premium writings in that state, with any excess funding
typically distributed to the participating companies on the same basis. To the
extent that these assessments are imposed on the insurance subsidiaries of
Professionals Group, they could have an adverse effect on Professionals Group or
its insurance subsidiaries.
Restrictions on Dividends. Insurance companies and self-insurance trust
funds are subject to various state and regulatory restrictions, generally
applicable to each insurer in its state of incorporation, which limit the amount
of dividends or distributions by an insurer to its stockholders or
policyholders. The restrictions are generally based on certain levels of
surplus, investment income and operating income, as determined under statutory
accounting practices.
The Michigan Insurance Code and the Illinois Insurance Code regulate the
distribution of dividends and other payments to a holding company by its
insurance subsidiaries. Under each of the Michigan Insurance Code and the
Illinois Insurance Code, an insurer may pay dividends or distribute cash or
other property so long as such dividends or distributions, together with all
other dividends or distributions made within the preceding year, do not exceed
the greater of (i) 10% of the insurer's policyholders' surplus as of December 31
of the preceding year or (ii) the net income, not including realized capital
gains, for the twelve-month period ending December 31 of the preceding year,
with larger dividends payable only upon prior regulatory approval. Such
restrictions or any additional subsequently imposed restrictions may in the
future affect Professionals Group's ability to fund its operations, pay
principal and interest on its debt, pay its expenses and pay any cash dividends
to its stockholders. Future dividends from Professionals Group's subsidiaries
may also be limited by business considerations.
Risk-Based Capital. The National Association of Insurance Commissioners
(the "NAIC") has established risk-based capital ("RBC") requirements to assist
regulators in monitoring the financial strength and stability of property and
casualty insurers. Under the NAIC requirements, regulatory compliance is
A-13
<PAGE> 213
determined by a ratio of an insurer's regulatory total adjusted capital, as
defined by the NAIC, to its authorized control level of RBC, as defined by the
NAIC. Insurers below specific ratios are classified within certain levels, each
of which requires specific corrective action. The levels and ratios are as
follows:
<TABLE>
<CAPTION>
RATIO OF TOTAL ADJUSTED CAPITAL
TO AUTHORIZED CONTROL LEVEL
RBC
LEVEL (LESS THAN OR EQUAL TO)
----- -------------------------------
<S> <C>
Company action level........................ 2.0
Regulatory action level..................... 1.5
Authorized control level.................... 1.0
Mandatory control level..................... 0.7
</TABLE>
PICOM and ProNational Casualty have calculated their ratios of total
adjusted capital to authorized control level RBC and each were in excess of 4:1
at December 31, 1997. At December 31, 1997, PICOM's total adjusted capital was
$99.7 million, and its authorized control level RBC was $23.1 million, and
ProNational Casualty's total adjusted capital was $10.2 million, and its
authorized control level RBC was less than $1.0 million.
NAIC-IRIS Ratios. The NAIC's Insurance Regulatory Information System was
developed by a committee of state insurance regulators and is primarily intended
to assist state insurance departments in executing their statutory mandates to
oversee the financial condition of insurers operating in their respective
states. IRIS identifies 11 industry ratios and specifies "usual values" for each
ratio. Departure from the usual values on four or more ratios generally leads to
inquiries from individual state insurance commissioners.
In 1997, 1996 and 1995, PICOM did not have any ratios which varied from the
"usual value" range.
In 1995, ProNational Casualty had two ratios which varied from the "usual
value" range as follows:
<TABLE>
<CAPTION>
RATIO USUAL RANGE PRONATIONAL CASUALTY VALUE
----- ------------ --------------------------
<S> <C> <C>
Two year over-all operating ratio....... up to 100% 125%
Change in surplus....................... (10%) to 50% (26%)
</TABLE>
In 1996, ProNational Casualty had two ratios which varied from the "usual
value" range as follows:
<TABLE>
<CAPTION>
RATIO USUAL RANGE PRONATIONAL CASUALTY VALUE
----- ------------ --------------------------
<S> <C> <C>
Two year over-all operating ratio....... up to 100% 122%
Change in net writings.................. (33%) to 33% (99%)
</TABLE>
In 1997, ProNational Casualty had two ratios which varied from the "usual
value" range as follows:
<TABLE>
<CAPTION>
RATIO USUAL RANGE PRONATIONAL CASUALTY VALUE
----- ------------ --------------------------
<S> <C> <C>
Change in Surplus....................... (10%) to 50% 69%
Change in net writings.................. (33%) to 33% (99%)
</TABLE>
At present, no inquiries have been received from any state insurance
commissioner as a result of the "unusual values" for ProNational Casualty. In an
effort to remediate such "unusual values", and in order to allow ProNational
Casualty to assume PICOM's A.M. Best Rating, ProNational Casualty and PICOM
entered into a quota share reinsurance contract whereby not less than 90% of the
insurance risks written by ProNational Casualty are reinsured by PICOM. This
reinsurance mechanism, which will not affect the Company's consolidated results,
is expected to stabilize the underwriting results of ProNational Casualty.
Effect of Federal Legislation. Although the Federal government does not
directly regulate the business of insurance, Federal initiatives often affect
the insurance business in a variety of ways. Current and proposed Federal
measures which may significantly affect the insurance business include Federal
government participation in health care reform, product liability claims,
environmental regulation, pension regulation (ERISA), examination of the
taxation of insurers and reinsurers, minimum levels of liability insurance and
safety regulations.
A-14
<PAGE> 214
Tort Reform. On a state level, several states, including Michigan, have
adopted tort reforms designed to moderate the risk of practice to health care
providers. Although such legislation is being subjected to numerous
constitutional challenges, it generally has a positive impact by reducing
malpractice losses. Such legislation also tends to result in increased
competition because it causes the particular state to be more attractive to
other insurance companies seeking to expand their markets. The Company has seen
an increase in competition in its markets due, in part, to the passage of tort
reform.
On the Federal level, attempts to reform the delivery of medical care have
contained provisions that could, if adopted, have a material impact on the
Company and its insurance products. An example of such a change is the concept
of "enterprise liability" that was contained in President Clinton's health care
proposal. Under the enterprise liability concept, doctors would not bear
individual liability for malpractice events with such liability being borne by
the hospital or other enterprise in which the doctor practices. If enterprise
liability or a similar concept were adopted, insurers such as PICOM could be at
a competitive disadvantage since their business is concentrated in individual
physician risks and larger, more established, companies already provide medical
malpractice insurance for the enterprise risks.
SUBSIDIARIES:
Professionals Group has four direct wholly-owned subsidiaries and two
indirect wholly-owned subsidiaries. The direct wholly-owned subsidiaries are:
PICOM, PICOM Insurance Agency, Inc. ("PIA"), PICOM Financial Services
Corporation ("PFSC") and American Insurance Management Corporation ("AIMC"). The
indirect wholly-owned entities, all of which are wholly-owned subsidiaries of
PICOM, are: PICOM Claims Services Corporation ("PCSC") and ProNational Casualty.
PICOM is a stock, property and casualty insurer incorporated under the laws
of the State of Michigan in 1980. PICOM offers professional liability insurance
for physicians, surgeons, dentists, hospitals, other health care providers and
lawyers and law firms. The Company is licensed to provide such insurance
products in Michigan, Florida, Illinois, Indiana, Iowa, Kentucky, Missouri,
Ohio, Pennsylvania and Wisconsin. PIA is an inactive Michigan insurance agency
incorporated under the laws of the State of Michigan on March 31, 1981. PFSC is
an inactive business corporation incorporated under the laws of the State of
Michigan on May 29, 1986. 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 and was incorporated under the laws of the State of
Michigan on December 10, 1985. ProNational Casualty is a stock, property and
casualty insurer incorporated under the laws of the State of Illinois on
December 5, 1994. ProNational Casualty provided medical malpractice insurance to
physicians and physician corporations in Illinois through 1997.
EMPLOYEES:
The Company had 90 full-time employees and four part-time employees as of
December 31, 1997. None of these employees are covered by a collective
bargaining agreement. The Company believes that it enjoys good relations with
its personnel.
FORWARD-LOOKING STATEMENTS:
From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, new products and similar matters. The Private Securities Litigation
Reform Act of 1995 provides a safe harbor for forward-looking statements, which
are subject to risks and uncertainties. In order to avail itself of the safe
harbor, the Company notes that a variety of factors could cause its actual
results and experience to differ materially from the anticipated results or
other expectations expressed in its forward-looking statements. All of such
factors are difficult to predict and many are beyond the control of the Company.
These important factors include certain factors discussed elsewhere herein (such
as (i) future economic conditions in the regional and national markets in which
the Company competes; (ii) financial market conditions, including, but not
limited to, changes in interest rates; (iii) inflation; (iv) estimates of loss
reserves and trends in losses and LAE; (v) changing competition; and
A-15
<PAGE> 215
(vii) adverse changes in applicable law, regulations or rules governing
insurance holding companies and insurance companies, and environmental, tax or
accounting matters) and the following:
Market Conditions May Impact Results and Operations. A majority of the
direct insurance premium revenues of the Company are derived from medical
malpractice risks. Many factors influence the financial results of the medical
malpractice insurance business, several of which are beyond the control of the
Company. The supply of medical malpractice insurance, or the industry's
underwriting capacity, is determined principally by the industry's level of
capitalization, historical underwriting results, returns on investment and
perceived premium rate adequacy. Historically, the financial performance of the
medical malpractice insurance industry has tended to fluctuate in cyclical
patterns characterized by periods of greater competition in pricing and
underwriting terms and conditions (a "soft insurance market") followed by
periods of capital shortage and lesser competition (a "hard insurance market").
For several years, the medical malpractice insurance industry and the Company
have faced a soft insurance market that has generally resulted in lower premiums
and reduced profitability. Although the Company is endeavoring to offset lower
premiums charged through more selective underwriting practices, there can be no
assurance that these practices will be successful. There can be no assurances
regarding whether or when market conditions will improve, or the manner in
which, or the extent to which, changes in market conditions may impact the
results and operations of the Company.
Economic Conditions May Impact Results and Operations. Insurance companies
rely on the positive performance of their investment portfolios to offset
insurance losses and to enhance profitable results. Consequently, prevailing
economic conditions, particularly changes in market interest rates, may
significantly affect the operations of an insurance company that depend on its
net investment income. In addition, changes in interest rates also can affect
the value of an insurance company's interest-earning assets, which are comprised
of fixed and adjustable-rate investment securities. Generally, the value of
fixed-rate investment securities fluctuates inversely with changes in interest
rates. Changes in interest rates also can affect the average life of investment
securities. An insurance company is subject to reinvestment risk to the extent
that it is not able to reinvest prepayments at rates which are comparable to the
rates on the maturing investments.
Changes in market interest rates have resulted in significant changes in
the market value of the Company's portfolio of fixed maturity investments. As of
December 1997, such portfolio had a modified duration of approximately four
years and a market value that was $4.7 million more than the $308.9 million
amortized cost of such portfolio. As of December 31, 1996, such portfolio had a
modified duration of approximately four years and a market value that was
$298,000 more than the $286.0 million amortized cost of such portfolio. As of
December 31, 1997, a one hundred basis point increase in market interest rates
would decrease the value of this portfolio by approximately three and one-half
percent, whereas a one hundred basis point decrease in market interest rates
would increase the value of this portfolio by approximately three percent.
The success of the Company may also be influenced by general economic and
legal conditions in the geographic markets served by it and its respective
subsidiaries. No assurance can be given that favorable economic and legal
conditions will exist in such markets.
Health Care Industry Consolidation May Impact Results and Operations. The
Company derives a majority of its direct premium income from physicians and
other individual health care providers, physician groups, and smaller health
care facilities. The health care industry is undergoing rapid market driven
change and consolidation which may negatively impact the medical practice and
economic independence of physicians who are the primary customer base of the
Company. For example, the emergence of "managed care" has made it more difficult
for physicians to conduct a traditional fee-for-service practice and has caused
some physicians to leave private practice for employment with medical systems or
to join or contractually affiliate with managed care organizations or practice
management organizations. Such change and consolidation may result in the
elimination of, or a significant decrease in, the role of the physician in the
medical malpractice insurance purchasing decision. It could also result in
greater emphasis on the role of professional managers, who may seek to purchase
insurance on a price competitive basis and who may favor insurance companies
that are larger and more highly rated than the Company. In addition, such change
and
A-16
<PAGE> 216
consolidation could reduce medical malpractice premiums available to the Company
as groups of insurance purchasers generally retain more risk by accepting higher
deductibles and self insured retentions or by forming their own captive
insurance mechanisms.
The movement from a traditional fee-for-service practice to the managed
care environment may also result in an increase in the liability profile of the
Company's insureds. The majority of the Company's insured physicians practice in
primary care specialties such as internal medicine, family practice, general
practice and pediatrics. In the managed care environment, these primary care
physicians are being required to take on the role of "gatekeeper" and control
the use of specialty care by controlling access to specialists and by performing
certain procedures that would customarily be performed by specialists in a
fee-for-service setting. These practice changes may result in an increase in the
claims frequency and severity experienced by primary care physicians and by
their insurance carrier.
Underwriting Losses and Reserves Based on Actuarial Assumptions. The
Company collects premiums for the insurance coverage it provides. Such premiums
are based upon certain actuarial and other assumptions. Although Professionals
Group's insurance subsidiaries employ actuarial assumptions that they believe
are reasonable, such assumptions are, by their nature, estimates. To the extent
that the actuarial and other assumptions used by the Company prove to be
incorrect, it may incur unanticipated underwriting losses on the risks that it
insures. Medical malpractice claims and expenses may be paid over a period of
ten years or more, which is longer than most property and casualty insurance.
Trends in losses may therefore be slow to appear and accordingly, the reaction
of the Company, in terms of modifying underwriting practices and changing
premium rates, may lag underlying loss trends. In addition, inflation may
increase the ultimate loss costs of Professionals Group.
The loss and loss adjustment expense reserves established by the Company
are estimates of amounts needed to pay reported and unreported claims and
related loss adjustment expenses. The estimates are based on assumptions related
to the ultimate cost of settling such claims. If the reserves of the Company are
inadequate, it will be required to increase its reserves and thus reduce its net
income or stockholders' equity in the period in which the deficiency is
identified. Unanticipated underwriting losses or materially underestimated
reserves could have a material adverse effect on the Company.
Reliance on Reinsurance. In order to reduce risk and to increase its
underwriting capacity, the Company obtains reinsurance from unaffiliated
reinsurers (including domestic and foreign companies), although it retains a
portion of each risk reinsured. The Company is subject to credit risk with
respect to its reinsurers because reinsurance does not relieve the Company of
its original liability to its insureds for the risks ceded to reinsurers.
Although the Company believes that its reinsurance is maintained with
financially stable reinsurers and that any reinsurance security maintained is
adequate to protect its interests, the inability to collect on its reinsurance
recoverables, or the inability of its reinsurers to make payments under the
terms of reinsurance treaties (due to insolvency or otherwise), could have a
material adverse effect on its future results of operations and financial
position.
The amount and cost of reinsurance available to companies specializing in
medical professional liability insurance are subject, in large part, to
prevailing market conditions beyond the control of the Company. The ability of
the Company to provide professional liability insurance at competitive premium
rates and coverage limits on a continuing basis will depend in part upon its
ability to obtain adequate reinsurance in amounts and at rates that will not
adversely affect their competitive position. Although the Company anticipates
that it will continue to be able to obtain such reinsurance, there can be no
assurance that this will be the case.
Professionals Group is Dependent on Results and Operations of
Subsidiaries. Professionals Group is a legal entity separate and distinct from
its various subsidiaries. As a holding company with no significant operations of
its own, the principal sources of Professionals Group's funds are dividends and
other distributions from its subsidiaries, borrowings and sales of equity. The
rights of Professionals Group, and consequently its stockholders, to participate
in any distribution of assets of any of its subsidiaries is subject to prior
claims of policyholders, creditors and preferred stockholders, if any, of such
subsidiary (except to the extent claims of Professionals Group in its capacity
as a creditor are recognized), and to certain regulatory restrictions.
A-17
<PAGE> 217
Consequently, Professionals Group's ability to fund its operations, and to pay
debts, expenses and cash dividends to its stockholders may be limited.
Professionals Group may engage in activities in addition to providing
insurance through its subsidiaries. Such activities could include activities
related to providing insurance, such as claims and risk management services, and
activities unrelated to insurance, such as medical practice management services.
To the extent that Professionals Group engages in activities that are unrelated
to medical malpractice insurance, it may have no or limited experience or senior
management expertise related to such new activities.
Potential Adverse Consequences of Acquisitions, Business Combinations and
Reinsurance Relationships. The Company has experienced significant growth in
premium volume as a result of acquisitions, business combinations and
reinsurance relationships. The Company intends to continue to pursue such
transactions and relationships to the extent suitable candidates and acceptable
terms may be identified. The Company is unable to predict whether or when any
candidate for such a transaction or relationship will become available or the
likelihood that any such transaction or relationship will be completed. The
Company competes for acquisition, business combination, reinsurance and
expansion opportunities with many entities that have substantially greater
resources. In addition, such transactions and relationships may involve
difficulties in the retention of personnel, diversion of management's attention,
unexpected legal liabilities, and tax and accounting issues. There can be no
assurance that the Company will be able to successfully identify suitable
candidates for such transactions or relationships, complete any such
transactions or relationships, integrate acquired businesses into its
operations, or expand into new markets. Once integrated, such transactions or
relationships may not achieve comparable levels of revenues, profitability, or
productivity as the existing business of the Company or otherwise perform as
expected.
On August 15, 1997, Professionals Group announced that it had signed a
definitive agreement to merge PICOM with Physicians Protective Trust Fund a
medical malpractice self-insurance trust fund located in Coral Gables, Florida
that provides medical malpractice insurance for physicians and physician
corporations in the State of Florida ("PPTF"). See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." The merger is expected to be
accounted for as a pooling of interests (which means Professionals Group will
carry forward to its accounts the assets and liabilities of PPTF at the
respective amounts reported by PPTF) and is expected to occur in the second
quarter of 1998, subject to regulatory and stockholder/policyholder approval.
GLOSSARY OF SELECTED INSURANCE TERMS
A.M. Best Rating. A.M. Best Ratings are divided into "Secure" and
"Vulnerable" rating groups as follows. Secure Ratings: A++, A+ (Superior); A, A-
(Excellent); and B++, B+ (Very Good). Vulnerable Ratings: B, B-(Adequate); C++,
C+ (Fair); C, C- (Marginal); D (Very Vulnerable); E (Under State Supervision);
and F (In Liquidation).
Cede. To transfer to another insurer (the reinsurer) all or part of the
insurance risk underwritten by an insurer.
Claims-made policy. An insurance policy covering only those claims which
are reported during the policy period.
Combined ratio. The sum of the expense ratio and the loss and LAE ratio.
Earned premium. The prorated portion of an insurance premium which is no
longer considered prepaid as a result of the elapsed time the insurance policy
has been in force. For example, after six months, $12,000 of a prepaid $24,000
annual premium is considered earned premium.
Excess of loss reinsurance. A form of reinsurance in which the insurer
cedes to a reinsurer, and such reinsurer assumes, all or a portion of losses in
excess of a specified retention level up to a predetermined limit.
Expense ratio. The ratio of underwriting expenses to net premiums earned.
A-18
<PAGE> 218
Incurred but not reported (IBNR). The liability for future payments on
losses which have occurred but have not yet been reported.
Loss adjustment expenses (LAE). The expenses of settling claims, including
legal and other fees.
Loss and LAE ratio. The ratio of incurred losses and loss adjustment
expenses to premiums earned. Losses include increases in reserves for extended
reporting period claims.
Net premiums written. Premiums retained by an insurer after deducting
premiums on business ceded to others.
Occurrence Policy. An insurance policy covering losses occurring during the
policy period, without regard to when the claim is reported to the insurer.
Quota Share Reinsurance. A form of treaty or facultative reinsurance in
which the insurer cedes and the reinsurer assumes an agreed-upon percentage of
risks. Also known as proportional reinsurance.
Reinsurance. A procedure whereby an insurer remits or cedes a portion of
the premium to a reinsurer as payment to the reinsurer for assuming a portion of
the risk or liability under the policy. Reinsurance can be effected by
"treaties" under which all risks of a defined category, amount and type for a
primary insurer are covered, or on a "facultative" basis under which risks are
covered on an individual, contract-by-contract basis.
Reserves. Liability established by an insurer to reflect the estimated cost
of claim payments and loss adjustment expenses that the insurer will ultimately
be required to pay with respect to the insurance it has underwritten.
Standard & Poor's ratings. Standard & Poor's Claims-Paying Ability Ratings
are divided into "Secure Range" and "Vulnerable Range" groupings as follows.
Secure Range: AAA (Superior); AA (Excellent); A (Good); and BBB (Adequate).
Vulnerable Range: BB (May be Adequate); B (Vulnerable); CCC (Extremely
Vulnerable); and R (Regulatory Action).
Statutory Accounting Practices (SAP). Those principles required by state
law which must be followed by insurers in submitting their financial statements
to state insurance departments.
Statutory surplus. The amount remaining after all liabilities of an
insurance company are subtracted from all of its admitted assets, applying
statutory accounting principles.
ITEM 2. PROPERTIES
The Company owns its principal executive offices in Okemos, Michigan which
houses the majority of its employees. The Company also owns, primarily for
investment purposes, an office building in Williamston, Michigan. The Company
leases office facilities in Lisle, Illinois, Indianapolis, Indiana and Columbus,
Ohio. The Company also leases operating equipment under cancelable and
noncancelable agreements.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings to which Professionals Group or any
of its direct or indirect subsidiaries is a party or to which any of their
property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of Professionals Group's stockholders
during the fourth quarter of 1997.
A-19
<PAGE> 219
EXECUTIVE OFFICERS OF REGISTRANT:
As of March 16, 1998, the executive officers of Professionals Group
consisted of the persons identified below. Executive officers are elected
annually by, and serve at the pleasure of, Professionals Group's Board of
Directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
W. Peter McCabe, M.D. 58 Chairman
Victor T. Adamo, Esq., CPCU 50 President and Chief Executive
Officer
R. Kevin Clinton, FCAS, MAAA 43 Vice President, Treasurer and
Chief Financial Officer
Annette E. Flood, Esq., R.N. 39 Secretary
</TABLE>
W. PETER MCCABE, M.D. has been the Chairman of the Board and a director of
Professionals Group since 1996. Dr. McCabe has been Chairman of the Board and a
director of PICOM since 1994 and 1980, respectively. Dr. McCabe has been a
director of Michigan Educational Employees Mutual Insurance Company, a Michigan
mutual insurance company that writes personal automobile and homeowners
coverages, since May 1997. He is board certified in Plastic Surgery and a past
President of the Michigan State Medical Society. Dr. McCabe is engaged in
private practice and serves on the medical staff of Saint John Hospital,
Detroit, Michigan. Dr. McCabe is a graduate of Harvard College and Cornell
University Medical School.
VICTOR T. ADAMO, ESQ., has been the President and Chief Executive Officer
and a director of Professionals Group since 1996, the President and a director
of PICOM since 1990, and the Chief Executive Officer of PICOM since 1987. Mr.
Adamo also has been a director of Michigan Educational Employees Mutual
Insurance Company, a Michigan mutual insurance company that writes personal
automobile and homeowners coverages, since May 1997. Prior to joining PICOM, Mr.
Adamo was in private legal practice from 1975 to 1985 and represented PICOM in
corporate legal matters. Mr. Adamo is a graduate of The University of Michigan
and New York University School of Law and is a Chartered Property Casualty
Underwriter (CPCU). Mr. Adamo and Mr. R. Kevin Clinton are the only current
directors of Professionals Group who are also employees of Professionals Group
or a subsidiary of Professionals Group.
R. KEVIN CLINTON, FCAS, MAAA, has been the President and a director of
Michigan Educational Employees Mutual Insurance Company, a Michigan mutual
insurance company that writes personal automobile and homeowners coverages,
since May 1997. Mr. Clinton has been a Vice President and Chief Financial
Officer of Professionals Group since 1996 and a director of Professionals Group
since September 1997. Mr. Clinton served as Vice President, Treasurer and
Actuary of PICOM from 1990 through June 1997. Prior to becoming an officer of
PICOM, Mr. Clinton was PICOM's consulting actuary from 1986 to 1990. He formerly
served as the Actuary for the Michigan Insurance Bureau and in the actuarial
department of Michigan Mutual Insurance Company. Mr. Clinton is a fellow of the
Casualty Actuarial Society and a member of the American Academy of Actuaries.
Mr. Clinton is a graduate of The University of Michigan where he received a B.A.
degree in business administration and a M.A. in actuarial science. Mr. Clinton
and Mr. Victor T. Adamo are the only current directors of Professionals Group
who are also employees of Professionals Group or a subsidiary of Professionals
Group.
ANNETTE E. FLOOD, ESQ., R.N., has been the Secretary of Professionals Group
since 1996. Ms. Flood is Vice President, Corporate Secretary and Legal Counsel
of PICOM. Ms. Flood has been a director of Michigan Educational Employees Mutual
Insurance Company, a Michigan mutual insurance company that writes personal
automobile and homeowners coverages, since May 1997. Prior to joining PICOM in
1992, Ms. Flood was employed by Lansing General Hospital, Lansing, Michigan,
from 1986 to 1992, most recently in the capacity of Vice President, Legal
Services and Quality Management. Prior to joining the Lansing General Hospital
staff, Ms. Flood was in the litigation section of the law firm of Dykema Gossett
PLLC, Lansing, Michigan. Ms. Flood has a B.A. degree in nursing from The
University of Michigan and a law degree from Wayne State University Law School.
A-20
<PAGE> 220
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Shares of common stock, no par value per share, of Professionals Group have
been traded in the over-the-counter market and listed for quotation on the
Nasdaq National Market tier of the Nasdaq Stock Market under the symbol "PICM"
since September 3, 1996. Prior to Professionals Group's acquisition of all of
the issued and outstanding shares of PICOM common stock effective August 31,
1996, PICOM common stock was traded in the over-the-counter market and was
listed for quotation on the Nasdaq National Market tier of the Nasdaq Stock
Market under the symbol "PICM." Although transactions in common stock, no par
value per share, of Professionals Group have been, and are expected to continue
to be, facilitated by market-makers, there can be no assurance that an
established or liquid trading market will continue.
The table below sets forth (i) for the periods prior to September 3, 1996,
the high and low sale prices for PICOM common stock on the Nasdaq National
Market tier of the Nasdaq Stock Market, and (ii) for the periods since September
3, 1996, the high and low sale prices for the common stock, no par value per
share, of Professionals Group on the Nasdaq National Market tier of the Nasdaq
Stock Market. In each case the quotations have been adjusted as if the ten
percent stock dividend paid by Professionals Group on December 16, 1996 had
occurred prior to such quarters.
<TABLE>
<CAPTION>
COMMON STOCK
--------------------
HIGH LOW
------ ------
<S> <C> <C>
1997
- -------------------------------------------------------
First Quarter.......................................... $25.25 $20.00
Second Quarter......................................... 29.50 22.00
Third Quarter.......................................... 39.00 27.50
Fourth Quarter......................................... 43.00 33.00
1996
- -------------------------------------------------------
First Quarter.......................................... $23.41 $18.86
Second Quarter......................................... 22.95 19.77
Third Quarter.......................................... 22.27 19.55
Fourth Quarter......................................... 22.00 19.77
</TABLE>
As of March 16, 1998 there were 2,630 registered holders of shares of
common stock, no par value per share, of Professionals Group.
The holders of common stock, no par value per share, of Professionals Group
are entitled to receive such dividends as may be declared from time to time by
the Board of Directors of Professionals Group out of funds legally available
therefor. Professionals Group is not expected to declare cash dividends on its
common stock for the foreseeable future, as it is expected that earnings of
Professionals Group and its subsidiaries will be retained and used for
operations. Any future dividends will depend upon, among other things, future
financial results and requirements and contractual restrictions applicable to
Professionals Group or its subsidiaries, including a covenant related to
Professionals Group's bank term loan 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). Professionals Group
declared a 10% stock dividend on November 21, 1996 which was paid on December
16, 1996 to stockholders of record as of December 4, 1996. No fractional shares
of common stock were issued in payment of the stock dividend. In lieu of
fractional shares, cash of approximately $26,000 was paid to stockholders.
The ability of Professionals Group to fund its operations and to pay
dividends on its common stock will be dependent upon its receipt of dividends,
loans or advances from its insurance company subsidiaries (particularly PICOM).
The ability of those subsidiaries to pay dividends is subject to regulatory
restrictions. Generally, these restrictions limit the amount of dividends such
subsidiaries can pay to their respective parent in any 12-month period to the
greater of statutory net income for the preceding year (excluding realized gains
and losses on sales of investments), or ten percent of policyholders' surplus as
of the end of the preceding year.
A-21
<PAGE> 221
As of January 1, 1998, approximately $14.2 million of dividends could be paid by
Professionals Group's direct insurance subsidiaries without prior regulatory
approval. In 1997 and 1996, Professionals Group's insurance subsidiaries paid
cash dividends aggregating $4.7 million and $3.5 million, respectively, to
Professionals Group. None of Professionals Group's insurance subsidiaries paid
any cash dividends in 1995. There can be no assurance as to any future dividends
by Professionals Group or any of its subsidiaries (see also Note 12 to the
Company's consolidated financial statements).
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data are derived from the Company's
consolidated financial statements, except for selected statutory data, which are
presented in accordance with statutory accounting practices. The data should be
read in conjunction with the consolidated financial statements, related notes
and other financial information included elsewhere in this report. (All such
information is in thousands, except per share data.)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Income Statement Data(1):
Gross premiums written............................ $81,690 $64,771 $67,727 $51,110 $50,514
Net premiums written.............................. 71,146 55,464 55,151 48,778 48,177
Net premiums earned............................... 71,968 56,687 55,684 48,490 48,192
Net investment income............................. 18,719 15,741 14,729 13,379 12,363
Total revenues and other income................... 91,649 72,242 70,572 59,867 67,476
Losses and loss adjustment expenses(2)(4)......... 57,125 48,368 35,558 44,853 44,585
Total expenses.................................... 77,742 60,219 46,230 52,669 52,775
Income before cumulative effect of change in
accounting method.............................. 11,026 9,585 16,066 5,154 9,866
Cumulative effect of change in accounting
method(2)...................................... -- -- (8,125) -- --
------- ------- ------- ------- -------
Net income........................................ $11,026 $ 9,585 $ 7,941 $ 5,154 $ 9,866
======= ======= ======= ======= =======
Weighted average shares outstanding(3)............ 3,506 3,487 3,432 3,557 3,557
======= ======= ======= ======= =======
Weighted average shares outstanding-- assuming
dilution(3).................................... 3,508 3,487 3,432 3,557 3,557
======= ======= ======= ======= =======
Earnings per share(3):
Income before cumulative effect of change in
accounting method.............................. $ 3.15 $ 2.75 $ 4.68 $ 1.45 $ 2.77
Cumulative effect of change in accounting
method(2)...................................... -- -- (2.37) -- --
------- ------- ------- ------- -------
Net income per common share....................... $ 3.15 $ 2.75 $ 2.31 $ 1.45 $ 2.77
======= ======= ======= ======= =======
Net income per common share -- assuming
dilution....................................... $ 3.14 $ 2.75 $ 2.31 $ 1.45 $ 2.77
======= ======= ======= ======= =======
Cash dividends declared per share................... $ -- $ -- $ -- $ -- $ --
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total investments......................... $342,561 $300,132 $280,607 $249,979 $253,133
Total assets.............................. 413,195 357,382 330,712 297,926 301,106
Loss and loss adjustment expense
reserves(2)............................ 239,151 219,919 199,605 188,544 191,221
Reserve for extended reporting period
claims................................. 15,300 14,795 14,082 12,738 12,238
Unearned premiums......................... 21,665 21,945 23,122 24,557 24,347
Stockholders' equity...................... 101,926 87,958 78,411 63,142 64,839
Book value per common share(3)............ 29.07 25.09 22.84 17.75 18.23
</TABLE>
A-22
<PAGE> 222
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------------------------------------
1997 1996 1995 1994 1993
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Selected Statutory Data:
Loss ratio(4)................................. 80.1% 85.4% 71.5% 93.5% 94.1%
Expense ratio................................. 23.7% 15.9% 17.3% 15.4% 15.8%
-------- ------- ------- ------- -------
Combined ratio................................ 103.8% 101.3% 88.8% 108.9% 109.9%
======== ======= ======= ======= =======
Statutory surplus............................. $108,178 $80,572 $67,006 $47,149 $40,431
Net premiums written to statutory surplus..... .66x .74x .82x 1.03x 1.19x
Selected GAAP Data:
GAAP combined ratio(4)........................ 106.5% 106.2% 83.0% 108.6% 109.5%
======== ======= ======= ======= =======
</TABLE>
- ---------------
(1) Effective January 1, 1995, the Company began writing a book of business
previously written by an Illinois insurance company. Effective July 1, 1997,
the Company began assuming 40% of the net premiums of a Michigan insurance
company.
(2) The Company discounted loss and loss adjustment expense reserves through
1994. In 1993 the Company changed its loss and loss adjustment expense
reserve discount rate from 3.75% to 3%. This reduction in reserve discount
rate was treated as a change in accounting estimate and resulted in a
decrease in net income of $2.0 million for 1993. The effects of such change
in the reserve discount rate, which was previously presented as a change in
accounting method, has been reclassified and presented as a change in
accounting estimate. Effective January 1, 1995, the Company eliminated its
practice of discounting loss and loss adjustment expense reserves for GAAP
reporting purposes, which was treated as a change in accounting method.
(3) Weighted average shares outstanding are in thousands. Prior period amounts
have been restated for the effects of 10% stock dividends on December 16,
1996 and December 1, 1994 and 1993, respectively.
(4) In 1995 the Company reduced its estimated liability for loss and loss
adjustment expense reserves by $12.3 million for redundancies. The ratio
includes the increase in reserve for extended reporting period claims.
A-23
<PAGE> 223
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and the notes thereto included elsewhere
in this report.
FINANCIAL CONDITION:
The Company's total assets were $413.2 million and $357.4 million as of
December 31, 1997 and 1996, respectively, an increase of 15.6%. The increase in
total assets as of December 31, 1997 was due mainly to bank borrowings received
that were used to fund the Company's purchase of a $21.5 million surplus note
issued by MEEMIC (see "Liquidity and Capital Resources") and to positive cash
flows from operations.
Paid losses and loss adjustment expenses were $42.5 million in 1997, as
compared to $37.2 million in 1996 and $47.2 million in 1995. Paid losses and
loss adjustment expenses for 1997 were $5.3 million more than in 1996 due mainly
to the Company's reinsurance agreement with MEEMIC. See "Liquidity and Capital
Resources." Paid losses and loss adjustment expenses for 1996 were $10.0 million
less than in 1995 primarily due to the effect of tort reform legislation enacted
in Michigan during 1994. A pre-suit notification procedure enacted as part of
such tort reform legislation has enabled the Company to investigate and resolve
many claims in a less expensive manner. Since the adoption of such legislation,
the Company has been able to utilize its internal claims management staff to a
greater extent. In the years prior to the adoption of such legislation, the
Company had utilized, to a greater degree, more expensive outside legal counsel
to investigate and resolve claims. In addition, paid losses and loss adjustment
expenses were significantly higher in 1995 due to the high number of claims
filed in 1994 just prior to the effective date of such tort reform legislation.
As of December 31, 1997 and 1996, the Company had invested assets of $342.6
million and $300.1 million, respectively. Such 14.1% increase in invested assets
resulted mainly from bank borrowings received that were used to fund the
Company's purchase of a $21.5 million surplus note from MEEMIC (see "Liquidity
and Capital Resources") and positive cash flows from operations. As of December
31, 1997 and 1996, invested assets represented approximately 83% and 84%,
respectively, of the Company's total assets at those dates.
As of December 31, 1997 and 1996, the Company's investment portfolio was
dominated by fixed maturity securities and primarily consisted of U.S.
government and agency bonds, high-quality corporate bonds, mortgage-backed
securities, redeemable preferred stocks and tax-exempt U.S. municipal bonds. As
of December 31, 1997 and 1996, these fixed maturity securities aggregated $313.6
million and $286.3 million, respectively. Approximately $288.2 million of the
fixed maturity portfolio was comprised of rated securities of which 99.7% were
rated investment grade or better at December 31, 1997. Approximately 87.1% of
the non-rated fixed maturity portfolio was comprised of the surplus note
investment in MEEMIC.
The following table provides a profile of the Company's fixed maturity
portfolio by rating as of December 31, 1997:
<TABLE>
<CAPTION>
FAIR VALUE (AS REFLECTED PERCENT OF
S&P/MOODY'S RATING ON BALANCE SHEET) PORTFOLIO
------------------ ------------------------ ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
AAA/Aaa (including U.S. Governments of $32,200)...... $173,673 55.4%
AA/Aa................................................ 61,773 19.7
A/A.................................................. 45,055 14.4
BBB/Baa.............................................. 7,654 2.4
Not rated............................................ 24,662 7.8
All other............................................ 816 0.3
-------- ------
Total...................................... $313,633 100.0%
======== ======
</TABLE>
In December 1995, the Company reclassified all of its fixed maturity
securities previously classified as held-to-maturity to available-for-sale, as
permitted by the Special Report, "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities" issued by the
Financial
A-24
<PAGE> 224
Accounting Standards Board ("FASB"). This one-time reclassification increased
stockholders' equity by $511,000, net of deferred federal income taxes, as of
December 31, 1995. All fixed maturity securities are classified as
available-for-sale and are carried at fair value as of December 31, 1997 and
1996.
The Company's fixed maturity investment portfolio is sensitive to interest
rate changes. As of December 31, 1997 and 1996, the fixed maturity portfolio had
net unrealized gains of approximately $4.7 million and $298,000, respectively.
The increase in net unrealized gains was due to slightly lower interest rates at
year end 1997 compared to year end 1996. As of December 31, 1997, the fixed
maturity portfolio had a weighted average modified duration of approximately
four years. A one hundred basis point increase in market interest rates would
decrease the value of this portfolio by approximately three and one-half
percent, whereas a one hundred basis point decrease in market interest rates
would increase the value of this portfolio by approximately three percent.
Equity securities as of December 31, 1997 and 1996 consisted primarily of
common stock held in Physicians Insurance Company of Wisconsin, Inc., an
unrelated stock insurance company providing professional liability insurance to
health care providers primarily in Wisconsin. As of December 31, 1997 and 1996,
equity securities had net unrealized gains of $127,000 and $62,000,
respectively.
RESULTS OF OPERATIONS -- YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED
DECEMBER 31, 1996:
Professional liability related net premiums written were $51.0 million in
1997, a decrease of 8.0% when compared to professional liability net premiums
written of $55.5 million in 1996. The decrease in professional liability
premiums reflects continued price-based competition, particularly in the
Michigan and Illinois insurance markets. The decrease in professional liability
premiums in 1997 was offset by the reinsurance premiums assumed from MEEMIC,
which increased net premiums written by $20.1 million. See "Liquidity and
Capital Resources."
During 1997 and 1996, the Company continued to balance its need for rate
adjustments with the goal of maintaining market share in very competitive
environments in Michigan, Illinois, Indiana and Ohio. 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
$18.7 million for 1997, an increase of 18.9% over net investment income of $15.7
million for 1996. The increase in net investment income mainly resulted from an
increase in average invested assets associated with bank borrowings received
that were used to fund the Company's purchase of a $21.5 million surplus note
from MEEMIC (see "Liquidity and Capital Resources") and positive cash flows from
operations. The weighted average tax equivalent book yield of the fixed maturity
portfolio was 6.9% and 6.7% as of December 31, 1997 and 1996, respectively.
During 1997, the Company posted net realized investment losses of $207,000,
whereas net realized investment losses in 1996 were $473,000.
Loss and loss adjustment expense 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. Nevertheless, the Company's reserves have been
established within the range of acceptable values estimated 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.
Professional liability insurance incurred losses and loss adjustment
expenses (including the increase in reserve for extended reporting period
claims) for 1997 totaled $44.6 million, a decrease of 9.2%, as compared
A-25
<PAGE> 225
to professional liability insurance incurred losses and loss adjustment expenses
of $49.1 million for 1996. 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) improved slightly
to 85.9% in 1997, as compared to 86.6% in 1996. The Company has continued to
employ more selective underwriting practices during this time of highly
competitive market conditions. Accordingly, the professional liability incurred
loss and loss adjustment expense ratio has remained stable. There can be no
assurances, however, that these selective underwriting practices will be
successful in the long run.
Incurred losses and loss adjustment expenses related to the personal
automobile and homeowners insurance assumed from MEEMIC (the "personal liability
insurance") totaled $13.1 million for 1997. As a percentage of premiums earned,
such personal liability insurance generated an incurred loss and loss adjustment
expense ratio of 65.0% in 1997. The Company believes that such personal
liability insurance produced a low loss ratio primarily due to less severe
weather-related incidents in Michigan during 1997.
Policy acquisition and underwriting expenses were $19.0 million in 1997, a
70.7% increase over policy acquisition and underwriting expenses of $11.1
million in 1996. As a percentage of premiums earned, the underwriting expense
ratio increased to 26.4% during 1997, from 19.6% during 1996. The increase in
such expenses was mainly due to $1.1 million of non-recurring legal, accounting,
investment banker and related expenses associated with the Company's merger and
acquisition activities, and $6.6 million of ceding commission attributable to
the MEEMIC reinsurance agreement. Additional 1997 expenses included start-up
expenses associated with the Company's expansion of business into Indiana and
Ohio during 1997 and its planned expansion into Florida and Pennsylvania during
1998. Interest expense of $1.1 million during 1997 resulted from the Company's
bank borrowings of $22.5 million in April 1997. See "Liquidity and Capital
Resources."
The Company recorded $2.9 million in federal income tax expense in 1997 as
compared to $2.4 million in 1996. The Company's effective federal income tax
rate approximated 20.7% in 1997 compared to 20.3% in 1996. The slight increase
in the effective income tax rate is due mainly to certain merger and acquisition
expenses which are not deductible for federal income tax purposes.
Net income for 1997 was $11.0 million, or $3.14 per share (assuming
dilution), on revenues of $91.6 million. This compares to net income of $9.6
million, or $2.75 per share (assuming dilution), on revenues of $72.2 million in
1996. The favorable 1997 earnings were attributable to the factors described
above.
RESULTS OF OPERATIONS -- YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED
DECEMBER 31, 1995:
Professional liability net premiums written were $55.5 million in 1996, an
increase of 0.6% when compared to professional liability net premiums written of
$55.2 million in 1995. The increase in professional liability net premiums
written was primarily due to $1.1 million in additional net premiums written by
the Company's expansion of business into Indiana and Ohio. This increase was
partially offset by decreases in professional liability premiums in the
Company's Michigan and Illinois insurance markets.
During 1996 and 1995, the Company continued to balance its need for rate
adjustments with the goal of maintaining market share in very competitive
environments in Michigan, Illinois, Indiana and Ohio. 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
$15.7 million for 1996, an increase of 6.9% over net investment income of $14.7
million for 1995. Net investment income increased, despite a significant shift
in the Company's investment portfolio towards municipal bonds (which, due to
their tax-exempt status, offer lower pre-tax yields), due principally to the
increases in invested assets associated with positive cash flows from
operations. The weighted average tax equivalent book yield of the Company's
fixed maturity portfolio was 6.7% and 6.5% as of December 31, 1996 and 1995,
respectively. During 1996, the Company posted net realized investment losses of
$473,000, whereas net realized investment losses in 1995
A-26
<PAGE> 226
were negligible. The net realized investment losses posted in 1996 resulted from
the Company's repositioning of its fixed maturity portfolio to increase
after-tax yield.
Professional liability insurance incurred losses and loss adjustment
expenses (including the increase in reserve for extended reporting period
claims) for 1996 totaled $49.1 million, an increase of 33.0% over incurred
losses and loss adjustment expenses of $36.9 million for 1995. 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) was 86.6% in 1996 compared to 66.3% in 1995. The loss
and loss adjustment expense ratio was 22.1 percentage points lower in 1995 due
to the Company's $12.3 million reserve reduction at year-end 1995. Such reserve
reduction (which reduced the reserves relating to accident years 1986-1993 and
reflected lower incurred losses than had been originally reserved for) was made
possible by the favorable development of prior years' loss reserves. The factors
leading to such favorable development were (i) the Company's practice of
establishing its loss and loss adjustment expense reserves conservatively, as it
relates to immaturely developed accident years, to minimize potential
uncertainties, and (ii) lower than expected claims costs associated in part with
tort reform legislation enacted in Michigan between 1986 and 1994. Such tort
reform legislation shortened the statute of limitations, introduced a statute of
repose with a six year limitation for adults, modified expert witness rules to
require more qualified expert witnesses and capped non-economic damages.
At year-end 1994, the Company's loss and loss adjustment expense reserves
were discounted using a three percent interest rate assumption. Effective
January 1, 1995, the practice of discounting reserves for financial reporting
was eliminated and, accordingly, loss and loss adjustment expense reserves have
been established on an undiscounted basis thereafter (a more conservative
accounting practice used by most publicly-traded insurance companies).
Policy acquisition and underwriting expenses were $11.1 million in 1996, a
19.4% increase over policy acquisition and underwriting expenses of $9.3 million
in 1995. As a percentage of premiums earned, the underwriting expense ratio was
19.6% in 1996, up from the underwriting expense ratio of 16.8% in 1995. The
increase in such expenses in 1996 relative to 1995 is attributable to
non-recurring legal, accounting and related expenses associated with the
formation of the Professionals Group holding company system, a one-time stock
bonus paid to directors, officers and employees in 1996 and start-up expenses
associated with the Company's expansion of business into Indiana and Ohio.
The Company recorded $2.4 million in Federal income tax expense in 1996 as
compared to $8.3 million in 1995. The Company's effective Federal income tax
rate approximated 20.3% in 1996 compared to 34.0% in 1995. The decrease in the
effective income tax rate is due to the Company's increased holdings in
tax-exempt municipal bonds which caused a $1.0 million or 8.3% decrease in the
expense and effective rate, respectively, as well as a revision to the estimate
of the prior years' tax liability which caused a $913,000 or 7.6% decrease in
the expense and effective rate, respectively. These decreases were partially
offset by adjustments for other items, including dividends received deductions
and non-deductible meals and entertainment, respectively, in an aggregate amount
of $263,000 or 2.2% of the effective rate. The prior years' tax liability
adjustment related to an overestimated tax accrual that was revised with the
1995 Federal tax return filing.
Net income for 1996 was $9.6 million, or $2.75 per share (assuming
dilution), on revenues of $72.2 million. This compares to net income of $7.9
million, or $2.31 per share (assuming dilution), on revenues of $70.6 million in
1995. The favorable 1996 earnings were attributable to the factors described
above. Net income for 1995 was reduced by $8.1 million (net of deferred federal
income taxes), or $2.37 per share (assuming dilution), as a result of a
cumulative effect change in accounting method associated with the elimination of
the Company's practice of discounting its loss and loss adjustment expense
reserves during 1995.
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
A-27
<PAGE> 227
investment portfolio, which in turn produces future cash from investment income.
The Company continuously monitors available cash and short-term investment
balances in relation to projected cash needs to maintain adequate balances for
current payments while maximizing cash available for longer term investment
opportunities.
The payment of losses, loss adjustment expenses and operating expenses in
the ordinary course of business represents the Company's principal need for
liquid funds. Payments for losses and loss adjustment expenses are distributed
fairly evenly throughout the year. Payments for reinsurance are made within
thirty days subsequent to the end of each quarter, with adjustments made after
each reinsurance year. Historically, cash used to pay for these items has been
provided by operations. In 1997, the Company used a portion of its cash flow
from operations to fund its purchase of a new home office facility, including
furniture and equipment, for $7.1 million. As of December 31, 1997, 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.
The ability of Professionals Group to fund its operations and to pay
dividends on its common stock will be dependent upon its receipt of dividends,
loans or advances from its insurance company subsidiaries (particularly PICOM).
The ability of those subsidiaries to pay dividends is subject to regulatory
restrictions. Generally, these restrictions limit the amount of dividends such
subsidiaries can pay to their respective parent in any 12-month period to the
greater of statutory net income for the preceding year (excluding realized gains
and losses on sales of investments), or ten percent of policyholders' surplus as
of the end of the preceding year. As of January 1, 1998, approximately $14.2
million of dividends could be paid by Professionals Group's direct insurance
subsidiaries without prior regulatory approval. In 1997 and 1996, Professionals
Group's insurance subsidiaries paid cash dividends aggregating $4.7 million and
$3.5 million, respectively, to Professionals Group. None of Professionals
Group's insurance subsidiaries paid any cash dividends in 1995. There can be no
assurance as to any future dividends by Professionals Group or any of its
subsidiaries (see also Note 12 to the Company's consolidated financial
statements).
In April 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 (the "Credit Agreement"). Under the Credit
Agreement, interest, which accrued at the rate of 6.40% per annum as of December
31, 1997, is payable quarterly and principal is payable in installments on April
30 of each year as follows: 1998 -- $2,500,000; 1999 -- $2,500,000;
2000 -- $3,000,000; 2001 -- $3,000,000; 2002 -- $3,500,000; 2003 -- $3,500,000;
and 2004 -- $4,500,000. Professionals Group used $20.0 million of the proceeds
of this loan to make a capital contribution to PICOM, which in turn, used the
proceeds to purchase a $21.5 million Surplus Note from MEEMIC.
The Credit Agreement 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). It also required the Company to,
among other things, maintain total consolidated stockholders' 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 in the Credit
Agreement) of not less than 1.5:1 and 2.5:1, respectively. The Company was in
compliance with, or has received waivers of, all required covenants at December
31, 1997.
In April 1997, the Company completed certain transactions with MEEMIC
involving the Company's purchase of a twelve-year, $21.5 million surplus note
from MEEMIC, bearing interest at 8.5% per annum (the "MEEMIC Surplus Note") and
its reinsuring, on a quota-share basis, 40% of MEEMIC's net premiums beginning
July 1, 1997. In connection with these transactions (i) the Company agreed to
provide MEEMIC with information systems services and certain consulting services
under a management services agreement for a base fee of $2.0 million; (ii)
Professionals Group nominees were elected to all positions on the Board of
Directors of MEEMIC; and (iii) the Company agreed to assist MEEMIC in acquiring
the net assets of Michigan Educators Insurance Agency, Inc. ("MEIA"), the
exclusive distributor of MEEMIC insurance products.
A-28
<PAGE> 228
On September 22, 1997, MEEMIC Insurance Services Corporation (MEEMIC
Services Corp.), a newly formed subsidiary of MEEMIC, purchased the net assets
of MEIA. The purchase price equaled 3.75% of premiums written by MEEMIC Services
Corp. through July 2004, subject to a guaranteed minimum purchase price of $43.0
million. To fund this purchase, MEEMIC Services Corp. paid cash of $22.5 million
(utilizing the proceeds of the MEEMIC Surplus Note), and agreed to pay $20.5
million to MEIA as additional consideration through 2004, as provided for in the
purchase agreement. MEEMIC guaranteed payment of the first $3.0 million and
Professionals Group guaranteed payment of the final $17.5 million (payable in
years 2001-2004) of such additional consideration. The Company believes the
likelihood that the guarantee would become payable is minimal.
The Company assisted MEEMIC in MEEMIC's acquisition of the net assets of
MEIA for the reasons that follow: The Company believes that by virtue of such
acquisition, MEEMIC acquired greater control over the distribution and pricing
of its insurance products. The Company anticipates that such control will enable
MEEMIC to increase the volume of its insurance business. Given the terms of the
Company's reinsurance agreement with MEEMIC, an increase in the volume of
MEEMIC's insurance business will increase the amounts of insurance and insurance
premiums ceded to PICOM.
At a future date, the Company and MEEMIC expect to pursue demutualization
of MEEMIC. Such demutualization would be subject to regulatory approval by the
Michigan Commissioner of Insurance and approval by MEEMIC's policyholders. No
specific timetable has been set for demutualization and there can be no
assurances that MEEMIC will be demutualized.
On August 15, 1997, Professionals Group announced a definitive agreement to
merge PICOM with Physicians Protective Trust Fund. The terms of such merger,
which were amended and restated on October 3, 1997 pursuant to a First Amended
and Restated Agreement and Plan of Merger dated as of October 3, 1997 by and
among Professionals Group, PICOM and PPTF (the "Merger Agreement"), contemplate
the combining of the operations of PICOM and PPTF, through the conversion,
subject to dissenters' rights, of all membership rights of members of PPTF into
an aggregate of 4,089,160 shares of common stock of Professionals Group. The
contemplated merger is expected to be accounted for as a pooling of interests
(which means Professionals Group will carry forward to its accounts the assets
and liabilities of PPTF at the respective amounts reported by PPTF) and is
expected to occur in the second quarter of 1998, subject to regulatory and
stockholder/policyholder approval.
Professionals Group was incorporated in January 1996 for the purpose of
serving as the holding company for PICOM and its subsidiaries. Effective August
31, 1996, Professionals Group acquired all of the issued and outstanding shares
of PICOM common stock through the merger of a wholly-owned insurance company
subsidiary of Professionals Group with and into PICOM (the "Reorganization"). By
virtue of the Reorganization, each issued and outstanding share of PICOM common
stock was converted into one share of common stock, no par value per share, of
Professionals Group and PICOM became a wholly-owned subsidiary of Professionals
Group.
In May 1996, and in a transaction valued at approximately $1.2 million,
PICOM acquired all of the issued and outstanding shares of American Insurance
Management Corporation, a privately held Indiana corporation that serves as the
attorney-in-fact for American Medical Insurance Exchange, an inactive Indiana
interinsurance reciprocal exchange. While the acquisition was accounted for as a
purchase, the effect of the acquisition was not material to the Company's
consolidated results of operations (see also Note 12 to the Company's
consolidated financial statements).
On July 5, 1995, PICOM repurchased 254,823 shares of its common stock
(approximately 7.9% of the then issued and outstanding shares of PICOM Common
Stock) owned by Physicians Insurance Company of Ohio at a price of $17 per
share. During 1995, PICOM negotiated a reciprocal stock purchase agreement with
Physicians Insurance Company of Wisconsin, Inc. ("PIC-WIS"). Under the
agreement, PICOM acquired 1,583 shares of PIC-WIS common stock (representing
6.8% of the then outstanding shares of PIC-WIS common stock) for $2.5 million
and PIC-WIS purchased 131,579 shares of PICOM common stock (representing 4.2% of
the then issued and outstanding shares of PICOM common stock) for $2.5 million.
The
A-29
<PAGE> 229
transaction replaced more than one-half of the equity used to accomplish the
previously reported repurchase of shares of PICOM common stock held by
Physicians Insurance Company of Ohio.
IMPACT OF INFLATION AND CHANGING PRICES:
The consolidated financial statements and related data presented herein
have been prepared in accordance with generally accepted accounting principles
which require the measurement of financial position and operating results in
terms of historical dollars without considering changes in the relative
purchasing power of money over time due to inflation. The primary assets and
liabilities of the Company are monetary in nature. As a result, interest rates
have a more significant impact on the Company's performance than the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or magnitude as the cost of paying losses and loss adjustment
expenses. Moreover, increases in market interest rates, which often occur during
periods of high inflation, reduce the fair value of the Company's fixed maturity
securities. Conversely, reductions in market interest rates increase the fair
value of fixed maturity securities.
Inflation increases the costs of settling insurance claims over time.
Because insurance premiums are established before the amount of losses and loss
adjustment expenses, and the extent to which inflation may affect such expenses,
are known, the Company attempts to anticipate the future impact of inflation
when establishing rate levels. The Company may be limited in raising its premium
levels for competitive and regulatory reasons, in which case the Company, rather
than its insureds, would be required to absorb the effects of inflation. Future
economic changes which result in prolonged and increasing levels of inflation
could cause increases in the dollar amount of loss and loss adjustment expense
reserves and thereby adversely affect future reserve development. To minimize
such risk, the Company maintains what management considers to be strong and
adequate reinsurance, conducts regular actuarial reviews of reserves and
maintains adequate asset liquidity.
REINSURANCE:
In the normal course of business, the Company seeks to reduce the loss that
may arise from events that cause unfavorable underwriting results, provide
additional capacity for growth and protect stockholders' equity by reinsuring
certain levels of risk in various areas of exposure with other insurance
enterprises or reinsurers. At the present time, the Company has both excess of
loss reinsurance and errors and omissions insurance. Although reinsurance
agreements contractually obligate the Company's reinsurers to reimburse the
Company for their proportionate share of losses, they do not discharge the
primary liability of the Company. The Company is contingently liable for the
ceded amount of reserves for unpaid losses and loss adjustment expenses and
unearned premiums in the event the assuming insurance organizations are unable
to meet their contractual obligations. See "Item 1. Business -- Reinsurance."
The following table provides certain information for the year ended
December 31, 1997, with respect to the Company's reinsurers (see also Note 5 to
the consolidated financial statements for amounts recoverable from the Company's
reinsurers):
<TABLE>
<CAPTION>
REINSURANCE
REINSURER PREMIUM CEDED A.M. BEST RATING
--------- ---------------------- ----------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
TIG Reinsurance.......................... $ 3,858 A
PMA Reinsurance Corporation.............. 1,936 A+
Continental Casualty Company............. 1,708 A
Odyssey Reinsurance Company.............. 869 A-
Other.................................... 2,173 --
-------
$10,544
=======
</TABLE>
The Company continually reviews its reinsurers, considering a number of
factors, the most critical of which is their financial stability. Based on these
reviews, the Company evaluates its position with its reinsurers with respect to
existing and future reinsurance. To date, the Company has not experienced any
material
A-30
<PAGE> 230
difficulty in collecting reinsurance recoverables. No assurance can be given,
however, regarding the future ability of any of the Company's reinsurers to meet
their future obligations. See "Item 1. Business -- Reinsurance."
During 1997, PICOM entered into an agreement with Michigan Lawyers Mutual
Insurance Company, whereby PICOM ceded all of its Michigan lawyers professional
liability insurance policies in-force to MLM and reinsured 35% of MLM's net
premiums. As part of this arrangement MLM will provide certain insurance support
services to enable PICOM to introduce its lawyers professional liability product
into Illinois, Ohio and Indiana during 1998. The assumed premiums earned and the
assumed losses and loss adjustment expenses incurred in connection with the MLM
reinsurance agreement were $548,000 and $494,000, respectively, for the year
ended December 31, 1997.
Effective July 1, 1997, PICOM began assuming, on a quota-share basis, 40%
of the net personal automobile and homeowners insurance risks of MEEMIC. The
assumed premiums earned and the assumed losses and loss adjustment expenses
incurred in connection with the MEEMIC reinsurance agreement were $20.1 million
and $13.1 million, respectively, for the year ended December 31, 1997.
REGULATION:
Certain regulations that affect the Company's insurance subsidiaries are
promulgated by the National Association of Insurance Commissioners, which is an
association of state insurance commissioners, regulators and support staff that
acts as a coordinating body for the state insurance regulatory process. The NAIC
has established risk-based-capital requirements to assist regulators in
monitoring the financial strength and stability of property and casualty
insurers. Under the NAIC requirements, regulatory compliance is determined by a
ratio of an insurance company's regulatory total adjusted capital, as defined by
the NAIC, to its authorized control level of RBC, as defined by the NAIC.
Companies below specific ratios are classified within certain levels, each of
which requires specific corrective action. As of December 31, 1997 and 1996,
PICOM and ProNational Casualty were in compliance with such ratios and were not
required to take any corrective action. See "Item 1. Business -- Regulation."
The NAIC has proposed a new model investment law that may affect the
statutory carrying values of certain investments. Additionally, the NAIC has
undertaken a project to codify statutory accounting practices, which, if
completed and adopted, may affect the statutory carrying value of assets and
liabilities. It is not certain, nor is it possible to predict what impact these
projects will have on the Company's insurance subsidiaries, in the event the
projects are adopted by the NAIC. See "Item 1. Business -- Regulation."
EFFECTS OF NEW ACCOUNTING PRONOUNCEMENTS:
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards ("SFAS") No. 128 "Earnings Per Share" which is effective
for financial statements issued for both interim and annual periods ending after
December 15, 1997. Earlier application is not permitted. This standard replaces
the presentation of primary earnings per share with a presentation of basic
earnings per share and also requires dual presentation of basic and diluted
earnings per share for all entities with complex capital structures. The Company
adopted SFAS No. 128, as required, in the fourth quarter of 1997 and all prior
interim and annual period earnings per share data presented herein has been
restated to conform with the provisions of SFAS No. 128. The impact of the
adoption of SFAS No. 128 was not material to previously reported earnings per
share amounts.
The FASB has also issued SFAS No. 130 "Reporting Comprehensive Income,"
which is effective for fiscal years beginning after December 15, 1997. This
standard requires that an enterprise (a) classify items of other comprehensive
income by their nature in a financial statement and (b) display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of a statement of financial
position. The adoption of SFAS No. 130 is not expected to have a material effect
on the Company's consolidated results of operations or financial condition.
A-31
<PAGE> 231
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 has
not determined what effects the adoption of SFAS No. 131 will have on its
consolidated results of operations or financial condition.
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 $150,000 (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 in this area and the ability to locate and correct all
relevant computer codes.
ITEM 7A. 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 nor a 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 7A.
A-32
<PAGE> 232
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
Investments (note 4):
Available for sale, at fair value:
Fixed maturities (amortized cost $308,941 and $285,976
in 1997 and 1996, respectively)....................... $313,633 $286,274
Equity securities (cost $2,704 and $2,630 in 1997 and
1996, respectively)................................... 2,831 2,692
Short-term investments, at cost, which approximates fair
value.................................................. 25,655 10,711
Real estate, at cost, net of accumulated depreciation of
$90 and $69 in 1997 and 1996, respectively............. 442 455
-------- --------
Total investments................................. 342,561 300,132
Cash........................................................ 2,176 2,023
Premiums due from policyholders............................. 7,051 7,268
Reinsurance balances (note 5)............................... 24,257 17,550
Accrued investment income................................... 4,785 3,885
Prepaid reinsurance premiums (note 5)....................... 664 122
Deferred federal income taxes (note 6)...................... 15,003 17,301
Property and equipment, at cost, net of accumulated
depreciation (note 7)..................................... 9,060 2,459
Deferred policy acquisition costs (note 8).................. 1,376 998
Other assets (note 16)...................................... 6,262 5,644
-------- --------
Total assets...................................... $413,195 $357,382
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Loss and loss adjustment expense reserves (note 9)........ $239,151 $219,919
Reserve for extended reporting period claims.............. 15,300 14,795
Unearned premiums......................................... 21,665 21,945
Drafts outstanding........................................ 1,991 2,540
Long-term debt (note 10).................................. 22,500 --
Balance due on purchased book of business................. 1,446 2,200
Accrued expenses and other liabilities.................... 9,216 8,025
-------- --------
Total liabilities................................. 311,269 269,424
-------- --------
Shareholders' equity (notes 12 and 14):
Preferred stock, no par value; 5,000,000 shares
authorized; no shares issued and outstanding........... -- --
Common stock, no par value; 25,000,000 shares authorized;
3,505,750 shares issued and outstanding in 1997 and
1996................................................... 3,506 3,506
Additional paid-in capital................................ 14,569 14,569
Retained earnings......................................... 80,671 69,645
Net unrealized appreciation on investments, net of
deferred federal income taxes.......................... 3,180 238
-------- --------
Total shareholders' equity........................ 101,926 87,958
-------- --------
Commitments and contingencies (notes 5, 16 and 19)
Total liabilities and shareholders' equity........ $413,195 $357,382
======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
A-33
<PAGE> 233
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
---------- --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues and other income:
Premiums written, including $21,871 and $563 of premiums
assumed in 1997 and 1996, respectively (note 5)........ $ 81,690 $64,771 $ 67,727
Premiums ceded (note 5)................................... (10,544) (9,307) (12,576)
-------- ------- --------
Net premiums written.............................. 71,146 55,464 55,151
Decrease in unearned premiums, net of prepaid reinsurance
premiums............................................... 822 1,223 533
-------- ------- --------
Premiums earned, net.............................. 71,968 56,687 55,684
Net investment income (note 4)............................ 18,719 15,741 14,729
Net realized investment losses (note 4)................... (207) (473) (6)
Other..................................................... 1,169 287 165
-------- ------- --------
Total revenues and other income................... 91,649 72,242 70,572
-------- ------- --------
Expenses:
Losses and loss adjustment expenses, net (notes 5 and
9)..................................................... 57,125 48,368 35,558
Increase in reserve for extended reporting period
claims................................................. 505 713 1,344
Policy acquisition and other underwriting expenses........ 19,014 11,138 9,328
Interest expense.......................................... 1,098 -- --
-------- ------- --------
Total expenses.................................... 77,742 60,219 46,230
-------- ------- --------
Income from operations before federal income taxes
and cumulative effect of change in accounting
method.......................................... 13,907 12,023 24,342
Federal income taxes (note 6)............................... 2,881 2,438 8,276
-------- ------- --------
Income before cumulative effect of change in
accounting method............................... 11,026 9,585 16,066
Cumulative effect of change in accounting
method -- elimination of loss and loss adjustment expense
reserve discount, net of deferred federal income tax
benefit of $4,185 (note 9)................................ -- -- (8,125)
-------- ------- --------
Net income (note 14).............................. $ 11,026 $ 9,585 $ 7,941
======== ======= ========
Net income per common share:
Income before cumulative effect of change in accounting
method................................................. $ 3.15 2.75 4.68
Cumulative effect of change in accounting method.......... -- -- (2.37)
-------- ------- --------
Net income per common share................................. $ 3.15 $ 2.75 $ 2.31
======== ======= ========
Net income per common share -- assuming dilution:
Income before cumulative effect of change in accounting
method................................................. $ 3.14 $ 2.75 $ 4.68
Cumulative effect of change in accounting method.......... -- -- (2.37)
-------- ------- --------
Net income per common share -- assuming dilution............ $ 3.14 $ 2.75 $ 2.31
======== ======= ========
</TABLE>
See accompanying notes to the consolidated financial statements.
A-34
<PAGE> 234
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
NET UNREALIZED
APPRECIATION
COMMON STOCK (DEPRECIATION)
-------------------------------- ON INVESTMENTS, COST OF
SHARES ADDITIONAL NET OF DEFERRED COMMON TOTAL
----------------------- PAID-IN RETAINED FEDERAL STOCK IN SHAREHOLDERS'
ISSUED IN TREASURY AMOUNT CAPITAL EARNINGS INCOME TAXES TREASURY EQUITY
--------- ----------- ------ ---------- --------- ---------------- -------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31,
1994................. 3,238,959 -- $3,239 $ 8,181 $59,053 $(7,331) -- $ 63,142
Net income............. -- -- -- -- 7,941 -- -- 7,941
Purchase of treasury
shares, at cost (note
12).................. -- 254,823 -- -- -- -- (4,385) (4,385)
Sale of treasury shares
(note 4)............. -- (131,579) -- 236 -- -- 2,264 2,500
Net appreciation on
debt securities
transferred from
held-to-maturity
classification (note
4)................... -- -- -- -- -- 511 -- 511
Net appreciation on
debt and equity
securities........... -- -- -- -- -- 8,702 -- 8,702
--------- -------- ------ ------- ------- ------- ------- --------
Balances, December 31,
1995................. 3,238,959 123,244 3,239 8,417 66,994 1,882 (2,121) 78,411
Net income............. -- -- -- -- 9,585 -- -- 9,585
Issuance of common
stock (note 1)....... 1 -- -- -- -- -- -- --
Issuance of treasury
shares as stock bonus
(note 12)............ -- (28,430) -- 207 -- -- 490 697
Issuance of treasury
shares in purchase of
subsidiary (note
12).................. -- (44,000) -- 178 -- -- 757 935
Retirement and
cancellation of
treasury shares (note
12).................. (50,814) (50,814) (51) (823) -- -- 874 --
Issuance of 10% stock
dividend............. 317,604 -- 318 6,590 (6,934) -- -- (26)
Net depreciation on
debt and equity
securities........... -- -- -- -- -- (1,644) -- (1,644)
--------- -------- ------ ------- ------- ------- ------- --------
Balances, December 31,
1996................. 3,505,750 -- 3,506 14,569 69,645 238 -- 87,958
Net income............. -- -- -- -- 11,026 -- -- 11,026
Net appreciation on
debt and equity
securities........... -- -- -- -- -- 2,942 -- 2,942
--------- -------- ------ ------- ------- ------- ------- --------
Balances, December 31,
1997................. 3,505,750 -- $3,506 $14,569 $80,671 $ 3,180 $ -- $101,926
========= ======== ====== ======= ======= ======= ======= ========
</TABLE>
See accompanying notes to the consolidated financial statements.
A-35
<PAGE> 235
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
AND SUBSIDIARIES
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................................................ $ 11,026 $ 9,585 $ 7,941
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 2,525 2,423 1,056
Realized losses on investments.......................... 207 473 6
Deferred federal income taxes........................... 782 1,834 5,250
Stock bonus............................................. -- 697 --
Changes in assets and liabilities:
Premiums due from policyholders....................... 217 350 558
Reinsurance recoverables.............................. (6,707) (5,286) (8,809)
Accrued investment income............................. (900) (273) (615)
Prepaid reinsurance premiums.......................... (542) (46) 902
Deferred policy acquisition costs..................... (378) 94 20
Other assets.......................................... (1,342) (1,137) (331)
Loss and loss adjustment expense reserves............. 19,232 20,314 11,061
Reserve for extended reporting period claims.......... 505 713 1,344
Unearned premiums..................................... (280) (1,177) (1,435)
Drafts outstanding.................................... (549) (905) (18)
Accrued expenses and other liabilities................ 1,191 1,877 667
--------- --------- ---------
Net cash provided by operating activities.......... 24,987 29,536 17,597
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sale or maturity of short-term
investments............................................. 373,238 293,643 658,437
Purchases of short-term investments....................... (387,690) (286,325) (634,287)
Proceeds from maturity of securities available-for-sale... 2,620 2,000 43,847
Proceeds from sale of securities available-for-sale....... 61,829 97,188 115,684
Purchases of securities available-for-sale................ (89,121) (130,506) (216,175)
Proceeds from maturity of securities held-to-maturity..... -- -- 27,686
Proceeds from sale of securities held-to-maturity......... -- -- 758
Purchases of securities held-to-maturity.................. -- -- (12,861)
Payable for securities.................................... -- (3,205) 3,205
Purchases of property and equipment....................... (7,456) (667) (774)
Payment on liability for purchased book of business....... (754) (894) (893)
--------- --------- ---------
Net cash used in investing activities.............. (47,334) (28,766) (15,373)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of long-term debt.................. 22,500 -- --
Purchase of treasury shares............................... -- -- (4,385)
Sale of treasury shares................................... -- -- 2,500
Cash paid in lieu of fractional shares.................... -- (26) --
--------- --------- ---------
Net cash provided by (used in) financing
activities........................................ 22,500 (26) (1,885)
--------- --------- ---------
Net increase in cash........................................ 153 744 339
Cash, beginning of year..................................... 2,023 1,279 940
--------- --------- ---------
Cash, end of year........................................... $ 2,176 $ 2,023 $ 1,279
========= ========= =========
Supplemental disclosure of cash flow information:
Federal income taxes paid (recovered)..................... $ 2,000 $ 1,593 $ (159)
Interest paid............................................. 730 -- --
Supplemental schedule of noncash investing and financing
activities:
Purchase of book of business (note 16):
Intangible assets acquired.............................. $ -- $ (400) $ (3,587)
Amount due.............................................. -- 400 3,587
Issuance of treasury shares as stock bonus (note 12)...... -- 697 --
Issuance of treasury shares for acquired company (note
12)..................................................... -- 935 --
</TABLE>
See accompanying notes to the consolidated financial statements.
A-36
<PAGE> 236
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(1) DESCRIPTION OF BUSINESS
General
Professionals Insurance Company Management Group (Professionals Group) is
an insurance holding company incorporated under Michigan law on January 31,
1996. Professionals Group owns all of the issued and outstanding common stock of
PICOM Insurance Company (PICOM), a stock insurance company incorporated under
Michigan law. Professionals Group and subsidiaries are collectively referred to
as "the Company."
Effective August 31, 1996, and pursuant to a Reorganization Agreement dated
May 13, 1996 (the Reorganization Agreement), and an Agreement and Plan of Merger
dated May 13, 1996 (Plan of Merger), among Professionals Group, PICOM Interim
Insurance Company, a stock insurance company incorporated under Michigan law and
a wholly owned subsidiary of Professionals Group (INSCO) and PICOM,
Professionals Group acquired all of the outstanding capital stock of PICOM
through the merger of INSCO with and into PICOM (the Merger). As a result of the
Merger: (1) INSCO was merged into PICOM and INSCO ceased to exist; (2) PICOM, as
the surviving corporation, became a wholly owned subsidiary of Professionals
Group; (3) each issued and outstanding share of common stock of PICOM
(representing 3,188,145 shares) was converted into one share of common stock of
Professionals Group, and (4) all of the issued and outstanding shares of INSCO
held by Professionals Group were converted into shares of common stock of PICOM.
The Merger has been accounted for in a manner similar to a pooling of
interests, whereby Professionals Group has carried forward to its accounts the
assets and liabilities of PICOM at their respective amounts as reported by
PICOM.
PICOM is a Michigan-domiciled property and casualty insurance company
licensed in eight states which provides professional liability insurance for
physicians, surgeons, dentists, hospitals, other health care providers and
lawyers and law firms.
Following is a description of the most significant risks facing
property/casualty insurers and how the Company 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
Company mitigates this risk through underwriting and loss adjusting practices
which identify and minimize the adverse impact of this risk.
Credit Risk is the risk that issuers of securities owned by the Company
will default or other parties, including reinsurers, which owe the Company money
will not pay. Also, the Company writes a significant amount of business under
which policyholders reimburse the Company for policy deductibles. The Company
minimizes this risk by adhering to a conservative investment strategy, by
maintaining sound reinsurance and credit and collection practices 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 Company mitigates this
risk by attempting to approximately 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, an insurer would have to sell assets prior
to maturity and recognize a gain or loss. At December 31, 1997, the estimated
market value of the Company's bond portfolio was greater than its amortized
cost.
A-37
<PAGE> 237
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the dates of the balance sheets and revenues and expenses for
the periods then ended. Actual results may differ from those estimates.
The most significant estimates that are susceptible to significant change
in the near term relate to the determination of the loss and loss adjustment
expense reserves and the reserve for extended reporting period claims. Although
considerable variability is inherent in these estimates, management believes
that the reserves are adequate. The estimates are reviewed regularly and
adjusted as necessary. Such adjustments are generally reflected in current
operations. Other material estimates that are susceptible to significant change
in the near term relate to the recoverability of deferred federal income tax
assets.
(2) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Professionals Group, and the following wholly owned subsidiaries:
PICOM, including PICOM's two wholly owned subsidiaries, PICOM Claims
Services Corporation -- a provider of claims processing services to a
nonaffiliated professional liability company and ProNational Casualty Company
(ProNational Casualty), formerly PICOM Insurance Company of Illinois -- an
Illinois-domiciled property and casualty insurance company which provided
professional liability insurance for physicians and surgeons in the State of
Illinois through 1997. ProNational Casualty was formed in December 1994 to write
the book of business purchased effective January 1, 1995 (see note 16).
PICOM Financial Services Corporation -- an inactive financial services
company.
PICOM Insurance Agency, Inc. -- an inactive insurance agency.
American Insurance Management Corporation -- an Indiana Corporation that
serves as the attorney-in-fact for American Medical Insurance Exchange, an
inactive Indiana interinsurance reciprocal exchange.
All significant intercompany transactions and balances have been eliminated
in consolidation.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles (GAAP), which vary in certain respects
from statutory accounting practices (SAP) followed in reporting to insurance
regulatory authorities (see note 14 for the effects of such differences).
(b) Investments
Investment securities are classified upon acquisition into one of three
categories: trading, available-for-sale or held-to-maturity. Trading securities
are bought and held principally for the purpose of selling them in the near
term. Held-to-maturity securities are those securities the Company has the
positive intent and ability to hold until maturity. At December 31, 1997 and
1996, all of the Company's securities are classified as available-for-sale and
are those securities that would be available to be sold in response to the
Company's liquidity needs, changes in market interest rates and asset-liability
management strategies, among others.
Available-for-sale securities are recorded at fair value, whereas
held-to-maturity securities are recorded at amortized cost. Unrealized gains and
losses, net of the related income tax effect, on available-for-sale
A-38
<PAGE> 238
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
securities are excluded from income and reported in the separate component of
shareholders' equity. Transfers of securities between categories are recorded at
fair value at the date of transfer. Unrealized gains and losses associated with
transfers of securities from held-to-maturity to available-for-sale are recorded
in the separate component of shareholders' equity.
A decline in the fair value of an available-for-sale or held-to-maturity
security below cost that is deemed other than temporary results in a charge to
income, resulting in the establishment of a new cost basis for the security. All
declines in fair values of the Company's investment securities in 1997, 1996 or
1995 were deemed to be temporary.
Investments in preferred stock and common stock of nonaffiliates are stated
at fair value. Fair values are based on quoted market prices or dealer quotes.
If a quoted market price is not available, fair value is estimated using quoted
market prices for similar securities.
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.
Premiums and discounts are amortized or accreted, respectively, over the
life of the related debt security as an adjustment to yield using the
yield-to-maturity method. Dividends and interest income are recognized when
earned. Realized gains and losses are included in earnings and are derived using
the specific-identification method for determining the cost of securities sold.
(c) Revenue Recognition
Insurance premium income is recognized on a monthly pro rata basis over the
respective terms of the policies in-force and unearned premiums represent the
portion of premiums written which is applicable to the unexpired terms of the
policies in-force.
Reinsurance arrangements are prospective contracts for which prepaid
reinsurance premiums are amortized ratably over the related policy terms based
on the estimated ultimate amounts to be paid.
(d) Loss and Loss Adjustment Expense Reserves
Loss and loss adjustment expense reserves represent the accumulation of
individual case estimates for reported losses and loss adjustment expenses, bulk
adjustments to case estimates and actuarial estimates for incurred but not
reported losses and loss adjustment expenses, based upon the Company's actual
experience, assumptions and projections as to claims frequency, severity,
inflationary trends and settlement payments. The reserve for 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 reserve is stated gross of reinsurance ceded.
Through December 31, 1994, the Company discounted loss and loss adjustment
expense reserves to present value. Effective January 1, 1995, the Company
eliminated its practice of discounting, a change in method of accounting (see
note 9).
(e) Reserve for Extended Reporting Period Claims
The reserve for extended reporting period claims coverage is recorded
during the term of the original claims-made policy, utilizing the pure-premium
approach, in amounts adequate to pay for estimated future claims reported
subsequent to a current policyholders' death, disability or retirement. Changes
in this reserve are charged or credited to income.
A-39
<PAGE> 239
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(f) Property and Equipment and Depreciation
Property and equipment are recorded at cost, net of accumulated
depreciation. Depreciation is computed on the straight-line method over periods
ranging from 4 to 25 years. Maintenance, repairs and minor renewals are charged
to expense as incurred.
The cost and related accumulated depreciation of assets sold are removed
from the related accounts and the resulting gain or loss is reflected in income.
(g) Deferred Policy Acquisition Costs
Policy acquisition costs, specifically commissions, are deferred, subject
to ultimate recoverability from future income, including investment income and
amortized to expense over the period in which related premiums are earned.
(h) Federal Income Taxes
Deferred federal income tax assets and liabilities are recognized for the
expected future tax consequences attributable to differences between the
financial statement carrying amount of 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
these temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(i) Intangible Assets
Intangible assets are comprised mainly of goodwill, which represents the
excess of cost over the fair value of assets acquired, and the cost of a
purchased book of business (see note 16), both of which are being amortized on a
straight-line basis over ten years. The carrying value of intangible assets is
periodically reviewed by the Company based on the expected future undiscounted
operating cash flows of the related item. Based upon its most recent analysis,
the Company believes that no material impairment of intangible assets exists at
December 31, 1997.
(j) Stock-Based Compensation
As more fully described in note 13, the Company records compensation
expense for stock options only if the market price of the Company's stock, on
the date of grant, exceeds the amount an individual must pay to acquire the
stock.
(k) 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 year after giving effect to stock dividends and
treasury shares.
The Company adopted Statement of Financial Accounting Standards No. 128
"Earnings Per Share" (SFAS No. 128) during the fourth quarter of 1997. All
income per share amounts presented herein have been restated to conform with the
provisions of SFAS No. 128. A reconciliation of the numerators and
A-40
<PAGE> 240
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
denominators of the "income per share" and "income per share -- assuming
dilution" computations for "income before cumulative effect of change in
accounting method" are presented below:
<TABLE>
<CAPTION>
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
For the Year Ended December 31, 1997:
Income before cumulative effect of change in
accounting method........................ $11,026,000
-----------
Income per share............................ 11,026,000 3,505,750 $3.15
=====
Effect of dilutive securities -- stock
options.................................. -- 2,011
----------- ---------
Income per share -- assuming dilution....... $11,026,000 3,507,761 $3.14
=========== ========= =====
For the Year Ended December 31, 1996:
Income before cumulative effect of change in
accounting method........................ $ 9,585,000
-----------
Income per share............................ 9,585,000 3,486,698 $2.75
=====
Effect of dilutive securities -- stock
options.................................. -- 25
----------- ---------
Income per share -- assuming dilution....... $ 9,585,000 3,486,723 $2.75
=========== ========= =====
For the Year Ended December 31, 1995:
Income before cumulative effect of change in
accounting method........................ $16,066,000
-----------
Income per share............................ 16,066,000 3,432,339 $4.68
=====
Effect of dilutive securities -- stock
options.................................. -- --
----------- ---------
Income per share -- assuming dilution....... $16,066,000 3,432,339 $4.68
=========== ========= =====
</TABLE>
(4) INVESTMENTS
In November 1995, the Financial Accounting Standards Board issued a Guide
to Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities. This guide allowed companies to reassess the
appropriateness of the classification of securities as of the date of the
implementation guide, but no later than December 31, 1995. As a result, the
Company made a one-time transfer of approximately $77,893,000 in investment
securities previously classified as held-to-maturity to the available-for-sale
classification. The effect of such reclassification increased shareholders'
equity by $511,000, net of deferred federal income taxes.
A-41
<PAGE> 241
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
A summary of amortized cost, gross unrealized gains and losses and
estimated fair value of investments in securities as of December 31, 1997 and
1996, follows:
<TABLE>
<CAPTION>
1997
-------------------------------------------
GROSS UNREALIZED
AMORTIZED ---------------- ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ------ ------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Fixed maturities available for sale:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies........... $ 31,774 $ 431 $ 5 $ 32,200
Debt securities issued by states of the United
States and political subdivisions of the
states......................................... 105,045 2,345 1 107,389
Debt securities issued by foreign governments..... 691 177 -- 868
Corporate debt securities......................... 74,558 738 33 75,263
Mortgage-backed securities:
Government..................................... 69,552 530 159 69,923
Other.......................................... 12,746 126 5 12,867
Redeemable preferred stocks....................... 14,575 548 -- 15,123
-------- ------ ------ --------
$308,941 $4,895 $ 203 $313,633
======== ====== ====== ========
Equity securities available for sale -- common
stocks............................................ $ 2,704 $ 132 $ 5 $ 2,831
======== ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
1996
-------------------------------------------
GROSS UNREALIZED
AMORTIZED ---------------- ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ------ ------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Fixed maturities available for sale:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies........... $ 52,065 $ 342 $ 394 $ 52,013
Debt securities issued by states of the United
States and political subdivisions of the
states......................................... 95,433 581 258 95,756
Debt securities issued by foreign governments..... 690 150 -- 840
Corporate debt securities......................... 46,356 345 375 46,326
Mortgage-backed securities:
Government..................................... 68,752 466 788 68,430
Other.......................................... 15,684 168 41 15,811
Redeemable preferred stocks....................... 6,996 104 2 7,098
-------- ------ ------ --------
$285,976 $2,156 $1,858 $286,274
======== ====== ====== ========
Equity securities available for sale -- common
stocks............................................ $ 2,630 $ 67 $ 5 $ 2,692
======== ====== ====== ========
</TABLE>
The amortized cost and estimated fair value of fixed maturities at December
31, 1997, by contractual maturity, are shown below. Expected maturities on
certain corporate and mortgage-backed securities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
A-42
<PAGE> 242
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
--------- ----------
(IN THOUSANDS)
<S> <C> <C>
Due in one year or less................................ $ 4,992 $ 5,005
Due after one year through five years.................. 90,641 91,470
Due after five years through ten years................. 75,372 77,354
Due after ten years.................................... 41,063 41,891
-------- --------
212,068 215,720
Mortgage-backed securities:
Government........................................... 69,552 69,923
Other................................................ 12,746 12,867
Redeemable preferred stocks............................ 14,575 15,123
-------- --------
$308,941 $313,633
======== ========
</TABLE>
Proceeds and related gross realized gains and gross realized losses on
sales of fixed maturities follow:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Proceeds..................................... $61,825 $97,127 $116,441
======= ======= ========
Gross realized gains......................... $ 418 $ 319 $ 1,672
Gross realized losses........................ (597) (807) (1,345)
------- ------- --------
Net realized gains (losses)............. $ (179) $ (488) $ 327
======= ======= ========
</TABLE>
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.............................. $18,421 $15,548 $11,920
Equity securities............................. 100 32 2
Short-term investments and cash and cash
equivalents................................. 815 860 3,176
Real estate................................... 147 87 70
Other investment assets....................... 109 143 477
------- ------- -------
Total investment income.................. 19,592 16,670 15,645
Less investment expenses...................... 873 929 916
------- ------- -------
Net investment income.................... $18,719 $15,741 $14,729
======= ======= =======
</TABLE>
A-43
<PAGE> 243
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
Realized gains (losses) 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............................ $ (179) $ (488) $ 327
Equity securities........................... (28) 15 (333)
------- ------- -------
Net realized losses...................... $ (207) $ (473) $ (6)
======= ======= =======
Change in net unrealized gains (losses):
Fixed maturities............................ $ 4,394 $(2,552) $19,356
Equity securities........................... 65 29 22
------- ------- -------
Total change in net unrealized gains
(losses)............................... $ 4,459 $(2,523) $19,378
======= ======= =======
</TABLE>
On December 28, 1995, under a reciprocal stock purchase agreement with
Physicians Insurance Company of Wisconsin, Inc. (PIC-Wis), the Company acquired
1,583 shares of PIC-Wis' common stock (representing 6.77% of PIC-Wis'
outstanding stock) for $2,500,000, and PIC-Wis acquired 131,579 shares of the
Company's common stock (representing 4.2% of the Company's outstanding stock)
for $2,500,000.
At December 31, 1997, U.S. Treasury notes and certificates of deposit with
a carrying value of $3,395,000 were on deposit with regulatory authorities, as
required by law.
(5) REINSURANCE
In the normal course of business, the Company seeks to reduce the loss that
may arise from events that cause unfavorable underwriting results by reinsuring
certain levels of risk in various areas of exposure with other insurance
enterprises or reinsurers. Amounts receivable from reinsurers are estimated in a
manner consistent with the claim liability associated with the reinsured policy.
Although reinsurance agreements contractually obligate the Company's reinsurers
to reimburse the Company for their proportionate share of losses, they do not
discharge the primary liability of the Company. The Company remains liable for
the ceded amount of reserves for unpaid losses and loss adjustment expenses and
unearned premiums in the event the assuming insurance organizations are unable
to meet their contractual obligations.
The Company has various excess of loss and quota share reinsurance
agreements. As of December 31, 1997, the maximum current net retention on
business generated by Professionals Group's insurance subsidiaries, subject to
certain adjustments of risk on any single coverage per claim after reinsurance,
was $300,000. Effective January 1, 1998, the Company's net retention was
increased to $500,000 on all business.
The Company continually reviews its reinsurers, considering a number of
factors, the most critical of which is their financial stability. Based on these
reviews, the Company evaluates its position with reinsurers with respect to
existing and future reinsurance.
The Company first assumed business from other insurance companies on
December 31, 1996, when it assumed all of the loss and loss adjustment expense
reserves and unearned premiums of American Medical Insurance Exchange (AMIE).
Effective July 1, 1997, PICOM began assuming, on a quota-share basis, 40% of
Michigan Educational Employees Mutual Insurance Company's (MEEMIC) net business
(see note 19).
A-44
<PAGE> 244
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
At December 31, 1997, amounts related to reinsurance balances and prepaid
reinsurance premiums follow:
<TABLE>
<CAPTION>
PREPAID
REINSURANCE REINSURANCE
BALANCES PREMIUMS
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
TIG Reinsurance...................................... $ 7,299 $242
Underwriters Reinsurance Company..................... 4,125 --
PMA Reinsurance Corporation.......................... 3,445 179
Continental Casualty Company......................... 3,014 143
Michigan Educational Employees Mutual Insurance
Company............................................ 2,003 --
Odyssey Reinsurance Company.......................... 1,347 100
Other................................................ 3,024 --
------- ----
$24,257 $664
======= ====
</TABLE>
Reinsurance balances consisted of amounts related to:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Recoverables:
Paid losses and loss adjustment expenses............... $ 267 $ 41
Unpaid losses and loss adjustment expenses............. 23,840 19,206
------- -------
Total reinsurance recoverables................. 24,107 19,247
Ceded reinsurance premiums payable....................... (2,841) (2,059)
Assumed reinsurance premiums receivable.................. 6,278 --
Ceded reinsurance commissions receivable................. 386 362
Assumed reinsurance commissions payable.................. (3,673) --
------- -------
$24,257 $17,550
======= =======
</TABLE>
Premiums earned and losses and loss adjustment expenses are net of the
following reinsurance ceded amounts:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Premiums earned................................ $10,002 $9,261 $13,478
Losses and loss adjustment expenses............ 5,687 6,356 11,475
</TABLE>
Premiums earned and losses and loss adjustment expenses have been increased
by the following reinsurance assumed amounts for the year ended December 31,
1997:
<TABLE>
<CAPTION>
MEEMIC OTHER
------- -----
(IN THOUSANDS)
<S> <C> <C>
Premiums earned............................................ $20,115 $756
Losses and loss adjustment expenses........................ 13,078 717
</TABLE>
A-45
<PAGE> 245
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(6) FEDERAL INCOME TAXES
Professionals Group, together with its subsidiaries, files a consolidated
federal income tax return. Income tax expense is computed under the liability
method, whereby deferred income taxes reflect the estimated future tax effects
of temporary differences between the carrying value of assets and liabilities
for financial reporting purposes and those for income tax purposes. A valuation
allowance is then required to be established to reduce a deferred tax asset if
it is "more likely than not" that the related tax benefits will not be realized.
The provision for federal income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1997 1996 1995
------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current......................................... $2,099 $ 604 $(1,159)
Deferred........................................ 782 1,834 9,435
------ ------ -------
$2,881 $2,438 $ 8,276
====== ====== =======
</TABLE>
The significant components of federal income tax expense (benefit) are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1997 1996 1995
------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Continuing operations........................... $2,881 $2,438 $ 8,276
Accounting change............................... -- -- (4,185)
Shareholders' equity............................ 1,517 (840) 4,740
------ ------ -------
$4,398 $1,598 $ 8,831
====== ====== =======
</TABLE>
Actual federal income taxes vary from amounts computed by applying the
current federal income tax rate of 34% to income or loss before federal income
taxes. For the years ended December 31, 1997, 1996 and 1995, the reasons for
these differences, and the tax effects thereof, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Expected tax expense........................... $ 4,728 $ 4,088 $8,276
Dividends received deduction................. (138) (11) --
Tax-exempt interest.......................... (1,395) (1,000) (65)
Adjustment to prior years' tax liability..... (399) (913) --
Other, net................................... 85 274 65
------- ------- ------
Actual tax expense............................. $ 2,881 $ 2,438 $8,276
======= ======= ======
</TABLE>
A-46
<PAGE> 246
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
The tax effects of temporary differences that give rise to deferred federal
income tax assets and deferred federal income tax liabilities follow:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred federal income tax assets arising from:
Loss and loss adjustment expense reserves.............. $16,027 $14,704
Unearned premium reserves.............................. 1,428 1,484
Alternative minimum tax credits........................ -- 1,656
Other.................................................. 231 194
------- -------
Total deferred federal income tax assets....... 17,686 18,038
------- -------
Deferred federal income tax liabilities arising from:
Deferred policy acquisition costs...................... 468 339
Net unrealized gains on investments.................... 1,640 123
Other.................................................. 575 275
------- -------
Total deferred federal income tax
liabilities.................................. 2,683 737
------- -------
Net deferred federal income taxes.............. $15,003 $17,301
======= =======
</TABLE>
In assessing the realizability of deferred federal income tax assets,
management considers whether it is more likely than not that some portion of the
deferred federal income tax assets will not be realized. Because of the
carryforward provisions of the Internal Revenue Code, the expectation that
temporary differences will reverse during periods in which taxable income is
generated, and the fact that the Company has not incurred an operating loss for
either financial or federal income tax reporting purposes since 1987, management
believes it is more likely than not that the Company will fully realize the net
deferred federal income tax assets. Accordingly, no valuation allowance has been
established.
(7) PROPERTY AND EQUIPMENT
At December 31, 1997 and 1996, property and equipment consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Real estate.............................................. $ 6,739 $ 1,998
Data processing equipment, including software............ 2,424 2,008
Furniture, fixtures and equipment........................ 2,839 1,210
------- -------
12,002 5,216
Accumulated depreciation................................. (2,942) (2,757)
------- -------
Total property and equipment................... $ 9,060 $ 2,459
======= =======
</TABLE>
A-47
<PAGE> 247
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(8) DEFERRED POLICY ACQUISITION COSTS
Changes in deferred policy acquisition costs are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Net asset balance, beginning of year.......... $ 998 $ 1,092 $ 1,112
------- ------- -------
Amounts deferred:
Agent commissions and ceding commission
expense.................................. 3,539 2,873 3,181
Ceding commission income.................... (1,323) (1,229) (1,543)
------- ------- -------
Net amounts deferred................ 2,216 1,644 1,638
Net amortization.............................. (1,838) (1,738) (1,658)
------- ------- -------
Net asset balance, end of year................ $ 1,376 $ 998 $ 1,092
======= ======= =======
</TABLE>
(9) LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
Prior to 1995, loss and loss adjustment expense reserves were discounted to
reflect anticipated investment income. Discounts were based on historical
payment patterns and assumed an interest rate at or below the Company's
investment yield, which was the same rate used for statutory reporting purposes.
Effective January 1, 1995, the Company eliminated its practice of
discounting loss and loss adjustment expense reserves for GAAP reporting
purposes, a change in method of accounting. The Company believes it is
preferable not to discount reserves because it is more conservative and is
practiced by most publicly held insurers. This change in method of accounting
resulted in a one-time cumulative charge of $8,125,000, net of deferred federal
income taxes, as of January 1, 1995.
A-48
<PAGE> 248
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
Activity in 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, beginning of year................. $219,919 $199,605 $188,544
Less reinsurance balances recoverable...... (19,206) (14,186) (3,760)
-------- -------- --------
Net balance, beginning of year............. 200,713 185,419 184,784
-------- -------- --------
Incurred related to:
Current year............................. 83,466 65,986 63,027
Prior years.............................. (26,341) (17,618) (27,469)
-------- -------- --------
Total incurred................... 57,125 48,368 35,558
-------- -------- --------
Effect of change in accounting method...... -- -- 12,310
Loss and loss adjustment expense reserves
assumed (see note 5)..................... -- 4,119 --
-------- -------- --------
Paid related to:
Current year............................. 10,512 4,352 3,053
Prior years.............................. 32,015 32,841 44,180
-------- -------- --------
Total paid....................... 42,527 37,193 47,233
-------- -------- --------
Net balance, end of year................... 215,311 200,713 185,419
Plus reinsurance balances recoverable...... 23,840 19,206 14,186
-------- -------- --------
Balance, end of year....................... $239,151 $219,919 $199,605
======== ======== ========
</TABLE>
The Company establishes conservative reserves for the most recent accident
years and adjusts the reserves as new information becomes available. This
reserving practice has resulted in favorable development in estimates of prior
years' reserves.
(10) LONG-TERM DEBT
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 (6.40% at December 31, 1997), and payable quarterly
(the "Credit Agreement"). Principal payments are due on April 30, as follows:
1998 -- $2,500,000; 1999 -- $2,500,000; 2000 -- $3,000,000; 2001 -- $3,000,000;
2002 -- $3,500,000; 2003 -- $3,500,000; and 2004 -- $4,500,000.
The Credit Agreement contains a covenant which prohibits the payment of
cash dividends on Professionals Group's common stock (except for cash paid in
lieu of fractional shares related to stock dividends declared). Additional
covenants also require the Company to, among other things, maintain total
consolidated shareholders' equity of at least $80.0 million plus 50% of the
preceding fiscal year's consolidated net income, maintain a fixed charges ratio
and an interest coverage ratio (as defined by the Credit Agreement) of not less
than 1.5:1 and 2.5:1, respectively. The Company was in compliance with, or has
received waivers of, all required covenants at December 31, 1997.
(11) EMPLOYEE BENEFIT PLANS
The Company currently maintains two defined contribution employee benefit
plans -- a 401(k) plan and a money purchase plan -- which cover substantially
all employees meeting certain eligibility requirements.
A-49
<PAGE> 249
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
With respect to the 401(k) plan, the Company annually contributes 5% of an
employee's salary and matches employee contributions up to 5% of an employee's
salary. During 1997, 1996 and 1995, the Company's expense under the 401(k) plan
was $370,000, $295,000 and $261,000, respectively.
With respect to the money purchase plan, the Company annually contributes
3% of an employee's salary up to a prescribed maximum, plus 5% of the excess of
an employee's salary over the prescribed maximum. During 1997, 1996 and 1995,
the Company's expense under the money purchase plan was $145,000, $112,000 and
$114,000, respectively.
The Company has a stock purchase plan through which employees and directors
of the Company and its wholly owned subsidiaries may purchase the Company's
common stock by means of payroll deduction. Pursuant to this plan, the Company
may elect to match participant purchases, which it is currently matching at the
rate of $1.25 (of which $1.00 is used to purchase the Company's common stock and
$0.25 is applied to income taxes) for each $1.00 of participant purchases up to
a maximum participant purchase of $6,000 per year. In 1997, 1996 and 1995, the
Company incurred expenses of $250,000, $215,000 and $82,000, respectively, under
this plan.
(12) SHAREHOLDERS' EQUITY
Approximately $363.8 million of consolidated assets represents assets of
the Company's insurance operations that may not be transferred to Professionals
Group in the form of dividends, loans or advances without prior regulatory
approval. The amount of dividends that Professionals Group's insurance
subsidiaries can pay to Professionals Group in any 12-month period is limited to
the greater of statutory net income for the preceding year, excluding realized
gains (losses) on sales of investments, or 10% of policyholders' surplus as of
the preceding year-end. As of January 1, 1998, approximately $14,185,000 could
be paid by Professionals Group's insurance subsidiaries without prior regulatory
approval. In 1997 and 1996, Professionals Group's insurance subsidiaries paid
dividends of $4,717,049 and $3,530,334, respectively. In 1995, Professionals
Group's insurance subsidiaries did not pay any dividends.
On February 28, 1996, the Company awarded 28,430 shares of common stock
held in treasury to directors, officers and employees of the Company as a
one-time stock bonus. Compensation expense for this stock bonus approximated
$697,000, which was charged to policy acquisition and other underwriting
expenses.
On May 1, 1996, in a transaction approximating $1,244,000, the Company paid
$309,000 and issued 44,000 shares of common stock held in treasury (valued at
$935,000) in exchange for all of the issued and outstanding shares of American
Insurance Management Corporation. The acquisition was accounted for as a
purchase. The effect of the acquisition was not material to the Company's
consolidated results of operations.
As a result of the merger on August 31, 1996 (see note 1), the remaining
50,814 shares of the Company's common stock held in treasury were canceled and
retired at cost.
On November 21, 1996, the Company declared a 10% stock dividend, issued on
December 16, 1996 to shareholders of record as of December 4, 1996. All
per-share information in the accompanying consolidated financial statements has
been adjusted to give retroactive effect to this stock dividend.
Effective July 5, 1995, the Company purchased 254,823 shares of its common
stock (approximately 7.9% of its then-issued and outstanding shares) from
Physicians Insurance Company of Ohio for $4,331,991 ($17 per share), plus
$53,000 for advisory and finder fees. These shares, net of 131,579 shares sold
in December 1995 (see note 4), were held as treasury stock available for resale
at December 31, 1995.
A-50
<PAGE> 250
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(13) STOCK OPTIONS AND AWARDS
The Company has established the 1996 Long-Term Stock Incentive Plan (the
"Incentive Plan") under which, subject to adjustment, 300,000 shares of the
Company's common stock are available to grant incentive and non-qualified stock
options, stock appreciation rights (SARs), restricted stock, restricted stock
units, performance awards, dividend equivalents and other stock-based awards to
employees of, including any officer or officer-director, or consultants to the
Company and its subsidiaries. All terms and conditions of any grants under the
Incentive Plan are at the discretion of the Compensation Committee of the
Company's Board of Directors. During 1997, 146,500 options were granted at the
market price of the Company's common stock on the date of grant. These options
vest and become exercisable over five years beginning in 1998, and expire in
2007. No charges to operations are recorded with respect to authorization, grant
or exercise of options. Proceeds received upon exercise are credited to
shareholder's equity. During 1996, no grants were made under the Incentive Plan.
The Company has also established the 1996 Non-Employee Directors Stock
Option Plan (the "Directors Plan") under which, subject to adjustment,
non-qualified options for 50,000 shares of the Company's common stock may be
granted to non-employee directors (maximum of 5,000 shares to one individual) of
the Company. Options are granted at the market price of the Company's common
stock on the date of grant. Options become exercisable one year from the date of
grant and expire seven years from the date of grant. No charges to operations
are recorded with respect to authorization, grant or exercise of options.
Proceeds received upon exercise are credited to shareholders' equity. During
both 1997 and 1996, stock options totaling 4,500 shares of the Company's common
stock had been granted under the Directors Plan at exercise prices of $25.28 and
$21.63, respectively. No options were exercised or canceled during 1997 or 1996.
Information regarding the Incentive Plan for 1997 follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- ----------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE NUMBER AVERAGE
EXERCISE REMAINING EXERCISABLE AT EXERCISE
SHARES PRICE CONTRACTUAL LIFE DECEMBER 31, 1997 PRICE
-------- -------- ---------------- ----------------- --------
<S> <C> <C> <C> <C> <C>
Options outstanding, beginning of
year.............................. -- $ -- -- -- --
Options granted..................... 146,500 37.00 9 years -- --
-------- ------
Options outstanding, end of year.... 146,500 $37.00 9 years -- --
======== ====== ===== ======
Range of exercise prices for options
outstanding, end of year.......... $ 37.00
========
Options available for grant, end of
year.............................. 153,500
========
Weighted average fair value of
options granted during the year... $ 21.14
========
</TABLE>
A-51
<PAGE> 251
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
Information regarding the Directors Plan for 1997 follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- ----------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE NUMBER AVERAGE
EXERCISE REMAINING EXERCISABLE AT EXERCISE
SHARES PRICE CONTRACTUAL LIFE DECEMBER 31, 1997 PRICE
-------- -------- ---------------- ----------------- --------
<S> <C> <C> <C> <C> <C>
Options outstanding, beginning of
year.............................. 4,500 $21.63 7 years -- $ --
Stock dividend adjustment........... 450 -- 7 years -- --
Options granted..................... 4,500 25.28 7 years -- --
-------- ------
Options outstanding, end of year.... 9,450 $22.34 6.5 years 4,950 $19.66
======== ====== ===== ======
Range of exercise prices for options
outstanding, end of year.......... $ 19.66-- $25.28
====================
Options available for grant, end of
year.............................. 40,550
========
Weighted average fair value of
options granted during the year... $ 12.90
========
</TABLE>
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation" (SFAS No.
123). This standard prescribes a method of accounting for stock-based
compensation that recognizes compensation cost based on the fair value of
options at grant date. In lieu of applying this fair value based method, a
company may elect to disclose only the proforma effects of such application in
the footnotes to its financial statements.
The Company has elected the disclosure-only provisions of SFAS No. 123.
Accordingly, had compensation cost for the Directors and Incentive Plans been
based on the fair value of options at grant date, the Company's 1997 net income
(in thousands) and net income per common share -- assuming dilution would have
been reduced to the proforma amounts below:
<TABLE>
<S> <C>
Net income:
As reported............................................... $11,026
Proforma.................................................. 8,524
Net income per common share -- assuming dilution:
As reported............................................... $ 3.14
Proforma.................................................. 2.43
</TABLE>
The fair value of options at date of grant was estimated using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1997: dividend yield of 0%; expected volatility
of 35.7%; risk free interest rate of 6.29% and 6.62% for the Incentive Plan and
Directors Plan, respectively; and expected lives of 9 years and 7 years for the
Incentive Plan and Directors Plan, respectively. The proforma effect on net
income for 1997 is not representative of the proforma effect on net income for
future years because additional stock option awards could be made in future
years.
(14) STATUTORY INSURANCE ACCOUNTING PRACTICES
PICOM and ProNational Casualty are required to file financial statements
prepared in accordance with SAP prescribed or permitted by Michigan and Illinois
with their respective domiciliary states. The only material statutory accounting
method utilized by PICOM that is permitted rather than prescribed is PICOM's
discounting of its loss and loss adjustment expense reserves through December
31, 1994 and discounting of loss reserves only thereafter. The impact of such
permitted practice is to increase the statutory policyholders'
A-52
<PAGE> 252
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
surplus of PICOM by approximately $10,658,000 at both December 31, 1997 and
1996, respectively. ProNational Casualty does not utilize any permitted
accounting practices.
Accounting practices used to prepare statutory-basis financial statements
differ in some respects from GAAP. A reconciliation of statutory capital and
surplus at December 31, 1997 and 1996, and statutory net income for the years
ended December 31, 1997, 1996 and 1995, of PICOM and ProNational Casualty, as
applicable (as filed with their respective insurance regulatory authorities), to
the amounts shown in the accompanying consolidated financial statements follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Statutory capital and surplus.......................... $108,178 $ 80,572
Add (deduct) adjustments to statutory capital and
surplus to convert to GAAP:
Net unrealized appreciation on securities available
for sale.......................................... 4,710 293
Deferred policy acquisition costs.................... 1,376 998
Deferred federal income taxes........................ 15,003 17,301
Non-admitted assets.................................. 2,378 813
Loss and loss adjustment expense reserve discount.... (10,658) (10,658)
Liabilities for GAAP in excess of SAP................ (2,250) (2,700)
Provision for unauthorized reinsurance............... 887 524
Accumulated intercompany dividends................... 6,717 2,000
Accumulated deficit attributable to Professionals
Group............................................. (4,035) (1,287)
Intercompany paid-in capital......................... (20,000) --
Other, net........................................... (380) 102
-------- --------
Total shareholders' equity per accompanying
consolidated balance sheets.......................... $101,926 $ 87,958
======== ========
</TABLE>
A-53
<PAGE> 253
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Statutory net income.......................... $13,719 $14,238 $22,201
Add (deduct) adjustments to statutory net
income to convert to GAAP:
Deferred federal income tax expense......... (782) (1,834) (9,435)
Change in loss and loss adjustment expense
reserve discount......................... -- (1,265) 1,925
Change in liabilities for GAAP in excess of
SAP...................................... 450 -- 1,000
Cumulative effect of change in accounting
methods.................................. -- -- (8,125)
Other, net.................................. 437 (245) 371
------- ------- -------
Combined net income of insurance companies
based on GAAP............................... 13,824 10,894 7,937
Net income (loss) attributable to
non-insurance subsidiaries.................. (50) (22) 4
Net loss attributable to Professionals
Group....................................... (2,748) (1,287) --
------- ------- -------
Net income per accompanying consolidated
statements of income........................ $11,026 $ 9,585 $ 7,941
======= ======= =======
</TABLE>
Certain regulations that affect PICOM, ProNational Casualty and the
insurance industry are promulgated by the National Association of Insurance
Commissioners (NAIC), which is an association of state insurance commissioners,
regulators and support staff that acts as a coordinating body for the state
insurance regulatory process. The NAIC has established risk-based capital (RBC)
requirements to assist regulators in monitoring the financial strength and
stability of property and casualty insurers. Under the NAIC requirements, each
insurer must maintain its total capital and surplus above a calculated minimum
threshold or take corrective measures to achieve that threshold. PICOM and
ProNational Casualty have calculated their RBC levels based on these
requirements and have determined that they passed the RBC test and have capital
and surplus in excess of the minimum threshold.
(15) CONCENTRATIONS AND CREDIT RISK
The Company writes approximately 85% of its premiums through independent
agents and approximately 15% of its premiums directly. In 1997, 1996 and 1995,
the top ten agents produced, in aggregate, approximately 55%, 58% and 55%,
respectively, and one agent individually produced approximately 10% of the
Company's direct written premiums.
All premiums are directly billed to policyholders and premiums due are
secured by the related unearned premiums. When insureds fail to pay their
premiums, coverage is canceled. The Company requires policyholders to remit a
minimum of 20% to 40% of the premium at policy origination date. Subsequent
scheduled payments are monitored to prevent the Company from providing coverage
beyond the date for which payment has been received. In the opinion of
management, the amounts carried on the accompanying consolidated balance sheets
are collectible.
(16) COMMITMENTS
Effective January 1, 1995, PICOM purchased the right to solicit and write
medical professional liability insurance in Illinois that was formerly written
by another Illinois insurance company. The purchase price,
A-54
<PAGE> 254
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
which is a percentage of annualized gross premiums written through 1999, will be
a minimum of $3,452,954, plus $134,000 attributable to a non-compete covenant.
To the extent the ultimate purchase price exceeds the minimum, such excess will
be capitalized. During 1996, the actual purchase price was estimated to exceed
the minimum. As a result, an additional $400,000 was capitalized in 1996. The
adjusted purchase price of $3,986,954, net of accumulated amortization of
$1,126,000 and $717,000, was recorded as an intangible asset at December 31,
1997 and 1996, respectively.
(17) QUARTERLY FINANCIAL DATA (UNAUDITED)
The unaudited operating results by quarter for 1997 and 1996, are
summarized below:
<TABLE>
<CAPTION>
NET INCOME
PER
TOTAL INCOME COMMON
REVENUES BEFORE SHARE --
AND OTHER INCOME NET ASSUMING
INCOME TAXES INCOME DILUTION
--------- ------- ------- ----------
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
<S> <C> <C> <C> <C>
1997:
1st............................. $16,581 $ 3,462 $ 2,621 $0.75
2nd............................. 18,050 3,681 2,677 0.76
3rd............................. 28,255 3,700 2,975 0.85
4th............................. 28,763 3,064 2,753 $0.78
------- ------- ------- =====
Year.................... $91,649 $13,907 $11,026
======= ======= =======
1996:
1st............................. $18,275 $ 3,166 $ 2,328 $0.68
2nd............................. 17,649 2,761 2,158 0.62
3rd............................. 17,925 3,251 2,396 0.68
4th............................. 18,393 2,845 2,703 $0.77
------- ------- ------- =====
Year.................... $72,242 $12,023 $ 9,585
======= ======= =======
</TABLE>
(18) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures About Fair Value of Financial Instruments,
requires disclosures of fair-value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate the value. In situations where quoted market prices are not available,
fair values are to be based on estimates using present value or other valuation
techniques. SFAS No. 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements.
Under SFAS No. 107, the Company's investment securities, cash, short-term
investments, long-term debt, drafts outstanding and balance due on purchased
book of business constitute financial instruments. The carrying amounts of all
financial instruments -- other than investment securities, which are presented
in note 4 -- approximated their fair values at December 31, 1997 and 1996.
(19) RELATED PARTY TRANSACTIONS
In April 1997, the Company completed an agreement with Michigan Educational
Employees Mutual Insurance Company ("MEEMIC"), a Michigan-domiciled specialty
writer of personal automobile and homeowners coverages for teachers and other
members of the educational community in Michigan, whereby:
A-55
<PAGE> 255
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(i) PICOM purchased a twelve-year, $21.5 million surplus note ("Surplus Note")
from MEEMIC, bearing interest at 8.5% per annum; (ii) PICOM reinsures 40% of
MEEMIC's net premiums beginning July 1, 1997; (iii) Professionals Group provides
MEEMIC with information systems services and certain consulting services under a
management services agreement for a base fee of $2.0 million per year; and (iv)
Professionals Group nominees were elected to all MEEMIC Board positions. The
Company also agreed to assist MEEMIC in acquiring the net assets of Michigan
Educators Insurance Agency, Inc. ("MEIA"), the exclusive distributor of MEEMIC
insurance products.
On September 22, 1997, MEEMIC Insurance Services Corporation (Services
Corp.), a newly formed subsidiary of MEEMIC, purchased the net assets of MEIA.
The purchase price equals 3.75% of premiums written by Services Corp. through
July 2004, subject to a guaranteed minimum purchase price of $43.0 million. To
fund this purchase, Services Corp. paid cash of $22.5 million (utilizing the
proceeds of the Surplus Note), and agreed to pay $20.5 million to MEIA as
additional consideration through 2004, as provided for in the purchase
agreement. MEEMIC guaranteed payment of the first $3.0 million and Professionals
Group guaranteed payment of the final $17.5 million (payable in years 2001-2004)
of the purchase price. The Company believes the likelihood that its guarantee
will become payable is minimal.
At a future date, Professionals Group and MEEMIC expect to pursue
demutualization of MEEMIC. Such demutualization would be subject to regulatory
approval by the Michigan Commissioner of Insurance, approval by MEEMIC's
policyholders and approval by Professionals Group's shareholders. No specific
timetable has been set for demutualization and there can be no assurances that
MEEMIC will be demutualized.
On August 15, 1997, Professionals Group announced a definitive agreement to
merge PICOM with Physicians Protective Trust Fund, a medical malpractice
self-insurance trust fund located in Coral Gables, Florida ("PPTF"). PPTF is a
provider of medical malpractice insurance for physicians and physician
corporations in the State of Florida. This agreement was amended and restated on
October 3, 1997, and pursuant to the amended and restated agreement,
Professionals Group will issue 4,089,160 shares of Professionals Group common
stock to the eligible members of PPTF and 153,000 shares to directors and
management of PPTF upon consummation of the merger. The transaction is expected
to be accounted for as a pooling of interests, whereby Professionals Group will
carry forward to its accounts the assets and liabilities of PPTF at their
respective amounts as reported by PPTF. The closing of the merger is expected to
occur in the second quarter of 1998, subject to regulatory and
shareholder/policyholder approval.
A-56
<PAGE> 256
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Professionals Insurance Company Management Group:
We have audited the accompanying consolidated balance sheets of
Professionals Insurance Company Management Group and subsidiaries as of December
31, 1997 and 1996, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the years in the three year
period ended December 31, 1997. In connection with our audits of the
consolidated financial statements, we also have audited the financial statement
schedule as of and for the periods ended December 31, 1997 and 1996. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audits 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 consolidated financial position of
Professionals Insurance Company Management Group and subsidiaries as of December
31, 1997 and 1996, and the consolidated 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. Also in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
As discussed in notes 3 and 9 to the consolidated financial statements, the
Company changed its method of accounting for loss and loss adjustment expense
reserves to eliminate discounting of such reserves in 1995.
KPMG Peat Marwick LLP
East Lansing, Michigan
February 27, 1998
A-57
<PAGE> 257
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP (PARENT COMPANY)
CONDENSED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Assets:
Investment in subsidiaries................................ $120,486 $87,271
Short-term investments, at cost, which approximates fair
value.................................................. 3,866 2,030
Cash...................................................... 3 --
Other assets.............................................. 1,336 --
-------- -------
Total assets...................................... $125,691 $89,301
======== =======
Liabilities and Shareholders' Equity:
Liabilities:
Long-term debt............................................ $ 22,500 $ --
Accrued expenses and other liabilities.................... 1,265 1,343
-------- -------
23,765 1,343
-------- -------
Shareholders' Equity:
Preferred stock, no par value; 5,000,000 shares authorized;
no shares issued and outstanding.......................... -- --
Common stock, no par value; 25,000,000 shares authorized;
3,505,750 shares issued and outstanding in 1997 and
1996...................................................... 3,506 3,506
Additional paid-in capital.................................. 14,569 14,569
Retained earnings........................................... 80,671 69,645
Net unrealized appreciation on investments, net of deferred
taxes..................................................... 3,180 238
-------- -------
Total shareholders' equity........................ 101,926 87,958
-------- -------
Total liabilities and shareholders' equity........ $125,691 $89,301
======== =======
</TABLE>
These condensed financial statements should be read in conjunction with the
accompanying consolidated financial statements and notes thereto of
Professionals Insurance Company Management Group and subsidiaries.
See accompanying notes to the condensed financial information of registrant.
A-58
<PAGE> 258
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP (PARENT COMPANY)
CONDENSED STATEMENTS OF INCOME
PERIODS ENDED DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
------- ------
<S> <C> <C>
Revenues:
Dividend income from subsidiary........................... $ 4,717 $3,530
Investment income......................................... 106 30
Other income.............................................. 1,005 --
------- ------
Total revenues......................................... 5,828 3,560
------- ------
Expenses:
Operating and administrative.............................. 2,761 1,317
Interest expense.......................................... 1,098 30
------- ------
Total expenses......................................... 3,859 1,347
------- ------
Income before federal income taxes and equity in
undistributed income of subsidiaries.................. 1,969 2,213
Federal income taxes........................................ -- --
------- ------
Income before equity in undistributed income of
subsidiaries.......................................... 1,969 2,213
Equity in undistributed income of subsidiaries.............. 9,057 4,823
------- ------
Net income............................................. $11,026 $7,036
======= ======
</TABLE>
These condensed financial statements should be read in conjunction with the
accompanying consolidated financial statements and notes thereto of
Professionals Insurance Company Management Group and subsidiaries.
See accompanying notes to the condensed financial information of registrant.
A-59
<PAGE> 259
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP (PARENT COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
PERIODS ENDED DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 11,026 $ 7,036
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed income of subsidiaries......... (9,057) (4,823)
Dividend of investment from subsidiary................. (1,217) --
Amortization........................................... 183 --
Increase in other assets............................... (1,594) --
Increase (decrease) in accrued expenses and other
liabilities........................................... (78) 1,343
-------- -------
Net cash provided by (used in) operating
activities.......................................... (737) 3,556
-------- -------
Cash flows from investing activities:
Proceeds from sale or maturity of short-term
investments............................................ 32,578 6,048
Purchases of short-term investments....................... (34,338) (8,078)
Capital contribution to consolidated subsidiary........... (20,000) (1,500)
-------- -------
Net cash used in investing activities................ (21,760) (3,530)
-------- -------
Cash flows from financing activities:
Proceeds from issuance of note payable.................... -- 1,500
Payments on note payable.................................. -- (1,500)
Cash paid in lieu of fractional shares.................... -- (26)
Proceeds from issuance of long-term debt.................. 22,500 --
-------- -------
Net cash provided by (used in) financing
activities.......................................... 22,500 (26)
-------- -------
Net change in cash.......................................... 3 --
Cash, beginning of year..................................... -- --
-------- -------
Cash, end of year........................................... $ 3 $ --
======== =======
</TABLE>
These condensed financial statements should be read in conjunction with the
accompanying consolidated financial statements and notes thereto of
Professionals Insurance Company Management Group and subsidiaries.
See accompanying notes to the condensed financial information of registrant.
A-60
<PAGE> 260
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP (PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PERIODS ENDED DECEMBER 31, 1997 AND 1996
(1) DESCRIPTION OF BUSINESS
Professionals Insurance Company Management Group (Professionals Group) is
an insurance holding company incorporated under Michigan law on January 31,
1996. Accordingly, 1996 condensed financial information for Professionals Group
is only being presented from the period January 31, 1996 (date of inception)
through December 31, 1996.
Professionals Group owns all of the issued and outstanding common stock of
the following entities:
PICOM Insurance Company -- a stock insurance company incorporated under
Michigan law.
PICOM Financial Services Corporation -- an inactive financial services
company.
PICOM Insurance Agency, Inc. -- an inactive insurance agency.
American Insurance Management Corporation -- an Indiana corporation that
serves as the attorney-in-fact for American Medical Insurance Exchange, an
inactive Indiana interinsurance reciprocal exchange.
(2) FEDERAL INCOME TAXES
Under terms of Professionals Group's tax sharing agreement with its
subsidiaries, income tax provisions for the individual companies are computed on
a separate company basis.
A-61
<PAGE> 261
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by this item with respect to the directors of
Professionals Group will be reported in Professionals Group's Notice of Annual
Meeting of Stockholders and Proxy Statement for its 1998 Annual Meeting of
Stockholders under the captions "Management and Operations After the
Transactions -- Directors," and "-- Executive Officers," and "Information
Regarding the Professionals Group Annual Meeting -- Election of Directors." Such
information is herein incorporated by reference.
Information regarding the executive officers of Professionals Group is
reported in Part I on this Annual Report on Form 10-K pursuant to General
Instruction G to Form 10-K.
Section 16(a) of the Exchange Act requires Professionals Group's directors
and executive officers, and persons who own more than 10% of a registered class
of Professionals Group's equity securities, to file with the Securities and
Exchange Commission initial reports of ownership and reports of changes in
ownership of Professionals Group common stock and other equity securities of
Professionals Group. Officers, directors and greater than 10% stockholders are
required by the Securities and Exchange Commission regulation to furnish
Professionals Group with copies of all Section 16(a) forms they file.
To Professionals Group's knowledge, based solely on a review of the copies
of such reports furnished to Professionals Group and written representations
that no other reports were required, all Section 16(a) filing requirements
applicable to its officers, directors and greater than 10 percent beneficial
owners were complied with during the year ended December 31, 1997, except for
Isaac J. Powell, M.D., who inadvertently failed to file on a timely basis a Form
4 in September reporting his purchase of Professionals Group common stock on
August 25, 1997. A Form 5 was subsequently filed in February 1998 reporting the
purchase of such shares.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this item with respect to executive
compensation of Professionals Group will be reported in Professionals Group's
Notice of Annual Meeting of Stockholders and Proxy Statement for its 1998 Annual
Meeting of Stockholders under the caption "Information Regarding the
Professionals Group Annual Meeting -- Management Remuneration," "-- Stock
Purchase Plan" and "-- Employment Severance Compensation Plans." Such
information is herein incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this item with respect to the security
ownership of certain beneficial owners and management of Professionals Group
will be reported in Professionals Group's Notice of Annual Meeting of
Stockholders and Proxy Statement for its 1998 Annual Meeting of Stockholders
under the caption "Beneficial Ownership of Professionals Group Common Stock."
Such information is herein incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this item with respect to certain
relationships and related transactions of Professionals Group will be reported
in Professionals Group's Notice of Annual Meeting of Stockholders and Proxy
Statement for its 1998 Annual Meeting of Stockholders under the caption
"Information Regarding the Professionals Group Annual Meeting -- Director
Compensation and Benefits," "-- Compensation Committee Interlocks and Insider
Participation," and "-- Related Party Transactions." Such information is herein
incorporated by reference.
A-62
<PAGE> 262
PART IV
ITEM 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
EXHIBITS:
<TABLE>
<CAPTION>
ITEM 601
REGULATION S-K
EXHIBIT REFERENCE
NUMBER EXHIBIT DESCRIPTION
----------------- -------------------
<S> <C>
(2)(a)/(10)(a) 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)).
(3)(a)/(4)(a) First Amended and Restated Articles of Incorporation of
Professionals Insurance Company Management Group and all
amendments thereto (incorporated by reference to Exhibit
(3)(a)/(4)(a) 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)).
(3)(b)/(4)(b) By-laws of Professionals Insurance Company Management Group
(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)).
(4)(c) Specimen certificate for Professionals Insurance Company
Management Group's common stock (incorporated by reference
to Exhibit 4(c) of the Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1996 as filed with the
Securities and Exchange Commission on November 12, 1996
(file no. 0-21223)).
(4)(d) Specimen stock option issued under the Professionals
Insurance Company Management Group 1996 Non-Employee
Directors Stock Option Plan (incorporated by reference to
Exhibit 4(d) of the Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1996 filed with the
Securities and Exchange Commission on November 12, 1996
(file no. 0-21223)).
(4)(e) Specimen stock option issued under the Professionals
Insurance Company Management Group 1996 Long Term Incentive
Plan.*
(10)(b) Credit Agreement dated April 4, 1997 for $22.5 million
between the registrant and LaSalle National Bank
(incorporated by reference to Exhibit (10)(a) of the
registrant's Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1997 as filed with the Securities and
Exchange Commission on May 12, 1997 (file no. 0-21223)).
(10)(c) Professionals Insurance Company Management Group 1996 Long
Term Incentive Plan (incorporated by reference to Exhibit
10(c) of Amendment No. 1 to the registrant's Registration
Statement on Form S-4 as filed with the Securities and
Exchange Commission on June 11, 1996 (registration no.
333-3138)).
(10)(d) Professionals Insurance Company Management Group 1996
Non-Employee Directors Stock Option Plan (incorporated by
reference to Exhibit 10(d) of Amendment No. 1 to the
registrant's Registration Statement on Form S-4 as filed
with the Securities and Exchange Commission on June 11, 1996
(registration no. 333-3138)).
(10)(e) Professionals Insurance Company Management Group Stock
Purchase Plan (incorporated by reference to Exhibit 10(e) 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)).
</TABLE>
A-63
<PAGE> 263
<TABLE>
<CAPTION>
ITEM 601
REGULATION S-K
EXHIBIT REFERENCE
NUMBER EXHIBIT DESCRIPTION
----------------- -------------------
<S> <C>
(10)(f) PICOM Insurance Company Employees' Savings and Retirement
Plan (incorporated by reference to Exhibit (10)(d) of the
initial filing of the registrant's Annual Report on Form
10-K for the year ended December 31, 1996 as filed with the
Securities and Exchange Commission on March 28, 1997 (file
no. 0-21223)).
(10)(g) PICOM Insurance Company Pension Plan (incorporated by
reference to Exhibit (10)(e) of the initial filing of the
registrant's Annual Report on Form 10-K for the year ended
December 31, 1996 as filed with the Securities and Exchange
Commission on March 28, 1997 (file no. 0-21223)).
(10)(h) PICOM Insurance Company Key Employee Retention Plan
(incorporated by reference to Exhibit (99)(e) of the initial
filing of the registrant's Registration Statement on Form
S-4 filed with the Securities and Exchange Commission on
April 3, 1996 (registration no. 333-3138)).
(10)(i) PICOM Insurance Company Employee Retention Plan
(incorporated by reference to Exhibit (99)(f) of the initial
filing of the registrant's Registration Statement on Form
S-4 filed with the Securities and Exchange Commission on
April 3, 1996 (registration no. 333-3138)).
(10)(j) Adverse Development Stop Loss Reinsurance Contract between
Physicians Protective Trust Fund (the "Reassured") and PICOM
Insurance Company (the "Reinsurer") effective February 1,
1998, 12:01 a.m. Eastern Standard Time (incorporated by
reference to Exhibit 10 of the registrant's Current Report
on Form 8-K dated October 27, 1997 filed with the Securities
and Exchange Commission on October 31, 1997 (file no.
0-21223)).
(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.
(21) List of subsidiaries of the registrant (incorporated by
reference to Exhibit 21 of the registrant's Annual Report on
Form 10-K for the year ended December 31, 1996 as filed with
the Securities and Exchange Commission on March 28, 1997
(file no. 0-21223)).
(23) Consent of KPMG Peat Marwick LLP, independent certified
public accountants.*
(24) Powers of attorney.*
(27) Financial Data Schedule of registrant.*
</TABLE>
- ---------------
* Filed herewith.
Management contracts and compensatory plans or arrangements:
The management contracts and compensatory plans or arrangements required to
be filed as exhibits and included in such list of exhibits are as follows:
Exhibit (4)(d) Specimen stock option issued under the Professionals
Insurance Company Management Group 1996 Non-Employee Directors Stock Option
Plan.
Exhibit (4)(e) Specimen stock option issued under the Professionals
Insurance Company Management Group 1996 Long Term Incentive Plan.
Exhibit (10)(c) Professionals Insurance Company Management Group 1996
Long-Term Incentive Plan.
Exhibit (10)(d) Professionals Insurance Company Management Group 1996
Non-Employee Directors Stock Option Plan.
A-64
<PAGE> 264
Exhibit (10)(e) Professionals Insurance Company Management Group Stock
Purchase Plan.
Exhibit (10)(f) PICOM Insurance Company Employees' Savings and
Retirement Plan.
Exhibit (10)(g) PICOM Insurance Company Pension Plan.
Exhibit (10)(h) PICOM Insurance Company Key Employee Retention Plan.
Exhibit (10)(i) PICOM Insurance Company Employee Retention Plan.
Index to Financial Statements and Financial Statement Schedules:
<TABLE>
<CAPTION>
10-K
REPORT
PAGE(S)
-------
<S> <C>
Financial Statements:
Consolidated balance sheets as of December 31, 1997 and
1996...................................................... A-33
Consolidated statements of income for each of the years
ended December 31, 1997, 1996 and 1995.................... A-34
Consolidated statements of shareholders' equity for each of
the years ended December 31, 1997, 1996 and 1995.......... A-35
Consolidated statements of cash flows for each of the years
ended December 31, 1997, 1996 and 1995.................... A-36
Notes to consolidated financial statements.................. A-37
Report of independent auditors.............................. A-57
Financial Statement Schedules:
II. Condensed financial information of registrant........... A-58
</TABLE>
- ---------------
All other schedules for which provision is made in Regulation S-X either (i) are
not required under the related instructions or are inapplicable and, therefore,
have been omitted, or (ii) the information required is included in the
consolidated financial statements or the notes thereto that are a part hereof.
Reports on Form 8-K:
The Company filed a Current Report on Form 8-K dated October 3, 1997, in
connection with the execution of a First Amended and Restated Agreement and Plan
of Merger dated October 3, 1997, by and among Professionals Group, PICOM and
Physicians Protective Trust Fund, a medical malpractice self-insurance trust
fund, located in Coral Gables, Florida ("PPTF").
The Company filed a Current Report on Form 8-K dated October 27, 1997, in
connection with the execution of an Adverse Development Stop Loss Reinsurance
Contract between PPTF and PICOM, effective February 1, 1998.
No other reports were filed during the three months ended December 31,
1997.
A-65
<PAGE> 265
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PROFESSIONALS INSURANCE COMPANY
MANAGEMENT GROUP
Date: March 26, 1998 By: /s/ VICTOR T. ADAMO
---------------------------------------
Victor T. Adamo
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ R. KEVIN CLINTON
---------------------------------------
R. Kevin Clinton
Vice President, Treasurer and Chief
Financial Officer
(Principal Financial Officer
and Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ VICTOR T. ADAMO Director, President and March 26, 1998
- ----------------------------------------------------- Chief Executive Officer
Victor T. Adamo (Principal Executive Officer)
/s/ R. KEVIN CLINTON Director, Vice President, March 26, 1998
- ----------------------------------------------------- Treasurer and Chief Financial
R. Kevin Clinton Officer (Principal Financial
Officer and Principal
Accounting Officer)
/s/ JERRY D. CAMPBELL* Director March 26, 1998
- -----------------------------------------------------
Jerry D. Campbell
/s/ JOHN F. DODGE, JR.* Director March 26, 1998
- -----------------------------------------------------
John F. Dodge, Jr.
/s/ H. HARVEY GASS* Director March 26, 1998
- -----------------------------------------------------
H. Harvey Gass
/s/ W. PETER MCCABE* Director March 26, 1998
- -----------------------------------------------------
W. Peter McCabe
/s/ JOHN F. MCCAFFREY* Director March 26, 1998
- -----------------------------------------------------
John F. McCaffrey
/s/ ISAAC J. POWELL* Director March 26, 1998
- -----------------------------------------------------
Isaac J. Powell
/s/ ANN F. PUTALLAZ* Director March 26, 1998
- -----------------------------------------------------
Ann F. Putallaz
/s/ DONALD S. YOUNG* Director March 26, 1998
- -----------------------------------------------------
Donald S. Young
/s/ WILLIAM H. WOODHAMS* Director March 26, 1998
- -----------------------------------------------------
William H. Woodhams
*By: /s/ VICTOR T. ADAMO
------------------------------------------------
Victor T. Adamo, as attorney-in-fact
for the persons indicated
</TABLE>
A-66
<PAGE> 266
ANNEX B
FIRST AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
DATED AS OF OCTOBER 3, 1997 BY AND AMONG
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP,
PICOM INSURANCE COMPANY
AND PHYSICIANS PROTECTIVE TRUST FUND
(WITHOUT ANY EXHIBITS OR SCHEDULES)
B-1
<PAGE> 267
EXECUTION COPY
FIRST AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
THIS FIRST AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER (the
"Agreement"), dated as of October 3, 1997, by and among PROFESSIONALS INSURANCE
COMPANY MANAGEMENT GROUP, a Michigan business corporation ("Professionals
Group"), PICOM INSURANCE COMPANY, a Michigan stock insurance company ("PICOM"),
and PHYSICIANS PROTECTIVE TRUST FUND, a medical malpractice self-insurance trust
fund organized under Florida Statutes Section 627.357 ("PPTF").
WITNESSETH:
WHEREAS, the Boards of Directors of Professionals Group and PICOM have
determined that it is in the best interests of their respective companies and
their stockholders to effect a "merger of equals" of Professionals Group and
PPTF through the consummation of the business combination transactions provided
for in this Agreement; and
WHEREAS, the Board of Trustees of PPTF has determined that it is in the
best interests of its members to effect a "merger of equals" of Professionals
Group and PPTF through the consummation of the business combination transactions
provided for in this Agreement; and
WHEREAS, it is the intent of the respective Boards of Directors of
Professionals Group and PICOM, and of the Board of Trustees of PPTF, that
Professionals Group and PICOM be the surviving corporations in such business
combination transactions, and that following the consummation of such business
combination transactions, Professionals Group and PICOM be governed and operated
on the basis of a "merger of equals" of Professionals Group and PPTF; and
WHEREAS, Professionals Group, PICOM and PPTF desire to make certain
representations, warranties and agreements in connection with, and to prescribe
certain conditions to, such business combination transactions.
WHEREAS, Professionals Group, PICOM and PPTF entered into an Agreement and
Plan of Merger dated as of August 14, 1997 (the "Initial Merger Agreement")
providing for business combination transactions upon the terms and conditions
set forth therein; and
WHEREAS, it was determined that such business combination transactions
could not be consummated upon the terms set forth in the Initial Merger
Agreement; and
WHEREAS, Professionals Group, PICOM and PPTF have agreed to certain
modifications and amendments to the Initial Merger Agreement and desire to amend
and restate the Initial Merger Agreement in its entirety so as to reflect such
modifications and amendments; and
NOW, THEREFORE, in consideration of the mutual covenants, representations,
warranties and agreements contained in this Agreement, and intending to be
legally bound by this Agreement, the parties to this Agreement agree as follows:
ARTICLE I
THE MERGERS
1.1 Formation of INSCO. Subject to the terms and conditions of this
Agreement, and for the sole purpose of facilitating the consummation of the
transactions contemplated by this Agreement by merging with and into PPTF,
Professionals Group and PICOM shall cause a stock insurance company ("INSCO") to
be incorporated as a wholly-owned subsidiary of Professionals Group under and
pursuant to Title XXXVII, Florida Statutes, as amended (the "Florida Insurance
Code"), and to become authorized to transact business in the State of Michigan
under and pursuant to the Michigan Insurance Code of 1956, as amended (the
"Michigan Insurance Code"), and in the State of Florida under and pursuant to
the Florida Insurance Code. Prior to the INSCO Effective Time (as defined in
Section 1.3 of this Agreement), INSCO shall not write or
B-2
<PAGE> 268
underwrite any lines of insurance and INSCO shall not engage in any business
activities other than those business activities as are expressly provided for or
contemplated by this Agreement.
1.2 INSCO Merger. Subject to the terms and conditions of this Agreement
and in accordance with the Florida Insurance Code, at the INSCO Effective Time,
PPTF shall merge with and into INSCO (the "INSCO Merger"). INSCO shall be the
surviving corporation in the INSCO Merger, and shall continue its corporate
existence under the laws of the State of Florida. Upon consummation of the INSCO
Merger, the separate existence (corporate and otherwise) of PPTF shall
terminate.
1.3 INSCO Effective Time. The INSCO Merger shall become effective as set
forth in articles of merger (the "INSCO Certificate of Merger") filed with the
appropriate authorities of the State of Florida on the Closing Date (as defined
in Section 9.1 of this Agreement). The effective date and time of the INSCO
Merger specified in the INSCO Certificate of Merger shall be no earlier than the
date and time the INSCO Certificate of Merger is filed with the appropriate
authorities of the State of Florida and shall be as soon after such filing as is
practicable. The term "INSCO Effective Time" shall be the date and time when the
INSCO Merger becomes effective, as set forth in the INSCO Certificate of Merger
filed in accordance with the Florida Insurance Code and the Florida Business
Corporation Act, as amended (the "FBCA").
1.4 Effects of INSCO Merger. At and after the INSCO Effective Time, the
INSCO Merger shall have the effects set forth in this Agreement, the INSCO
Certificate of Merger, the Florida Insurance Code and the FBCA. At the INSCO
Effective Time, (i) the insurance policies and indemnity agreements previously
issued by PPTF and then in effect (collectively, the "PPTF Indemnity
Agreements") will become and be insurance policies issued by INSCO and will be
converted from assessable insurance policies to nonassessable insurance
policies, without any endorsement or modification thereto, and the coverages and
benefits under such PPTF Indemnity Agreements will continue unaffected by the
INSCO Merger; (ii) all rights, franchises, licenses and interests of PPTF in and
to every type of property, real, personal and mixed, and all choses in action of
PPTF shall continue unaffected and uninterrupted by the INSCO Merger and shall
accrue to INSCO; (iii) all obligations and liabilities of PPTF (including all
surplus notes previously issued by PPTF (the "PPTF Surplus Notes")) then
outstanding shall become and be obligations of INSCO and shall continue
unaffected and uninterrupted by the INSCO Merger; and (iv) no action or
proceeding then pending and to which PPTF is a party shall be abated or
discontinued but may be prosecuted to final judgment by INSCO. If the INSCO
Merger is not consummated, then PPTF will remain a medical malpractice
self-insurance trust fund organized under Florida Statutes Section 627.357.
1.5 Conversion of Membership Rights.
(a) At the INSCO Effective Time, and except as otherwise provided in this
Agreement, by virtue of the INSCO Merger and without any action on the part of
Professionals Group, PICOM, INSCO, PPTF or any Eligible Member (as defined in
Exhibit A to this Agreement), all Membership Rights (as defined in Exhibit A to
this Agreement) shall be converted into 4,089,160 shares (the "Aggregate Merger
Shares") of common stock, no par value per share, of Professionals Group
("Professionals Group Common Stock"). Notwithstanding anything express or
implied to the contrary in this Agreement or the Allocation Formula (as defined
in this Section 1.5): (x) the aggregate number of shares of Professionals Group
Common Stock issuable as a result of the INSCO Merger shall be not be more than
4,089,160 shares of Professionals Group Common Stock; (y) no fractional shares
of Professionals Group Common Stock shall be issued to any Eligible Member and,
in lieu thereof, all of said fractional shares shall be paid the cash equivalent
value thereof based on the average of the daily closing prices per share of
Professionals Group Common Stock as reported on the Nasdaq National Market for
the period of twenty (20) business days ending on the fifth (5th) business day
prior to the Closing Date; and (z) except as otherwise expressly provided in
Section 1.28 of this Agreement, no shares of Professionals Group Common Stock
shall be issuable or issued to any person or entity other than an Eligible
Member in connection with the INSCO Merger.
(b) At the INSCO Effective Time, and except as otherwise provided in this
Agreement, by virtue of the INSCO Merger and without any action on the part of
Professionals Group, PICOM, INSCO, PPTF or any Eligible Member: (i) all Eligible
Members shall cease to have any rights as Eligible Members of PPTF (including
the right to elect trustees, the right to vote as to other matters, and any
rights with respect to the distribution of surplus in liquidation); and (ii) all
Membership Rights shall no longer be outstanding, and shall
B-3
<PAGE> 269
automatically be cancelled and shall cease to exist; provided, however, that at
and after the INSCO Effective Time, each individual Membership Right shall
represent the right to receive, in accordance with the Allocation Formula (as
defined in this Section 1.5), a certificate representing the number of whole
shares of Professionals Group Common Stock and cash in lieu of any fractional
share of Professionals Group Common Stock into which such Membership Right has
been converted pursuant to this Agreement.
(c) In consideration for his or her Membership Right, each Eligible Member
shall be allocated and shall be entitled to receive a portion of the Aggregate
Merger Shares determined in accordance with an allocation formula (the
"Allocation Formula"). The Allocation Formula shall be determined by PPTF and
then approved by the appropriate authorities of the State of Florida. Once the
Allocation Formula is so approved by such authorities, the parties to this
Agreement shall prepare and execute an amendment to this Agreement that amends
and restates Exhibit A to this Agreement so as to include the Allocation Formula
as approved by such authorities. Each Membership Right shall be exchanged for
certificates representing whole shares, and cash in lieu of any fractional
share, of Professionals Group Common Stock in accordance with Article II of this
Agreement.
(d) If, prior to the INSCO Effective Time, the outstanding shares of
Professionals Group Common Stock shall have been increased, decreased, changed
into or exchanged for a different number or kind of shares or securities as a
result of a reorganization, recapitalization, reclassification, stock dividend,
stock split, reverse stock split, or other similar change in capitalization,
then an appropriate and proportionate adjustment shall be made to the number of
Aggregate Merger Shares.
(e) Membership Rights to which dissenters' rights are perfected under
applicable law shall not be converted into or represent the right to receive any
shares, or any cash payment in lieu of any fractional shares of Professionals
Group Common Stock; provided, however, that if any holder of the dissenting
Membership Right shall withdraw his or her demand for payment of the fair value
of his or her Membership Right or shall fail to perfect his or her dissenters'
rights in accordance with applicable law, then such holder's dissenting
Membership Right shall cease to be a dissenting Membership Right and shall,
subject to the terms of this Agreement, be converted into and represent the
right to receive a certificate representing the number of whole shares of
Professionals Group Common Stock and cash in lieu of any fractional share of
Professionals Group Common Stock into which such Membership Right has been
converted pursuant to this Agreement.
1.6 INSCO Common Stock. At the INSCO Effective Time, each share of common
stock of INSCO issued and outstanding immediately prior to the INSCO Effective
Time shall remain an issued and outstanding share of common stock of INSCO, as
the surviving corporation in the INSCO Merger, and shall not be affected by the
INSCO Merger.
1.7 INSCO Articles of Incorporation. Subject to the terms and conditions
of this Agreement, at the INSCO Effective Time, the Articles of Incorporation of
INSCO then in effect shall be, and shall continue in effect as, the Articles of
Incorporation of INSCO, as the surviving corporation in the INSCO Merger, until
thereafter amended in accordance with this Agreement and applicable law.
1.8 INSCO Bylaws. Subject to the terms and conditions of this Agreement,
at the INSCO Effective Time, the Bylaws of INSCO then in effect shall be, and
shall continue in effect as, the Bylaws of INSCO, as the surviving corporation
in the INSCO Merger, until thereafter amended in accordance with this Agreement
and applicable law.
1.9 INSCO Merger Tax Consequences and Accounting Treatment. It is intended
that (i) the INSCO Merger shall constitute a reorganization within the meaning
of Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended (the
"Code"), (ii) this Agreement shall constitute a "plan of reorganization" for the
purposes of Section 368 of the Code, and (iii) the INSCO Merger shall qualify
for "pooling of interests" accounting treatment under Accounting Principles
Board Opinion No. 16 and SEC Accounting Series Releases 130 and 135, as amended.
1.10 PICOM Merger. Subject to the terms and conditions of this Agreement
and in accordance with the Michigan Insurance Code and the Florida Insurance
Code, at the PICOM Effective Time (as defined in Section 1.11 of this
Agreement), INSCO shall merge with and into PICOM (the "PICOM Merger," and
together with the INSCO Merger, the "Mergers"). PICOM shall be the surviving
corporation in the PICOM
B-4
<PAGE> 270
Merger, and shall continue its corporate existence under the laws of the State
of Michigan. Upon consummation of the PICOM Merger, the separate corporate
existence of INSCO shall terminate.
1.11 PICOM Effective Time. The PICOM Merger shall become effective as set
forth in certificates of merger or articles of merger (each, a "PICOM
Certificate of Merger") filed with the appropriate authorities of the State of
Michigan and the State of Florida on the Closing Date. The effective date and
time of the PICOM Merger specified in the PICOM Certificates of Merger shall be
no earlier than the date and time the PICOM Certificates of Merger are filed
with the appropriate authorities of the State of Michigan and the State of
Florida and shall be as soon after such filings as is practicable. The term
"PICOM Effective Time" shall be the date and time when the PICOM Merger becomes
effective, as set forth in the PICOM Certificates of Merger filed in accordance
with the Michigan Insurance Code, the Florida Insurance Code and the FBCA.
1.12 Effects of PICOM Merger. At and after the PICOM Effective Time, the
PICOM Merger shall have the effects set forth in this Agreement, the PICOM
Certificates of Merger, the Michigan Insurance Code, the Florida Insurance Code
and the FBCA. At the PICOM Effective Time, (i) the insurance policies previously
issued, or assumed by INSCO (including any PPTF Indemnity Agreements assumed by
INSCO in, or as a result of, the INSCO Merger) and then in effect will become
and be insurance policies issued by PICOM, without any endorsement or
modification thereto, and the coverages and benefits under such insurance
policies will continue unaffected by the PICOM Merger; (ii) all rights,
franchises, licenses and interests of INSCO in and to every type of property,
real, personal and mixed, and all choses in action of INSCO shall continue
unaffected and uninterrupted by the PICOM Merger and shall accrue to PICOM;
(iii) all obligations and liabilities of INSCO (including all PPTF Surplus
Notes) then outstanding shall become and be obligations of PICOM and shall
continue unaffected and uninterrupted by the PICOM Merger; and (iv) no action or
proceeding then pending and to which INSCO is a party shall be abated or
discontinued but may be prosecuted to final judgment by PICOM.
1.13 Conversion of INSCO Common Stock. At the PICOM Effective Time, and
except as otherwise provided in this Agreement, by virtue of the PICOM Merger
and without any action on the part of Professionals Group, PICOM, INSCO, PPTF or
the holder of any securities of any of them, each share of common stock of INSCO
issued and outstanding immediately prior to the PICOM Effective Time shall be
converted into the number of duly authorized, validly issued, fully paid and
nonassessable shares of common stock, $1.00 par value per share, of PICOM, as
the surviving corporation in the PICOM Merger, that is provided for in the PICOM
Certificates of Merger. At and after the PICOM Effective Time each outstanding
stock certificate which prior to the PICOM Effective Time represented shares of
common stock of INSCO automatically and for all purposes shall be deemed to
represent the number of shares of common stock of PICOM into which the shares of
common stock of INSCO represented by such certificate have been converted
pursuant to this Section 1.13.
1.14 PICOM Articles of Incorporation. Subject to the terms and conditions
of this Agreement, at the PICOM Effective Time, the Articles of Incorporation of
PICOM then in effect shall be, and shall continue in effect as, the Articles of
Incorporation of PICOM, as the surviving corporation in the PICOM Merger, until
amended in accordance with applicable law; provided, however, that in connection
with and as a result of the consummation of the PICOM Merger, Article II of the
Articles of Incorporation of PICOM then in effect shall be amended so as to
change the name of PICOM to a name that is mutually agreed upon by Professionals
Group and PPTF.
1.15 PICOM Bylaws. Subject to the terms and conditions of this Agreement,
at the PICOM Effective Time, the Bylaws of PICOM then in effect shall be, and
shall continue in effect as, the Bylaws of PICOM, as the surviving corporation
in the PICOM Merger, until amended in accordance with applicable law.
1.16 PICOM Merger Tax Consequences; Accounting Treatment. It is intended
that (i) the PICOM Merger shall constitute a reorganization within the meaning
of Section 368(a)(1)(A) of the Code, (ii) this Agreement shall constitute a
"plan of reorganization" for the purposes of Section 368 of the Code, and (iii)
the PICOM Merger shall qualify for "pooling of interests" accounting treatment
under Accounting Principles Board Opinion No. 16 and SEC Accounting Series
Releases 130 and 135, as amended.
B-5
<PAGE> 271
1.17 PICOM Management. At the PICOM Effective Time, Eliot H. Berg, M.D.,
shall be the Chairman of the Board of PICOM, as the surviving corporation in the
PICOM Merger; W. Peter McCabe, M.D., shall be the Vice-Chairman of the Board of
PICOM, as the surviving corporation in the PICOM Merger; and Mr. Steven L.
Salman (consistent with his legal obligations) shall be the President and Chief
Executive Officer of PICOM, as the surviving corporation in the PICOM Merger.
1.18 PICOM Board of Directors. At the PICOM Effective Time, the Board of
Directors of PICOM, as the surviving corporation in the PICOM Merger, shall
consist of ten (10) persons; including Dr. McCabe, Mr. Adamo, and three (3)
other persons named as directors of PICOM, as the surviving corporation in the
PICOM Merger, by the Board of Directors of Professionals Group (the "PG PICOM
Directors"), and Dr. Berg and Mr. Salman (consistent with his legal
obligations), and three (3) other persons named as directors of PICOM, as the
surviving corporation in the PICOM Merger, by the Board of Trustees of PPTF (the
"PPTF PICOM Directors"). The PG PICOM Directors and the PPTF PICOM Directors
shall be divided as equally as practicable among the three classes of directors
of PICOM, as the surviving corporation in the PICOM Merger, in proportion to the
aggregate representation set forth in the preceding sentence; provided, however,
(i) that Dr. McCabe shall not be in the same class of directors as Dr. Berg,
(ii) that Mr. Adamo shall not be in the same class of directors as Mr. Salman,
and (iii) that Mr. Salman shall not be in the same class of directors as Dr.
Berg.
1.19 PICOM Headquarters. At the PICOM Effective Time, the registered
office of PICOM, as the surviving corporation in the PICOM Merger, shall be
located in Okemos, Michigan, provided, however, that PICOM shall conduct
significant corporate activities from regional executive offices located in
Coral Gables, Florida and in Okemos, Michigan.
1.20 Offer of Insurance. On the first renewal date occurring after the
Closing Date with respect to each person or entity who was insured by PPTF,
INSCO or PICOM at the PICOM Effective Time, PICOM will offer insurance to such
person or entity (subject in each case to the underwriting standards of PICOM
then in effect).
1.21 Professionals Group Common Stock. At and after each of the INSCO
Effective Time and the PICOM Effective Time, each share of Professionals Group
Common Stock issued and outstanding immediately prior thereto shall remain an
issued and outstanding share of common stock of Professionals Group and shall
not be affected by either one or both of the Mergers.
1.22 Professionals Group Warrants and Stock Options. At and after each of
the INSCO Effective Time and the PICOM Effective Time, each option granted by
Professionals Group to purchase shares of Professionals Group Common Stock which
is outstanding and unexercised immediately prior thereto shall continue to
represent a right to acquire shares of Professionals Group Common Stock and
shall remain 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 Benefit
Plans (as defined in Section 3.11 of this Agreement) under which they were
issued and the agreements evidencing grants thereunder, and shall not be
affected by either one or both of the Mergers.
1.23 Professionals Group Articles of Incorporation. Subject to the terms
and conditions of this Agreement, at each of the INSCO Effective Time and the
PICOM Effective Time, the Articles of Incorporation of Professionals Group then
in effect shall be, and shall continue in effect as, the Articles of
Incorporation of Professionals Group until thereafter amended in accordance with
applicable law.
1.24 Professionals Group Bylaws. Subject to the terms and conditions of
this Agreement, at each of the INSCO Effective Time and the PICOM Effective
Time, the Bylaws of Professionals Group then in effect shall be, and shall
continue in effect as, the Bylaws of Professionals Group until thereafter
amended in accordance with applicable law.
1.25 Professionals Group Management. At and after each of the INSCO
Effective Time and the PICOM Effective Time, Dr. McCabe shall be the Chairman of
the Board of Professionals Group, Dr. Berg shall be the Vice-Chairman of the
Board of Professionals Group, Mr. Adamo shall be the President and Chief
Executive Officer of Professionals Group, and Mr. Salman (consistent with his
legal obligations) shall be the Chief Operating Officer of Professionals Group.
B-6
<PAGE> 272
1.26 Professionals Group Board of Directors.
(a) At each of the INSCO Effective Time and the PICOM Effective Time, the
Board of Directors of Professionals Group shall consist of sixteen (16) persons;
including all eleven (11) of the persons who are directors of Professionals
Group at the PICOM Effective Time (including Dr. McCabe and Mr. Adamo) (the
"Professionals Group Representatives") and R. Kevin Clinton, FCAS, MAAA, who is
the President of Michigan Educational Employees Mutual Insurance Company
("MEEMIC"), and Dr. Berg, Mr. Salman (consistent with his legal obligations) and
three (3) other persons named as directors of Professionals Group by the Board
of Trustees of PPTF (the "PPTF Representatives"). The PPTF Representatives shall
be divided as equally as practicable among the three classes of directors of
Professionals Group; provided, however, (i) that Dr. McCabe shall not be in the
same class as Dr. Berg, (ii) that Mr. Adamo shall not be in the same class as
either Mr. Salman or Mr. Clinton, and (iii) that Mr. Salman shall not be in the
same class as Mr. Clinton.
(b) At each of the INSCO Effective Time and the PICOM Effective Time there
shall be a committee of the Board of Directors of Professionals Group known as
the "Nominating Committee." Said committee (i) shall be comprised of four (4)
members of the Board of Directors of Professionals Group, with two (2) members
being selected from the Professionals Group Representatives and two (2) members
being selected from the PPTF Representatives, and (ii) to the fullest extent
permitted under the Articles of Incorporation and Bylaws of Professionals Group,
shall be delegated and authorized to exercise the full power and authority of
the Board of Directors of Professionals Group with respect to recommending
nominees for election to the Board of Directors of Professionals Group. Action
of this Nominating Committee of the Board of Directors of Professionals Group
within the meaning of Section 523 of the Michigan Business Corporation Act, as
amended, shall require the favorable vote of at least 75% of the members of this
Nominating Committee.
1.27 Professionals Group Headquarters. At each of the INSCO Effective Time
and the PICOM Effective Time, the headquarters and principal executive offices
of Professionals Group shall be located in Okemos, Michigan.
1.28 PPTF Consulting and Other Arrangements.
(a) On the date of the first annual meeting of stockholders of
Professionals Group following the INSCO Effective Time, Professionals Group
shall issue and deliver to each person identified on Exhibit B to this Agreement
as a "PPTF Trustee Participant" (each, a "PPTF Trustee Participant") a number of
shares of Professionals Group Common Stock that is equal to 20% of the number
that is set forth opposite the name of such PPTF Trustee Participant on Exhibit
B to this Agreement. Upon and pursuant to the terms and conditions of a PPTF
Trustee Participant's Consulting Agreement (as defined in this Section 1.28)
Professionals Group shall issue and deliver Trustee Participant a number of
shares of Professionals Group Common Stock that is equal to 80% of the number
that is set forth opposite the name of such PPTF Trustee Participant on Exhibit
B to this Agreement.
(b) On the date of the first annual meeting of stockholders of
Professionals Group following the INSCO Effective Time, Professionals Group
shall issue and deliver to each person identified on Exhibit B to this Agreement
as a "PPTF Officer" (each, a "PPTF Officer") a number of shares of Professionals
Group Common Stock that is equal to 20% of the number that is set forth opposite
the name of such PPTF Officer on Exhibit B to this Agreement. Upon and pursuant
to the terms and conditions of a PPTF Officer's Stock Grant Agreement (as
defined in this Section 1.28), Professionals Group shall issue and deliver to
such PPTF Officer a number of shares of Professionals Group Common Stock that is
equal to 80% of the number that is set forth opposite the name of such PPTF
Officer on Exhibit B to this Agreement.
(c) Notwithstanding anything express or implied to the contrary in this
Agreement: (i) no shares of Professionals Group Common Stock shall be issuable
or issued or delivered to a PPTF Trustee Participant pursuant to this Section
1.28 unless such PPTF Trustee Participant shall have executed and delivered to
Professionals Group a Consulting, Confidentiality and Noncompetition Agreement
in form and substance reasonably acceptable to Professionals Group and PPTF
(each a "Consulting Agreement"); (ii) no shares of Professionals Group Common
Stock shall be issuable or issued or delivered to a PPTF Officer pursuant to
this Section 1.28 unless such PPTF Officer shall have executed and delivered to
Professionals Group a
B-7
<PAGE> 273
Confidentiality, Noncompetition and Stock Grant Agreement in form and substance
reasonably acceptable to Professionals Group and PPTF (each, a "Stock Grant
Agreement"); (iii) Professionals Group and PICOM shall execute and deliver the
Assignment and Assumption Agreement attached to this Agreement as Exhibit C (the
"Assignment and Assumption Agreement"); and (iv) if, prior to the INSCO
Effective Time, the outstanding shares of Professionals Group Common Stock shall
have been increased, decreased, changed into or exchanged for a different number
or kind of shares or securities as a result of a reorganization,
recapitalization, reclassification, stock dividend, stock split, reverse stock
split, or other similar change in capitalization, then an appropriate and
proportionate adjustment shall be made to the number of shares of Professionals
Group Common Stock to be issued to each PPTF Trustee Participant and each PPTF
Officer pursuant to this Section 1.28.
ARTICLE II
EXCHANGE OF MEMBERSHIP RIGHTS
2.1 Professionals Group to Make Shares Available. At or prior to the INSCO
Effective Time, Professionals Group shall deposit, or shall cause to be
deposited, with ChaseMellon Shareholder Services, L.L.C., or another bank or
trust company reasonably acceptable to each of Professionals Group and PPTF (the
"Exchange Agent"), for the benefit of the Eligible Members of PPTF and for
exchange in accordance with this Article II, certificates representing the whole
shares of Professionals Group Common Stock and cash for payment of consideration
in lieu of fractional shares (such certificates for whole shares of
Professionals Group Common Stock, together with any such cash for payment of
consideration in lieu of fractional shares and any dividends or distributions
with respect to such whole shares of Professionals Group Common Stock are
sometimes referred to as the "Exchange Fund") to be issued and paid in exchange
for the Membership Rights pursuant to this Agreement.
2.2 Exchange of Membership Rights.
(a) As soon as practicable prior to the INSCO Effective Time, and in no
event later than thirty (30) days prior to the INSCO Effective Time, (i) PPTF
shall prepare a list (which list shall be certified to Professionals Group by
the Chairman of PPTF and the President and Chief Executive Officer of PPTF)
identifying each Eligible Member of PPTF and setting forth the number of whole
shares, and cash in lieu of any fractional shares, of Professionals Group Common
Stock that each Eligible Member of PPTF is entitled to receive by virtue of the
consummation of the INSCO Merger, and (ii) PPTF shall deliver to Professionals
Group such list, as certified by the Chairman of PPTF and the President and
Chief Executive Officer of PPTF, and such other information as shall enable
Professionals Group to verify the information contained in such list.
(b) As soon as reasonably practicable after receiving from PPTF the list
and other information required to be delivered to it by this Section 2.2,
Professionals Group may verify the information contained in such list and shall
cause the Exchange Agent to send to each Eligible Member of PPTF, by first class
mail, a notice (the "Notice") that, among other things, (i) sets forth the
number of whole shares, and cash in lieu of any fractional shares, of
Professionals Group Common Stock that such Eligible Member has been credited
with, and the calculation by which such numbers were obtained, and (ii) states
that the Membership Rights in PPTF of all Eligible Members were extinguished
upon consummation of the INSCO Merger. Said notice shall be accompanied by a
letter of transmittal stating instructions for obtaining certificates
representing the whole shares of Professionals Group Common Stock and any cash
in lieu of fractional shares into which the Membership Rights shall have been
converted pursuant to this Agreement. Upon receipt by the Exchange Agent of a
copy of the Notice (or such other document as the Exchange Agent may require)
duly executed by the Eligible Member, such Eligible Member shall be entitled to
receive in exchange therefor (i) a certificate representing that number of whole
shares of Professionals Group Common Stock, and (ii) a check representing the
amount of cash in lieu of fractional shares, to which such Eligible Member shall
have become entitled pursuant to this Agreement. No interest will be paid or
accrued on any cash in lieu of fractional shares or on any unpaid dividends and
distributions payable with respect to any Membership Rights.
B-8
<PAGE> 274
(c) No dividends or other distributions declared with respect to
Professionals Group Common Stock with a record date following the INSCO
Effective Time shall be paid to an Eligible Member until such Eligible Member
shall return the Notice (or such other documentation as the Exchange Agent may
require) to the Exchange Agent in accordance with this Article II.
(d) After the INSCO Effective Time, there shall be no transfers on the
records of PPTF of Membership Rights, except as expressly required under PPTF
Indemnity Agreements issued and outstanding immediately prior to the INSCO
Effective Time. After the INSCO Effective Time, and as Notices (or such other
documentation as the Exchange Agent may require) are presented to the Exchange
Agent, the Exchange Agent shall issue certificates representing whole shares of
Professionals Group Common Stock and cash in lieu of fractional shares in
accordance with this Agreement.
(e) Notwithstanding anything to the contrary contained in this Agreement,
no certificates or scrip representing fractional shares of Professionals Group
Common Stock shall be issued upon the presentation of a Notice (or such other
documentation as the Exchange Agent may require), no dividend or distribution
with respect to Professionals Group Common Stock shall be payable on or with
respect to any such fractional share, and such fractional share interests shall
not entitle the owner thereof to vote or to any other rights of a stockholder of
Professionals Group or an Eligible Member of PPTF. In lieu of the issuance of
any such fractional share, Professionals Group shall pay to each Eligible Member
of PPTF who otherwise would be entitled to receive such fractional share an
amount in cash determined in accordance with this Agreement.
(f) Any portion of the Exchange Fund that remains unclaimed by the Eligible
Members for 12 months after the INSCO Effective Time shall be paid to
Professionals Group. Any Eligible Members who have not theretofore complied with
this Article II shall thereafter look only to Professionals Group for payment of
the whole shares of Professionals Group Common Stock, any cash in lieu of
fractional shares, and any unpaid dividends and distributions on such whole
shares of Professionals Group Common Stock deliverable in respect of each
Membership Right such Eligible Member holds as determined pursuant to this
Agreement, in each case, without any interest thereon. Notwithstanding the
foregoing, none of PPTF, Professionals Group, the Exchange Agent or any other
person shall be liable to any former Eligible Member of PPTF for any amount
delivered in good faith to a public official pursuant to applicable abandoned
property, escheat or similar laws.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PROFESSIONALS GROUP
Except as disclosed in the Professionals Group disclosure schedule
delivered to PPTF with the Initial Merger Agreement and any supplement to such
disclosure schedule delivered to PPTF concurrently herewith (collectively, the
"Professionals Group Disclosure Schedule"), Professionals Group hereby
represents and warrants to PPTF as follows:
3.1 Corporate Organization.
(a) Professionals Group is a corporation duly organized, validly existing
and in good standing under the laws of the State of Michigan. Professionals
Group has the corporate power and authority to own or lease all of its
properties and assets and to carry on its business as it is now being conducted,
and is duly licensed or qualified to do business in each jurisdiction in which
the nature of the business conducted by it or the character or location of the
properties and assets owned or leased by it makes such licensing or
qualification necessary, except where the failure to be so licensed or qualified
would not have a Material Adverse Effect on Professionals Group. As used in this
Agreement, the term "Material Adverse Effect" means, with respect to PPTF,
Professionals Group, PICOM, INSCO, or the surviving corporation in each of the
Mergers, as the case may be, a material adverse effect on the business, assets,
properties, operations, condition (financial or otherwise), or (insofar as they
can reasonably be foreseen) prospects of such party and its Subsidiaries taken
as a whole, excluding for this purpose only, however, the payment and/or
incurrence of transactional expenses by PPTF, Professionals Group, PICOM , or
INSCO in connection with the Mergers, to the extent having such an effect. As
used in this Agreement, the word "Subsidiary" when used with respect to any
party means any corporation, association, partnership, limited liability
company, or other organization, whether incorporated or unincorporated, which is
consolidated with such party for financial reporting purposes. True and
B-9
<PAGE> 275
complete copies of the Articles of Incorporation and Bylaws of Professionals
Group, as in effect as of the date of this Agreement, have previously been made
available by Professionals Group to PPTF.
(b) The only direct and indirect Subsidiaries of Professionals Group are
PICOM, PICOM Insurance Company of Illinois, an Illinois stock insurance company
and wholly-owned subsidiary of PICOM ("PICOM-Illinois," and together with PICOM,
the "Professionals Group Insurance Subsidiaries"), PICOM Claims Services
Corporation, a Michigan business corporation and wholly-owned subsidiary of
PICOM, PICOM Financial Services Corporation, a Michigan business corporation,
PICOM Insurance Agency, a Michigan business corporation, and American Insurance
Management Corporation, an Indiana corporation. Each Subsidiary of Professionals
Group (i) is duly organized and validly existing as a corporation under the laws
of its jurisdiction of organization, (ii) is duly qualified to do business and
in good standing in all jurisdictions (whether Federal, state, local or foreign)
where its ownership or leasing of property or the conduct of its business
requires it to be so qualified and in which the failure to be so qualified would
have a Material Adverse Effect on Professionals Group, and (iii) has all
requisite corporate power and authority to own or lease its properties and
assets and to carry on its business as now conducted. True and complete copies
of the Articles of Incorporation and Bylaws of each Subsidiary of Professionals
Group, as in effect on the date of this Agreement, have previously been made
available by Professionals Group to PPTF.
(c) A record of all corporate action taken by the stockholders and Board of
Directors (including committees thereof) of Professionals Group and each
Subsidiary of Professionals Group, and complete and accurate copies of all of
their respective proceedings and actions by written consent, and all minutes of
their respective meetings, are contained in the respective minute books of
Professionals Group and each Subsidiary of Professionals Group. The minute books
and stock ledgers of Professionals Group contain an accurate and complete record
of all issuances, transfers and cancellations of shares of capital stock of
Professionals Group. The minute books and stock ledgers of each Subsidiary of
Professionals Group contain an accurate and complete record of all issuances,
transfers and cancellations of shares of capital stock of such Subsidiary of
Professionals Group. PPTF has been given access to and an opportunity to review
all such minutes, minute books and stock ledgers.
3.2 Capitalization.
(a) The authorized capital stock of Professionals Group consists of
30,000,000 shares, with said shares divided into two classes. One class of said
shares consists of 5,000,000 shares of preferred stock and the other class of
said shares consists of 25,000,000 shares of Professionals Group Common Stock.
As of June 30, 1997, no shares of such preferred stock and 3,505,750 shares of
Professionals Group Common Stock were issued and outstanding and no shares of
either such preferred stock or Professionals Group Common Stock were held in
treasury. All of the issued and outstanding shares of Professionals Group Common
Stock have been duly authorized and validly issued and are fully paid,
nonassessable and free of preemptive rights with no personal liability attaching
to the ownership thereof. As of the date of this Agreement, and except pursuant
to the terms of this Agreement, the Professionals Insurance Company Management
Group 1996 Non-Employee Directors Stock Option Plan (the "Professionals Group
Director Option Plan"), the Professionals Insurance Company Management Group
1996 Long Term Stock Incentive Plan (the "Professionals Group LTIP"), and stock
options issued pursuant to the Professionals Group Director Option Plan,
Professionals Group does not have and is not bound by any outstanding
subscriptions, options, warrants, calls, commitments or agreements of any
character calling for the purchase or issuance of any shares of Professionals
Group Common Stock or any other equity securities of Professionals Group or any
securities representing the right to purchase or otherwise receive any shares of
Professionals Group Common Stock or any other equity securities of Professionals
Group. As of June 30, 1997, no shares of Professionals Group Common Stock were
reserved for issuance, except for (i) 50,000 shares reserved for issuance upon
the exercise of stock options issued pursuant to the Professionals Group
Director Option Plan (of which options representing 9,450 shares of
Professionals Group Common Stock have been granted and are outstanding) and (ii)
300,000 shares reserved for issuance pursuant to awards under the Professionals
Group LTIP (of which there are none as of the date of this Agreement). Since
January 1, 1997, Professionals Group has not issued any shares of Professionals
Group Common Stock or other equity securities of Professionals Group, or any
securities convertible into or exercisable for any shares of Professionals Group
Common Stock or other equity securities of Professionals Group, other than (x)
as contemplated by this Agreement or (y) stock options issued under the
Professionals
B-10
<PAGE> 276
Group Director Option Plan or (z) pursuant to the exercise of stock options
issued under the Professionals Group Director Option Plan or employee stock
options granted prior to such date. The shares of Professionals Group Common
Stock to be issued pursuant to the INSCO Merger will be duly authorized and
validly issued and, at the INSCO Effective Time, all such shares will be fully
paid, nonassessable and free of preemptive rights with no personal liability
attaching to the ownership thereof.
(b) The authorized capital stock of PICOM consists of 10,000,000 shares,
$1.00 par value per share, of common stock ("PICOM Common Stock"). As of June
30, 1997, 3,188,145 shares of PICOM Common Stock were issued and outstanding and
no shares of PICOM Common Stock were held in treasury. As of June 30, 1997, no
shares of PICOM Common Stock were reserved for issuance. Since January 1, 1997,
PICOM has not issued any shares of PICOM Common Stock or other equity securities
of PICOM, or any securities convertible into or exercisable for any shares of
PICOM Common Stock or other equity securities of PICOM. Professionals Group
owns, directly or indirectly, all of the issued and outstanding shares of
capital stock of each of the Subsidiaries of Professionals Group, free and clear
of all liens, pledges, charges, encumbrances and security interests whatsoever
("Liens"), and all of such shares are duly authorized and validly issued and are
fully paid, nonassessable and free of preemptive rights with no personal
liability attaching to the ownership thereof. No Subsidiary of Professionals
Group has or is bound by any outstanding subscriptions, options, warrants,
calls, commitments or agreements of any character calling for the purchase or
issuance of any shares of capital stock or any other equity security of such
Subsidiary or any securities representing the right to purchase or otherwise
receive any shares of capital stock or any other equity security of such
Subsidiary.
(c) The Professionals Group Disclosure Schedule sets forth a complete list
of (i) the officers and directors of Professionals Group and each Subsidiary of
Professionals Group, (ii) the percentage of the outstanding voting stock of such
Subsidiary owned or controlled, directly or indirectly, by Professionals Group,
and (iii) the percentage of the outstanding voting stock of such Subsidiary
owned or controlled, directly or indirectly, by one or more of Professionals
Group's other Subsidiaries. Professionals Group does not have any direct or
indirect equity or ownership interest in any other business or entity and does
not have any direct or indirect obligation or any commitment to invest any funds
in any corporation or other business or entity, other than for investment
purposes in the ordinary course of business in accordance with past practices.
3.3 Authority; No Violation.
(a) Professionals Group has full corporate power and authority to execute
and deliver this Agreement and to consummate the transactions contemplated by
this Agreement. The execution and delivery of this Agreement and the
consummation of the transactions contemplated by this Agreement have been duly
and validly approved by the Board of Directors of Professionals Group. The Board
of Directors of Professionals Group has directed that this Agreement and the
transactions contemplated by this Agreement be submitted to the stockholders of
Professionals Group for approval at a meeting of such stockholders and, except
for the adoption of this Agreement by the affirmative vote of the holders of a
majority of the outstanding shares of Professionals Group Common Stock, no other
corporate proceedings on the part of Professionals Group are necessary to
approve this Agreement and to consummate the transactions contemplated by this
Agreement. This Agreement has been duly and validly executed and delivered by
Professionals Group and (assuming due authorization, execution and delivery by
PICOM and PPTF and the receipt of all Requisite Regulatory Approvals (as defined
in Section 7.1(e) of this Agreement) constitutes a valid and binding obligation
of Professionals Group, enforceable against Professionals Group in accordance
with its terms.
(b) PICOM has full corporate power and authority to execute and deliver
this Agreement and to consummate the transactions contemplated by this
Agreement. The execution and delivery of this Agreement and the consummation of
the transactions contemplated by this Agreement have been duly and validly
approved by the Board of Directors of PICOM. The Board of Directors of PICOM has
directed that this Agreement and the transactions contemplated by this Agreement
be submitted to the stockholders of PICOM for approval at a meeting of such
stockholders and, except for the adoption of this Agreement by the affirmative
vote of the holders of a majority of the outstanding shares of capital stock of
PICOM, no other corporate proceedings on the part of PICOM are necessary to
approve this Agreement and to consummate the transactions contemplated by this
Agreement. This Agreement has been duly and validly executed and
B-11
<PAGE> 277
delivered by PICOM and (assuming due authorization, execution and delivery by
PPTF and Professionals Group and the receipt of all Requisite Regulatory
Approvals) constitutes a valid and binding obligation of PICOM, enforceable
against PICOM in accordance with its terms.
(c) Neither the execution and delivery of this Agreement by Professionals
Group nor the consummation by Professionals Group of the transactions
contemplated by this Agreement, nor compliance by Professionals Group with any
of the terms or provisions of this Agreement, will (i) violate any provision of
the Articles of Incorporation or Bylaws of Professionals Group or (ii) assuming
that all Requisite Regulatory Approvals and all of the consents and approvals
referred to in Section 3.4 of this Agreement are duly obtained, (x) violate any
statute, code, ordinance, rule, regulation, judgment, order, writ, decree or
injunction applicable to Professionals Group or any of its properties or assets,
or (y) violate, conflict with, result in a breach of any provision of or the
loss of any benefit under, constitute a default (or an event which, with notice
or lapse of time, or both, would constitute a default) under, result in the
termination of or a right of termination or cancellation under, accelerate the
performance required by, or result in the creation of any Lien upon any of the
properties or assets of Professionals Group under, any of the terms, conditions
or provisions of any note, bond, mortgage, indenture, deed of trust, license,
lease, agreement or other instrument or obligation to which Professionals Group
is a party, or by which it or any of its properties or assets may be bound or
affected, except (in the case of clause (y) above) for such violations,
conflicts, breaches or defaults which, either individually or in the aggregate,
will not have or be reasonably likely to have a Material Adverse Effect on
Professionals Group.
(d) Neither the execution and delivery of this Agreement by PICOM nor the
consummation by PICOM of the transactions contemplated by this Agreement, nor
compliance by PICOM with any of the terms or provisions of this Agreement, will
(i) violate any provision of the Articles of Incorporation or Bylaws of PICOM or
(ii) assuming that all Requisite Regulatory Approvals and all of the consents
and approvals referred to in Section 3.4 of this Agreement are duly obtained,
(x) violate any statute, code, ordinance, rule, regulation, judgment, order,
writ, decree or injunction applicable to PICOM or any of its properties or
assets, or (y) violate, conflict with, result in a breach of any provision of or
the loss of any benefit under, constitute a default (or an event which, with
notice or lapse of time, or both, would constitute a default) under, result in
the termination of or a right of termination or cancellation under, accelerate
the performance required by, or result in the creation of any Lien upon any of
the respective properties or assets of PICOM under, any of the terms, conditions
or provisions of any note, bond, mortgage, indenture, deed of trust, license,
lease, agreement or other instrument or obligation to which PICOM is a party, or
by which it or any of its properties or assets may be bound or affected, except
(in the case of clause (y) above) for such violations, conflicts, breaches or
defaults which, either individually or in the aggregate, will not have or be
reasonably likely to have a Material Adverse Effect on PICOM.
3.4 Consents and Approvals. Except for (i) the filing of applications,
notices and forms with, and the obtaining of approvals from, the Commissioner of
Insurance of the State of Michigan (the "Michigan Insurance Commissioner") under
the Michigan Insurance Code, the Department of Insurance of the State of Florida
(the "Florida Insurance Department") under the Florida Insurance Code, and the
Director of Insurance of the State of Illinois (the "Illinois Insurance
Director") under the Illinois Insurance Code, as amended (the "Illinois
Insurance Code"), with respect to the transactions contemplated by this
Agreement (including the incorporation of INSCO and its authorization to do
business in the State of Michigan and the State of Florida), (ii) the filing of
any other required applications, notices and forms with, and the obtaining of
approvals from, any other Governmental Entity (as defined in this Section 3.4),
(iii) the filing with the Securities and Exchange Commission (the "SEC") of a
joint proxy statement in definitive form relating to the meeting of stockholders
of Professionals Group and the meeting of Members of PPTF to be held in
connection with this Agreement and the transactions contemplated by this
Agreement (the "Joint Proxy Statement") and the registration statement on Form
S-4 in which the Joint Proxy Statement will be included as a prospectus (the
"S-4"), (iv) the filing of the INSCO Certificate of Merger and the PICOM
Certificates of Merger with the appropriate authorities of the State of Michigan
pursuant to the Michigan Insurance Code and with the appropriate authorities of
the State of Florida pursuant to the Florida Insurance Code and the FBCA, (v)
the filing of a notification and report form (the "HSR Act Report") with the
Pre-Merger Notification Office of the Federal Trade Commission and with the
Antitrust Division of the Department of
B-12
<PAGE> 278
Justice (collectively, the "Pre-Merger Notification Agencies") pursuant to the
Hart-Scott-Rodino Anti-Trust Improvements Act, as amended, and the rules and
regulations thereunder (collectively, the "HSR Act"), (vi) any consents,
authorizations, orders and approvals required under (A) the Michigan Insurance
Code, (B) the Florida Insurance Code, (C) the Illinois Insurance Code, (D) the
Securities Act of 1933, as amended, and the rules and regulations thereunder
(collectively, the "Securities Act"), (E) the Securities Exchange Act of 1934,
as amended, and the rules and regulations thereunder (collectively, the
"Exchange Act"), and (F) the HSR Act, (vii) any consents, authorizations,
approvals, filings or exemptions in connection with compliance with the
applicable provisions of Federal and state securities laws relating to the
regulation of broker-dealers or investment advisers, and Federal commodities
laws relating to the regulation of futures commission merchants and the rules
and regulations thereunder and of any applicable industry self-regulatory
organization (including the National Association of Insurance Commissioners (the
"NAIC"), the National Association of Securities Dealers, Inc. (the "NASD") and
the Nasdaq National Market) (each, an "SRO"), or which are required under
insurance and other similar laws, (viii) such filings and approvals as are
required to be made or obtained under the securities or "Blue Sky" laws of
various states in connection with the issuance of the shares of Professionals
Group Common Stock pursuant to this Agreement, and (ix) the approval of this
Agreement by the requisite votes of the stockholders of Professionals Group, the
stockholders of PICOM, the stockholders of INSCO, and the Voting Members of
PPTF, no consents or approvals of or filings or registrations with any court,
administrative agency or commission or other governmental authority or
instrumentality (together with the SEC, the Pre-Merger Notification Agencies,
the Michigan Insurance Commissioner, the Florida Insurance Department and the
Illinois Insurance Director, a "Governmental Entity") or with any third party
are necessary in connection with the execution and delivery by Professionals
Group and PICOM of this Agreement or the consummation by Professionals Group or
any of its Subsidiaries of the transactions contemplated by this Agreement.
3.5 Reports. The Professionals Group Insurance Subsidiaries (i) have
timely filed all annual and quarterly convention statements (including the
financial statements contained therein), reports, registrations and statements,
together with all amendments required to be made with respect thereto, that they
were required to file since January 1, 1994 with each Governmental Entity having
jurisdiction, (ii) have timely filed all other reports and statements, together
with all amendments required to be made with respect thereto, that they were
required to file since January 1, 1997 under all applicable laws, rules or
regulations (including any report or statement required to be filed pursuant to
the laws, rules or regulations of the United States, any state, or any other
Governmental Entity), and (iii) have paid all fees and assessments due and
payable in connection therewith, except where the failure to file such
convention statements, reports, registrations or statements, or to file any of
such other reports, or to pay such fees and assessments, either individually or
in the aggregate, will not have a Material Adverse Effect on Professionals
Group. All such convention statements, reports, registrations and statements,
together with all such amendments, were in substantial compliance with
applicable law when filed and, as of their respective dates, to the best
knowledge of Professionals Group, did not contain any false statements or
material misstatements of fact or omit to state any material facts necessary to
make the statements set forth therein not materially misleading in light of the
circumstances in which such statements were made. No material deficiencies have
been asserted by any Governmental Entity with respect to such convention
statements, reports, registrations and statements or any such amendments
thereto. Professionals Group has delivered to PPTF complete and accurate copies
of all annual and quarterly convention statements (including the financial
statements contained therein) filed by the Professionals Group Insurance
Subsidiaries since January 1, 1994. Except for normal examinations conducted by
a Governmental Entity in the regular course of the business of Professionals
Group and its Subsidiaries, no Governmental Entity has initiated any proceeding
or, to the best knowledge of Professionals Group, investigation into the
business or operations of Professionals Group or any of its Subsidiaries since
January 1, 1994, except where such proceedings or investigations are not likely,
either individually or in the aggregate, to have a Material Adverse Effect on
Professionals Group. There is no unresolved violation, criticism, or exception
by any Governmental Entity with respect to any report or statement relating to
any examinations of Professionals Group or any of its Subsidiaries which, in the
reasonable judgment of Professionals Group, is likely, either individually or in
the aggregate, to have a Material Adverse Effect on Professionals Group.
B-13
<PAGE> 279
3.6 Financial Statements.
(a) Professionals Group has previously made available to PPTF copies of (i)
the consolidated balance sheets of Professionals Group and its Subsidiaries as
of December 31, for the fiscal years 1996 and 1995, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for the
fiscal years 1996, 1995 and 1994, inclusive, as reported in Professionals
Group's Annual Report on Form 10-K for the fiscal year ended December 31, 1996
filed with the SEC under the Exchange Act, in each case accompanied by the audit
reports of KPMG Peat Marwick LLP (with respect to the years ended December 31,
1996 and 1995) and Coopers & Lybrand L.L.P. (with respect to the year ended
December 31, 1994), both independent public accountants with respect to
Professionals Group, and (ii) the unaudited consolidated balance sheet of
Professionals Group and its Subsidiaries as of June 30, 1997 and the related
unaudited consolidated statements of income and cash flows for the six-month
period then ended as reported in Professionals Group's Quarterly Report on Form
10-Q for the period ended June 30, 1997 filed with the SEC under the Exchange
Act (the "Professionals Group June 30, 1997 Form 10-Q"). The consolidated
balance sheets of Professionals Group as of December 31, 1996 and 1995
(including the related notes, where applicable) fairly present the consolidated
financial position of Professionals Group and its Subsidiaries as of the dates
thereof, and the other financial statements referred to in this Section 3.6(a)
(including the related notes, where applicable) fairly present (subject, in the
case of the unaudited statements, to recurring audit adjustments normal in
nature and amount) the results of the consolidated operations and changes in
stockholders' equity and consolidated financial position of Professionals Group
and its Subsidiaries for the respective fiscal periods or as of the respective
dates therein set forth; each of such statements (including the related notes,
where applicable) comply in all material respects with applicable accounting
requirements and with the published rules and regulations of the SEC with
respect thereto; and each of such statements (including the related notes, where
applicable) has been prepared in all material respects in accordance with
generally accepted accounting principles consistently applied ("GAAP") during
the periods involved, except, in each case, as indicated in such statements or
in the notes thereto or, in the case of unaudited statements, as permitted by
Form 10-Q. The books and records of Professionals Group and its Subsidiaries
have been, and are being, maintained in all material respects in accordance with
GAAP and any other applicable legal and accounting requirements and reflect only
actual transactions.
(b) Professionals Group has previously made available to PPTF copies of the
Statutory Annual Statements for each of the Professionals Group Insurance
Subsidiaries for the years ended December 31, 1996, 1995 and 1994 (collectively,
the "Professionals Group Insurance Subsidiary Statutory Statements"). The
Professionals Group Insurance Subsidiary Statutory Statements (i) have been
prepared in accordance with the books and records of the Professionals Group
Insurance Subsidiaries, (ii) have been prepared in accordance with the statutory
accounting practices and principles prescribed by or permitted under the
insurance laws of the applicable jurisdictions, and (iii) are consistent with
prior periods, except as provided for therein and except for any changes
required by applicable law or the accounting practices and principles referred
to in clause (ii) of this sentence. The Professionals Group Insurance Subsidiary
Statutory Statements, when read in conjunction with the notes thereto and any
statutory audit reports relating thereto, present fairly in all material
respects the statutory financial condition of the Professionals Group Insurance
Subsidiaries at December 31, 1996, 1995 and 1994, respectively, and the
statutory results of their respective operations for the period then ended.
3.7 Broker's Fees. Neither Professionals Group nor any Subsidiary of
Professionals Group nor any of their respective officers or directors has
employed any broker or finder or incurred any liability for any broker's fees,
commissions or finder's fees in connection with the transactions contemplated by
this Agreement, other than Cochran, Caronia & Co. and McDonald & Company
Securities, Inc. (copies of which engagement agreements have been disclosed by
Professionals Group to PPTF) whose fees, commissions and expenses shall be paid
by Professionals Group.
3.8 Absence of Certain Changes or Events.
(a) Except as disclosed in the Professionals Group Reports (as defined in
Section 3.12 of this Agreement) filed prior to the date of this Agreement, since
December 31, 1996, (i) Professionals Group and its Subsidiaries taken as a whole
have not incurred any material indebtedness or other liability or obligation
B-14
<PAGE> 280
(whether absolute, accrued, contingent or otherwise), other than in the ordinary
course of their business or in connection with the incorporation of, and for the
purpose of incorporating, INSCO, (ii) neither Professionals Group nor any
Subsidiary of Professionals Group has declared or paid any dividend or other
distribution in respect of the capital stock of Professionals Group or any
Professionals Group Subsidiary, or any direct or indirect redemption, purchase
or other acquisition by Professionals Group or such Professionals Group
Subsidiary of any such stock; (iii) to the best knowledge of Professionals
Group, there has been no material adverse change in the business, assets,
properties, operations, or condition (financial or otherwise) of Professionals
Group or any Subsidiary of Professionals Group, and (iv) no event has occurred
which has had, or is likely to have, individually or in the aggregate, a
Material Adverse Effect on Professionals Group.
(b) Except as disclosed in the Professionals Group Reports filed prior to
the date of this Agreement, since December 31, 1996, Professionals Group and its
Subsidiaries have carried on their respective businesses in all material
respects in the ordinary and usual course theretofore conducted.
(c) Since December 31, 1996, neither Professionals Group nor any of its
Subsidiaries has (i) except for such actions as are in the ordinary course of
business consistent with past practice or except as required by applicable law,
(A) increased the wages, salaries, compensation, pension, or other fringe
benefits or perquisites payable to any executive officer, employee, or director
from the amount thereof in effect as of December 31, 1996, or (B) granted any
severance or termination pay, entered into any contract to make or grant any
severance or termination pay, or paid any bonuses in excess of its 1996 salary
and employee benefits expenses, or (ii) suffered any strike, work stoppage,
slowdown, or other labor disturbance which, in its reasonable judgment, is
likely, either individually or in the aggregate, to have a Material Adverse
Effect on Professionals Group.
3.9 Legal Proceedings.
(a) Neither Professionals Group nor any of its Subsidiaries is a party to
any, and there are no pending or, to the best of their knowledge, threatened,
material legal, administrative, arbitral or other proceedings, claims, actions
or governmental or regulatory investigations of any nature (including
noncontractual claims, bad faith claims and claims against any directors or
officers of Professionals Group or any Subsidiary of Professionals Group, but
excluding coverage and other claims made with respect to insurance policies
issued by any Professionals Group Insurance Subsidiary) against Professionals
Group or any of its Subsidiaries or challenging the validity or propriety of the
transactions contemplated by this Agreement as to which there is a reasonable
likelihood of an adverse determination and which, if adversely determined,
either individually or in the aggregate, would have a Material Adverse Effect on
Professionals Group.
(b) There is no injunction, order, judgment, decree, or regulatory
restriction (including noncontractual claims, bad faith claims and claims
against any directors or officers of Professionals Group or any Subsidiary of
Professionals Group, but excluding coverage and other claims made with respect
to insurance policies issued by any Professionals Group Insurance Subsidiary)
imposed upon Professionals Group, any of its Subsidiaries or the assets of
Professionals Group or any of its Subsidiaries which has had, or might
reasonably be expected to have, a Material Adverse Effect on Professionals
Group.
3.10 Taxes and Tax Returns.
(a) Each of Professionals Group and its Subsidiaries has duly filed all Tax
Returns (as defined in Section 3.10(b) of this Agreement) required to be filed
by them on or prior to the date of this Agreement (all such Tax Returns being
accurate and complete in all material respects) and has duly paid or made
provisions for the payment of all Taxes (as defined in Section 3.10(b) of this
Agreement) which have been incurred or are due or claimed to be due from it by
Federal, state, county, foreign or local taxing authorities on or prior to the
date of this Agreement (including, if and to the extent applicable, those due in
respect of its properties, income, business, capital stock, premiums,
franchises, licenses, sales and payrolls) other than (i) Taxes or other charges
which are not yet delinquent or are being contested in good faith and have not
been finally determined for which adequate reserves have been made on the
financial statements described in Section 3.6(a) of this Agreement, or (ii) Tax
Returns or Taxes the failure to file, pay or make provision for, either
individually or in the aggregate, are not likely, in the reasonable judgment of
Professionals Group, to have a Material Adverse Effect on Professionals Group.
The Tax Returns of Professionals Group and its Subsidiaries
B-15
<PAGE> 281
have been examined by the Internal Revenue Service (the "IRS") and the
corresponding Governmental Entities for state, county and local Taxes and any
liability with respect thereto has been satisfied for all years to and including
1994, and either no material deficiencies were asserted as a result of such
examination for which Professionals Group does not have adequate reserves or all
such deficiencies were satisfied. There are no material disputes pending, or
claims asserted for, Taxes or assessments upon Professionals Group or any of its
Subsidiaries for which Professionals Group does not have adequate reserves, nor
has Professionals Group or any of its Subsidiaries given any currently effective
waivers extending the statutory period of limitation applicable to any Tax
Return for any period. In addition, (A) proper and accurate amounts have been
withheld by Professionals Group and its Subsidiaries from their employees for
all prior periods in compliance in all material respects with the tax
withholding provisions of applicable Federal, state and local laws, except where
failure to do so would not have a Material Adverse Effect on Professionals
Group, (B) Tax Returns which are accurate and complete in all material respects
have been filed by Professionals Group and its Subsidiaries for all periods for
which returns were due with respect to income tax withholding, Social Security
and unemployment taxes, except where failure to do so would not have a Material
Adverse Effect on Professionals Group, (C) the amounts shown on such Tax Returns
to be due and payable have been paid in full or adequate provision therefor has
been included by Professionals Group in its consolidated financial statements as
of December 31, 1996, except where failure to do so would not have a Material
Adverse Effect on Professionals Group and (D) there are no Tax Liens upon any
property or assets of Professionals Group or its Subsidiaries except Liens for
current Taxes not yet due or Liens that would not have a Material Adverse Effect
on Professionals Group. Neither Professionals Group nor any of its Subsidiaries
has been required to include in income any adjustment pursuant to Section 481 of
the Code by reason of a voluntary change in accounting method initiated by
Professionals Group or any of its Subsidiaries, and the IRS has not initiated or
proposed any such adjustment or change in accounting method, in either case
which has had or is reasonably likely to have a Material Adverse Effect on
Professionals Group. Except as set forth in the financial statements described
in Section 3.6(a) of this Agreement, neither Professionals Group nor any of its
Subsidiaries has entered into a transaction which is being accounted for as an
installment obligation under Section 453 of the Code, which would be reasonably
likely to have a Material Adverse Effect on Professionals Group. Neither
Professionals Group nor any of its Subsidiaries is a party to or bound by any
tax indemnity, tax sharing or tax allocation agreement (other than such
agreements as exist by and among themselves). Neither Professionals Group nor
any of its Subsidiaries has ever been a member of an affiliated group of
corporations within the meaning of Section 1504 of the Code other than as a
common parent corporation. Neither Professionals Group nor any of its
Subsidiaries is liable for the Taxes of any person under Section 1.1502-6 of the
Treasury Regulations (or any similar provision of state, local or foreign Tax
law) or by contract, as a successor or otherwise. Neither Professionals Group
nor any of its Subsidiaries is a party to any joint venture, partnership or
other arrangement or contract that could be treated as a partnership for Federal
income tax purposes. Professionals Group's basis and excess loss account, if
any, in each of its Subsidiaries is set forth in the Professionals Group
Disclosure Schedule.
(b) As used in this Agreement, (i) the term "Tax" or "Taxes" means all
taxes, charges, fees, levies and other governmental assessments and impositions
of any kind payable to any governmental authority or agency (including all
Federal, state, county, local, and foreign income, excise, gross receipts, gross
income, ad valorem, profits, gains, property, capital, sales, transfer, use,
payroll, employment, severance, withholding, duties, intangibles, franchise,
backup withholding, and other taxes, charges, levies or like assessments
together with all penalties and additions to tax and interest thereon); and (ii)
the term "Tax Return" or "Tax Returns" means any and all returns, reports,
information returns and information statements with respect to Taxes required to
be filed by Professionals Group or any of its Subsidiaries with the IRS or any
other Governmental Entity or tax authority or agency, whether domestic or
foreign (including consolidated, combined and unitary tax returns).
(c) Any amount that is reasonably likely to be received (whether in cash or
property or the vesting of property) as a result of any of the transactions
contemplated by this Agreement by any employee, officer or director of
Professionals Group or any of its affiliates who is a "Disqualified Individual"
(as such term is defined in proposed Treasury Regulation Section 1.280G-1) under
any employment, severance or termination agreement, other compensation
arrangement or Professionals Group Benefit Plan (as defined in
B-16
<PAGE> 282
Section 3.11(a) of this Agreement) currently in effect will not be characterized
as an "excess parachute payment" (as such term is defined in Section 280G(b)(1)
of the Code).
(d) No disallowance of a deduction under Section 162(m) of the Code for
employee remuneration of any amount paid or payable by Professionals Group or
any Professionals Group Subsidiary under any contract, plan, program,
arrangement or understanding will have a Material Adverse Effect on
Professionals Group.
3.11 Employee Benefit Plans; Labor Matters.
(a) The Professionals Group Disclosure Schedule sets forth a true and
complete list of each material employee benefit plan, arrangement or agreement
that is maintained as of the date of this Agreement (the "Professionals Group
Benefit Plans") by Professionals Group or any of its Subsidiaries or by any
affiliated trade or business, whether or not incorporated (an "ERISA
Affiliate"), all of which together with Professionals Group would be deemed a
"single employer" within the meaning of Section 4001 of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA").
(b) Professionals Group has heretofore delivered or made available to PPTF
true and complete copies of each of the Professionals Group Benefit Plans and
certain related documents, including (i) the actuarial report for such
Professionals Group Benefit Plan (if applicable) for each of the last two years,
and (ii) the most recent determination letter from the IRS (if applicable) for
such Professionals Group Benefit Plan.
(c) (i) Each of the Professionals Group Benefit Plans has been operated and
administered in all material respects in compliance with applicable laws,
including, but not limited to, ERISA and the Code, (ii) each of the
Professionals Group Benefit Plans intended to be "qualified" within the meaning
of Section 401(a) of the Code has received a determination letter from the IRS
that it is so qualified and no event has occurred that will or is likely to give
rise to disqualification of any such plan or trust created thereunder, (iii)
with respect to each Professionals Group Benefit Plan which is subject to Title
IV of ERISA, the present value of accrued benefits under such Professionals
Group Benefit Plan, based upon the actuarial assumptions used for funding
purposes in the most recent actuarial report prepared by the actuary for such
Professionals Group Benefit Plan with respect to such Professionals Group
Benefit Plan, did not, as of its latest valuation date, exceed the then current
value of the assets of such Professionals Group Benefit Plan allocable to such
accrued benefits, (iv) no Professionals Group Benefit Plan provides benefits,
including death or medical benefits (whether or not insured), with respect to
current or former employees of Professionals Group, its Subsidiaries or any
ERISA Affiliate beyond their retirement or other termination of service, other
than (A) coverage mandated by applicable law, (B) death benefits or retirement
benefits under any "employee pension plan" (as such term is defined in Section
3(2) of ERISA), (C) deferred compensation benefits accrued as liabilities on the
books of Professionals Group, its Subsidiaries or the ERISA Affiliates, (D)
benefits the full cost of which is borne by the current or former employee (or
his or her beneficiary), or (E) disability or severance plans identified on the
Professionals Group Disclosure Schedule, (v) no material liability under Title
IV of ERISA has been incurred by Professionals Group, its Subsidiaries or any
ERISA Affiliate (other than liability for premiums to the Pension Benefit
Guaranty Corporation (the "PBGC") arising in the ordinary course) that has not
been satisfied in full, and no condition exists that presents a material risk to
Professionals Group, its Subsidiaries or any ERISA Affiliate of incurring a
material liability thereunder, (vi) no Professionals Group Benefit Plan is a
"multiemployer pension plan" (as such term is defined in Section 3(37) of
ERISA), (vii) all required contributions or other amounts payable by
Professionals Group or its Subsidiaries as of the INSCO Effective Time with
respect to each Professionals Group Benefit Plan in respect of current or prior
plan years have been timely paid or accrued in accordance with GAAP and Section
412 of the Code, (viii) to the best knowledge of Professionals Group neither
Professionals Group, its Subsidiaries nor any ERISA Affiliate has engaged in a
transaction in connection with which Professionals Group, its Subsidiaries or
any ERISA Affiliate reasonably could be subject to either a material civil
penalty assessed pursuant to Section 409 or 502(i) of ERISA or a material tax
imposed pursuant to Section 4975 or 4976 of the Code, and (ix) there are no
pending, or to the best knowledge of Professionals Group, threatened or
anticipated claims (other than routine claims for benefits and administrative
expenses payable in the ordinary course) by, on behalf of or against any of the
Professionals Group Benefit Plans or any trusts related thereto which are, in
the reasonable judgment of Professionals Group, likely to have a Material
Adverse Effect on Professionals Group.
B-17
<PAGE> 283
(d) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated by this Agreement will (i) result
in any material payment (including severance, unemployment compensation, golden
parachute or otherwise) becoming due to any director or employee of
Professionals Group or any of its affiliates from Professionals Group or any of
its affiliates under any Professionals Group Benefit Plan or otherwise, (ii)
materially increase any benefits otherwise payable under any Professionals Group
Benefit Plan or (iii) result in any acceleration of the time of payment or
vesting of any such benefits to any material extent.
(e) To the best knowledge of Professionals Group, Professionals Group and
each Subsidiary of Professionals Group is in compliance in all material respects
with all currently applicable laws and regulations respecting employment and
employment matters, discrimination in employment, terms and conditions of
employment, wages, hours and occupational safety and health and employment
practices (including Federal and state wage and hour laws, workplace safety
laws, workers' compensation laws, equal employment opportunity laws, equal pay
laws, civil rights laws, the Americans With Disabilities Act and the Fair Labor
Standards Act of 1938, as amended), and is not engaged in any unfair labor
practice. Professionals Group and each Subsidiary of Professionals Group has
complied with all applicable notice provisions of and has no material
obligations under COBRA with respect to any former employees or qualifying
beneficiaries thereunder. There is no action, claim, cause of action, suit or
proceeding pending or, to the best knowledge of Professionals Group, threatened,
on the part of any employee, independent contractor or applicant for employment,
including any such action, claim, cause of action, suit or proceeding based on
allegations of wrongful termination or discrimination on the basis of age, race,
religion, sex, sexual preference, or mental or physical handicap or disability
that could, or could reasonably be expected to, have a Material Adverse Effect
on Professionals Group. Neither Professionals Group nor any Subsidiary of
Professionals Group is a party to any collective bargaining agreement or other
labor union contract nor does Professionals Group know of any activities or
proceedings of any labor union to organize any employees of Professionals Group
or any Subsidiary of Professionals Group. Professionals Group and each
Subsidiary of Professionals Group has provided all employees with all relocation
benefits, stock options, bonuses and incentives, and all other compensation that
such employee has earned up through the date of this Agreement or that such
employee was otherwise promised in his or her employment agreement(s) with
Professionals Group or the relevant Subsidiary of Professionals Group, as the
case may be.
(f) Except as disclosed in the Professionals Group Reports, all material
sums due for employee compensation have been paid, accrued or otherwise provided
for, and all employer contributions for employee benefits, including deferred
compensation obligations, and all benefits under any Professionals Group Benefit
Plan have been duly and adequately paid or provided for in accordance with plan
documents. To the best knowledge of Professionals Group, no person treated as an
independent contractor by Professionals Group or any Subsidiary of Professionals
Group is an employee as defined in Section 3401(c) of the Code, nor has any
employee been otherwise improperly classified, as exempt, nonexempt or
otherwise, for purposes of Federal or state income tax withholding or overtime
laws, rules, or regulations. To the best knowledge of Professionals Group, no
executive or key employee or group of employees of Professionals Group or any
Subsidiary of Professionals Group has any plans to terminate his, her or their
employment.
(g) Neither Professionals Group nor any of its Subsidiaries has any
commitment to (i) create any additional plan or modify or change any existing
Professionals Group Benefit Plan or (ii) enter into any contract to provide
compensation or benefits to any individual.
3.12 SEC Reports. Professionals Group has previously made available to
PPTF a complete copy of each (a) final registration statement, prospectus,
report, schedule and definitive proxy statement filed since April 1, 1996 by
Professionals Group with the SEC pursuant to the Securities Act or the Exchange
Act (the "Professionals Group Reports") and prior to the date of this Agreement
and (b) communication mailed by Professionals Group to its stockholders since
April 1, 1996 and prior to the date of this Agreement, and no such registration
statement, prospectus, report, schedule, proxy statement or communication
contained any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances in which they were made, not
misleading, except that information as of a later date shall be deemed to modify
information as of an earlier date. Since April 1, 1996, Professionals Group has
timely filed all Professionals Group Reports and other
B-18
<PAGE> 284
documents required to be filed by it under the Securities Act and the Exchange
Act, and, as of their respective dates, all Professionals Group Reports complied
in all material respects with the published rules and regulations of the SEC
with respect thereto.
3.13 Compliance with Applicable Law. Professionals Group and each of its
Subsidiaries hold all material licenses, franchises, permits and authorizations
necessary for the lawful conduct of their respective businesses under and
pursuant to, and have complied in all material respects with and are not in
default in any material respect under any, and have maintained and conducted
their respective businesses in all material respects in compliance with, all
applicable laws, statutes, orders, rules, regulations, policies and/or
guidelines of each Governmental Entity relating to Professionals Group or any of
its Subsidiaries, except where the failure to hold such license, franchise,
permit or authorization or such noncompliance or default would not, either
individually or in the aggregate, have a Material Adverse Effect on
Professionals Group.
3.14 Certain Contracts.
(a) Neither Professionals Group nor any of its Subsidiaries is a party to
or bound by any contract, arrangement, commitment or understanding (whether
written or oral) (i) with respect to the employment of any directors, officers
or employees other than in the ordinary course of business consistent with past
practice, (ii) which, upon the consummation of the transactions contemplated by
this Agreement will (either alone or upon the occurrence of any additional acts
or events) result in any payment (whether of severance pay or otherwise)
becoming due from PPTF, Professionals Group, PICOM, INSCO, or any of their
respective Subsidiaries to any director, officer or employee thereof, (iii)
which is a "material contract" (as such term is defined in Item 601(b)(10) of
Regulation S-K of the SEC) to be performed after the date of this Agreement that
has not been filed or incorporated by reference in the Professionals Group
Reports, (iv) which materially restricts the conduct of any line of business by
Professionals Group, (v) with or to a labor union or guild (including any
collective bargaining agreement) or (vi) (including any stock option plan, stock
appreciation rights plan, restricted stock plan or stock purchase plan) any of
the benefits of which will be increased, or the vesting of the benefits of which
will be accelerated, by the occurrence of any of the transactions contemplated
by this Agreement, or the value of any of the benefits of which will be
calculated on the basis of any of the transactions contemplated by this
Agreement. Professionals Group has previously made available to PPTF true and
correct copies of all employment and deferred compensation agreements which are
in writing and to which Professionals Group or any of its Subsidiaries is a
party. Each contract, arrangement, commitment or understanding of the type
described in this Section 3.14(a), whether or not set forth in the Professionals
Group Disclosure Schedule, is referred to in this Agreement as a "Professionals
Group Contract", and neither Professionals Group nor any of its Subsidiaries
knows of, or has received notice of, any violation of the above by any of the
other parties thereto which, either individually or in the aggregate, would have
a Material Adverse Effect on Professionals Group.
(b) Each Professionals Group Contract is valid and binding on Professionals
Group or any of its Subsidiaries, as applicable, and in full force and effect.
Professionals Group and its Subsidiaries have in all material respects performed
all obligations required to be performed by them to date under each
Professionals Group Contract, except where such noncompliance, either
individually or in the aggregate, would not have a Material Adverse Effect on
Professionals Group. No event or condition exists which constitutes or, after
notice or lapse of time or both, would constitute, a material default on the
part of Professionals Group or any of its Subsidiaries under any such
Professionals Group Contract, except where such default, either individually or
in the aggregate, would not have a Material Adverse Effect on Professionals
Group.
3.15 Agreements with Regulatory Agencies. Neither Professionals Group nor
any of its Subsidiaries is subject to any cease-and-desist or other order issued
by, or is a party to any written agreement, consent agreement or memorandum of
understanding with, or is a party to any commitment letter or similar
undertaking to, or is subject to any order or directive by, or has been since
January 1, 1993, a recipient of any supervisory letter from, or since January 1,
1993, has adopted any board resolutions at the request of any Governmental
Entity that currently restricts in any material respect the conduct of its
business or that in any material manner relates to its capital adequacy, its
credit policies, its management or its business (each, whether or not set forth
in the Professionals Group Disclosure Schedule, a "Professionals Group
Regulatory Agreement"), nor has Professionals Group or any of its Subsidiaries
been advised since January 1, 1993, by
B-19
<PAGE> 285
any Governmental Entity that it is considering issuing or requesting any such
Professionals Group Regulatory Agreement.
3.16 Other Activities of Professionals Group and its Subsidiaries. Neither
Professionals Group nor any of the Professionals Group Insurance Subsidiaries,
directly or indirectly, engages in any activity prohibited by applicable law.
3.17 Investment Securities. Each of Professionals Group and its
Subsidiaries has good and marketable title to all securities held by it (except
securities sold under repurchase agreements or held in any fiduciary or agency
capacity), free and clear of any Lien, except to the extent such securities are
pledged in the ordinary course of business consistent with prudent business
practices to secure obligations of Professionals Group or any of its
Subsidiaries. Such securities are permissible investments under all applicable
laws, such securities are valued on the books of Professionals Group in
accordance with GAAP, and none of such securities is in default in the payment
of principal, interest or dividends or is impaired to any extent.
3.18 Interest Rate Risk Management Instruments. All interest rate swaps,
caps, floors and option agreements and other interest rate risk management
arrangements entered into for the account of Professionals Group or its
Subsidiaries were entered into in the ordinary course of business and, to the
best knowledge of Professionals Group, in accordance with prudent business
practice and applicable rules, regulations and policies of any Governmental
Entity and with counterparties believed to be financially responsible at the
time and are legal, valid and binding obligations of Professionals Group or its
Subsidiaries enforceable in accordance with their terms (except as may be
limited by bankruptcy, insolvency, moratorium, reorganization or similar laws
affecting the rights of creditors generally and the availability of equitable
remedies), and are in full force and effect. Professionals Group and each of its
Subsidiaries have duly performed in all material respects all of their material
obligations thereunder to the extent that such obligations to perform have
accrued; and, to the best knowledge of Professionals Group, there are no
material breaches, violations or defaults or allegations or assertions of such
by any party thereunder.
3.19 Undisclosed Liabilities. Except for (i) those liabilities that are
fully reflected or reserved against on the consolidated balance sheet of
Professionals Group included in the Professionals Group June 30, 1997 Form 10-Q,
(ii) those liabilities incurred in the ordinary course of business consistent
with past practice since June 30, 1997, and (iii) coverage and other claims
(other than bad faith claims) made with respect to insurance policies issued by
any Professionals Group Insurance Subsidiary, neither Professionals Group nor
any of its Subsidiaries has incurred any liability of any nature whatsoever
(whether absolute, accrued, contingent or otherwise and whether due or to become
due) that, either alone or when combined with all similar liabilities, has had,
or could reasonably be expected to have, a Material Adverse Effect on
Professionals Group.
3.20 Intellectual Property.
(a) Professionals Group owns or has the right to use pursuant to license,
sublicense, agreement or permission all intellectual property necessary for the
operation of its business as presently conducted and as presently proposed to be
conducted. The term "intellectual property" means all trademarks, service marks,
logos, trade names and corporate names and registrations and applications for
registration thereof, copyrights and registrations and applications for
registration thereof, computer software, data and documentation, trade secrets
and confidential business information (including financial, marketing and
business data, pricing and cost information, business and marketing plans, and
customer and supplier lists and information), other proprietary rights, and
copies and tangible embodiments thereof (in whatever form or medium).
(b) To the best knowledge of Professionals Group, Professionals Group has
not interfered with, infringed upon, misappropriated or otherwise come into
conflict with any intellectual property rights of third parties and neither
Professionals Group, nor any of the directors or officers (and employees with
responsibility for intellectual property matters) of Professionals Group has
ever received any charge, complaint, claim or notice alleging any such
interference, infringement, misappropriation or violation. To the knowledge of
Professionals Group, no third party has interfered with, infringed upon,
misappropriated or otherwise come into conflict with any intellectual property
rights of Professionals Group.
B-20
<PAGE> 286
(c) The Professionals Group Disclosure Schedule identifies each item of
intellectual property that any third party owns and that Professionals Group
uses pursuant to license, sublicense, agreement, or permission. Professionals
Group has made correct and complete copies of all such licenses, sublicenses,
agreements and permissions (as amended to date) available to PPTF. With respect
to each such item of such intellectual property: (i) the license, sublicense,
agreement or permission covering the item is legal, valid, binding, enforceable
and in full force and effect; (ii) the license, sublicense, agreement or
permission will continue to be legal, valid, binding and enforceable and in full
force and effect on identical terms on and after the Closing Date; (iii) no
party to the license, sublicense, agreement or permission is in breach or
default, and no event of default has occurred which with notice or lapse of
time, or both, would constitute a breach or default or permit termination,
modification or acceleration thereunder; (iv) no party to the license,
sublicense, agreement or permission has repudiated any provision thereof; (v)
with respect to such sublicense, the representations and warranties set forth in
(i) through (iv) above are true and correct with respect to the underlying
license; and (vi) Professionals Group has not granted any sublicense or similar
right with respect to the license, sublicense, agreement or permission.
3.21 Real Property; Environmental Liability.
(a) Neither Professionals Group nor any Subsidiary of Professionals Group
owns any right, title or interest in any real property except as described on
the Professionals Group Disclosure Schedule (collectively, the "Professionals
Group Real Property"). The Professionals Group Disclosure Schedule sets forth a
complete and accurate list and general description of all material leases for
real property ("Professionals Group Real Property Leases") to which
Professionals Group or any Subsidiary of Professionals Group is a party or by
which any of them are bound. Professionals Group or a Subsidiary of
Professionals Group owns all right, title and interest in, and has good and
marketable title to, the Professionals Group Real Property and Professionals
Group and each Subsidiary of Professionals Group have valid leasehold interests
in each of the Professionals Group Real Property Leases held by any of them,
free and clear of all mortgages, options to purchase, covenants, conditions,
restrictions, easements, liens, security interests, charges, claims, assessments
and encumbrances, except for (i) rights of lessors, co-lessees or sublessees
that are reflected in each Professionals Group Real Property Lease, (ii) current
taxes not yet due and payable; (iii) Liens of public record; and (iv) such
nonmonetary imperfections of title and encumbrances, if any, as do not
materially detract from the value of or materially interfere with the present
use of such property. To the best knowledge of Professionals Group, the
activities of Professionals Group and its Subsidiaries with respect to all real
property and Professionals Group Real Property Leases owned or held by each of
them for use in connection with their respective operations are in all material
respects permitted and authorized by applicable zoning laws, ordinances and
regulations and all laws, rules and regulations of any court, administrative
agency or commission or other governmental authority or instrumentality
affecting such properties. Professionals Group and its Subsidiaries enjoy
peaceful and undisturbed possession under all material Professionals Group Real
Property Leases to which they are parties, and all of such Professionals Group
Real Property Leases are valid and in full force and effect.
(b) There are no legal, administrative, arbitral or other proceedings,
claims, actions, causes of action, private environmental investigations or
remediation activities or governmental investigations of any nature seeking to
impose, or that could reasonably be expected to result in the imposition, on
Professionals Group or any of its Subsidiaries of any liability or obligation
arising under common law or under any local, state or Federal environmental
statute, regulation or ordinance (including the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended ("CERCLA")),
pending or threatened against Professionals Group or any of its Subsidiaries,
which liability or obligation could reasonably be expected to have a Material
Adverse Effect on Professionals Group. To the knowledge of Professionals Group,
there is no reasonable basis for any such proceeding, claim, action or
governmental investigation that would impose any material liability or
obligation that could reasonably be expected to have a Material Adverse Effect
on Professionals Group. Neither Professionals Group nor any of its Subsidiaries
is subject to any agreement, order, judgment, decree, letter or memorandum by or
with any court, governmental authority, regulatory agency or third party
imposing any material liability or obligation that could reasonably be expected
to have a Material Adverse Effect on Professionals Group.
B-21
<PAGE> 287
3.22 State Takeover Laws. The Board of Directors of Professionals Group
has approved the transactions contemplated by this Agreement and taken such
action such that the provisions of Chapter 7A of the MBCA and any other
provisions of any state or local "takeover" law applicable to Professionals
Group will not apply to this Agreement or any of the transactions contemplated
by this Agreement.
3.23 Pooling of Interests. Professionals Group has no reason to believe
that the Mergers will not qualify as a "pooling of interests" for accounting
purposes.
3.24 Insurance Matters.
(a) Each form of insurance policy, policy endorsement or amendment,
reinsurance contract, application form, sales material and service contract now
in use by any Professionals Group Insurance Subsidiary in any jurisdiction has,
where required, received interim or final approvals from the appropriate
Governmental Entity of such jurisdiction except for those approvals which, if
not obtained, would not result in a Material Adverse Effect on Professionals
Group.
(b) Neither Professionals Group nor any Professionals Group Insurance
Subsidiary has issued any participating policies or any retrospectively rated
policies of insurance, other than policies with final premiums subject to audit.
(c) All premium rates required to be filed with or approved by any
Governmental Entity have been so filed and have received interim or final
approval from each such Governmental Entity, and all premiums charged by the
Professionals Group Insurance Subsidiaries conform with such approvals, except
for those filings or approvals which, if not obtained, would not result in a
Material Adverse Effect on Professionals Group.
(d) The Professionals Group Insurance Subsidiaries Statutory Statements for
the year ended December 31, 1996 set forth all of the reserves of the
Professionals Group Insurance Subsidiaries as of December 31, 1996
(collectively, the "Professionals Group Reserves"). The Professionals Group
Reserves, gross and net of the reinsurance thereof, were prepared in accordance
with the statutory accounting practices and principles prescribed by or
permitted under the insurance laws of the applicable jurisdictions and make good
and sufficient provisions for all insurance obligations of the Professionals
Group Insurance Subsidiaries. Outstanding claims and claims expenses of the
Professionals Group Insurance Subsidiaries have been opined upon as reasonable
and adequate as of December 31, 1996, by Mr. R. Kevin Clinton, the Chief
Financial Officer of Professionals Group and PICOM, a duly qualified actuary who
is a member in good standing in the American Academy of Actuaries, and a Fellow
of the Casualty Actuarial Society. Each of the Professionals Group Insurance
Subsidiaries has assets that qualify as admitted assets under the insurance laws
of the applicable jurisdictions in an amount at least equal to the sum of all
such reserves and liability amounts and its minimum statutory capital and
surplus as required by such insurance laws.
(e) The Professionals Group Disclosure Schedule sets forth a list and
description of all reinsurance agreements or treaties to which Professionals
Group or any Professionals Group Insurance Subsidiary is a party. The
consummation of the transactions contemplated by this Agreement will not result
in the termination of any such reinsurance agreements or treaties. Professionals
Group has provided PPTF true and correct copies of all such reinsurance
agreements or treaties. The reserve for unpaid losses, loss adjustment expenses
and unearned premiums at each of December 31, 1996 and December 31, 1995, as
reflected in the Professionals Group Insurance Subsidiaries Statutory
Statements, are stated net of reinsurance ceded amounts. Professionals Group has
no knowledge of any facts that would cause it to believe that the reinsurance
recoverable amounts reflected in said balance sheets are not collectible, and
Professionals Group is unaware of any material adverse change in the financial
condition of its reinsurers that might raise concern regarding their ability to
honor their reinsurance commitments, and no party to any of such reinsurance
agreements or treaties has given notice to Professionals Group or any of the
Professionals Group Insurance Subsidiaries that such party intends to terminate
or cancel any of such reinsurance agreements or treaties as a result of or
following consummation of the Mergers. Each reinsurance agreement or treaty to
which any Professionals Group Insurance Subsidiary is a party is valid and
binding on such Professionals Group Insurance Subsidiary and is in full force
and effect in accordance with its terms except as enforceability may be limited
by bankruptcy, insolvency or other similar laws affecting the enforcement of
creditors rights generally and except that the
B-22
<PAGE> 288
availability of equitable remedies, including specific performance, is subject
to the discretion of the court before which the enforcement of any proceeding
therefor may be brought. None of the Professionals Group Insurance Subsidiaries
is in default in any material respect with respect to any such reinsurance
agreement or treaty, and no such reinsurance agreement or treaty contains any
provision providing that the other party thereto may terminate the same by
reason of the transactions contemplated by this Agreement, or contains any other
provision which would be altered or otherwise become applicable by reason of
such transactions.
(f) The Professionals Group Reserves, gross and net of reinsurance thereof,
as of December 31, 1996, pertaining to the property and casualty insurance
businesses (including medical malpractice) of the Professionals Group Insurance
Subsidiaries have been determined on a consistent basis in accordance with past
practices.
(g) The Professionals Group Disclosure Schedule lists all written contracts
between Professionals Group and its Subsidiaries and each of their respective
agents, managing general agents, and brokers.
3.25 No Investment Company. Neither Professionals Group nor any Subsidiary
of Professionals Group is an "investment company," or a company "controlled" by
an "investment company," within the meaning of the Investment Company Act of
1940, as amended.
3.26 Accuracy of Information Supplied.
(a) To the best knowledge of Professionals Group, none of the information
supplied or to be supplied by Professionals Group or any Professionals Group
Subsidiary to PPTF pursuant to this Agreement contains or will contain any
untrue statement of a material fact or omits or will omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading.
(b) The S-4 and the Joint Proxy Statement used for the registration and
qualification of shares of Professionals Group Common Stock to be issued upon
consummation of the INSCO Merger and used to solicit approval of the Mergers by
the stockholders of Professionals Group and the Voting Members of PPTF, and all
other documents to be filed with the SEC or any applicable state securities law
regulatory authorities relating to this Agreement or the transactions
contemplated by this Agreement (including the Mergers), at the respective times
such documents are filed or become effective, and with respect to the Joint
Proxy Statement, from the time of mailing to the stockholders of Professionals
Group and the Voting Members of PPTF through the period required for the Voting
Members of PPTF to perfect dissenters' rights under applicable law, shall, as to
all information provided by Professionals Group: (i) comply in all material
respects with the provisions of all applicable regulations issued by the SEC
pursuant to the Securities Act and the Exchange Act and all other applicable
laws and regulations; and (ii) not contain any statement which, at the time and
in light of the circumstances under which it is made, is false or misleading
with respect to any material fact and not omit to state any material fact
necessary in order to make the statements therein not false or misleading or
necessary to correct any statement in any earlier communication with respect to
the solicitation of a proxy for the same meeting or subject matter which have
become false or misleading.
3.27 Effective Time of Representations, Warranties, Covenants and
Agreements. Each representation, warranty, covenant and agreement of
Professionals Group set forth in this Agreement, as updated by any written
disclosure schedule delivered pursuant to Section 6.11 of this Agreement, shall
be deemed to be made on and as of the date of this Agreement, as of the
effective date of the S-4, as of the Closing Date, as of the INSCO Effective
Time, and as of the PICOM Effective Time.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PPTF
Except as disclosed in the PPTF disclosure schedule delivered to
Professionals Group with the Initial Merger Agreement and any supplement to such
disclosure schedule delivered to Professional Group
B-23
<PAGE> 289
concurrently herewith (collectively, the "PPTF Disclosure Schedule") PPTF hereby
represents and warrants to Professionals Group as follows:
4.1 Corporate Organization.
(a) PPTF is a medical malpractice self-insurance trust fund duly organized
pursuant to an Amended Trust Agreement dated January 1, 1987, its Bylaws (said
Amended Trust Agreement and said Bylaws being the "PPTF Charter Documents") and
Florida Statutes Section 627.357, and is validly existing and in good standing
under the laws of the State of Florida. PPTF has the power and authority to own
or lease all of its properties and assets and to carry on its business as it is
now being conducted, and is duly licensed or qualified to do business (as a
medical malpractice self-insurance trust fund or otherwise) only in the State of
Florida. PPTF does not carry on or conduct any business (as a medical
malpractice self-insurance trust fund or otherwise) in any jurisdiction other
than the State of Florida. True and complete copies of the PPTF Charter
Documents, as in effect as of the date of this Agreement, have previously been
made available by PPTF to Professionals Group.
(b) The only Subsidiary of PPTF is Physicians Protective Plan, Inc., a
Florida corporation formerly known as "Parkway Medical & Dental Building, Inc."
(the "PPTF Subsidiary"). The PPTF Subsidiary (i) is duly organized and validly
existing as a corporation under the laws of the State of Florida, (ii) is duly
qualified to do business and in good standing in all jurisdictions (whether
Federal, state, local or foreign) where its ownership or leasing of property or
the conduct of its business requires it to be so qualified and in which the
failure to be so qualified would have a Material Adverse Effect on PPTF, and
(iii) has all requisite corporate power and authority to own or lease its
properties and assets and to carry on its business as now conducted. True and
complete copies of the Articles of Incorporation and Bylaws of the PPTF
Subsidiary, as in effect on the date of this Agreement, have previously been
made available by PPTF to Professionals Group.
(c) A record of all action taken by the Voting Members and the Board of
Trustees of PPTF (including committees thereof), and a record of all corporate
action taken by the stockholders and Board of Directors (including committees
thereof) of the PPTF Subsidiary, and complete and accurate copies of all of
their respective proceedings and actions by written consent, and all minutes of
their respective meetings, are contained in the respective minute books of PPTF
and the PPTF Subsidiary. The records of PPTF contain an accurate and complete
record of all Eligible Members of PPTF and their Membership Rights. The minute
books and stock ledgers of the PPTF Subsidiary taken together contain an
accurate and complete record of all issuances, transfers and cancellations of
shares of capital stock of the PPTF Subsidiary. Professionals Group has been
given access to and an opportunity to review all such minutes, minute books,
membership records and stock ledgers.
4.2 Capitalization.
(a) The Voting Members of PPTF have the full and complete power and
authority to approve and authorize this Agreement and the consummation of all of
the transactions contemplated by this Agreement. The Eligible Members are the
only persons and entities entitled to receive shares of Professionals Group
Common Stock, and cash in lieu of fractional shares of Professionals Group
Common Stock, upon consummation of the INSCO Merger, in exchange for Membership
Rights. As of June 30, 1997, PPTF had 3,338 Voting Members. PPTF has no
authorized, issued or outstanding shares of capital stock and does not have and
is not bound by any outstanding subscriptions, options, warrants, calls,
commitments or agreements of any character calling for the purchase or issuance
of any shares of capital stock or any other equity securities of PPTF or any
securities representing the right to purchase or otherwise receive any shares of
capital stock or any other equity securities of PPTF.
(b) The authorized capital stock of the PPTF Subsidiary consists of 20,000
shares, $1.00 par value per share, of stock ("PPTF Subsidiary Stock"). As of
June 30, 1997, 20,000 shares of PPTF Subsidiary Stock were issued and
outstanding and no shares of PPTF Subsidiary Stock were held in treasury. As of
June 30, 1997, no shares of PPTF Subsidiary Stock were reserved for issuance.
Other than the shares of PPTF Subsidiary Stock described in the preceding
sentence, the PPTF Subsidiary has not issued any shares of PPTF Subsidiary Stock
or other equity securities of the PPTF Subsidiary, or any securities convertible
into or exercisable for any shares of PPTF Subsidiary Stock or other equity
securities of the PPTF Subsidiary. PPTF
B-24
<PAGE> 290
owns directly all of the issued and outstanding shares of PPTF Subsidiary Stock,
free and clear of all Liens, and all of such shares are duly authorized and
validly issued and are fully paid, nonassessable and free of preemptive rights
with no personal liability attaching to the ownership thereof. The PPTF
Subsidiary does not have and is not bound by any outstanding subscriptions,
options, warrants, calls, commitments or agreements of any character calling for
the purchase or issuance of any shares of capital stock or any other equity
security of the PPTF Subsidiary or any securities representing the right to
purchase or otherwise receive any shares of capital stock or any other equity
security of the PPTF Subsidiary. The Voting Trust Agreement dated May 12, 1975
among the PPTF Subsidiary, William L. Gray, III, Eliot H. Berg and Leon Termin,
as amended, and encumbering the PPTF Subsidiary Stock has been terminated and is
of no force or effect.
(c) The PPTF Disclosure Schedule sets forth a complete list of (i) the
officers and trustees of PPTF, (ii) the officers and directors of the PPTF
Subsidiary, and (iii) the percentage of the outstanding voting stock of the PPTF
Subsidiary owned or controlled, directly or indirectly, by PPTF. PPTF does not
have any direct or indirect equity or ownership interest in any other business
or entity and does not have any direct or indirect obligation or any commitment
to invest any funds in any corporation or other business or entity, other than
for investment purposes in the ordinary course of business in accordance with
past practices.
4.3 Authority; No Violation.
(a) PPTF has full power and authority to execute and deliver this Agreement
and to consummate the transactions contemplated by this Agreement. The execution
and delivery of this Agreement and the consummation of the transactions
contemplated by this Agreement have been duly and validly approved by the Board
of Trustees of PPTF. The Board of Trustees of PPTF has directed that this
Agreement and the transactions contemplated by this Agreement be submitted to
the Voting Members of PPTF for approval at a meeting of such Voting Members and,
except for the adoption of this Agreement by the requisite affirmative vote of
the holders of the outstanding PPTF Membership Rights, no other proceedings on
the part of PPTF are necessary to approve this Agreement and to consummate the
transactions contemplated by this Agreement. This Agreement has been duly and
validly executed and delivered by PPTF and (assuming due authorization,
execution and delivery by Professionals Group and PICOM and the receipt of all
Requisite Regulatory Approvals) constitutes a valid and binding obligation of
PPTF, enforceable against PPTF in accordance with its terms.
(b) Neither the execution and delivery of this Agreement by PPTF nor the
consummation by PPTF of the transactions contemplated by this Agreement, nor
compliance by PPTF with any of the terms or provisions of this Agreement, will
(i) violate any provision of the PPTF Charter Documents, or (ii) assuming that
the consents and approvals referred to in Section 4.4 of this Agreement are duly
obtained, (x) violate any statute, code, ordinance, rule, regulation, judgment,
order, writ, decree or injunction applicable to PPTF or any of its properties or
assets, or (y) violate, conflict with, result in a breach of any provision of or
the loss of any benefit under, constitute a default (or an event which, with
notice or lapse of time, or both, would constitute a default) under, result in
the termination of or a right of termination or cancellation under, accelerate
the performance required by, or result in the creation of any Lien upon any of
the properties or assets of PPTF under, any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, deed of trust, license,
lease, agreement or other instrument or obligation to which PPTF is a party, or
by which it or any of its properties or assets may be bound or affected, except
(in the case of clause (y) above) for such violations, conflicts, breaches or
defaults which, either individually or in the aggregate, will not have or be
reasonably likely to have a Material Adverse Effect on PPTF.
4.4 Consents and Approvals. Except for (i) the filing of applications,
notices and forms with, and the obtaining of approvals from, the Michigan
Insurance Commissioner under the Michigan Insurance Code, the Florida Insurance
Department under the Florida Insurance Code, and the Illinois Insurance Director
under the Illinois Insurance Code with respect to the transactions contemplated
by this Agreement (including the incorporation of INSCO and its authorization to
do business in the State of Michigan and the State of Florida), (ii) the filing
of any other required applications, notices and forms with, and the obtaining of
approvals from any other Governmental Entity, (iii) the filing with the SEC of
the Joint Proxy Statement and the S-4, (iv) the filing of the INSCO Certificate
of Merger and the PICOM Certificates of Merger with the appropriate authorities
of the State of Michigan pursuant to the Michigan Insurance Code and with the
B-25
<PAGE> 291
appropriate authorities of the State of Florida pursuant to the Florida
Insurance Code and the FBCA, (v) the filing of the HSR Act Report with the
Pre-Merger Notification Agencies pursuant to the HSR Act, (vi) any consents,
authorizations, orders and approvals required under (A) the Michigan Insurance
Code, (B) the Florida Insurance Code, (C) the Illinois Insurance Code, (D) the
Securities Act, (E) the Exchange Act, and (F) the HSR Act, (vii) any consents,
authorizations, approvals, filings or exemptions in connection with compliance
with the applicable provisions of any SRO, or which are required under insurance
or other similar laws, and (viii) the approval of this Agreement by the
requisite votes of the stockholders of Professionals Group, the stockholders of
PICOM, the stockholders of INSCO, and the Voting Members of PPTF, no consents or
approvals of or filings or registrations with any Governmental Entity or with
any third party are necessary in connection with the execution and delivery by
PPTF of this Agreement or the consummation by PPTF of the transactions
contemplated by this Agreement.
4.5 Reports. PPTF and the PPTF Subsidiary (i) have timely filed all annual
and quarterly statements (including the financial statements contained therein),
reports, registrations and statements, together with all amendments required to
be made with respect thereto, that they were required to file since January 1,
1994 with each Governmental Entity having jurisdiction, (ii) have timely filed
all other reports and statements, together with all amendments required to be
made with respect thereto, that they were required to file since January 1, 1997
under all applicable laws, rules or regulations (including any report or
statement required to be filed pursuant to the laws, rules or regulations of the
United States, any state, or any other Governmental Entity), and (iii) have paid
all fees and assessments due and payable in connection therewith, except where
the failure to file such reports, registrations or statements, or to file any of
such other reports, or to pay such fees and assessments, either individually or
in the aggregate, will not have a Material Adverse Effect on PPTF. All such
reports, registrations and statements, together with all such amendments, were
in substantial compliance with applicable law when filed and, as of their
respective dates, to the best knowledge of PPTF, did not contain any false
statements or material misstatements of fact or omit to state any material facts
necessary to make the statements set forth therein not materially misleading in
light of the circumstances in which such statements were made. No material
deficiencies have been asserted by any Governmental Entity with respect to such
reports, registrations and statements or any such amendments thereto. PPTF has
delivered to Professionals Group complete and accurate copies of all annual and
quarterly statements (including the financial statements contained therein)
required to be filed by PPTF under applicable law since January 1, 1994. Except
for normal examinations conducted by a Governmental Entity in the regular course
of the business of PPTF and the PPTF Subsidiary, no Governmental Entity has
initiated any proceeding or, to the best knowledge of PPTF, investigations into
the business or operations of PPTF or the PPTF Subsidiary since January 1, 1994,
except where such proceedings or investigation are not likely, either
individually or in the aggregate, to have a Material Adverse Effect on PPTF.
There is no unresolved violation, criticism, or exception by any Governmental
Entity with respect to any report or statement relating to any examinations of
PPTF or the PPTF Subsidiary which, in the reasonable judgment of PPTF, is
likely, either individually or in the aggregate, to have a Material Adverse
Effect on PPTF.
4.6 Financial Statements.
(a) PPTF has previously made available to Professionals Group copies of (i)
the consolidated balance sheets of PPTF and the PPTF Subsidiary as of December
31, for the fiscal years 1996 and 1995, and the related consolidated statements
of income, changes in capital and surplus and cash flows for the fiscal years
1996, 1995 and 1994, inclusive, in each case accompanied by the audit reports of
KPMG Peat Marwick LLP, independent public accountants with respect to PPTF, and
(ii) the unaudited consolidated balance sheet of PPTF and its Subsidiaries as of
June 30, 1997 and the related unaudited consolidated statements of income, cash
flows and changes in capital and surplus for the six-month period then ended.
The consolidated balance sheets of PPTF as of December 31, 1996 and 1995
(including the related notes, where applicable) fairly present the consolidated
financial position of PPTF and the PPTF Subsidiary as of the dates thereof, and
the other financial statements referred to in this Section 4.6(a) (including the
related notes, where applicable) fairly present (subject, in the case of the
unaudited statements, to recurring audit adjustments normal in nature and
amount) the results of the consolidated operations and changes in capital and
surplus and consolidated financial position of PPTF and the PPTF Subsidiary for
the respective fiscal periods or as of the respective dates therein set forth;
each of such statements (including the related notes, where applicable)
B-26
<PAGE> 292
comply in all material respects with applicable accounting requirements; and
each of such statements (including the related notes, where applicable) has been
prepared in all material respects in accordance with GAAP during the periods
involved, except, in each case, as indicated in such statements or in the notes
thereto. The books and records of PPTF and the PPTF Subsidiary have been, and
are being, maintained in all material respects in accordance with GAAP and any
other applicable legal and accounting requirements and reflect only actual
transactions.
(b) PPTF has previously made available to Professionals Group copies of the
annual Statutory Financial Statements for PPTF and its Subsidiary for the years
ended December 31, 1996, 1995 and 1994 (collectively, the "PPTF Statutory
Statements"). The PPTF Statutory Statements (i) have been prepared in accordance
with the books and records of PPTF and the PPTF Subsidiary, (ii) have been
prepared in accordance with the statutory accounting practices and principles
prescribed by or permitted under the Florida Insurance Code, and (iii) are
consistent with prior periods, except as provided for therein and except for any
changes required by applicable law or the accounting practices and principles
referred to in clause (ii) of this sentence. The PPTF Statutory Statements, when
read in conjunction with the notes thereto and any statutory audit reports
relating thereto, present fairly in all material respects the statutory
financial condition of PPTF and the PPTF Subsidiary at December 31, 1996, 1995
and 1994, respectively, and the statutory results of their respective operations
for the period then ended.
4.7 Broker's Fees. Neither PPTF nor the PPTF Subsidiary nor any of their
respective officers or trustees or directors has employed any broker or finder
or incurred any liability for any broker's fees, commissions or finder's fees in
connection with the transactions contemplated by this Agreement, other than
Donaldson, Lufkin & Jenrette Securities Corporation (a copy of which engagement
agreement has been disclosed by PPTF to Professionals Group) whose fees,
commissions and expenses shall be paid by PPTF.
4.8 Absence of Certain Changes or Events.
(a) Since December 31, 1996, (i) PPTF and the PPTF Subsidiary taken as a
whole have not incurred any material indebtedness or other liability or
obligation (whether absolute, accrued, contingent or otherwise), other than in
the ordinary course of their business, (ii) neither PPTF nor the PPTF Subsidiary
has declared or paid any dividend or other distribution in respect of the
Membership Rights of PPTF or the capital stock of the PPTF Subsidiary, or any
direct or indirect redemption, purchase or other acquisition by PPTF or the PPTF
Subsidiary of any such Membership Rights or stock; (iii) to the best knowledge
of PPTF, there has been no material adverse change in the business, assets,
properties, operations, or condition (financial or otherwise) of PPTF or the
PPTF Subsidiary, and (iv) no event has occurred which has had, or is likely to
have, individually or in the aggregate, a Material Adverse Effect on PPTF.
(b) Since December 31, 1996, PPTF and the PPTF Subsidiary have carried on
their respective businesses in all material respects in the ordinary and usual
course theretofore conducted.
(c) Since December 31, 1996, neither PPTF nor the PPTF Subsidiary has (i)
except for such actions as are in the ordinary course of business consistent
with past practice or except as required by applicable law, (A) increased the
wages, salaries, compensation, pension, or other fringe benefits or perquisites
payable to any executive officer, employee, director, or trustee from the amount
thereof in effect as of December 31, 1996, or (B) granted any severance or
termination pay, entered into any contract to make or grant any severance or
termination pay, or paid any bonuses in excess of its 1996 salary and employee
benefits expenses, or (ii) suffered any strike, work stoppage, slowdown, or
other labor disturbance which, in its reasonable judgment, is likely, either
individually or in the aggregate, to have a Material Adverse Effect on PPTF.
4.9 Legal Proceedings.
(a) Neither PPTF nor the PPTF Subsidiary is a party to any, and there are
no pending or, to the best of their knowledge, threatened, material legal,
administrative, arbitral or other proceedings, claims, actions or governmental
or regulatory investigations of any nature (including noncontractual claims, bad
faith claims and claims against any trustees or directors or officers of PPTF or
the PPTF Subsidiary, but excluding coverage and other claims made with respect
to insurance policies issued by PPTF or the PPTF Subsidiary) against PPTF or the
PPTF Subsidiary or challenging the validity or propriety of the transactions
contemplated by this
B-27
<PAGE> 293
Agreement as to which there is a reasonable likelihood of an adverse
determination and which, if adversely determined, would, individually or in the
aggregate, have a Material Adverse Effect on PPTF.
(b) There is no injunction, order, judgment, decree, or regulatory
restriction (including noncontractual claims, bad faith claims and claims
against any trustees or directors or officers of PPTF or the PPTF Subsidiary,
but excluding coverage and other claims made with respect to insurance policies
issued by PPTF or the PPTF Subsidiary) imposed upon PPTF or the PPTF Subsidiary
or the assets of PPTF or the PPTF Subsidiary which has had, or might reasonably
be expected to have, a Material Adverse Effect on PPTF.
4.10 Taxes and Tax Returns.
(a) Each of PPTF and the PPTF Subsidiary has duly filed all Tax Returns
required to be filed by them on or prior to the date of this Agreement (all such
returns being accurate and complete in all material respects) and has duly paid
or made provisions for the payment of all Taxes which have been incurred or are
due or claimed to be due from it by Federal, state, county, foreign or local
taxing authorities on or prior to the date of this Agreement (including, if and
to the extent applicable, those due in respect of its properties, income,
business, capital stock, premiums, franchises, licenses, sales and payrolls)
other than (i) Taxes or other charges which are not yet delinquent or are being
contested in good faith and have not been finally determined for which adequate
reserves have been made on the financial statements described in Section 4.6(a)
of this Agreement, or (ii) Tax Returns or Taxes the failure to file, pay or make
provision for, either individually or in the aggregate, are not likely, in the
reasonable judgment of PPTF, to have a Material Adverse Effect on PPTF. The Tax
Returns of PPTF and the PPTF Subsidiary have been examined by the IRS and the
corresponding Governmental Entities for state, county and local Taxes and any
liability with respect thereto has been satisfied for all years to and including
1994, and either no material deficiencies were asserted as a result of such
examination for which PPTF does not have adequate reserves or all such
deficiencies were satisfied. There are no material disputes pending, or claims
asserted for, Taxes upon PPTF or the PPTF Subsidiary for which PPTF does not
have adequate reserves, nor has PPTF or the PPTF Subsidiary given any currently
effective waivers extending the statutory period of limitation applicable to any
Tax Return for any period. In addition, (A) proper and accurate amounts have
been withheld by PPTF and the PPTF Subsidiary from their employees for all prior
periods in compliance in all material respects with the tax withholding
provisions of applicable Federal, state and local laws, except where failure to
do so would not have a Material Adverse Effect on PPTF, (B) Tax Returns which
are accurate and complete in all material respects have been filed by PPTF and
the PPTF Subsidiary for all periods for which returns were due with respect to
income tax withholding, Social Security and unemployment taxes, except where
failure to do so would not have a Material Adverse Effect on PPTF, (C) the
amounts shown on such Tax Returns to be due and payable have been paid in full
or adequate provision therefor has been included by PPTF in its consolidated
financial statements as of December 31, 1996, except where failure to do so
would not have a Material Adverse Effect on PPTF and (D) there are no Tax Liens
upon any property or assets of PPTF or the PPTF Subsidiary except Liens for
current Taxes not yet due or Liens that would not have a Material Adverse Effect
on PPTF. Neither PPTF nor the PPTF Subsidiary has been required to include in
income any adjustment pursuant to Section 481 of the Code by reason of a
voluntary change in accounting method initiated by PPTF or the PPTF Subsidiary,
and the IRS has not initiated or proposed any such adjustment or change in
accounting method, in either case which has had or is reasonably likely to have
a Material Adverse Effect on PPTF. Except as set forth in the financial
statements described in Section 4.6 of this Agreement, neither PPTF nor the PPTF
Subsidiary has entered into a transaction which is being accounted for as an
installment obligation under Section 453 of the Code, which would be reasonably
likely to have a Material Adverse Effect on PPTF. Neither PPTF nor the PPTF
Subsidiary is a party to or bound by any tax indemnity, tax sharing or tax
allocation agreement. Neither PPTF nor the PPTF Subsidiary has ever been a
member of an affiliated group of corporations within the meaning of Section 1504
of the Code other t han as a common parent corporation. Neither PPTF nor the
PPTF Subsidiary is liable for the Taxes of any person under Section 1.1502-6 of
the Treasury Regulations (or any similar provision of state, local or foreign
Tax law) or by contract, as a successor or otherwise. Neither PPTF nor the PPTF
Subsidiary is a party to any joint venture, partnership or other arrangement or
contract that could be treated as a partnership for Federal income tax purposes.
PPTF's basis and excess loss account, if any, in the PPTF Subsidiary is set
forth in the PPTF Disclosure Schedule.
B-28
<PAGE> 294
(b) Any amount that is reasonably likely to be received (whether in cash or
property or the vesting of property) as a result of any of the transactions
contemplated by this Agreement by any employee, officer, director or trustee of
PPTF or any of its affiliates who is a "Disqualified Individual" (as such term
is defined in proposed Treasury Regulation Section 1.280G-1) under any
employment, severance or termination agreement, other compensation arrangement
or PPTF Benefit Plan (as defined in Section 4.11(a) of this Agreement) currently
in effect will not be characterized as an "excess parachute payment' (as such
term is defined in Section 280G(b)(1) of the Code).
(c) No disallowance of a deduction under Section 162(m) of the Code for
employee remuneration of any amount paid or payable by PPTF or the PPTF
Subsidiary under any contract, plan, program, arrangement or understanding will
have a Material Adverse Effect on PPTF.
4.11 Employee Benefit Plans; Labor Matters.
(a) The PPTF Disclosure Schedule sets forth a true and complete list of
each material employee benefit plan, arrangement or agreement that is maintained
as of the date of this Agreement (the "PPTF Benefit Plans") by PPTF or its
Subsidiary or by any ERISA Affiliate, all of which together with PPTF would be
deemed a "single employer" within the meaning of Section 4001 of ERISA.
(b) PPTF has heretofore delivered or made available to Professionals Group
true and complete copies of each of the PPTF Benefit Plans and certain related
documents, including (i) the actuarial report for such PPTF Benefit Plan (if
applicable) for each of the last two years, and (ii) the most recent
determination letter from the IRS (if applicable) for such PPTF Benefit Plan.
(c) (i) Each of the PPTF Benefit Plans has been operated and administered
in all material respects in compliance with applicable laws, including, but not
limited to, ERISA and the Code, (ii) each of the PPTF Benefit Plans intended to
be "qualified" within the meaning of Section 401(a) of the Code has received a
determination letter from the IRS that it is so qualified and no event has
occurred that will or is likely to give rise to disqualification of any such
plan or trust created thereunder, (iii) with respect to each PPTF Benefit Plan
which is subject to Title IV of ERISA, the present value of accrued benefits
under such PPTF Benefit Plan, based upon the actuarial assumptions used for
funding purposes in the most recent actuarial report prepared by the actuary for
such PPTF Benefit Plan with respect to such PPTF Benefit Plan, did not, as of
its latest valuation date, exceed the then current value of the assets of such
PPTF Benefit Plan allocable to such accrued benefits, (iv) no PPTF Benefit Plan
provides benefits, including death or medical benefits (whether or not insured),
with respect to current or former employees of PPTF, the PPTF Subsidiary or any
ERISA Affiliate beyond their retirement or other termination of service, other
than (A) coverage mandated by applicable law, (B) death benefits or retirement
benefits under any "employee pension plan" (as such term is defined in Section
3(2) of ERISA), (C) deferred compensation benefits accrued as liabilities on the
books of PPTF, the PPTF Subsidiary or the ERISA Affiliates, (D) benefits the
full cost of which is borne by the current or former employee (or his or her
beneficiary), or (E) disability or severance plans identified on the PPTF
Disclosure Schedule, (v) no material liability under Title IV of ERISA has been
incurred by PPTF, the PPTF Subsidiary or any ERISA Affiliate (other than
liability for premiums to the PBGC arising in the ordinary course) that has not
been satisfied in full, and no condition exists that presents a material risk to
PPTF, the PPTF Subsidiary or any ERISA Affiliate of incurring a material
liability thereunder, (vi) no PPTF Benefit Plan is a "multiemployer pension
plan" (as such term is defined in Section 3(37) of ERISA), (vii) all required
contributions or other amounts payable by PPTF or the PPTF Subsidiary as of the
INSCO Effective Time with respect to each PPTF Benefit Plan in respect of
current or prior plan years have been timely paid or accrued in accordance with
GAAP and Section 412 of the Code, (viii) to the best knowledge of PPTF neither
PPTF, the PPTF Subsidiary nor any ERISA Affiliate has engaged in a transaction
in connection with which PPTF, the PPTF Subsidiary or any ERISA Affiliate
reasonably could be subject to either a material civil penalty assessed pursuant
to Section 409 or 502(i) of ERISA or a material tax imposed pursuant to Section
4975 or 4976 of the Code, and (ix) there are no pending, or to the best
knowledge of PPTF, threatened or anticipated claims (other than routine claims
for benefits and administrative expenses payable in the ordinary course) by, on
behalf of or against any of the PPTF Benefit Plans or any trusts related thereto
which are, in the reasonable judgment of PPTF, likely, either individually or in
the aggregate, to have a Material Adverse Effect on PPTF.
B-29
<PAGE> 295
(d) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated by this Agreement will (i) result
in any material payment (including severance, unemployment compensation, golden
parachute or otherwise) becoming due to any trustee or director or employee of
PPTF or any of its affiliates from PPTF or any of its affiliates under any PPTF
Benefit Plan or otherwise, (ii) materially increase any benefits otherwise
payable under any PPTF Benefit Plan, or (iii) result in any acceleration of the
time of payment or vesting of any such benefits to any material extent.
(e) To the best knowledge of PPTF, PPTF and the PPTF Subsidiary are in
compliance in all material respects with all currently applicable laws and
regulations respecting employment and employment matters, discrimination in
employment, terms and conditions of employment, wages, hours and occupational
safety and health and employment practices (including Federal and state wage and
hour laws, workplace safety laws, workers' compensation laws, equal employment
opportunity laws, equal pay laws, civil rights laws, the Americans With
Disabilities Act and the Fair Labor Standards Act of 1938, as amended), and are
not engaged in any unfair labor practice. PPTF and the PPTF Subsidiary has
complied with all applicable notice provisions of and has no material
obligations under COBRA with respect to any former employees or qualifying
beneficiaries thereunder. There is no action, claim, cause of action, suit or
proceeding pending or, to the best knowledge of PPTF, threatened, on the part of
any employee, independent contractor or applicant for employment, including any
such action, claim, cause of action, suit or proceeding based on allegations of
wrongful termination or discrimination on the basis of age, race, religion, sex,
sexual preference, or mental or physical handicap or disability that could, or
could reasonably be expected to, have a Material Adverse Effect on PPTF. Neither
PPTF nor the PPTF Subsidiary is a party to any collective bargaining agreement
or other labor union contract nor does PPTF know of any activities or
proceedings of any labor union to organize any employees of PPTF or the PPTF
Subsidiary. PPTF and the PPTF Subsidiary have provided all employees with all
relocation benefits, stock options, bonuses and incentives, and all other
compensation that such employee has earned up through the date of this Agreement
or that such employee was otherwise promised in his or her employment
agreement(s) with PPTF or the PPTF Subsidiary, as the case may be.
(f) All material sums due for employee compensation have been paid, accrued
or otherwise provided for, and all employer contributions for employee benefits,
including deferred compensation obligations, and all benefits under any PPTF
Benefit Plan have been duly and adequately paid or provided for in accordance
with plan documents. To the best knowledge of PPTF, no person treated as an
independent contractor by PPTF or the PPTF Subsidiary is an employee as defined
in Section 3401(c) of the Code, nor has any employee been otherwise improperly
classified, as exempt, nonexempt or otherwise, for purposes of Federal or state
income tax withholding or overtime laws, rules, or regulations. To the best
knowledge of PPTF, no executive or key employee or group of employees of PPTF or
the PPTF Subsidiary has any plans to terminate his, her or their employment.
(g) Neither PPTF nor the PPTF Subsidiary has any commitment to (i) create
any additional plan or modify or change any existing PPTF Benefit Plan or (ii)
enter into any contract to provide compensation or benefits to any individual.
4.12 Compliance with Applicable Law. PPTF and the PPTF Subsidiary hold all
material licenses, franchises, permits and authorizations necessary for the
lawful conduct of their respective businesses under and pursuant to, and have
complied in all material respects with and are not in default in any material
respect under any, and have maintained and conducted their respective businesses
in all material respects in compliance with, all applicable laws, statutes,
orders, rules, regulations, policies and/or guidelines of each Governmental
Entity relating to PPTF or the PPTF Subsidiary, except where the failure to hold
such license, franchise, permit or authorization or such noncompliance or
default would not, individually or in the aggregate, have a Material Adverse
Effect on PPTF.
4.13 Certain Contracts.
(a) Neither PPTF nor the PPTF Subsidiary is a party to or bound by any
contract, arrangement, commitment or understanding (whether written or oral) (i)
with respect to the employment of any trustees, directors, officers or employees
other than in the ordinary course of business consistent with past practice,
(ii) which, upon the consummation of the transactions contemplated by this
Agreement will (either alone or upon the occurrence of any additional acts or
events) result in any payment (whether of severance pay or
B-30
<PAGE> 296
otherwise) becoming due from Professionals Group, PPTF, PICOM, INSCO, or any of
their respective Subsidiaries to any trustee, director, officer or employee
thereof, (iii) which is a "material contract" (as such term is defined in Item
601(b)(10) of Regulation S-K of the SEC) to be performed after the date of this
Agreement that has not been filed or incorporated by reference in the
Professionals Group Reports, (iv) which materially restricts the conduct of any
line of business by PPTF, (v) with or to a labor union or guild (including any
collective bargaining agreement) or (vi) any of the benefits of which will be
increased, or the vesting of the benefits of which will be accelerated, by the
occurrence of any of the transactions contemplated by this Agreement, or the
value of any of the benefits of which will be calculated on the basis of any of
the transactions contemplated by this Agreement. PPTF has previously made
available to Professionals Group true and correct copies of all employment and
deferred compensation agreements which are in writing and to which PPTF or the
PPTF Subsidiary is a party. Each contract, arrangement, commitment or
understanding of the type described in this Section 4.13(a), whether or not set
forth in the PPTF Disclosure Schedule, is referred to in this Agreement as a
"PPTF Contract", and neither PPTF nor the PPTF Subsidiary knows of, or has
received notice of, any violation of the above by any of the other parties
thereto which, individually or in the aggregate, would have a Material Adverse
Effect on PPTF.
(b) Each PPTF Contract is valid and binding on PPTF or the PPTF Subsidiary,
as applicable, and in full force and effect. PPTF and the PPTF Subsidiary have
in all material respects performed all obligations required to be performed by
them to date under each PPTF Contract, except where such noncompliance,
individually or in the aggregate, would not have a Material Adverse Effect on
PPTF. No event or condition exists which constitutes or, after notice or lapse
of time or both, would constitute, a material default on the part of PPTF or the
PPTF Subsidiary under any such PPTF Contract, except where such default,
individually or in the aggregate, would not have a Material Adverse Effect on
PPTF.
4.14 Agreements with Regulatory Agencies. Neither PPTF nor the PPTF
Subsidiary is subject to any cease-and-desist or other order issued by, or is a
party to any written agreement, consent agreement or memorandum of understanding
with, or is a party to any commitment letter or similar undertaking to, or is
subject to any order or directive by, or has been since January 1, 1993, a
recipient of any supervisory letter from, or since January 1, 1993, has adopted
any board resolutions at the request of any Governmental Entity that currently
restricts in any material respect the conduct of its business or that in any
material manner relates to its capital adequacy, its credit policies, its
management or its business (each, whether or not set forth in the PPTF
Disclosure Schedule, a "PPTF Regulatory Agreement"), nor has PPTF or the PPTF
Subsidiary been advised since January 1, 1996, by any Governmental Entity that
it is considering issuing or requesting any such PPTF Regulatory Agreement.
4.15 Other Activities of PPTF and the PPTF Subsidiary. Neither PPTF nor
the PPTF Subsidiary, directly or indirectly, engages in any activity prohibited
by applicable law.
4.16 Investment Securities. Each of PPTF and the PPTF Subsidiary has good
and marketable title to all securities held by it (except securities sold under
repurchase agreements or held in any fiduciary or agency capacity), free and
clear of any Lien, except to the extent such securities are pledged in the
ordinary course of business consistent with prudent business practices to secure
obligations of PPTF or the PPTF Subsidiary. Such securities are permissible
investments under all applicable laws, such securities are valued on the books
of PPTF in accordance with GAAP, and none of such securities is in default in
the payment of principal, interest or dividends or is impaired to any extent.
4.17 Interest Rate Risk Management Instruments. All interest rate swaps,
caps, floors and option agreements and other interest rate risk management
arrangements, whether entered into for the account of PPTF or the PPTF
Subsidiary, were entered into in the ordinary course of business and, to the
best knowledge of PPTF, in accordance with prudent business practice and
applicable rules, regulations and policies of any Governmental Entity and with
counterparties believed to be financially responsible at the time and are legal,
valid and binding obligations of PPTF or the PPTF Subsidiary enforceable in
accordance with their terms (except as may be limited by bankruptcy, insolvency,
moratorium, reorganization or similar laws affecting the rights of creditors
generally and the availability of equitable remedies), and are in full force and
effect. PPTF and the PPTF Subsidiary have duly performed in all material
respects all of their material obligations thereunder to the extent that such
obligations to perform have accrued; and, to the best knowledge of PPTF,
B-31
<PAGE> 297
there are no material breaches, violations or defaults or allegations or
assertions of such by any party thereunder.
4.18 Undisclosed Liabilities. Except for (i) those liabilities that are
fully reflected or reserved against on the consolidated balance sheet of PPTF at
December 31, 1996, (ii) those liabilities incurred in the ordinary course of
business consistent with past practice since December 31, 1996, and (iii)
coverage and other claims (other than bad faith claims) made with respect to
insurance policies issued by PPTF or the PPTF Subsidiary, neither PPTF nor the
PPTF Subsidiary has incurred any liability of any nature whatsoever (whether
absolute, accrued, contingent or otherwise and whether due or to become due)
that, either alone or when combined with all similar liabilities, has had, or
could reasonably be expected to have, a Material Adverse Effect on PPTF.
4.19 Intellectual Property.
(a) PPTF owns or has the right to use pursuant to license, sublicense,
agreement or permission all intellectual property necessary for the operation of
its business as presently conducted and as presently proposed to be conducted.
(b) To the best knowledge of PPTF, PPTF has not interfered with, infringed
upon, misappropriated or otherwise come into conflict with any intellectual
property rights of third parties and neither PPTF, nor any of the directors or
officers (and employees with responsibility for intellectual property matters)
of PPTF has ever received any charge, complaint, claim or notice alleging any
such interference, infringement, misappropriation or violation. To the knowledge
of PPTF, no third party has interfered with, infringed upon, misappropriated or
otherwise come into conflict with any intellectual property rights of PPTF.
(c) The PPTF Disclosure Schedule identifies each item of intellectual
property that any third party owns and that PPTF uses pursuant to license,
sublicense, agreement, or permission. PPTF has made correct and complete copies
of all such licenses, sublicenses, agreements and permissions (as amended to
date) available to Professionals Group. With respect to each such item of such
intellectual property: (i) the license, sublicense, agreement or permission
covering the item is legal, valid, binding, enforceable and in full force and
effect; (ii) the license, sublicense, agreement or permission will continue to
be legal, valid, binding and enforceable and in full force and effect on
identical terms on and after the Closing Date; (iii) no party to the license,
sublicense, agreement or permission is in breach or default, and no event of
default has occurred which with notice or lapse of time, or both, would
constitute a breach or default or permit termination, modification or
acceleration thereunder; (iv) no party to the license, sublicense, agreement or
permission has repudiated any provision thereof; (v) with respect to such
sublicense, the representations and warranties set forth in (i) through (iv)
above are true and correct with respect to the underlying license; and (vi) PPTF
has not granted any sublicense or similar right with respect to the license,
sublicense, agreement or permission.
4.20 Real Property; Environmental Liability.
(a) Neither PPTF nor the PPTF Subsidiary owns any right, title or interest
in any real property. The PPTF Disclosure Schedule sets forth a complete and
accurate list and general description of all material leases for real property
("PPTF Real Property Leases") to which PPTF or the PPTF Subsidiary is a party or
by which either of them is bound. PPTF and the PPTF Subsidiary have valid
leasehold interests in each of the PPTF Real Property Leases held by any of
them, free and clear of all mortgages, options to purchase, covenants,
conditions, restrictions, easements, liens, security interests, charges, claims,
assessments and encumbrances, except for (i) rights of lessors, co-lessees or
sublessees that are reflected in each PPTF Real Property Lease, (ii) current
taxes not yet due and payable; (iii) Liens of public record; and (iv) such
nonmonetary imperfections of title and encumbrances, if any, as do not
materially detract from the value of or materially interfere with the present
use of such property. To the best knowledge of PPTF, the activities of PPTF and
the PPTF Subsidiary with respect to all real property and PPTF Real Property
Leases owned or held by each of them for use in connection with their respective
operations are in all material respects permitted and authorized by applicable
zoning laws, ordinances and regulations and all laws, rules and regulations of
any court, administrative agency or commission or other governmental authority
or instrumentality affecting such properties. PPTF and the PPTF Subsidiary enjoy
peaceful and undisturbed possession under all material PPTF Real Property Leases
to which they are parties, and all of such PPTF Real Property Leases are valid
and in full force and effect.
B-32
<PAGE> 298
(b) There are no legal, administrative, arbitral or other proceedings,
claims, actions, causes of action, private environmental investigations or
remediation activities or governmental investigations of any nature seeking to
impose, or that could reasonably be expected to result in the imposition, on
PPTF or the PPTF Subsidiary of any liability or obligation arising under common
law or under any local, state or Federal environmental statute, regulation or
ordinance (including, CERCLA), pending or threatened against PPTF or the PPTF
Subsidiary, which liability or obligation could reasonably be expected to have a
Material Adverse Effect on PPTF. To the knowledge of PPTF, there is no
reasonable basis for any such proceeding, claim, action or governmental
investigation that would impose any material liability or obligation that could
reasonably be expected to have a Material Adverse Effect on PPTF. Neither PPTF
nor the PPTF Subsidiary is subject to any agreement, order, judgment, decree,
letter or memorandum by or with any court, governmental authority, regulatory
agency or third party imposing any material liability or obligation that could
reasonably be expected to have a Material Adverse Effect on PPTF.
4.21 Pooling of Interests. PPTF has no reason to believe that the Mergers
will not qualify as a "pooling of interests" for accounting purposes.
4.22 Insurance Matters.
(a) Each form of insurance policy, policy endorsement or amendment,
reinsurance contract, annuity contract, application form, sales material and
service contract now in use by PPTF or the PPTF Subsidiary in any jurisdiction
has, where required, received interim or final approvals from the appropriate
Governmental Entity of such jurisdiction, except for those approvals which, if
not obtained, would not result in a Material Adverse Effect on PPTF.
(b) Neither PPTF nor its Subsidiary has issued any participating policies
or any retrospectively rated policies of insurance, other than policies with
final premiums subject to audit.
(c) All premium rates required to be filed with or approved by any
Governmental Entity have been so filed and have received interim or final
approval from each such Governmental Entity, and all premiums charged by PPTF or
the PPTF Subsidiary conform with such approvals, except for those filings or
approvals which, if not obtained, would not result in a Material Adverse Effect
on PPTF.
(d) The PPTF Disclosure Schedule sets forth all of the reserves of PPTF and
the PPTF Subsidiary as of December 31, 1996 (collectively, the "PPTF Reserves").
The PPTF Reserves, gross and net of the reinsurance thereof, were prepared in
accordance with the statutory accounting practices and principles prescribed by
or permitted under the Florida Insurance Code and make good and sufficient
provisions for all insurance obligations of PPTF and the PPTF Subsidiary.
Outstanding claims and claims expenses have been opined upon as reasonable and
adequate as of December 31, 1996, by Tillinghast-Towers Perrin, a duly qualified
actuary who is a member in good standing in the American Academy of Actuaries.
Each of PPTF and the PPTF Subsidiary has assets that qualify as admitted assets
under the insurance laws of the applicable jurisdictions in an amount at least
equal to the sum of all such reserves and liability amounts and its minimum
statutory capital and surplus as required by such insurance laws.
(e) The PPTF Disclosure Schedule sets forth a list and description of all
reinsurance agreements or treaties to which PPTF or the PPTF Subsidiary is a
party. The consummation of the transactions contemplated by this Agreement will
not result in the termination of any such reinsurance agreements or treaties.
PPTF has provided Professionals Group true and correct copies of all such
reinsurance agreements or treaties. The reserve for unpaid losses, loss
adjustment expenses and unearned premiums at each of December 31, 1996 and
December 31, 1995, as reflected in the balance sheets in the financial
statements of PPTF identified in Section 4.6 of this Agreement, are stated net
of reinsurance ceded amounts. PPTF has no knowledge of any facts that would
cause it to believe that the reinsurance recoverable amounts reflected in said
balance sheets are not collectible, and PPTF is unaware of any material adverse
change in the financial condition of its reinsurers that might raise concern
regarding their ability to honor their reinsurance commitments, and no party to
any of such reinsurance agreements or treaties has given notice to PPTF or the
PPTF Subsidiary that such party intends to terminate or cancel any of such
reinsurance agreements or treaties as a result of or following consummation of
the Mergers. Each reinsurance agreement or treaty to which PPTF or the PPTF
Subsidiary is a party is valid and binding on such entity and is in full force
and effect in
B-33
<PAGE> 299
accordance with its terms except as enforceability may be limited by bankruptcy,
insolvency or other similar laws affecting the enforcement of creditors rights
generally and except that the availability of equitable remedies, including
specific performance, is subject to the discretion of the court before which the
enforcement of any proceeding therefor may be brought. Neither PPTF nor the PPTF
Subsidiary is in default in any material respect with respect to any such
reinsurance agreement or treaty, and no such reinsurance agreement or treaty
contains any provision providing that the other party thereto may terminate the
same by reason of the transactions contemplated by this Agreement, or contains
any other provision which would be altered or otherwise become applicable by
reason of such transactions.
(f) The PPTF Reserves, gross and net of reinsurance thereof, as of December
31, 1996, pertaining to the property and casualty insurance businesses
(including medical malpractice) of PPTF and the PPTF Subsidiary have been
determined on a consistent basis in accordance with past practices.
(g) The PPTF Disclosure Schedule lists all written contracts between PPTF
and its Subsidiary and each of their respective agents, managing general agents,
and brokers.
(h) Neither PPTF nor the PPTF Subsidiary owns, beneficially or of record,
any shares of Professionals Group Common Stock or other equity securities of
Professionals Group, or any securities convertible into or exercisable for any
shares of Professionals Group Common Stock or other equity securities of
Professionals Group. Upon consummation of the INSCO Merger, no Eligible Member
of PPTF will, by virtue of his or her Membership Rights, receive more than 3% of
the aggregate number of shares of Professionals Group Common Stock issued in the
INSCO Merger to PPTF Eligible Members.
4.23 No Investment Company. Neither PPTF nor the PPTF Subsidiary is an
"investment company," or a company "controlled" by an "investment company,"
within the meaning of the Investment Company Act of 1940, as amended.
4.24 Accuracy of Information Supplied.
(a) To the best knowledge of PPTF, none of the information supplied or to
be supplied by PPTF or the PPTF Subsidiary to Professionals Group pursuant to
this Agreement contains or will contain any untrue statement of a material fact
or omits or will omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading.
(b) The S-4 and the Joint Proxy Statement used for the registration and
qualification of shares of Professionals Group Common Stock to be issued upon
consummation of the INSCO Merger and used to solicit approval of the Mergers by
the stockholders of Professionals Group and the Voting Members of PPTF, and all
other documents to be filed with the SEC or any applicable state securities law
regulatory authorities relating to this Agreement or the transactions
contemplated by this Agreement (including the Mergers), at the respective times
such documents are filed or become effective, and with respect to the Joint
Proxy Statement, from the time of mailing to the stockholders of Professionals
Group and the Voting Members of PPTF through the period required for the Voting
Members of PPTF to perfect dissenters' rights under applicable law, shall, as to
all information provided by PPTF: (i) comply in all material respects with the
provisions of all applicable regulations issued by the SEC pursuant to the
Securities Act and the Exchange Act and all other applicable laws and
regulations; and (ii) not contain any statement which, at the time and in light
of the circumstances under which it is made, is false or misleading with respect
to any material fact and not omit to state any material fact necessary in order
to make the statements therein not false or misleading or necessary to correct
any statement in any earlier communication with respect to the solicitation of a
proxy for the same meeting or subject matter which have become false or
misleading.
4.25 Effective Time of Representations, Warranties, Covenants and
Agreements. Each representation, warranty, covenant and agreement of PPTF set
forth in this Agreement, as updated by any written disclosure schedule delivered
pursuant to Section 6.11 of this Agreement, shall be deemed to be made on and as
of the date of this Agreement, as of the effective date of the S-4, as of the
Closing Date, as of the INSCO Effective Time, and as of the PICOM Effective
Time.
B-34
<PAGE> 300
ARTICLE V
COVENANTS RELATING TO CONDUCT OF BUSINESS
5.1 Conduct of Businesses Prior to the Effective Times. During the period
from the date of this Agreement to the INSCO Effective Time, except as expressly
contemplated or permitted by this Agreement (including the Professionals Group
Disclosure Schedule and the PPTF Disclosure Schedule), each of Professionals
Group and PPTF shall, and shall cause each of their respective Subsidiaries to,
(a) conduct its business in the usual, regular and ordinary course consistent
with past practice, (b) use reasonable best efforts to maintain and preserve
intact its business organization, employees and advantageous business
relationships and retain the services of its key officers and key employees and
(c) take no action which would adversely affect or delay the ability of any
party to this Agreement to obtain any Requisite Regulatory Approval for the
transactions contemplated by this Agreement or to perform its covenants and
agreements under this Agreement.
5.2 Forbearances. During the period from the date of this Agreement to the
INSCO Effective Time, except as set forth in the Professionals Group Disclosure
Schedule or the PPTF Disclosure Schedule, as the case may be, and, except as
expressly contemplated or permitted by this Agreement, neither Professionals
Group nor PPTF shall, and neither Professionals Group nor PPTF shall permit any
of their respective Subsidiaries to, without the prior written consent of the
other:
(a) other than in the ordinary course of business consistent with past
practice, incur any indebtedness for borrowed money (other than (i)
indebtedness incurred in connection with the incorporation of, and for the
purpose of incorporating, INSCO, and (ii) short-term indebtedness incurred
to refinance short-term indebtedness and indebtedness of Professionals
Group or any of its Subsidiaries to Professionals Group or any of its
Subsidiaries, on the one hand, or of PPTF or the PPTF Subsidiary to PPTF or
any of its Subsidiaries, on the other hand), assume, guarantee, endorse or
otherwise as an accommodation become responsible for the obligations of any
other individual, corporation or other entity, or make any loan or advance
(it being understood and agreed that incurrence of indebtedness in the
ordinary course of business shall include entering into repurchase
agreements and reverse repurchase agreements);
(b) redeem, repay, discharge or defease any surplus note (including
the PPTF Surplus Notes), unless such redemption, repayment, discharge or
defeasance is an express condition of any Requisite Regulatory Approval;
(c) (i) adjust, split, combine or reclassify any capital stock; (ii)
make, declare or pay any dividend or make any other distribution on, or
directly or indirectly redeem, purchase or otherwise acquire, any shares of
its capital stock or any securities or obligations convertible into or
exchangeable for any shares of its capital stock (except (A) in the case of
Professionals Group, a stock dividend not exceeding 10% of the shares of
Professionals Group Common Stock outstanding as of the date such stock
dividend is declared may be made, declared or paid at any time prior to the
INSCO Effective Time, and (B) dividends paid by any of the Subsidiaries of
each of Professionals Group and PPTF to Professionals Group or PPTF or any
of their Subsidiaries, respectively), (iii) grant any stock appreciation
rights or grant any individual, corporation or other entity any right to
acquire any shares of its capital stock (and no such rights or options
shall be granted, (A) except that at any time prior to the Closing Date,
and pursuant to the terms of the Professionals Group LTIP, Professionals
Group may make Awards (defined in this Agreement as in the Professionals
Group LTIP) to Participants (defined in this Agreement as in the
Professionals Group LTIP) covering up to 150,000 shares of Professionals
Group Common Stock in the aggregate, and (B) except as otherwise agreed in
writing by Professionals Group and PPTF), or (iv) issue any additional
shares of capital stock except pursuant to (A) the exercise of stock
options or warrants outstanding as of the date of this Agreement, or (B) as
permitted under clause (ii) or clause (iii) of this sentence;
(d) sell, transfer, mortgage, encumber or otherwise dispose of any of
its properties or assets to any individual, corporation or other entity
other than a Subsidiary, or cancel, release or assign any indebtedness to
any such person or any claims held by any such person, except in the
ordinary course of
B-35
<PAGE> 301
business consistent with past practice or pursuant to contracts or
agreements in force at the date of this Agreement;
(e) except for transactions in the ordinary course of business
consistent with past practice, or in connection with the incorporation of,
and for the purpose of incorporating, INSCO, or pursuant to contracts or
agreements in force at the date of this Agreement, make any material
investment either by purchase of stock or securities, contributions to
capital, property transfers, or purchase of any property or assets of any
other individual, corporation or other entity other than a Subsidiary
thereof;
(f) except for transactions in the ordinary course of business
consistent with past practice, enter into or terminate any material
contract or agreement, or make any change in any of its material leases or
contracts, other than renewals of contracts and leases without material
adverse changes of terms;
(g) increase in any manner the compensation or fringe benefits of any
of its employees or pay any pension or retirement allowance not required by
any existing plan or agreement to any such employees or become a party to,
amend or commit itself to any pension, retirement, profit-sharing or
welfare benefit plan or agreement or employment agreement with or for the
benefit of any employee other than in the ordinary course of business
consistent with past practice or accelerate the vesting of any stock
options or other stock-based compensation;
(h) settle any claim, action or proceeding involving money damages,
except in the ordinary course of business consistent with past practice;
(i) take any action that would prevent or impede the Mergers from
qualifying (i) for "pooling of interests" accounting treatment or (ii) as a
reorganization within the meaning of Section 368 of the Code;
(j) in the case of Professionals Group, each of its Subsidiaries and
the PPTF Subsidiary, amend its Articles of Incorporation, or its Bylaws,
except as contemplated by this Agreement;
(k) in the case of PPTF, amend any of the PPTF Charter Documents
except as contemplated by this Agreement;
(l) other than in accordance with its investment guidelines and prior
consultation with every other party to this Agreement, restructure or
materially change its investment securities portfolio through purchases,
sales or otherwise, or the manner in which the portfolio is classified or
reported;
(m) take any action that is intended or may reasonably be expected to
result in any of its representations and warranties set forth in this
Agreement being or becoming untrue in any material respect at any time
prior to the INSCO Effective Time, or in any of the conditions to the
Mergers set forth in Article VII of this Agreement not being satisfied or
in a violation of any provision of this Agreement, except, in every case,
as may be required by applicable law; or
(n) agree to, or make any commitment to, take any of the actions
prohibited by this Section 5.2.
ARTICLE VI
ADDITIONAL AGREEMENTS
6.1 Regulatory Matters.
(a) In connection with the solicitation of approval of the principal terms
of the Mergers by the stockholders of Professionals Group and the Voting Members
of PPTF and the registration of the shares of Professionals Group Common Stock
to be issued upon consummation of the INSCO Merger, the parties will prepare,
and Professionals Group will file, the S-4 and the Joint Proxy Statement with
the SEC which shall comply as to form, in all material respects, with the
provisions of the Securities Act, the Exchange Act and other applicable law.
Professionals Group will use all reasonable effects to respond to the comments
of the SEC staff with respect to the S-4 and the Joint Proxy Statement and to
have the S-4 and the Joint Proxy Statement declared effective by the SEC as soon
as practicable, and Professionals Group shall thereafter mail or deliver the
Joint Proxy Statement to its stockholders and PPTF shall thereafter mail or
deliver the Joint
B-36
<PAGE> 302
Proxy Statement to its Voting Members. The information provided and to be
provided by Professionals Group and PPTF for use in the S-4 and the Joint Proxy
Statement will not, in the case of the S-4 on the date it becomes effective, and
in the case of Joint Proxy Statement on such date and on the date on which
approval of the Mergers by the stockholders of Professionals Group and the
Voting Members of PPTF is obtained, contain any untrue statement of material
fact or omit to state any material fact required to be stated in this Agreement
or necessary to make the statements therein, in light of the circumstances in
which they were made, not misleading. Each of Professionals Group and PPTF agree
promptly to correct any such information provided by it which shall have become
false or misleading in any material respect and to take all steps necessary to
file with the SEC and have declared effective or cleared by the SEC any
amendment or supplement to the S-4 or the Joint Proxy Statement so as to correct
the same and to cause the Joint Proxy Statement so corrected to be distributed
to the stockholders of Professionals Group and the Voting Members of PPTF to the
extent required by applicable law. To the extent that any opinion regarding the
tax consequences of the Mergers is required with respect to the S-4 or the Joint
Proxy Statement, Professionals Group and PPTF will both cause each of their
respective tax counsel to issue substantially similar opinions.
(b) Professionals Group will prepare and file, and PPTF will cooperate with
and assist Professionals Group in preparing and filing, all statements,
applications, correspondence or forms required to be filed with appropriate
state securities law regulatory authorities to register or qualify the shares of
Professionals Group Common Stock to be issued upon consummation of the INSCO
Merger or to establish an exemption from such registration or qualification (the
"Blue Sky Filings").
(c) Pursuant to the HSR Act, Professionals Group and PPTF will promptly
prepare and file, or cause to be filed, the HSR Act Report with the Pre-Merger
Notification Agencies in respect of the transactions contemplated by this
Agreement, which filing shall comply as to form with all requirements applicable
thereto and all of the data and information reported therein shall be accurate
and complete in all material respects. Each of Professionals Group and PPTF will
promptly comply with all requests, if any, of the Pre-Merger Notification
Agencies for additional information or documentation in connection with the HSR
Act Report forms filed by or on behalf of each of such parties pursuant to the
HSR Act, and all such additional information or documentation shall comply as to
form with all requirements applicable thereto and shall be accurate and complete
in all material respects.
(d) Each of Professionals Group and PPTF shall duly make all other
regulatory filings required to be made by each in respect of this Agreement or
the transactions contemplated by this Agreement. Each party shall use all
reasonable efforts to obtain all material permits, approvals and consents
required to be obtained prior to the consummation of each of the Mergers or
necessary to carry out the transactions contemplated by this Agreement under
applicable Federal, state, local and foreign laws, rules and regulations,
including any approvals required under applicable state insurance laws. A
representative of each party shall participate in all substantive discussions
with the SEC, the Pre-Merger Notification Agencies and any other Governmental
Entity, unless such right to participate is waived by such party.
(e) Each party will furnish all information, including certificates,
consents and opinions of counsel concerning it and its Subsidiaries reasonably
deemed necessary by the other party for the filing or preparation for filing of
the S-4 and Joint Proxy Statement, the Blue Sky Filings, the HSR Act Report and
the applications for all Requisite Regulatory Approvals. Each party covenants
and agrees that all information furnished by it for inclusion in the S-4 and the
Joint Proxy Statement, Blue Sky Filings and all other documents filed to obtain
the Requisite Regulatory Approvals will comply in all material respects with the
provisions of applicable law, including the Securities Act and the Exchange Act,
and will not contain any untrue statement of material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
contained therein, in light of the circumstances under which they were made, not
misleading.
(f) Each party shall provide to the other, (i) promptly after filing
thereof, copies of all statements, applications, correspondence or forms filed
by such party prior to the Closing Date with state securities law regulatory
authorities, the SEC, the Pre-Merger Notification Agencies and any other
Governmental Entity in connection with the transactions contemplated by this
Agreement; and (ii) promptly after delivery to, or
B-37
<PAGE> 303
receipt from, such regulatory authorities, all written communications, letters,
reports or other documents relating to the transactions contemplated by this
Agreement.
(g) Professionals Group shall deliver to PPTF letters from KPMG Peat
Marwick LLP, dated the effective date of the S-4 and the Closing Date, addressed
to PPTF and satisfactory to PPTF, to the effect that (x) they are the
independent public accountants with respect to Professionals Group within the
meaning of the Securities Act and the rules and regulations promulgated
thereunder, and (y) they have carried out certain procedures specified in the
letter and reasonably acceptable to PPTF, not constituting an audit, with
respect to the unaudited financial statements and certain amounts, percentages
and financial information which are derived from the general accounting records
of Professionals Group and the Professionals Group Subsidiaries; and are
included in the S-4 and the Joint Proxy Statement or in the documents filed with
the SEC pursuant to the Exchange Act and incorporated by reference in the S-4
and the Joint Proxy Statement, and on the basis of such procedures: (i) nothing
came to their attention that caused them to believe that the unaudited financial
statements included in the S-4 and the Joint Proxy Statement are not stated on a
basis substantially consistent with that of the audited financial statements of
Professionals Group included in the S-4 and the Joint Proxy Statement or in the
documents filed with the SEC pursuant to the Exchange Act and incorporated by
reference in the S-4 and the Joint Proxy Statement; and (ii) they have compared
such amounts, percentages, and financial information with such general
accounting records of Professionals Group and the Professionals Group
Subsidiaries and with information derived from such records and have found them
to be in agreement, excluding any questions of legal interpretation.
(h) PPTF shall deliver to Professionals Group letters from KPMG Peat
Marwick LLP, dated the effective date of the S-4 and the Closing Date, addressed
to Professionals Group and satisfactory to Professionals Group, to the effect
that (x) they are the independent public accountants with respect to PPTF within
the meaning of the Securities Act and the rules and regulations promulgated
thereunder; and (y) they have carried out certain procedures specified in the
letter and reasonably acceptable to Professionals Group, not constituting an
audit, with respect to the unaudited financial statements and certain amounts,
percentages and financial information which are derived from the general
accounting records of PPTF and the PPTF Subsidiary and are included in the S-4
and the Joint Proxy Statement and on the basis of such procedures: (i) nothing
came to their attention that caused them to believe that the unaudited financial
statements included in the S-4 and the Joint Proxy Statement are not stated on a
basis substantially consistent with that of the audited financial statements of
PPTF included in the S-4 and the Joint Proxy Statement; and (ii) they have
compared such amounts, percentages and financial information with such general
accounting records of PPTF and the PPTF Subsidiary and with information derived
from such records and have found them to be in agreement, excluding any
questions of legal interpretation.
(i) The parties hereto shall cooperate with each other and use their best
efforts to promptly prepare and file all necessary documentation, to effect all
applications, notices, petitions and filings, to obtain as promptly as
practicable all permits, consents, approvals and authorizations of all third
parties and Governmental Entities which are necessary or advisable to consummate
the transactions contemplated by this Agreement (including the Mergers), and to
comply with the terms and conditions of all such permits, consents, approvals
and authorizations of all such Governmental Entities. Professionals Group and
PPTF shall have the right to review in advance, and, to the extent practicable,
each will consult the other on, in each case subject to applicable laws relating
to the exchange of information, all the information relating to Professionals
Group or PPTF, as the case may be, and any of their respective Subsidiaries,
which appear in any filing made with, or written materials submitted to, any
third party or any Governmental Entity in connection with the transactions
contemplated by this Agreement. In exercising the foregoing right, each of the
parties hereto shall act reasonably and as promptly as practicable. The parties
hereto agree that they will consult with each other with respect to the
obtaining of all permits, consents, approvals and authorizations of all third
parties and Governmental Entities necessary or advisable to consummate the
transactions contemplated by this Agreement and each party will keep the other
apprised of the status of matters relating to completion of the transactions
contemplated by this Agreement.
(j) Professionals Group and PPTF shall, upon request, furnish each other
with all information concerning themselves, their Subsidiaries, directors,
officers and stockholders and such other matters as may be reasonably necessary
or advisable in connection with the Joint Proxy Statement, the S-4 or any other
B-38
<PAGE> 304
statement, filing, notice or application made by or on behalf of Professionals
Group, PPTF or any of their respective Subsidiaries to any Governmental Entity
in connection with the Mergers and the other transactions contemplated by this
Agreement.
(k) Professionals Group and PPTF shall promptly advise each other upon
receiving any communication from any Governmental Entity whose consent or
approval is required for consummation of the transactions contemplated by this
Agreement which causes such party to believe that there is a reasonable
likelihood that any Requisite Regulatory Approval will not be obtained or that
the receipt of any such approval will be materially delayed.
6.2 Access to Information.
(a) Upon reasonable notice and subject to applicable laws relating to the
exchange of information and to the Confidentiality Agreement dated February 27,
1996, as amended (the "Confidentiality Agreement"), among the parties to this
Agreement, each of Professionals Group and PPTF shall, and shall cause each of
their respective Subsidiaries to, afford to the officers, employees,
accountants, counsel and other representatives of the other party, access,
during normal business hours during the period prior to the INSCO Effective
Time, to all its properties, books, contracts, commitments and records and,
during such period, each of Professionals Group and PPTF shall, and shall cause
their respective Subsidiaries to, make available to the other party (i) a copy
of each report, schedule, registration statement and other document filed or
received by it during such period pursuant to the requirements of Federal
securities laws or state insurance laws (other than reports or documents which
Professionals Group or PPTF, as the case may be, is not permitted to disclose
under applicable law or by agreement) and (ii) all other information concerning
its business, properties and personnel as such party may reasonably request.
Neither Professionals Group nor PPTF nor any of their respective Subsidiaries
shall be required to provide access to or to disclose information where such
access or disclosure would violate or prejudice the rights of Professionals
Group's or PPTF's, as the case may be, customers, jeopardize the attorney-client
and work product privileges of the entity in possession or control of such
information or contravene any law, rule, regulation, order, judgment, decree,
fiduciary duty or binding agreement entered into prior to the date of this
Agreement. The parties hereto will make appropriate substitute disclosure
arrangements under circumstances in which the restrictions of the preceding
sentence apply.
(b) Each of Professionals Group and PPTF agrees to keep confidential, and
not divulge to any other party or person (other than employees of, and
attorneys, accountants, financial advisors and other representatives for, any
said party who agree to be bound by the Confidentiality Agreement), all
non-public documents, information, records and financial statements received
from the other and, in addition, any and all reports, information and financial
information obtained through audits or other reviews conducted pursuant to this
Agreement (unless readily ascertainable from public or published information, or
trade sources, or already known or subsequently developed by a party
independently of any investigation or received from a third party not under an
obligation to the other party to keep such information confidential), and to use
the same only in connection with the transactions contemplated by this
Agreement; and if the transactions contemplated by this Agreement are not
consummated for any reason, each party agrees to promptly return to the other
party all written materials furnished by the other party, and all copies
thereof, in connection with such investigation, and to destroy all documents and
records in its possession containing extracts or summaries of any such non-
public information.
(c) No investigation by either of the parties or their respective
representatives shall affect the representations, warranties, covenants or
conditions of the other set forth in this Agreement.
6.3 Professionals Group Stockholder Approval. Professionals Group shall
call a meeting of its stockholders to be held as soon as reasonably practicable
for the purpose of obtaining the requisite stockholder approval required in
connection with this Agreement and the Mergers, and shall use its best efforts
to cause such meeting to occur on the same date as the meeting of the Voting
Members of PPTF called for the purpose of obtaining the requisite Voting Member
approval required in connection with this Agreement and the Mergers.
Professionals Group will, through its Board of Directors, subject to its
fiduciary obligations as determined by its Board of Directors, recommend to its
stockholders approval of this Agreement and the Mergers.
B-39
<PAGE> 305
6.4 PPTF Member Approval. PPTF shall call a meeting of its members to be
held as soon as reasonably practicable for the purpose of obtaining the
requisite Voting Member approval required in connection with this Agreement and
the Mergers, and shall use its best efforts to cause such meeting to occur on
the same date as the meeting of the stockholders of Professionals Group called
for the purpose of obtaining the requisite Professionals Group stockholder
approval required in connection with this Agreement and the Mergers. PPTF will,
through its Board of Trustees, subject to its fiduciary obligations as
determined by its Board of Trustees, recommend to its Voting Members approval of
this Agreement and the Mergers.
6.5 Legal Conditions to Mergers. Each of Professionals Group and PPTF
shall, and shall cause its Subsidiaries to, use their best efforts (a) to take,
or cause to be taken, all actions necessary, proper or advisable to comply
promptly with all legal requirements which may be imposed on such party or its
Subsidiaries with respect to the Mergers and, subject to the conditions set
forth in Article VII of this Agreement, to consummate the transactions
contemplated by this Agreement and (b) to obtain (and to cooperate with the
other party to obtain) any consent, authorization, order or approval of, or any
exemption by, any Governmental Entity and any other third party which is
required to be obtained by Professionals Group or PPTF or any of their
respective Subsidiaries in connection with the Mergers and the other
transactions contemplated by this Agreement.
6.6 Affiliates; Publication of Combined Financial Results.
(a) Each of Professionals Group, PICOM, and PPTF shall use its best efforts
to cause each director, trustee, executive officer and other person who is an
"affiliate" (for purposes of Rule 145 under the Securities Act and for purposes
of qualifying the Mergers for "pooling of interests" accounting treatment) of
such party to deliver to the other party hereto, as soon as practicable after
the date of this Agreement, and prior to the earlier of the date of the meeting
of stockholders called by Professionals Group and the date of the meeting of
Voting Members called by PPTF to approve this Agreement, a written agreement, in
the form of Exhibit D to this Agreement, providing that such person will not
sell, pledge, transfer or otherwise dispose of any shares of Professionals Group
Common Stock or PPTF Membership Rights held by such "affiliate" and, in the case
of the "affiliates" of PPTF, the shares of Professionals Group Common Stock to
be received by such "affiliate" in the INSCO Merger: (i) in the case of shares
of Professionals Group Common Stock to be received by "affiliates" of PPTF in
the INSCO Merger, except in compliance with the applicable provisions of the
Securities Act and the rules and regulations thereunder; and (ii) except to the
extent and under the conditions permitted therein, during the period commencing
thirty (30) days prior to the INSCO Merger and ending at the time of the
publication of financial results covering at least thirty (30) days of combined
operations of PICOM and PPTF.
(b) Professionals Group shall use its best efforts to publish as promptly
as reasonably practical but in no event later than forty-five (45) days after
the end of the first month after the later of the INSCO Effective Time and the
PICOM Effective Time in which there are at least thirty (30) days of post-merger
combined operations (which month may be the month in which the later of the
INSCO Effective Time and the PICOM Effective Time occurs), combined sales and
net income figures as contemplated by and in accordance with the terms of SEC
Accounting Series Release No. 135.
6.7 Nasdaq National Market Listing. Professionals Group shall cause the
shares of Professionals Group Common Stock to be issued in the INSCO Merger to
be approved for trading and reporting on the Nasdaq National Market subject to
official notice of issuance, prior to the INSCO Effective Time.
6.8 Employee Benefit Plans.
(a) Prior to the Closing Date, Professionals Group and PPTF shall cooperate
in reviewing, evaluating and analyzing the Professionals Group Benefit Plans and
PPTF Benefit Plans with a view towards developing appropriate new benefit plans
for the employees covered thereby subsequent to the Mergers in substantial
conformance with the Professionals Group Benefit Plans in effect as of the later
of the INSCO Effective Time and the PICOM Effective Time, in replacement and
substitution for the PPTF Benefit Plans which shall be cancelled, terminated or
frozen to the extent permitted by applicable law. It is the intention of
Professionals Group and PPTF to develop such new benefit plans, effective as of
the later of the INSCO Effective Time and the PICOM Effective Time, which, among
other things, (i) treat similarly situated employees on a
B-40
<PAGE> 306
substantially equivalent basis, taking into account all relevant factors,
including duties, geographic location, tenure, qualifications and abilities, and
(ii) do not discriminate between employees who were covered by Professionals
Group Benefit Plans, on the one hand, and those covered by PPTF Benefit Plans,
on the other, prior to the later of the INSCO Effective Time and the PICOM
Effective Time, but (iii) with the overall view that the PPTF Benefit Plans
would be cancelled, terminated or frozen, and replaced by the Professionals
Group Benefit Plans for times following the later of the INSCO Effective Time
and the PICOM Effective Time to the extent permitted by applicable law.
(b) Nothing in this Section 6.8 shall be interpreted as preventing
Professionals Group from amending, modifying or terminating any Professionals
Group Benefit Plans, PPTF Benefit Plans, or other contracts, arrangements,
commitments or understandings, in accordance with their terms and applicable
law.
6.9 Indemnification; Directors' and Officers' Insurance.
(a) In the event of any threatened or actual claim, action, suit,
proceeding or investigation, whether civil, criminal or administrative,
including any such claim, action, suit, proceeding or investigation in which any
individual who is now, or has been at any time prior to the date of this
Agreement, or who becomes prior to the later of the INSCO Effective Time and the
PICOM Effective Time, a director or trustee or officer or employee Professionals
Group or any Subsidiary of Professionals Group or of PPTF or the PPTF
Subsidiary, including any entity specified in the Professionals Group Disclosure
Schedule or the PPTF Disclosure Schedule (the "Indemnified Parties"), is, or is
threatened to be, made a party based in whole or in part on, or arising in whole
or in part out of, or pertaining to (i) the fact that he is or was a director,
trustee, officer or employee of Professionals Group or any Subsidiary of
Professionals Group or PPTF, the PPTF Subsidiary or any entity specified in the
Professionals Group Disclosure Schedule or the PPTF Disclosure Schedule, or any
of their respective predecessors or (ii) this Agreement or any of the
transactions contemplated by this Agreement or thereby, whether in any case
asserted or arising before or after the INSCO Effective Time, the parties hereto
agree to cooperate and use their best efforts to defend against and respond
thereto. It is understood and agreed that after the INSCO Effective Time,
Professionals Group shall indemnify and hold harmless, as and to the fullest
extent permitted by law (and, as relates to acts or times prior to the Effective
Time, to the fullest extent permitted under applicable law at such time,
including the provisions of Section 5(k) of PPTF's Amended Trust Agreement dated
January 1, 1987), each such Indemnified Party against any losses, claims,
damages, liabilities, costs, expenses (including reasonable attorney's fees and
expenses in advance of the final disposition of any claim, suit, proceeding or
investigation to each Indemnified Party to the fullest extent permitted by law
upon receipt of any undertaking required by applicable law), judgments, fines
and amounts paid in settlement in connection with any such threatened or actual
claim, action, suit, proceeding or investigation, and in the event of any such
threatened or actual claim, action, suit, proceeding or investigation (whether
asserted of arising before or after the INSCO Effective Time), the Indemnified
Parties may retain counsel reasonably satisfactory to them after consultation
with Professionals Group; provided, however, that (A) Professionals Group shall
have the right to assume the defense thereof and upon such assumption
Professionals Group shall not be liable to any Indemnified Party for any legal
expenses of other counsel or any other expenses subsequently incurred by any
Indemnified Party in connection with the defense thereof, except that if
Professionals Group elects not to assume such defense the Indemnified Party may
retain counsel reasonably satisfactory to him after consultation with
Professionals Group, and Professionals Group shall pay the reasonable fees and
expenses of such counsel for the Indemnified Party, (B) Professionals Group
shall be obligated pursuant to this paragraph to pay for only one firm of
counsel for all Indemnified Parties except to the extent representation by a
single firm or attorney is, in the absence of an informed consent by the
Indemnified Party, prohibited by ethical rules relating to lawyers' conflicts of
interest, (C) Professionals Group shall not be liable for any settlement
effected without its prior written consent (which consent shall not be
unreasonably withheld), (D) Professionals Group shall have no obligation
hereunder to any Indemnified Party when and if a court of competent jurisdiction
shall ultimately determine, and such determination shall have become final and
nonappealable, that indemnification of such Indemnified Party in the manner
contemplated by this Agreement is prohibited by applicable law and (E)
Professionals Group shall have no obligation hereunder to any Indemnified Party
for which and to the extent payment is actually and unqualifiedly made to such
Indemnified Party under any insurance policy, any other agreement for
indemnification or otherwise. Any Indemnified Party wishing to claim
Indemnification under this
B-41
<PAGE> 307
Section 6.9, upon learning of any such claim, action, suit, proceeding or
investigation, shall notify Professionals Group thereof, provided that the
failure to so notify shall not affect the obligations of Professionals Group
under this Section 6.9 except to the extent such failure to notify materially
prejudices Professionals Group. Professionals Group's obligations under this
Section 6.9 continue in full force and effect for a period of six (6) years from
the later of the INSCO Effective Time and the PICOM Effective Time (or the
period of the applicable statute of limitations, if longer); provided, however,
that all rights to indemnification in respect of any claim (a "Claim") asserted
or made within such period shall continue until the final disposition of such
Claim.
(b) Professionals Group shall use its best efforts to cause the individuals
serving as officers and directors of PPTF, the PPTF Subsidiary or any entity
specified in the PPTF Disclosure Schedule immediately prior to the INSCO
Effective Time to be covered for a period of six (6) years from the later of the
INSCO Effective Time and the PICOM Effective Time (or the period of the
applicable statute of limitations, if longer) by the directors' and officers'
liability insurance policy maintained by PPTF or the PPTF Subsidiary (provided
that Professionals Group may substitute therefor policies of the same or
substantially similar coverage and amounts containing terms and conditions which
are not less advantageous in any material respect than such policy) with respect
to acts or omissions occurring prior to the INSCO Effective Time which were
committed by such officers and directors in their capacity as such; provided,
however, that in no event shall Professionals Group be required to expend more
than 200% of the current amount expended by PPTF or the PPTF Subsidiary (the
"Insurance Premium Amount") to maintain or procure insurance coverage pursuant
hereto; and provided, further, that if Professionals Group is unable to maintain
or obtain the insurance called for by this Section 6.9(b), Professionals Group
shall use its best efforts to obtain as much comparable insurance as available
for the Insurance Premium Amount.
(c) In the event Professionals Group or any of its successors or assigns
(i) consolidates with or merges into any other person and shall not be the
continuing or surviving corporation or entity of such consolidation or merger,
or (ii) transfers or conveys all or substantially all of its properties and
assets to any person, then, and in each such case, to the extent necessary,
proper provision shall be made so that the successors and assigns of
Professionals Group assume the obligations set forth in this Section 6.9.
(d) The provisions of this Section 6.9 are intended to be for the benefit
of, and shall be enforceable by, each Indemnified Party and his or her heirs and
representatives.
6.10 Additional Agreements.
(a) In case at any time prior to the INSCO Effective Time any further
action is necessary or desirable to carry out the purposes of this Agreement
(including the incorporation of INSCO and obtaining authorization for INSCO to
transact business under the Michigan Insurance Code and the Florida Insurance
Code) or the Mergers, the proper officers and directors of each party to this
Agreement and their respective Subsidiaries shall take all such necessary action
as may be reasonably requested by, and at the sole expense of, Professionals
Group.
(b) In case at any time after the INSCO Effective Time any further action
is necessary or desirable to carry out the purposes of this Agreement (including
any merger between a Subsidiary of Professionals Group and a Subsidiary of PPTF)
or to vest Professionals Group or any of its Subsidiaries with full title to all
properties, assets, rights, approvals, immunities and franchises of any of the
parties to this Agreement or the Mergers, the proper officers and directors of
each party to this Agreement and their respective Subsidiaries shall take all
such necessary action as may be reasonably requested by, and at the sole expense
of, Professionals Group.
(c) Prior to the INSCO Effective Time, neither PPTF nor the PPTF Subsidiary
shall acquire, directly or indirectly, beneficial or record ownership of any
shares of Professionals Group Common Stock or other equity securities of
Professionals Group, or any securities convertible into or exercisable for any
shares of Professionals Group Common Stock or other equity securities of
Professionals Group.
6.11 Advice of Changes. Professionals Group and PPTF shall give prompt
notice to the other party as soon as practicable after it has actual knowledge
of (i) the occurrence, or failure to occur, of any event which would or would be
likely to cause any party's representations or warranties contained in this
Agreement to be
B-42
<PAGE> 308
untrue or incorrect in any material respect at any time from the date of this
Agreement to the INSCO Effective Time, or (ii) any failure on its part or on the
part of any of its or its Subsidiaries' officers, directors, employees,
representatives or agents (other than persons or entities who are such
employees, representatives or agents only because they are appointed insurance
agents of such parties) to comply with or satisfy in any material respect any
covenant, condition or agreement to be complied with or satisfied by such party
under this Agreement. Each party shall have the right to deliver to the other
party a written disclosure schedule as to any matter of which it becomes aware
following execution of this Agreement which would constitute a breach of any
representation, warranty or covenant of this Agreement by such party,
identifying on such disclosure schedule the representation, warranty or covenant
which would be so breached, provided that each such disclosure schedule shall be
delivered as soon as practicable after such party becomes aware of the matter
disclosed therein. The nondisclosing party shall have five (5) business days
from receipt of such disclosure schedule to notify the disclosing party that (x)
it will close notwithstanding the new disclosure, (y) it will not close based on
such new disclosure, or (z) further investigation or negotiation is required for
it to reach a determination whether or not to close based on such new
disclosure. If the parties thereafter are unable to reach agreement on a
mutually satisfactory means of resolving the matter so disclosed, the
nondisclosing party shall have the right in its discretion, to terminate this
Agreement pursuant to Section 8 of this Agreement. Professionals Group shall
update the Professionals Group Disclosure Schedule (the "Closing Date
Professionals Group Disclosure Schedule") to a date that is no earlier than ten
(10) business days prior to the Closing Date and no later than seven (7)
business days prior to the Closing Date and shall deliver the Closing Date
Professionals Group Disclosure Schedule to PPTF no earlier than six (6) business
days prior to the Closing Date. PPTF shall update the PPTF Disclosure Schedule
(the "Closing Date PPTF Disclosure Schedule") to a date that is no earlier than
ten (10) business days prior to the Closing Date and no later than seven (7)
business days prior to the Closing Date and shall deliver the Closing Date PPTF
Disclosure Schedule to Professionals Group no earlier than six (6) business days
prior to the Closing Date.
6.12 Professionals Group LTIP Awards. At any time prior to the Closing
Date, and pursuant to the terms of the Professionals Group LTIP, Professionals
Group may make Awards to Participants covering up to 150,000 shares of
Professionals Group Common Stock in the aggregate.
6.13 Negotiations with Other Parties.
(a) So long as this Agreement remains in effect and no notice of
termination has been given under this Agreement, neither Professionals Group, on
the one hand, nor PPTF, on the other hand, shall authorize or knowingly permit
any of its representatives, directly or indirectly, to initiate, entertain,
solicit, encourage, engage in, or participate in, negotiations with any person
or entity or any group of persons or entities other than the other party to this
Agreement or any of its affiliates (a "Potential Acquiror") concerning any
Acquisition Proposal (as defined in this Section 6.13) other than as expressly
provided in this Agreement. PPTF will promptly inform Professionals Group, and
Professionals Group will promptly inform PPTF, of any serious, bona fide inquiry
it may receive with respect to any Acquisition Proposal and each shall furnish
to the other a copy thereof.
(b) Nothing contained in this Agreement shall prohibit Professionals Group
or its Board of Directors from making such disclosures to its stockholders as
are required under applicable law or the rules of the NASD or the Nasdaq
National Market. Nothing contained in this Agreement shall prohibit the Board of
Directors of Professionals Group from furnishing information to, or entering
into discussions or negotiations with, any person or entity that makes a
Acquisition Proposal if: (A) the Board of Directors of Professionals Group,
after consultation with and receiving the advice of its legal counsel and
financial advisors, determines in good faith that such action is necessary or
required for the Board of Directors of Professionals Group to comply with its
fiduciary duties to its stockholders under applicable law or its Articles of
Incorporation or Bylaws, (B) prior to furnishing such information to, or
entering into discussions or negotiations with, such person or entity,
Professionals Group discloses to PPTF that it is furnishing information to, or
entering into discussions or negotiations with, such person or entity, which
notice shall describe the terms thereof (but need not identify the person or
entity making the offer), (C) prior to furnishing such information to such
person or entity, Professionals Group receives from such person or entity an
executed confidentiality agreement, and (D) Professionals Group keeps PPTF
informed promptly of the status (including the terms, but any disclosure of
terms shall be covered by a confidentiality agreement) of any such discussions
or negotiations
B-43
<PAGE> 309
(provided that, Professionals Group shall not be required to disclose to PPTF
confidential information concerning the business or operations of the person or
entity making the expression of interest). Subject to the preceding sentence,
the Board of Directors of Professionals Group may approve and recommend to the
stockholders of Professionals Group an Acquisition Proposal from a Potential
Acquiror.
(c) Nothing contained in this Agreement shall prohibit PPTF or its Board of
Trustees from making such disclosures to its Eligible Members as are required
under the Florida Insurance Code and the FBCA. Nothing contained in this
Agreement shall prohibit the Board of Trustees of PPTF from furnishing
information to, or entering into discussions or negotiations with, any person or
entity that makes a Acquisition Proposal if: (A) the Board of Trustees of PPTF,
after consultation with and receiving the advice of its legal counsel and
financial advisors, determines in good faith that such action is necessary or
required for the Board of Trustees of PPTF to comply with its fiduciary duties
to its Eligible Members under applicable law or the PPTF Charter Documents, (B)
prior to furnishing such information to, or entering into discussions or
negotiations with, such person or entity, PPTF discloses to Professionals Group
that it is furnishing information to, or entering into discussions or
negotiations with, such person or entity, which notice shall describe the terms
thereof (but need not identify the person or entity making the offer), (C) prior
to furnishing such information to such person or entity, PPTF receives from such
person or entity an executed confidentiality agreement, and (D) PPTF keeps
Professionals Group informed promptly of the status (including the terms, but
any disclosure of terms shall be covered by a confidentiality agreement) of any
such discussions or negotiations (provided that, PPTF shall not be required to
disclose to Professionals Group confidential information concerning the business
or operations of the person or entity making the expression of interest);
provided, however, that if the person or entity making such Acquisition
Proposal, or any associate, or affiliate or predecessor-in-interest of such
person or entity, has more than 5.99% of the physicians medical malpractice
insurance market in the State of Florida based on gross written premiums, then
unless and until PPTF shall have been permitted to conduct and complete, to its
satisfaction, a full and complete due diligence inquiry of such person or
entity, PPTF shall neither provide such person or entity with any information,
data, reports, analyses, compilations, studies, interpretations, projections,
forecasts, records or materials pertaining to PPTF or the PPTF Subsidiary nor
permit such person or entity to conduct any due diligence inquiry of PPTF or the
PPTF Subsidiary on any premises owned, leased or utilized by PPTF. Subject to
the preceding sentence, the Board of Trustees of PPTF may approve and recommend
to the Voting Members of PPTF an Acquisition Proposal from a Potential Acquiror.
(d) As used in this Agreement, "Acquisition Proposal" means any (i)
proposal pursuant to which any corporation, partnership, person or other entity
or group, other than Professionals Group or PPTF, would acquire or participate
in a merger or other business combination involving Professionals Group or any
of the Professionals Group Subsidiaries, on the one hand, or PPTF or the PPTF
Subsidiary, on the other hand, directly or indirectly; (ii) proposal by which
any corporation, partnership, person or other entity or group, other than
Professionals Group or PPTF, would acquire the right to vote 10% or more of the
capital stock of Professionals Group or any of the Professionals Group
Subsidiaries, on the one hand, or the PPTF Subsidiary, on the other hand,
entitled to vote thereon for the election of directors; (iii) proposal by which
any corporation, partnership, person or other entity or group, other than
Professionals Group or PPTF, would acquire the right to vote 10% or more of the
"In-Force PPTF Policies" (as defined in this Section 6.13(d)), entitled to vote
thereon for the election of trustees; (iv) acquisition of 10% or more of the
assets of Professionals Group or any of the Professionals Group Subsidiaries,
other than in the ordinary course of business; (v) acquisition of 10% or more of
the assets of PPTF or the PPTF Subsidiary, other than in the ordinary course of
business; (vi) acquisition in excess of 10% of the outstanding capital stock of
Professionals Group or any of the Professionals Group Subsidiaries, on the one
hand, or the PPTF Subsidiary, on the other hand, other than as contemplated by
this Agreement; or (vii) acquisition in excess of 10% of the outstanding
In-Force PPTF Policies, other than as contemplated by this Agreement. As used in
this Agreement, "In-Force PPTF Policies" means an Individual Indemnity
Agreement, a Group Indemnity Agreement, a Master Indemnity Agreement or a
Physician Hospital Organization Indemnity Agreement, issued by PPTF.
B-44
<PAGE> 310
ARTICLE VII
CONDITIONS PRECEDENT
7.1 Conditions to Each Party's Obligation To Effect the Mergers. The
respective obligation of each party to effect the Mergers shall be subject to
the satisfaction at or prior to each of the INSCO Effective Time and the PICOM
Effective Time of the following conditions:
(a) This Agreement and the transactions contemplated by this Agreement
shall have been approved and adopted by the requisite affirmative vote of
the holders of Professionals Group Common Stock entitled to vote thereon.
(b) This Agreement and the transactions contemplated by this Agreement
shall have been approved and adopted by the requisite affirmative vote of
the Voting Members of PPTF entitled to vote thereon.
(c) The shares of Professionals Group Common Stock which shall be
issued to the Eligible Members of PPTF upon consummation of the INSCO
Merger shall have been authorized for trading and reporting on the Nasdaq
National Market, subject to official notice of issuance.
(d) The INSCO Certificate of Merger and the PICOM Certificates of
Merger shall have been filed with the appropriate Governmental Entities
immediately prior to the Closing.
(e) All approvals of Governmental Entities required to consummate the
transactions contemplated by this Agreement shall have been obtained and
shall remain in full force and effect and all statutory waiting periods in
respect thereof shall have expired, without the imposition of any condition
which in the reasonable judgment of Professionals Group is materially
burdensome upon Professionals Group or its Subsidiaries (all such approvals
and the expiration of all such waiting periods being referred to in this
Agreement as the "Requisite Regulatory Approvals"). Without limiting the
generality of the foregoing: (i) the S-4 shall have become effective under
the Securities Act, and no stop order suspending the effectiveness of the
S-4 shall have been issued and shall remain in effect and no proceedings
for that purpose shall have been initiated or threatened by the SEC; (ii)
all Blue Sky Filings shall have been made, and the sale of Professionals
Group Stock resulting from the INSCO Merger shall have been qualified or
registered with the appropriate state securities law regulatory authorities
of all states in which qualification or registration is required under
applicable state securities laws, and such qualifications or registrations
shall not have been suspended or revoked, or shall be exempt from such
qualification or registration; (iii) the HSR Act Report shall have been
submitted to the Pre-Merger Notification Agencies, and the waiting period
under the HSR Act shall have expired or notice of early termination of the
waiting period shall have been received; and (iv) the Mergers and the
transfer of ownership of PPTF and the PPTF Subsidiary shall have been
approved by the Michigan Insurance Commissioner, the Florida Insurance
Department, and the insurance departments of all states in which PPTF,
Professionals Group and any Subsidiaries of either of them conduct
business, to the extent such approvals are required.
(f) No order, injunction or decree issued by any Governmental Entity
of competent jurisdiction or other legal restraint or prohibition
preventing the consummation of the Mergers or any of the other transactions
contemplated by this Agreement shall be in effect. No statute, rule,
regulation, order, injunction or decree shall have been enacted, entered,
promulgated or enforced by any Governmental Entity which prohibits,
materially restricts or makes illegal consummation of the Mergers.
(g) Professionals Group and PPTF each shall have received an opinion
of their respective tax counsel, addressed to Professionals Group or PPTF,
as the case may be, in form and substance reasonably satisfactory to
Professionals Group and PPTF, dated as of the INSCO Effective Time,
substantially to the effect that, on the basis of facts, representations
and assumptions set forth in such opinion which are consistent with the
state of facts existing at the INSCO Effective Time:
(i) The Mergers will constitute a tax free reorganization under
Section 368(a)(1)(A) of the Code and Professionals Group and PPTF will
each be a party to the reorganization;
(ii) No gain or loss will be recognized by Professionals Group or
PPTF as a result of the Mergers; and
B-45
<PAGE> 311
(iii) No gain or loss will be recognized by the Eligible Members of
PPTF who exchange their PPTF Membership Rights solely for Professionals
Group Common Stock pursuant to the INSCO Merger (except with respect to
cash received in lieu of a fractional share interest in Professionals
Group Common Stock).
In rendering such opinion, counsel may require and rely upon
representations contained in certificates of officers of Professionals Group,
PPTF and others.
(h) Professionals Group and PPTF shall each have received letters,
effective as of the INSCO Effective Time and the PICOM Effective Time, from
their respective independent accountants addressed to Professionals Group
or PPTF, as the case may be, to the effect that each of the Mergers will
qualify for "pooling of interests" accounting treatment.
(i) INSCO shall have been duly incorporated under the Florida
Insurance Code and shall be authorized to transact business in the State of
Michigan under and pursuant to the Michigan Insurance Code and in the State
of Florida under and pursuant to the Florida Insurance Code.
(j) The percentage interests of those PPTF Voting Members perfecting
their dissenters' rights under applicable law, when aggregated, shall not
exceed 10% of the percentage interests of all PPTF Eligible Members as a
whole.
7.2 Conditions to Obligation of Professionals Group. The obligation of
Professionals Group to effect the Mergers is also subject to the satisfaction or
waiver by Professionals Group at or prior to the INSCO Effective Time of the
following conditions:
(a) The representations and warranties of PPTF set forth in this
Agreement shall be true and correct in all material respects as of the date
of this Agreement and (except (i) to the extent such representations and
warranties speak as of an earlier date and (ii) for any changes to the PPTF
Disclosure Schedule that are disclosed by PPTF to Professionals Group in
the Closing Date PPTF Disclosure Schedule) as of the Closing Date as though
made on and as of the Closing Date. Professionals Group shall have received
a certificate signed on behalf of PPTF by the Chief Executive Officer and
the Chief Financial Officer of PPTF to the foregoing effect, and to which
any Closing Date PPTF Disclosure Schedule shall be appended.
(b) PPTF shall have performed in all material respects all obligations
required to be performed by it under this Agreement at or prior to the
Closing Date, and Professionals Group shall have received a certificate
signed on behalf of PPTF by the Chief Executive Officer and the Chief
Financial Officer of PPTF to such effect.
(c) Professionals Group shall have received from KPMG Peat Marwick
LLP, accountants to PPTF, a letter, dated the Closing Date, addressed to
Professionals Group and satisfactory to Professionals Group, to the effect
that (i) they are the independent public accountants with respect to PPTF
within the meaning of the Securities Act and the rules and regulations
promulgated thereunder; (ii) on the basis of certain procedures specified
in the letter and reasonably acceptable to Professionals Group, not
constituting an audit, nothing came to their attention that caused them to
believe that: (A) the unaudited most recent financial statements of PPTF
delivered to Professionals Group pursuant to Section 4.6(a) of this
Agreement are not stated on a basis substantially consistent with that of
the audited most recent financial statements of PPTF delivered to
Professionals Group pursuant to Section 4.6 of this Agreement; and (B) as
of a specified date not more than five (5) days prior to the date of such
letter, there has been no increase in the long-term debt of PPTF or the
PPTF Subsidiary of greater than 10%, as compared with the long-term debt of
PPTF or the PPTF Subsidiary at December 31, 1996, or any increase in the
outstanding equity interests of the PPTF Subsidiary, or any decrease in
PPTF's capital and surplus of greater than 10%, as compared with capital
and surplus at December 31, 1996 (all as calculated in accordance with
GAAP). Professionals Group shall have no obligation to PPTF or any other
person or entity to waive, in whole or in part, delivery of any such letter
or the request that it contain any given information.
B-46
<PAGE> 312
(d) PPTF and the PPTF Subsidiary, taken as a whole, shall not have
suffered a material adverse change in their businesses, assets, properties,
operations or condition (financial or otherwise); and no event or
circumstance shall have occurred which has, or is likely to have, a
Materially Adverse Effect on PPTF or upon the right of PPTF or the PPTF
Subsidiary to conduct their respective businesses as presently conducted.
(e) PPTF shall have delivered to Professionals Group an opinion, dated
the Closing Date, of counsel for PPTF, satisfactory to Professionals Group
and its counsel, to the effect set forth on Exhibit E to this Agreement.
Such opinion shall also cover such other matters incident to the
transactions herein contemplated as Professionals Group and its counsel may
reasonably request. In rendering their opinion, counsel to PPTF may rely on
certificates of officers of PPTF, opinions of other counsel, the
authenticity of all signatures on documents believed to be genuine and such
other evidence as they may deem necessary or desirable.
(f) Professionals Group shall have received favorable opinions from
Cochran, Caronia & Co. and McDonald & Company Securities, Inc. in
connection with the deliberations of its Board of Directors approving this
Agreement and confirmed at or about the time the S-4 is declared effective
and the Joint Proxy Statement is distributed that consummation of the
Mergers and the other transactions contemplated by this Agreement upon the
terms and conditions provided in this Agreement is fair to the stockholders
of Professionals Group from a financial point of view.
(g) The capital and surplus of PPTF as of the last day of the calendar
month immediately preceding the Closing Date (the "PPTF Determination
Date") shall be not less than $91,979,603. Said capital and surplus shall
be calculated in accordance with GAAP; provided, however, that investments
shall be valued at their amortized cost on the PPTF Determination Date.
Professionals Group shall receive a certificate to said effect executed by
the President and Chief Executive Officer of PPTF.
(h) PPTF shall have delivered to Professionals Group such other
certificates and instruments as Professionals Group and its counsel may
reasonably request. The form and substance of all certificates,
instruments, opinions and other documentation delivered to Professionals
Group under this Agreement shall be reasonably satisfactory to
Professionals Group and its counsel.
7.3 Conditions to Obligation of PPTF. The obligation of PPTF to effect the
Mergers is also subject to the satisfaction or waiver by PPTF at or prior to the
INSCO Effective Time of the following conditions:
(a) The representations and warranties of Professionals Group set
forth in this Agreement shall be true and correct in all material respects
as of the date of this Agreement and (except (i) to the extent such
representations and warranties speak as of an earlier date and (ii) for any
changes to the Professionals Group Disclosure Schedule that are disclosed
by Professionals Group to PPTF in the Closing Date Professionals Group
Disclosure Schedule) as of the Closing Date as though made on and as of the
Closing Date. PPTF shall have received a certificate signed on behalf of
Professionals Group by the Chief Executive Officer and the Chief Financial
Officer of Professionals Group to the foregoing effect, and to which any
Closing Date Professionals Group Disclosure Schedule shall be appended.
(b) Professionals Group shall have performed in all material respects
all obligations required to be performed by it under this Agreement at or
prior to the Closing Date, and PPTF shall have received a certificate
signed on behalf of Professionals Group by the Chief Executive Officer and
the Chief Financial Officer of Professionals Group to such effect.
(c) PPTF shall have received from KPMG Peat Marwick LLP, accountants
to Professionals Group, a letter, dated the Closing Date, addressed to PPTF
and satisfactory to PPTF, to the effect that (i) they are the independent
public accountants with respect to Professionals Group within the meaning
of the Securities Act and the rules and regulations promulgated thereunder;
(ii) on the basis of certain procedures specified in the letter and
reasonably acceptable to PPTF, not constituting an audit, nothing came to
their attention that caused them to believe that: (A) the unaudited most
recent financial statements of Professionals Group delivered to PPTF
pursuant to Section 3.6(a) of this Agreement are not stated on a basis
substantially consistent with that of the audited most recent financial
statements of Professionals Group delivered to PPTF pursuant to Section
3.6(a) of this Agreement; and (B) as of a
B-47
<PAGE> 313
specified date not more than five (5) days prior to the date of such
letter, there has been no increase in the consolidated long-term debt of
Professionals Group, as compared with the consolidated long-term debt of
Professionals Group at December 31, 1996 (other than indebtedness incurred
under and pursuant to the U.S. $22,500,000 Credit Agreement dated as of
April 4, 1997 between Professionals Group and LaSalle National Bank), or
any increase in the outstanding capital stock of Professionals Group or any
Professionals Group Subsidiary (other than as contemplated by this
Agreement) as compared with capital stock of Professionals Group at
December 31, 1996, or any decrease in Professional Group's consolidated
stockholders' equity of greater than 10%, as compared with consolidated
stockholders' equity at December 31, 1996 (all as calculated in accordance
with GAAP. PPTF shall have no obligation to Professionals Group or any
other person to waive, in whole or in part, delivery of any such letter or
the request that it contain any given information.
(d) Professionals Group and its Subsidiaries, taken as a whole, shall
not have suffered a material adverse change in their financial condition,
operations, assets, or business prospects; and no event or circumstance
shall have occurred which has, or is likely to have, a Materially Adverse
Effect on Professionals Group or upon the right of Professionals Group or
any of the Professionals Group Subsidiaries to conduct their respective
businesses as presently conducted.
(e) Professionals Group shall have delivered to PPTF an opinion, dated
the Closing Date, of counsel for Professionals Group, satisfactory to PPTF
and its counsel, to the effect set forth on Exhibit F to this Agreement.
Such opinion shall also cover such other matters incident to the
transactions herein contemplated as PPTF and its counsel may reasonably
request. In rendering their opinion, counsel to Professionals Group may
rely on certificates of officers of Professionals Group, opinions of other
counsel, the authenticity of all signatures on documents believed to be
genuine and such other evidence as they may deem necessary or desirable.
(f) PPTF shall have received the favorable opinion from Donaldson,
Lufkin & Jenrette Securities Corporation in connection with the
deliberations of its Board of Trustees approving this Agreement and
confirmed at or about the time the S-4 is declared effective and the Joint
Proxy Statement is distributed that consummation of the Mergers and the
other transactions contemplated by this Agreement upon the terms and
conditions provided in this Agreement is fair to the Eligible Members of
PPTF from a financial point of view.
(g) The book value of Professionals Group as of the last day of the
calendar month immediately preceding the Closing Date (the "Professionals
Group Determination Date") shall be not less than $79,162,000. Said capital
and surplus shall be calculated in accordance with GAAP; provided, however,
that investments shall be valued at their amortized cost on the
Professionals Group Determination Date. PPTF shall receive a certificate to
said effect executed by the President and Chief Executive Officer of
Professionals Group.
(h) Professionals Group and PICOM shall have executed the Assignment
and Assumption Agreement.
(i) Professionals Group shall have delivered to PPTF such other
certificates and instruments as PPTF and its counsel may reasonably
request. The form and substance of all certificates, instruments and other
documentation delivered to PPTF under this Agreement shall be reasonably
satisfactory to PPTF and its counsel.
B-48
<PAGE> 314
ARTICLE VIII
TERMINATION AND AMENDMENT
8.1 Termination. This Agreement may be terminated at any time prior to the
INSCO Effective Time, whether before or after approval of the matters presented
in connection with the Mergers by the stockholders of Professionals Group and
the Voting Members of PPTF:
(a) by mutual consent of Professionals Group and PPTF in a written
instrument, if the Board of Directors of Professionals Group and the Board
of Trustees of PPTF determine to terminate this Agreement by an affirmative
vote of a majority of the members of its entire Board;
(b) by either Professionals Group or PPTF if (i) any Governmental
Entity which must grant a Requisite Regulatory Approval has denied approval
of either one or both of the Mergers and such denial has become final and
nonappealable or any Governmental Entity of competent jurisdiction shall
have issued a final nonappealable order permanently enjoining or otherwise
prohibiting the consummation of the transactions contemplated by this
Agreement, and (ii) the Board of Directors of Professionals Group or the
Board of Trustees of PPTF, as the case may be, determines to terminate this
Agreement by an affirmative vote of a majority of the members of its entire
Board;
(c) by either Professionals Group or PPTF if (i) the INSCO Merger
shall not have been consummated on or before April 1, 1998, unless the
failure of the INSCO Merger to be consummated by such date shall be due to
the failure of the party seeking to terminate this Agreement to perform or
observe the covenants and agreements of such party set forth in this
Agreement, and (ii) the Board of Directors of Professionals Group or the
Board of Trustees of PPTF, as the case may be, determines to terminate this
Agreement by an affirmative vote of a majority of the members of its entire
Board;
(d) by either Professionals Group or PPTF (provided that the
terminating party is not then in material breach of any representation,
warranty, covenant or other agreement contained in this Agreement) if (i)
there shall have been a material breach of any of the covenants or
agreements or any of the representations or warranties set forth in this
Agreement on the part of the other party, which breach is not cured within
forty-five (45) days following written notice to the party committing such
breach, or which breach, by its nature or timing, cannot be cured prior to
the Closing Date, and (ii) the Board of Directors of Professionals Group or
the Board of Trustees of PPTF, as the case may be, determines to terminate
this Agreement by an affirmative vote of a majority of the members of its
entire Board;
(e) by Professionals Group upon written notice to PPTF if the Board of
Trustees of PPTF does not, or shall indicate to Professionals Group that it
is unwilling or unable to, publicly recommend in the Joint Proxy Statement
that its Voting Members approve and adopt this Agreement, or if after
recommending in the Joint Proxy Statement that its Voting Members approve
and adopt this Agreement, the Board of Trustees of PPTF shall have
withdrawn, modified or amended such recommendation in any respect
materially adverse to Professionals Group, provided that any such notice of
termination must be given not later than 45 days after the later of the
date Professionals Group shall have been advised by PPTF in writing that it
is unable or unwilling to so recommend in the Joint Proxy Statement or that
it has withdrawn, modified or amended such recommendation, or such later
date as may be agreed upon by Professionals Group and PPTF;
(f) by PPTF upon written notice to Professionals Group if the Board of
Directors of Professionals Group does not, or shall indicate to PPTF that
it is unwilling or unable to, publicly recommend in the Joint Proxy
Statement that its stockholders approve and adopt this Agreement, or if
after recommending in the Joint Proxy Statement that its stockholders
approve and adopt this Agreement, the Board of Directors of Professionals
Group shall have withdrawn, modified or amended such recommendation in any
respect materially adverse to PPTF, provided that any such notice of
termination must be given not later than 45 days after the later of the
date PPTF shall have been advised by Professionals Group in writing that it
is unable or unwilling to so recommend in the Joint Proxy Statement or that
it has withdrawn, modified or amended such recommendation, or such later
date as may be agreed upon by Professionals Group and PPTF;
B-49
<PAGE> 315
(g) by Professionals Group upon written notice to PPTF if PPTF shall
have authorized, recommended, publicly proposed, or publicly announced an
intention to authorize, recommend or propose, or if PPTF shall have entered
into an agreement with any person or entity other than Professionals Group
or PICOM to effect an Acquisition Proposal, or if PPTF shall fail to
publicly oppose a tender offer or exchange offer by another person or
entity based on an Acquisition Proposal;
(h) by PPTF upon written notice to Professionals Group if
Professionals Group shall have authorized, recommended, publicly proposed,
or publicly announced an intention to authorize, recommend or propose, or
if Professionals Group shall have entered into an agreement with any person
or entity other than PPTF to effect an Acquisition Proposal, or if
Professionals Group shall fail to publicly oppose a tender offer or
exchange offer by another person or entity based on an Acquisition
Proposal;
(i) by either Professionals Group or PPTF if any approval of the
stockholders of Professionals Group or any approval of the Voting Members
of PPTF required for the consummation of the Mergers shall not have been
obtained by reason of the failure to obtain the required vote at a duly
held meeting of stockholders or Voting Members or at any adjournment or
postponement thereof;
(j) by either Professionals Group or PPTF if any of the conditions
specified by Article VII of this Agreement to the obligation of the
terminating party have not been satisfied on the Closing Date; or
(k) by Professionals Group if the Closing Date PPTF Disclosure
Schedule discloses any change from the PPTF Disclosure Schedule which has,
or is likely to have, a Material Adverse Effect on PPTF; or by PPTF if the
Closing Date Professionals Group Disclosure Schedule discloses any change
from the Professionals Group Disclosure Schedule which has, or is likely to
have, a Material Adverse Effect on Professionals Group; or
(l) by either Professionals Group or PPTF if the S-4 has not been
filed with the SEC by December 31, 1997, unless the failure to so file the
S-4 by such date shall be due to the failure of the party seeking to
terminate this Agreement to perform or observe the covenants and agreements
of such party set forth in this Agreement, and the Board of Directors of
Professionals Group or the Board of Trustees of PPTF, as the case may be,
determines to terminate this Agreement by an affirmative vote of a majority
of the members of its entire Board.
8.2 Effect of Termination. In the event of termination of this Agreement
by either Professionals Group or PPTF as provided in Section 8.1 of this
Agreement, (i) this Agreement shall forthwith become void and have no effect,
except that Sections 6.2(b), 8.2, 8.5, 9.2, 9.3, 9.5, 9.13 and 9.16 of this
Agreement shall survive any termination of this Agreement, and (ii) none of
Professionals Group, PICOM, INSCO, PPTF, any of their respective Subsidiaries or
any of the officers or directors or trustees of any of them shall have any
liability of any nature whatsoever under this Agreement, or in connection with
the transactions contemplated by this Agreement, except as otherwise provided in
Section 8.5 of this Agreement; provided, however, that notwithstanding anything
to the contrary contained in this Agreement, neither Professionals Group nor
PPTF shall be relieved or released from any liabilities or damages arising out
of its willful breach of any provision of this Agreement.
8.3 Amendment. Subject to compliance with applicable law, this Agreement
may be amended by the parties hereto, by action taken or authorized by the Board
of Directors of Professionals Group and the Board of Trustees of PPTF, at any
time before or after approval of the matters presented in connection with the
Mergers by the stockholders of Professionals Group or the Voting Members of
PPTF; provided, however, that after any approval of the transactions
contemplated by this Agreement by the stockholders of Professionals Group or the
Voting Members of PPTF, there may not be, without further approval of such
stockholders or Voting Members, any amendment of this Agreement which changes
the amount or the form of the consideration to be delivered to the Eligible
Members of PPTF under this Agreement other than as contemplated by this
Agreement. This Agreement may not be amended except by an instrument in writing
signed on behalf of each of the parties hereto.
8.4 Extension; Waiver. At any time prior to the INSCO Effective Time, the
parties to this Agreement may, to the extent legally allowed, (a) extend the
time for the performance of any of the obligations or other acts of the other
parties to this Agreement, (b) waive any inaccuracies in the representations and
warranties
B-50
<PAGE> 316
contained in this Agreement or in any document delivered pursuant hereto and (c)
waive compliance with any of the agreements or conditions contained in this
Agreement; provided, however, that after any approval of the transactions
contemplated by this Agreement by the stockholders of Professionals Group or the
Voting Members of PPTF, there may not be, without further approval of such
stockholders or Voting Members, as applicable, any extension or waiver of this
Agreement or any portion thereof which reduces the amount or changes the form of
the consideration to be delivered to the Eligible Members of PPTF under this
Agreement other than as contemplated by this Agreement. Any agreement on the
part of a party to this Agreement to any such extension or waiver shall be valid
only if set forth in a written instrument signed on behalf of such party, but
such extension or waiver or failure to insist on strict compliance with an
obligation, covenant, agreement or condition shall not operate as a waiver of,
or estoppel with respect to, any subsequent or other failure.
8.5 Liquidated Damages; Termination Fee.
(a) Notwithstanding anything to the contrary contained in this Agreement,
in the event that any of the following events or circumstances shall occur, PPTF
shall, within ten (10) days after notice of the occurrence thereof by
Professionals Group, pay to Professionals Group the sum equal to $4,500,000 plus
all out-of-pocket expenses of Professionals Group, which the parties agree and
stipulate as reasonable and full liquidated damages and reasonable compensation
for the involvement of Professionals Group in the transactions contemplated in
this Agreement, is not a penalty or forfeiture, and will not affect the
provisions of this Section 8.5: (i) at any time prior to termination of this
Agreement a PPTF Acquisition Event (as defined in this Section 8.5(a)) shall
occur; or (ii) Professionals Group shall terminate this Agreement pursuant to
Section 8.1(e) or (g) or if PPTF fails to call and hold the meeting of its
Voting Members as required by Section 6.4 of this Agreement. For purposes of
this Agreement a "PPTF Acquisition Event" shall mean that PPTF shall have
authorized, recommended, publicly proposed or publicly announced an intention to
authorize, recommend or propose, or entered into an agreement with any person
(other than any of the parties to this Agreement) to effect an Acquisition
Proposal or shall fail to publicly oppose a tender offer or exchange offer by
another person based on an Acquisition Proposal. Upon the making and receipt of
such payment under this Section 8.5, PPTF shall have no further obligation of
any kind under this Agreement and neither Professionals Group nor PICOM shall
have any further obligation of any kind under this Agreement, except in each
case under Section 8.2 of this Agreement, and no party shall have any liability
for any breach or alleged breach by such party of any provision of this
Agreement.
(b) Notwithstanding anything to the contrary contained in this Agreement,
in the event that any of the following events or circumstances shall occur,
Professionals Group shall, within ten (10) days after notice of the occurrence
thereof by PPTF, pay to PPTF the sum equal to $4,500,000 plus all out-of-pocket
expenses of PPTF, which the parties agree and stipulate as reasonable and full
liquidated damages and reasonable compensation for the involvement of PPTF in
the transactions contemplated in this Agreement, is not a penalty or forfeiture,
and will not affect the provisions of this Section 8.5: (i) at any time prior to
termination of this Agreement a Professionals Group Acquisition Event (as
defined in this Section 8.5(b)) shall occur; or (ii) PPTF shall terminate this
Agreement pursuant to Section 8.1(f) or (h) or if Professionals Group fails to
call and hold the meeting of its stockholders as required by Section 6.3 of this
Agreement. For purposes of this Agreement a "Professionals Group Acquisition
Event" shall mean that Professionals Group shall have authorized, recommended,
publicly proposed or publicly announced an intention to authorize, recommend or
propose, or entered into an agreement with any person (other than any of the
parties to this Agreement) to effect an Acquisition Proposal or shall fail to
publicly oppose a tender offer or exchange offer by another person based on an
Acquisition Proposal. Upon the making and receipt of such payment under this
Section 8.5, Professionals Group shall have no further obligation of any kind
under this Agreement and PPTF shall not have any further obligation of any kind
under this Agreement, except in each case under Section 8.2 of this Agreement,
and no party shall have any liability for any breach or alleged breach by such
party of any provision of this Agreement.
B-51
<PAGE> 317
ARTICLE IX
GENERAL PROVISIONS
9.1 Closing. Subject to the terms and conditions of this Agreement, the
closing of the Mergers (the "Closing") will take place at 10:00 a.m. on a date
and at a place to be specified by the parties, which shall be on the later of
January 1, 1998 or five (5) business days after the satisfaction or waiver
(subject to applicable law) of the latest to occur of the conditions set forth
in Article VII of this Agreement, unless extended by mutual agreement of the
parties (the "Closing Date").
9.2 Nonsurvival of Representations, Warranties and Agreements. None of the
representations, warranties, covenants and agreements in this Agreement or in
any instrument delivered pursuant to this Agreement shall survive the INSCO
Effective Time, except as otherwise provided in Section 8.2 of this Agreement
and except for those covenants and agreements contained in this Agreement and in
any such instrument which by their terms apply in whole or in part after the
INSCO Effective Time.
9.3 Expenses. Except as otherwise expressly provided in this Agreement,
all costs and expenses incurred in connection with this Agreement and the
transactions contemplated by this Agreement shall be paid by the party incurring
such expense; provided, however, (i) that the costs and expenses of printing and
mailing the Joint Proxy Statement, and all filing and other fees paid to the SEC
in connection with the Mergers, shall be borne equally by Professionals Group
and PPTF, and (ii) that Professionals Group will pay one-half and PPTF will pay
one-half of the HSR Act filing fee.
9.4 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, telecopied (with
confirmation), mailed by registered or certified mail (return receipt requested)
or delivered by an express courier (with confirmation) to the parties at the
following addresses (or at such other address for a party as shall be specified
by like notice):
(a) if to Professionals Group, or PICOM and/or INSCO to:
Professionals Insurance Company Management Group
4295 Okemos Road
Okemos, Michigan 48805
Attention: Victor T. Adamo
Fax: (517) 349-3127
with copies to:
Miller, Canfield, Paddock and Stone, P.L.C.
1400 N. Woodward Ave., Suite 100
Bloomfield Hills, Michigan 48304
Attention: Brad B. Arbuckle, Esq.
Fax: (248) 258-3036
and
(b) if to PPTF, to:
Physicians Protective Trust Fund
2121 Ponce de Leon Boulevard
Coral Gables, Florida 33114
Attention: Steven L. Salman
Fax: (305) 442-7431
with copies to:
Steel Hector & Davis LLP
1900 Phillips Point West
777 South Flagler Drive
West Palm Beach, Florida 33401
Attention: Thomas G. O'Brien III, Esq.
Fax: (561) 655-1509
B-52
<PAGE> 318
9.5 Jurisdiction; Service of Process. Any action or proceeding seeking to
enforce any provision of, or based on any right arising out of, this Agreement
may be brought against any of the parties in the courts of the jurisdiction in
which the defendant's principal place of business is located (i.e., the State of
Michigan, County of Ingham or the United States District Court for the Western
District of Michigan for Professionals Group and PICOM, and the State of
Florida, County of Dade or the United States District Court for the Southern
District of Florida for PPTF), and each of the parties consents to the
jurisdiction of such courts (and of the appropriate appellate courts) in any
such action or proceeding and waives any objection to venue laid therein.
Process in any action or proceeding referred to in the preceding sentence may be
served on any party anywhere in the world.
9.6 Further Assurances. At the request of any party to this Agreement, the
other parties shall execute, acknowledge and deliver such other documents and/or
instruments as may be reasonably required by the requesting party to carry out
the purposes of this Agreement. In the event any party to this Agreement shall
be involved in litigation, threatened litigation or government inquiries with
respect to a matter covered by this Agreement, every other party to this
Agreement shall also make available to such party, at reasonable times and
subject to the reasonable requirements of its own businesses, such of its
personnel as may have information relevant to such matters, provided that such
party shall reimburse the providing party for its reasonable costs for employee
time incurred in connection therewith if more than one business day is required.
Following the Closing, the parties will cooperate with each other in connection
with tax audits and in the defense of any legal proceedings.
9.7 Remedies Cumulative. Unless expressly made the exclusive remedy by the
terms of this Agreement, all remedies provided for in this Agreement are
cumulative and shall be in addition to any and all other rights and remedies
provided by law and by any other agreements between the parties.
9.8 Presumptions. It is expressly acknowledged and agreed that all parties
have been represented by counsel and have participated in the negotiation and
drafting of this Agreement, and that there shall be no presumption against any
party on the ground that such party was responsible for preparing this Agreement
or any part of it.
9.9 Exhibits and Schedules. Each of the exhibits and schedules referred to
in, and/or attached to, this Agreement is an integral part of this Agreement and
is incorporated in this Agreement by this reference.
9.10 Interpretation. When a reference is made in this Agreement to
Sections, Exhibits or Schedules, such reference shall be to a Section of or
Exhibit or Schedule to this Agreement unless otherwise indicated. The headings
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement. Whenever the words
"include," "includes" or "including" are used in this Agreement, they shall be
deemed to be followed by the words "without limitation". No provision of this
Agreement shall be construed to require Professionals Group, PPTF or any of
their respective Subsidiaries or affiliates to take any action which would
violate any applicable law, rule or regulation.
9.11 Counterparts. This Agreement may be executed in counterparts, all of
which shall be considered one and the same agreement and shall become effective
when counterparts have been signed by each of the parties and delivered to the
other parties, it being understood that all parties need not sign the same
counterpart.
9.12 Entire Agreement. This Agreement amends and restates the Initial
Merger Agreement and all of its terms and provisions in their entirety. It is
the intent and purpose of the parties to this Agreement, by executing this
Agreement, to ratify, confirm and reaffirm the Initial Merger Agreement and all
of its terms and provisions as amended and restated by this Agreement. This
Agreement (including the documents and the instruments referred to in this
Agreement) constitutes the entire agreement and supersedes all prior agreements
and understandings, both written and oral, among the parties with respect to the
subject matter of this Agreement.
9.13 Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Michigan, without regard to any
applicable conflicts of law principles.
B-53
<PAGE> 319
9.14 Severability. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
9.15 Publicity. Except as otherwise required by applicable law or the
rules of the NASD and the Nasdaq National Market, neither Professionals Group
nor PPTF shall, or shall permit any of its Subsidiaries to, issue or cause the
publication of any press release or other public announcement with respect to,
or otherwise make any public statement concerning, the transactions contemplated
by this Agreement without the consent of the other party, which consent shall
not be unreasonably withheld.
9.16 Assignment; Third Party Beneficiaries. Neither this Agreement nor any
of the rights, interests or obligations shall be assigned by any of the parties
to this Agreement (whether by operation of law or otherwise) without the prior
written consent of the other parties to this Agreement. Subject to the preceding
sentence, this Agreement will be binding upon, inure to the benefit of and be
enforceable by the parties and their respective successors and assigns. Except
as otherwise specifically provided in Section 6.9, this Agreement (including the
documents and instruments referred to in this Agreement) is not intended to
confer upon any person other than the parties to this Agreement any rights or
remedies under this Agreement.
9.17 Attorney Fees. If litigation is brought concerning this Agreement,
the prevailing party shall be entitled to receive from the non- prevailing
party, and the non-prevailing party shall upon final judgment and expiration of
all appeals immediately pay upon demand all reasonable attorneys' fees and
expenses of the prevailing party.
[THIS SPACE INTENTIONALLY LEFT BLANK]
B-54
<PAGE> 320
\
IN WITNESS WHEREOF, Professionals Group, PICOM, and PPTF have caused this
Agreement to be executed by their respective officers thereunto duly authorized
as of the date first above written.
PROFESSIONALS INSURANCE COMPANY
MANAGEMENT GROUP, a Michigan
business corporation
By: /s/ VICTOR T. ADAMO
------------------------------------
Victor T. Adamo
President and Chief Executive
Officer
PICOM INSURANCE COMPANY, a Michigan
stock insurance company
By: /s/ VICTOR T. ADAMO
------------------------------------
Victor T. Adamo
President and Chief Executive
Officer
PHYSICIANS PROTECTIVE TRUST FUND,
a medical malpractice self-insurance
trust fund organized under Florida
Statutes Section 627.357
By: /s/ STEVEN L. SALMAN
------------------------------------
Steven L. Salman
President and Chief Executive
Officer
B-55
<PAGE> 321
SCHEDULE OF EXHIBITS
<TABLE>
<S> <C> <C>
Exhibit A -- Certain Definitions, Allocation Formula and Related
Provisions
Exhibit B -- Lists of PPTF Trustee Participants and PPTF Officers
Exhibit C -- Assignment and Assumption Agreement
Exhibit D -- Affiliate Letter Agreement
Exhibit E -- Opinion of PPTF Counsel
Exhibit F -- Opinion of Professionals Group Counsel
</TABLE>
B-56
<PAGE> 322
ANNEX C
FIRST AMENDMENT TO FIRST AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
DATED AS OF APRIL 13, 1998 BY AND AMONG
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP,
PICOM INSURANCE COMPANY
AND PHYSICIANS PROTECTIVE TRUST FUND
THIS FIRST AMENDMENT TO FIRST AMENDED AND RESTATED AGREEMENT AND PLAN OF
MERGER (the "Amendment"), dated as of April 13, 1998, by and among PROFESSIONALS
INSURANCE COMPANY MANAGEMENT GROUP, a Michigan business corporation
("Professionals Group"), PICOM INSURANCE COMPANY, a Michigan stock insurance
company ("PICOM"), and PHYSICIANS PROTECTIVE TRUST FUND, a medical malpractice
self-insurance trust fund organized under Florida Statutes sec. 627.357
("PPTF").
WITNESSETH:
WHEREAS, the Boards of Directors of Professionals Group and PICOM have
determined that it is in the best interests of their respective companies and
their stockholders to effect a "merger of equals" of Professionals Group and
PPTF through the consummation of the business combination transactions provided
for in that certain First Amended and Restated Agreement and Plan of Merger
dated as of October 3, 1997 and executed by and among Professionals Group, PICOM
and PPTF (the "Merger Agreement"); and
WHEREAS, the Board of Trustees of PPTF has determined that it is in the
best interests of its members to effect a "merger of equals" of Professionals
Group and PPTF through the consummation of the business combination transactions
provided for in the Merger Agreement; and
WHEREAS, Professionals Group, PICOM and PPTF have agreed to certain
modifications and amendments to the Merger Agreement as contemplated by the
Merger Agreement and desire to amend the Merger Agreement so as to reflect such
modifications and amendments.
NOW, THEREFORE, in consideration of the mutual covenants, representations,
warranties and agreements contained in this Amendment, and intending to be
legally bound by this Amendment and the Merger Agreement, the parties to this
Amendment and the Merger Agreement agree as follows:
1. This Amendment is the amendment to the Merger Agreement
contemplated by, and provided for in, the Merger Agreement. Notwithstanding
anything to the contrary express or implied in this Amendment or the Merger
Agreement: (i) all capitalized terms in this Amendment that are not
otherwise defined in this Amendment shall be defined in this Amendment as
in the Merger Agreement; and (ii) in the event of any conflict between the
provisions of this Amendment and the provisions of the Merger Agreement,
the provisions of this Amendment shall control.
2. Sections 1.5(a) - (c), inclusive, of the Merger Agreement shall
be, and they hereby are, amended and restated in their entirety so as to
read and provide as follows:
"1.5 Conversion of Membership Rights.
(a) At the INSCO Effective Time, and except as otherwise provided
in this Agreement, by virtue of the INSCO Merger and without any action
on the part of Professionals Group, PICOM, INSCO, PPTF or any Eligible
Member, all Membership Rights shall be converted into 4,089,160 shares
of common stock, no par value per share, of Professionals Group
("Professionals Group Common Stock"). Notwithstanding anything express
or implied to the contrary in this Agreement or the Allocation Formula:
(x) the aggregate number of shares of Professionals Group Common Stock
issuable as a result of the INSCO Merger shall be not more than
4,089,160 shares of Professionals Group Common Stock; (y) no fractional
shares of Professionals Group Common Stock shall be issued to any
Eligible Member and, in lieu thereof, all of said fractional shares
shall be paid the cash equivalent value thereof based on the average of
the daily closing prices per share of
C-1
<PAGE> 323
Professionals Group Common Stock as reported on the Nasdaq National
Market for the period of twenty (20) business days ending on the fifth
(5th) business day prior to the Closing Date; and (z) except as
otherwise expressly provided in Section 1.28 of this Agreement, no
shares of Professionals Group Common Stock shall be issuable or issued
to any person or entity other than an Eligible Member in connection with
the INSCO Merger.
(b) At the INSCO Effective Time, and except as otherwise provided
in this Agreement, by virtue of the INSCO Merger and without any action
on the part of Professionals Group, PICOM, INSCO, PPTF or any Eligible
Member: (i) all Eligible Members shall cease to have any rights as
Eligible Members of PPTF (including the right to elect trustees, the
right to vote as to other matters, and any rights with respect to the
distribution of surplus in liquidation); and (ii) all Membership Rights
shall no longer be outstanding, and shall automatically be cancelled and
shall cease to exist; provided, however, that at and after the INSCO
Effective Time, each individual Membership Right shall represent the
right to receive, in accordance with the Allocation Formula, a
certificate representing the number of whole shares of Professionals
Group Common Stock and cash in lieu of any fractional share of
Professionals Group Common Stock into which such Membership Right has
been converted pursuant to this Agreement.
(c) In consideration for his or her Membership Right, each Eligible
Member shall be allocated and shall be entitled to receive a portion of
the Aggregate Merger Shares determined in accordance with the allocation
formula set forth on Exhibit A to the Amendment (the "Allocation
Formula"). Each Membership Right shall be exchanged for certificates
representing whole shares, and cash in lieu of any fractional share, of
Professionals Group Common Stock in accordance with Article II of this
Agreement."
3. Sections 1.28(a) - (b), inclusive, of the Merger Agreement shall
be, and they hereby are, amended and restated in their entirety so as to
read and provide as follows:
"(a) On the date of the first meeting of the Board of Directors of
Professionals Group following the INSCO Effective Time, Professionals
Group shall issue and deliver to each person identified on Exhibit B to
this Agreement as a "PPTF Trustee Participant" (each, a "PPTF Trustee
Participant") a number of shares of Professionals Group Common Stock
that is equal to 20% of the number that is set forth opposite the name
of such PPTF Trustee Participant on Exhibit B to this Agreement. Upon
and pursuant to the terms and conditions of a PPTF Trustee Participant's
Consulting Agreement (as defined in this Section 1.28) Professionals
Group shall issue and deliver Trustee Participant a number of shares of
Professionals Group Common Stock that is equal to 80% of the number that
is set forth opposite the name of such PPTF Trustee Participant on
Exhibit B to this Agreement.
(b) On the date of the first meeting of the Board of Directors of
Professionals Group following the INSCO Effective Time, Professionals
Group shall issue and deliver to each person identified on Exhibit B to
this Agreement as a "PPTF Officer" (each, a "PPTF Officer") a number of
shares of Professionals Group Common Stock that is equal to 20% of the
number that is set forth opposite the name of such PPTF Officer on
Exhibit B to this Agreement. Upon and pursuant to the terms and
conditions of a PPTF Officer's Stock Grant Agreement (as defined in this
Section 1.28), Professionals Group shall issue and deliver to such PPTF
Officer a number of shares of Professionals Group Common Stock that is
equal to 80% of the number that is set forth opposite the name of such
PPTF Officer on Exhibit B to this Agreement."
4. Section 6.8(b) of the Merger Agreement shall be, and it hereby is,
amended and restated in its entirety so as to read and provide as follows:
"(b) Nothing in this Section 6.8 shall be interpreted as preventing
Professionals Group from amending, modifying or terminating any
Professionals Group Benefit Plans, PPTF Benefit Plans, or other
contracts, arrangements, commitments or understandings, in accordance
with their terms and applicable law. It is understood and agreed that
the PICOM Insurance Company Employee Retention Plan shall apply only to
those persons who are employees of PICOM and otherwise eligible under
such plan immediately prior to the INSCO Effective Time, and that such
plan shall
C-2
<PAGE> 324
not apply to either employees of PICOM hired after the INSCO Effective
Time or employees of PPTF."
5. Section 8.1(c) of the Merger Agreement shall be, and it hereby is,
amended and restated in its entirety so as to read and provide as follows:
"(c) by either Professionals Group or PPTF if (i) the INSCO Merger
shall not have been consummated on or before August 13, 1998, unless the
failure of the INSCO Merger to be consummated by such date shall be due
to the failure of the party seeking to terminate this Agreement to
perform or observe the covenants and agreements of such party set forth
in this Agreement, and (ii) the Board of Directors of Professionals
Group or the Board of Trustees of PPTF, as the case may be, determines
to terminate this Agreement by an affirmative vote of a majority of the
members of its entire Board;"
6. Exhibit A to the Merger Agreement shall be, and it hereby is,
amended and restated in its entirety so as to read and provide as set forth
on Exhibit A to this Amendment.
7. It is expressly acknowledged and agreed that all parties have been
represented by counsel and have participated in the negotiation and
drafting of this Amendment and the Merger Agreement, and that there shall
be no presumption against any party on the ground that such party was
responsible for preparing this Amendment and the Merger Agreement or any
part of it.
8. This Amendment may be executed in counterparts, all of which shall
be considered one and the same agreement and shall become effective when
counterparts have been signed by each of the parties and delivered to the
other parties, it being understood that all parties need not sign the same
counterpart.
9. This Amendment amends the Merger Agreement. It is the intent and
purpose of the parties to this Amendment, by executing this Amendment, to
ratify, confirm and reaffirm the Merger Agreement and all of its terms and
provisions as amended by this Amendment. This Amendment and the Merger
Agreement (including the documents and the instruments referred to in this
Amendment and the Merger Agreement) constitute the entire agreement and
supersedes all prior agreements and understandings, both written and oral,
among the parties with respect to the subject matter of this Amendment and
the Merger Agreement.
10. This Amendment and the Merger Agreement shall be governed and
construed in accordance with the laws of the State of Michigan, without
regard to any applicable conflicts of law principles.
11. Any term or provision of this Amendment which is invalid or
unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of
this Amendment or affecting the validity or enforceability of any of the
terms or provisions of this Amendment in any other jurisdiction. If any
provision of this Amendment is so broad as to be unenforceable, the
provision shall be interpreted to be only so broad as is enforceable.
[THIS SPACE INTENTIONALLY LEFT BLANK]
C-3
<PAGE> 325
IN WITNESS WHEREOF, Professionals Group, PICOM, and PPTF have caused this
Amendment to be executed by their respective officers thereunto duly authorized
as of the date first above written.
PROFESSIONALS INSURANCE COMPANY
MANAGEMENT GROUP, a Michigan
business corporation
By: /s/ VICTOR T. ADAMO
------------------------------------
Victor T. Adamo, Esq.
President and Chief Executive
Officer
PICOM INSURANCE COMPANY, a Michigan
stock insurance company
By: /s/ VICTOR T. ADAMO
------------------------------------
Victor T. Adamo, Esq.
President and Chief Executive
Officer
PHYSICIANS PROTECTIVE TRUST FUND,
a medical malpractice self-insurance
trust fund organized under Florida
Statutes sec. 627.357
By: /s/ STEVEN L. SALMAN
------------------------------------
Steven L. Salman, Esq.
President and Chief Executive
Officer
C-4
<PAGE> 326
EXHIBIT A
CERTAIN DEFINITIONS,
ALLOCATION FORMULA AND RELATED PROVISIONS
CERTAIN DEFINITIONS:
As used in the Agreement, the words and phrases that follow, wherever
capitalized in the Agreement, shall have the respective meanings that follow:
"Aggregate Earned Premium" is $56,037,359 (which is the aggregate of
all Earned PPTF Policy Premiums for the 12 months ending on the PPTF Record
Date).
"Aggregate Merger Shares" means the 4,089,160 shares of Professionals
Group Common Stock into which, subject to the exercise of dissenters'
rights and the payment of cash in lieu of fractional shares, all Membership
Rights will be converted upon consummation of the transactions contemplated
by the Agreement.
"Agreement" means the First Amended and Restated Agreement and Plan of
Merger dated as of October 3, 1997 executed by and among Professionals
Group, PICOM and PPTF, as amended by the First Amendment to First Amended
and Restated Agreement and Plan of Merger dated as of April 13, 1998
executed by and among Professionals Group, PICOM and PPTF.
"Average Price" means 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 the closing date with respect to the transactions
contemplated by the Agreement.
"Earned PPTF Policy Premium" means, with respect to any Member, the
earned premium on such Member's PPTF Policy for the 12 months ending on the
PPTF Record Date.
"Eligible Member" means the person or entity who is the named insured
on a PPTF Policy.
"Member" means the person or entity who is the named insured on a PPTF
Policy.
"Membership Rights" means all of the rights of each Member under the
laws of the State of Florida, the PPTF Charter Documents, and each PPTF
Policy with respect to which such Member is a named insured.
"PPTF Record Date" means the date designated as such by the Board of
Trustees of PPTF.
"PPTF Charter Documents" means the Amended Trust Agreement dated
January 1, 1987 and By-laws of PPTF.
"PPTF Policy" means an indemnity agreement issued by PPTF that is in
effect on the PPTF Record Date.
"Voting Member" means the person or entity who is the named insured on
a PPTF Policy.
ALLOCATION FORMULA:
Upon consummation of the INSCO Merger, but subject to the exercise of
dissenters' rights and the payment of cash in lieu of fractional shares, all
Membership Rights will be converted into the Aggregate Merger Shares. In
consideration for all Membership Rights, the Aggregate Merger Shares will be
allocated and distributed to Members of PPTF in accordance with the formula that
follows: Each Member of PPTF who does not timely and properly exercise
dissenters' rights will be 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 such Member's Earned PPTF Policy Premium to the Aggregate
Earned Premium; provided, however, that in lieu of any fractional share of
Professionals Group Common Stock, such Member shall be paid the cash equivalent
value
C-5
<PAGE> 327
thereof based on the Average Price. Members of PPTF who timely and properly
exercise dissenters' rights will be paid the fair value of their Membership
Rights.
By way of example, under the Allocation Formula, and assuming (i) the
Aggregate Earned Premium equals $56,037,359 and (ii) he or she does not exercise
dissenters' rights, a Member of PPTF whose PPTF Policy has $24,000 of Earned
PPTF Policy Premium would be entitled to 1,754.16 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 1,754 whole
shares of Professionals Group Common Stock and, in lieu of the fractional share
of Professionals Group Common Stock, would be paid cash in an amount determined
by multiplying the amount of such fractional share (in this example .16) by the
Average Price.
Only Members of PPTF who do not exercise dissenters' rights will be
entitled to be allocated and to receive a portion of the Aggregate Merger
Shares. Except for the shares (and cash in lieu of any fractional share) issued
to such Members of PPTF and the shares issued or issuable pursuant to Section
1.28 of the Merger Agreement (which, subject to certain vesting requirements,
contemplates the issuance of an aggregate of 153,000 shares of Professionals
Group Common Stock to certain PPTF trustees and officers over a four year
period), no other shares of Professionals Group Common Stock (or cash in lieu of
any fractional share) will be issued or issuable upon consummation of the
transactions contemplated by the Merger Agreement.
C-6
<PAGE> 328
ANNEX D
PROPOSED AMENDMENT TO THE FIRST AMENDED AND RESTATED
ARTICLES OF INFORMATION OF
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
The proposed Name Change Amendment would modify Article I of the First
Amended and Restated Articles of Incorporation of Professionals Group as follows
(material in brackets would be deleted from, and material in bold type would be
added to, the present provision):
The name of the corporation is [Professionals Insurance Company
Management Group] PROFESSIONALS GROUP, INC.
D-1
<PAGE> 329
ANNEX E
OPINION OF COCHRAN, CARONIA & CO.
[COCHRAN, CARONIA & CO. LOGO]
April 27, 1998
Board of Directors
Professionals Insurance Company
Management Group
2600 Professionals Drive
Okemos, Michigan 48864
Gentlemen:
You have requested our opinion as to the fairness from a financial point of
view to the stockholders of Professionals Insurance Company Management Group
(the "Company") of the consideration to be paid by the Company to the Eligible
Members (as defined in the Agreement) of Physicians Protective Trust Fund
("PPTF") as set forth in the First Amended and Restated Agreement and Plan of
Merger dated as of October 3, 1997, as amended by the First Amendment to First
Amended and Restated Agreement and Plan of Merger dated as of April 13, 1998
(the "Agreement"), both executed by and among the Company, PICOM Insurance
Company ("PICOM") and PPTF.
The Agreement provides for a combination of PPTF with the Company through
the merger (the "INSCO Merger") of PPTF with and into a newly formed stock
insurance company subsidiary of Professionals Group ("INSCO"), followed
immediately by the merger (the "PICOM Merger", and together with the INSCO
Merger, the "Mergers") of INSCO with and into PICOM, with PICOM continuing as
the surviving insurance company. In connection with the INSCO Merger, among
other things, at the INSCO Effective Time (as defined in the Agreement), all
PPTF Membership Rights (as defined in the Agreement) shall be converted into an
aggregated number of shares of Professionals Group Common as set forth in
Article I, Section 1.5 of the Agreement (the "Aggregate Merger Shares"). The
terms and conditions of the Mergers are more fully set forth in the Agreement.
In connection with our opinion we have:
(a) reviewed the Agreement;
(b) reviewed certain GAAP and Statutory financial data and other
information relating to the Company, PICOM and PPTF that was publicly
available or furnished to us by the Company and/or PPTF, including
financial forecasts;
(c) met with members of the Company's and PPTF's management to discuss
the business, operations, historical financial results and future prospects
of the Company and/or PPTF;
(d) considered certain financial and securities data of the Company
and PPTF and compared that data with similar data for other publicly-held
companies in businesses similar to those of the Company and PPTF;
(e) considered the financial terms of certain recent acquisitions of
companies in businesses similar to those of the Company and PPTF;
(f) performed a discounted cash flow analysis;
(g) met with representatives of PPTF to discuss the December 31, 1996
and June 30, 1996 actuarial analyses with respect to PPTF; and
(h) considered such other information, financial studies, analyses,
and investigations and financial, economic and market criteria as we deemed
relevant and appropriate for purposes of this opinion.
E-1
<PAGE> 330
The opinion expressed below is subject to the following limitations:
(i) In arriving at our opinion, we have relied upon and assumed,
without independent verification, the accuracy and completeness of all
financial and other information that was publicly available or furnished us
by the Company and/or PPTF. With respect to the financial forecasts used by
us, we have assumed that they have been reasonably prepared on bases
reflecting the best currently available estimates and judgment of the
Company's and PPTF's management as to the future financial performance of
the Company and PPTF.
(ii) We have not performed an actuarial analysis of PICOM or PPTF.
(iii) Our opinion does not address, and should not be construed to
address, the underlying business decisions to effect the Transaction.
(iv) Our opinion is based upon business, economic, market and other
conditions as they exist as of the date hereof or as of the date of the
information provided to us. We have not been engaged to, and we do not,
express an opinion regarding any compensation that may be paid to PPTF
Trustee Participants (as defined in the Agreement) in respect of consulting
or other arrangements pursuant to Section 1.28 of the Agreement or
otherwise. This opinion does not represent our opinion as to what the value
of Professionals Group Common Stock may be at the effective date of either
the INSCO Merger or the PICOM Merger or as to the prospects of
Professionals Group's and PPTF's business.
(v) This opinion is effective as of the date hereof.
Based upon and subject to the foregoing, it is our opinion that as of the
date hereof, the consideration to be paid by the Company to the Members of PPTF
is fair to the Company from a financial point of view.
We will receive a fee as compensation for our services in rendering this
opinion. We have also acted as financial advisor to the Board of Directors of
the Company in connection with the transactions contemplated by the Agreement
and will receive a fee for our financial advisory services.
This letter is for the information of the Board of Directors of the Company
in connection with the transactions contemplated by the Agreement. This opinion
may not be quoted or referred to, in whole or in part, filed with or furnished
or disclosed to any other party, or used for any other purpose, without our
prior written consent; provided, however, we hereby consent to the summaries of,
the references to, and the inclusion as an annex to the Joint Proxy
Statement/Prospectus of Professionals Group and PPTF of, this opinion so long as
this opinion is quoted in full therein.
Very truly yours,
/s/ COCHRAN, CARONIA & CO.
--------------------------------------
E-2
<PAGE> 331
ANNEX F
OPINION OF MCDONALD & COMPANY SECURITIES, INC.
[MCDONALD & COMPANY SECURITIES, INC. LOGO]
APRIL 27, 1998
Board of Directors
Professionals Insurance Company Management Group
4295 Okemos Road
Okemos, MI 48864-9510
Gentlemen:
You have requested our opinion with respect to the fairness, from a
financial point of view, as of the date hereof, to the holders of common stock,
no par value per share ("Professionals Group Common"), of Professionals
Insurance Company Management Group ("Professionals Group") of the consideration
to be paid by Professionals Group to the Eligible Members (as defined in the
Merger Agreement, as amended) of Physicians Protective Trust Fund ("PPTF") as
set forth in 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 (the "Merger
Agreement") by and among Professionals Group, PICOM Insurance Company ("PICOM"),
and Physicians Protective Trust Fund ("PPTF").
The Merger Agreement provides for the merger (the "Merger") of PPTF with
Professionals Group through the merger of PPTF with and into a newly formed
stock insurance company subsidiary of Professionals Group ("INSCO"), followed
immediately by the merger of INSCO with and into PICOM, with PICOM continuing as
the surviving insurance company. In connection with the Merger, among other
things, at the INSCO Effective Time (as defined in the Merger Agreement), all
PPTF Membership Rights (as defined in the Merger Agreement) shall be converted
into an aggregate number of shares of Professionals Group Common as set forth in
Article I, Section 1.5 of the Merger Agreement (the "Aggregate Merger Shares").
The terms and conditions of the Merger are more fully set forth in the Merger
Agreement.
McDonald & Company Securities, Inc., as part of its investment banking
business, is customarily engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of listed and unlisted securities,
private placements and valuations for estate, corporate and other purposes.
In connection with rendering our opinion set forth herein, we have among
other things:
(i) Reviewed Professionals Group's Annual Reports to Shareholders and
Annual Reports on Form 10-K for each of the years ended December 31, 1997,
December 31, 1996 and December 31, 1995, including the audited financial
statements contained therein;
(ii) Reviewed PPTF's audited financial statements, prepared under GAAP
and under Statutory Accounting Principles, for each of the years ended
December 31, 1997, December 31, 1996 and December 31, 1995;
(iii) Reviewed certain other public and non-public information,
primarily financial in nature, relating to the respective businesses,
earnings, assets and prospects of Professionals Group and PPTF provided to
us or publicly available;
(iv) Participated in meetings and telephone conferences with members
of senior management of Professionals Group and PPTF concerning the
financial condition, business, assets, financial forecasts and prospects of
the respective companies, as well as other matters we believed relevant to
our inquiry;
(v) Compared the results of operations and financial condition of
Professionals Group and PPTF with that of certain companies which we deemed
to be relevant for purposes of this opinion;
F-1
<PAGE> 332
(vi) Reviewed the financial terms, to the extent publicly available,
of certain acquisition transactions which we deemed to be relevant for
purposes of this opinion;
(vii) Reviewed the Merger Agreement and its schedules and exhibits and
certain related documents and disclosure schedules; and
(viii) Performed such other reviews and analyses as we have deemed
appropriate.
In our review and analysis and in arriving at our opinion, we have assumed
and relied upon the accuracy and completeness of all of the financial and other
information reviewed by us and have relied upon the accuracy and completeness of
the representations, warranties and covenants of Professionals Group and PPTF
contained in the Merger Agreement. We have not been engaged to undertake, and
have not assumed any responsibility for, nor have we conducted, an independent
investigation or verification of such matters. We have not been engaged to and
we did not conduct a physical inspection of any of the assets, properties or
facilities of either Professionals Group or PPTF, nor have we made or obtained
or been furnished with any independent evaluation or appraisal of any of such
assets, properties or facilities or any of the liabilities of either
Professionals Group or PPTF. With respect to financial forecasts used in our
analysis, we have assumed that such forecasts have been reasonably prepared on a
basis reflecting the best currently available estimates and judgments of the
management of Professionals Group and PPTF to the future performance of
Professionals Group and PPTF, as the case may be. We express no view as to such
financial forecasts or the assumptions on which they are based. We have also
assumed that all of the conditions to the consummation of the Merger, as set
forth in the Merger Agreement, would be satisfied and that the Merger would be
consummated on a timely basis in the manner contemplated by the Merger
Agreement.
We will receive a fee for our services as financial advisor to
Professionals Group, including our services in rendering this opinion.
In the ordinary course of business, we may trade securities of
Professionals Group for our own account and for the accounts of customers and,
accordingly, we may at any time hold a long or short position in such
securities.
This opinion is based on economic and market conditions and other
circumstances existing on, and information made available as of, the date
hereof. In addition, our opinion is, in any event, limited to the fairness to
holders of Professionals Group Common, as of the date hereof, from a financial
point of view, of the consideration to be paid by Professionals Group to the
Eligible Members, and does not address Professionals Group's underlying business
decision to effect the Merger or any other terms of the Merger and does not
constitute a recommendation to any Professionals Group shareholder as to how
such shareholder should vote with respect to the Merger. We have not been
engaged to, and we do not, express an opinion regarding any compensation that
may be paid to PPTF Trustee Participants (as defined in the Merger Agreement) in
respect of consulting or other arrangements pursuant to Section 1.28 of the
Merger Agreement or otherwise. This opinion does not represent our opinion as to
what the value of Professionals Group Common may be at the effective date of the
Merger or as to the prospects of Professionals Group's and PPTF's business.
This opinion is directed to and has been prepared for the confidential use
of the Board of Directors of Professionals Group. This opinion shall not be
reproduced, summarized, described or referred to or given to any other person
without our prior written consent; provided, however, we hereby consent to the
summaries of, the references to, and the inclusion as an annex to the Joint
Proxy Statement/Prospectus of Professionals Group and PPTF to be mailed to the
holders of Professional Group Common and to the Members of PPTF of, this opinion
so long as this opinion is quoted in full therein.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the financial consideration to be paid by Professionals Group to
the Eligible Members is fair to the holders of Professionals Group Common from a
financial point of view.
Very truly yours,
/s/ McDONALD & COMPANY SECURITIES, INC.
F-2
<PAGE> 333
ANNEX G
OPINION OF DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
DONALDSON, LUFKIN & JENRETTE LETTERHEAD
April 27, 1998
Board of Trustees
Physicians Protective Trust Fund
2121 Ponce de Leon Boulevard
Coral Gables, FL 33114
Dear Sirs:
You have requested our opinion as to the fairness from a financial point of
view to the Eligible Members of Physicians Protective Trust Fund ("PPTF"), as a
group, of the consideration to be received by such Eligible Members pursuant to
the terms of the Agreement and Plan of Merger, dated as of August 14, 1997, as
amended as of October 3, 1997, and the First Amendment thereto on April 13, 1998
(as so amended, the "Agreement"), by and among Professionals Insurance Company
Management Group ("Professionals Group"), PICOM Insurance Company ("PICOM") and
PPTF, pursuant to which PPTF will be merged (the "INSCO Merger") with and into a
stock insurance company to be incorporated under the Florida Insurance Code
("INSCO") and immediately subsequent to the INSCO Merger, INSCO will be merged
(the "PICOM Merger," and together with the INSCO Merger, the "Mergers") with and
into PICOM. Capitalized terms not otherwise defined in this letter have the
meanings given to them in the Agreement.
At the INSCO Effective Time, subject to certain exceptions, all Membership
Rights shall be converted, in the aggregate, into 4,089,160 shares (the
"Aggregate Merger Shares") of common stock, no par value per share, of
Professionals Group ("Professionals Group Common Stock").
In arriving at our opinion, we have reviewed the Agreement and the exhibits
thereto and the Amended Trust Agreement dated January 1, 1987 of PPTF. We have
also reviewed financial and other information that was publicly available or
furnished to us by PPTF and Professionals Group, including information provided
during discussions with their respective managements. Included in the
information provided during discussions with the respective managements were
certain financial projections of PPTF for the years ending December 31, 1998
through December 31, 2000 prepared by the management of PPTF and certain
financial projections of Professionals Group, on a stand-alone basis, for the
years ending December 31, 1998 through December 31, 2001 prepared by the
management of Professionals Group. In addition, we have compared certain
financial data of PPTF and financial and securities data of Professionals Group
with various other companies whose securities are traded in public markets,
reviewed the historical stock prices and trading volumes of Professionals Group
Common Stock, reviewed prices and premiums paid in other business combinations
and conducted such other financial studies, analyses and investigations as we
deemed appropriate for purposes of this opinion.
In rendering our opinion, we have relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available to
us from public sources, that was provided to us by PPTF and Professionals Group
or their respective representatives, or that was otherwise reviewed by us. With
respect to the financial projections of PPTF supplied to us, we have assumed
that they have been reasonably prepared on a basis reflecting the best currently
available estimates and judgments of the management of PPTF as to the future
operating and financial performance of PPTF. With respect to the financial
projections of Professionals Group supplied to us, we have assumed that they
have been reasonably prepared on a basis reflecting the best currently available
estimates and judgments of the management of Professionals Group as to the
future operating and financial performance of Professionals Group. We have not
assumed any responsibility for making an independent evaluation of PPTF's and
Professionals Group's assets or liabilities or
G-1
<PAGE> 334
for making any independent verification of any of the information reviewed by
us. We have relied as to certain legal matters relating to PPTF as to which we
have made inquiry on advice of counsel to PPTF.
You have not asked for our opinion and we do not express any opinion as to:
(i) which of PPTF's policyholders constitute Eligible Members which are eligible
for receipt of consideration in the INSCO Merger, or (ii) the fairness of the
proposed consideration to be paid to any individual Eligible Member or any class
of Eligible Members in connection with the Mergers.
Our opinion is necessarily based on economic, market, financial and other
conditions as they exist on, and on the information made available to us as of,
the date of this letter and supersedes our opinions to the Board of Trustees
dated August 14, 1997 and October 3, 1997. It should be understood that although
subsequent developments may affect this opinion, we do not have any obligation
to update, revise or reaffirm this opinion. We are expressing no opinion herein
as to the prices at which Professionals Group Common Stock will actually trade
at any time.
We have reviewed a written indication of interest to acquire the PPTF from
FPIC Insurance Group, Inc. ("FPIC") dated September 26, 1997 (the "FPIC
Letter"). We understand that based upon (i) your review of the FPIC Letter, (ii)
discussions between your management and the management of FPIC regarding the
FPIC Letter, (iii) the advice of counsel regarding the factors you are permitted
to consider in evaluating the proposal set forth in the FPIC Letter and (iv)
your consideration of the effect of consummation of a transaction with FPIC on
the terms set forth in the FPIC Letter on Voting Members who are also Eligible
Members in their capacity as holders of insurance policies or indemnity
agreements issued by PPTF, you have determined not to proceed with further
discussions with FPIC regarding a possible transaction, and that we should
therefore evaluate the Mergers without taking into account the proposal set
forth in the FPIC Letter. Accordingly, our opinion does not address the relative
merits of the Mergers and the proposal set forth in the FPIC Letter or the Board
of Trustees' decision to proceed with the Mergers. Our opinion does not
constitute a recommendation to any Voting Member of PPTF as to how such member
should vote on the Mergers.
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), as part of its
investment banking services, is regularly engaged in the valuation of businesses
and securities in connection with mergers, acquisitions, underwritings, sales
and distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. DLJ has performed
investment banking and other services for Professionals Group in the past.
This opinion shall not be reproduced, summarized, described or referred to
or given to any other person without our prior written consent; provided,
however, we hereby consent to the summaries of, the references to, and the
inclusion as an annex to the Joint Proxy Statement/Prospectus of Professionals
Group and PPTF of, this opinion so long as this opinion is quoted in full
therein and any such description of or reference to DLJ or any summary of this
Opinion or presentation of DLJ included in such document is in form and
substance acceptable to DLJ and its legal counsel.
Based upon the foregoing and such other factors as we deem relevant, we are
of the opinion that the Aggregate Merger Shares to be received by the Eligible
Members of PPTF is fair to those Eligible Members, as a group, from a financial
point of view.
Very truly yours,
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: /s/ STEPHAN A. KIRATSOUS
------------------------------------
Stephan A. Kiratsous
Senior Vice President
G-2
<PAGE> 335
ANNEX H
CERTAIN PROVISIONS OF THE
FLORIDA BUSINESS CORPORATION ACT, AS AMENDED,
REGARDING DISSENTERS' RIGHTS
SECTION 607.1301 DISSENTERS' RIGHTS; DEFINITIONS.
The following definitions apply to sections 607.1302 and 607.1320:
(1) "Corporation" means the issuer of the shares held by a dissenting
shareholder before the corporate action or the surviving or acquiring
corporation by merger or share exchange of that issuer.
(2) "Fair value," with respect to a dissenter's shares, means the
value of the shares as of the close of business on the day prior to the
shareholders' authorization date, excluding any appreciation or
depreciation in anticipation of the corporate action unless exclusion would
be inequitable.
(3) "Shareholders' authorization date" means the date on which the
shareholders' vote authorizing the proposed action was taken, the date on
which the corporation received written consents without a meeting from the
requisite number of shareholders in order to authorize the action, or, in
the case of a merger pursuant to section 607.1104, the day prior to the
date on which a copy of the plan of merger was mailed to each shareholder
of record of the subsidiary corporation.
SECTION 607.1302 RIGHT OF SHAREHOLDERS TO DISSENT.
(1) Any shareholder of a corporation has the right to dissent from, and
obtain payment of the fair value of his or her shares in the event of, any of
the following corporate actions:
(a) Consummation of a plan of merger to which the corporation is a
party:
1. If the shareholder is entitled to vote on the merger, or
2. If the corporation is a subsidiary that is merged with its
parent under section 607.1104, and the shareholders would have been
entitled to vote on action taken, except for the applicability of
section 607.1104;
(b) Consummation of a sale or exchange of all, or substantially all,
of the property of the corporation, other than in the usual and regular
course of business, if the shareholder is entitled to vote on the sale or
exchange pursuant to section 607.1202, including a sale in dissolution but
not including a sale pursuant to court order or a sale for cash pursuant to
a plan by which all or substantially all of the net proceeds of the sale
will be distributed to the shareholders within 1 year after the date of
sale;
(c) As provided in section 607.0902(11), the approval of a
control-share acquisition;
(d) Consummation of a plan of share exchange to which the corporation
is a party as the corporation the shares of which will be acquired, if the
shareholder is entitled to vote on the plan;
(e) Any amendment of the articles of incorporation if the shareholder
is entitled to vote on the amendment and if such amendment would adversely
affect such shareholder by:
1. Altering or abolishing any preemptive rights attached to any of
his or her shares;
2. Altering or abolishing the voting rights pertaining to any of
his or her shares, except as such rights may be affected by the voting
rights of new shares then being authorized of any existing or new class
or series of shares;
3. Effecting an exchange, cancellation, or reclassification of any
of his or her shares, when such exchange, cancellation, or
reclassification would alter or abolish the shareholder's voting rights
or alter his or her percentage of equity in the corporation, or
effecting a reduction or cancellation of accrued dividends or other
arrearages in respect to such shares;
H-1
<PAGE> 336
4. Reducing the stated redemption price of any of the shareholder's
redeemable shares, altering or abolishing any provision relating to any
sinking fund for the redemption or purchase of any of his or her shares,
or making any of his or her shares subject to redemption when they are
not otherwise redeemable;
5. Making noncumulative, in whole or in part, dividends of any of
the shareholder's preferred shares which had theretofore been
cumulative;
6. Reducing the stated dividend preference of any of the
shareholder's preferred shares; or
7. Reducing any stated preferential amount payable on any of the
shareholder's preferred shares upon voluntary or involuntary
liquidation; or
(f) Any corporate action taken, to the extent the articles of
incorporation provide that a voting or nonvoting shareholder is entitled to
dissent and obtain payment for his or her shares.
(2) A shareholder dissenting from any amendment specified in paragraph
(1)(e) has the right to dissent only as to those of his or her shares which are
adversely affected by the amendment.
(3) A shareholder may dissent as to less than all the shares registered in
his or her name. In that event, the shareholder's rights shall be determined as
if the shares as to which he or she has dissented and his or her other shares
were registered in the names of different shareholders.
(4) Unless the articles of incorporation otherwise provide, this section
does not apply with respect to a plan of merger or share exchange or a proposed
sale or exchange of property, to the holders of shares of any class or series
which, on the record date fixed to determine the shareholders entitled to vote
at the meeting of shareholders at which such action is to be acted upon or to
consent to any such action without a meeting, were either registered on a
national securities exchange or designated as a national market system security
on an interdealer quotation system by the National Association of Securities
Dealers, Inc., or held of record by not fewer than 2,000 shareholders.
(5) A shareholder entitled to dissent and obtain payment for his or her
shares under this section may not challenge the corporate action creating his or
her entitlement unless the action is unlawful or fraudulent with respect to the
shareholder or the corporation.
SECTION 607.1320 PROCEDURES FOR EXERCISE OF DISSENTERS' RIGHTS.
(1)(a) If a proposed corporate action creating dissenters' rights under
section 607.1302 is submitted to a vote at a shareholders' meeting, the meeting
notice shall state that shareholders are or may be entitled to assert
dissenters' rights and be accompanied by a copy of sections 607.1301, 607.1302,
and 607.1320. A shareholder who wishes to assert dissenters' rights shall:
1. Deliver to the corporation before the vote is taken written notice
of the shareholder's intent to demand payment for his or her shares if the
proposed action is effectuated, and
2. Not vote his or her shares in favor of the proposed action. A proxy
or vote against the proposed action does not constitute such a notice of
intent to demand payment.
(b) If proposed corporate action creating dissenters' rights under section
607.1302 is effectuated by written consent without a meeting, the corporation
shall deliver a copy of sections 607.1301, 607.1302, and 607.1320 to each
shareholder simultaneously with any request for the shareholder's written
consent or, if such a request is not made, within 10 days after the date the
corporation received written consents without a meeting from the requisite
number of shareholders necessary to authorize the action.
(2) Within 10 days after the shareholders' authorization date, the
corporation shall give written notice of such authorization or consent or
adoption of the plan of merger, as the case may be, to each shareholder who
filed a notice of intent to demand payment for his or her shares pursuant to
paragraph (1)(a) or, in the case of action authorized by written consent, to
each shareholder, excepting any who voted for, or consented in writing to, the
proposed action.
H-2
<PAGE> 337
(3) Within 20 days after the giving of notice to him or her, any
shareholder who elects to dissent shall file with the corporation a notice of
such election, stating the shareholder's name and address, the number, classes,
and series of shares as to which he or she dissents, and a demand for payment of
the fair value of his or her shares. Any shareholder failing to file such
election to dissent within the period set forth shall be bound by the terms of
the proposed corporate action. Any shareholder filing an election to dissent
shall deposit his or her certificates for certificated shares with the
corporation simultaneously with the filing of the election to dissent. The
corporation may restrict the transfer of uncertificated shares from the date the
shareholder's election to dissent is filed with the corporation.
(4) Upon filing a notice of election to dissent, the shareholder shall
thereafter be entitled only to payment as provided in this section and shall not
be entitled to vote or to exercise any other rights of a shareholder. A notice
of election may be withdrawn in writing by the shareholder at any time before an
offer is made by the corporation, as provided in subsection (5), to pay for his
or her shares. After such offer, no such notice of election may be withdrawn
unless the corporation consents thereto. However, the right of such shareholder
to be paid the fair value of his or her shares shall cease, and the shareholder
shall be reinstated to have all his or her rights as a shareholder as of the
filing of his or her notice of election, including any intervening preemptive
rights and the right to payment of any intervening dividend or other
distribution or, if any such rights have expired or any such dividend or
distribution other than in cash has been completed, in lieu thereof, at the
election of the corporation, the fair value thereof in cash as determined by the
board as of the time of such expiration or completion, but without prejudice
otherwise to any corporate proceedings that may have been taken in the interim,
if:
(a) Such demand is withdrawn as provided in this section;
(b) The proposed corporate action is abandoned or rescinded or the
shareholders revoke the authority to effect such action;
(c) No demand or petition for the determination of fair value by a
court has been made or filed within the time provided in this section; or
(d) A court of competent jurisdiction determines that such shareholder
is not entitled to the relief provided by this section.
(5) Within 10 days after the expiration of the period in which shareholders
may file their notices of election to dissent, or within 10 days after such
corporate action is effected, whichever is later (but in no case later than 90
days from the shareholders' authorization date), the corporation shall make a
written offer to each dissenting shareholder who has made demand as provided in
this section to pay an amount the corporation estimates to be the fair value for
such shares. If the corporate action has not been consummated before the
expiration of the 90-day period after the shareholders' authorization date, the
offer may be made conditional upon the consummation of such action. Such notice
and offer shall be accompanied by:
(a) A balance sheet of the corporation, the shares of which the
dissenting shareholder holds, as of the latest available date and not more
than 12 months prior to the making of such offer; and
(b) A profit and loss statement of such corporation for the 12-month
period ended on the date of such balance sheet or, if the corporation was
not in existence throughout such 12-month period, for the portion thereof
during which it was in existence.
(6) If within 30 days after the making of such offer any shareholder
accepts the same, payment for his or her shares shall be made within 90 days
after the making of such offer or the consummation of the proposed action,
whichever is later. Upon payment of the agreed value, the dissenting shareholder
shall cease to have any interest in such shares.
(7) If the corporation fails to make such offer within the period specified
therefor in subsection (5) or if it makes the offer and any dissenting
shareholder or shareholders fail to accept the same within the period of 30 days
thereafter, then the corporation, within 30 days after receipt of written demand
from any dissenting shareholder given within 60 days after the date on which
such corporate action was effected, shall, or at its election at any time within
such period of 60 days may, file an action in any court of competent
jurisdiction in the county in this state where the registered office of the
corporation is located requesting that the fair value of
H-3
<PAGE> 338
such shares be determined. The court shall also determine whether each
dissenting shareholder, as to whom the corporation requests the court to make
such determination, is entitled to receive payment for his or her shares. If the
corporation fails to institute the proceeding as herein provided, any dissenting
shareholder may do so in the name of the corporation. All dissenting
shareholders (whether or not residents of this state), other than shareholders
who have agreed with the corporation as to the value of their shares, shall be
made parties to the proceeding as an action against their shares. The
corporation shall serve a copy of the initial pleading in such proceeding upon
each dissenting shareholder who is a resident of this state in the manner
provided by law for the service of a summons and complaint and upon each
nonresident dissenting shareholder either by registered or certified mail and
publication or in such other manner as is permitted by law. The jurisdiction of
the court is plenary and exclusive. All shareholders who are proper parties to
the proceeding are entitled to judgment against the corporation for the amount
of the fair value of their shares. The court may, if it so elects, appoint one
or more persons as appraisers to receive evidence and recommend a decision on
the question of fair value. The appraisers shall have such power and authority
as is specified in the order of their appointment or an amendment thereof. The
corporation shall pay each dissenting shareholder the amount found to be due him
or her within 10 days after final determination of the proceedings. Upon payment
of the judgment, the dissenting shareholder shall cease to have any interest in
such shares.
(8) The judgment may, at the discretion of the court, include a fair rate
of interest, to be determined by the court.
(9) The costs and expenses of any such proceeding shall be determined by
the court and shall be assessed against the corporation, but all or any part of
such costs and expenses may be apportioned and assessed as the court deems
equitable against any or all of the dissenting shareholders who are parties to
the proceeding, to whom the corporation has made an offer to pay for the shares,
if the court finds that the action of such shareholders in failing to accept
such offer was arbitrary, vexatious, or not in good faith. Such expenses shall
include reasonable compensation for, and reasonable expenses of, the appraisers,
but shall exclude the fees and expenses of counsel for, and experts employed by,
any party. If the fair value of the shares, as determined, materially exceeds
the amount which the corporation offered to pay therefor or if no offer was
made, the court in its discretion may award to any shareholder who is a party to
the proceeding such sum as the court determines to be reasonable compensation to
any attorney or expert employed by the shareholder in the proceeding.
(10) Shares acquired by a corporation pursuant to payment of the agreed
value thereof or pursuant to payment of the judgment entered therefor, as
provided in this section, may be held and disposed of by such corporation as
authorized by unissued shares of the corporation, except that, in the case of a
merger, they may be held and disposed of as the plan of merger otherwise
provides. The shares of the surviving corporation into which the shares of such
dissenting shareholders would have been converted had they assented to the
merger shall have the status of authorized but unissued shares of the surviving
corporation.
H-4
<PAGE> 339
PROXY PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP PROXY
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE 1998 ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON WEDNESDAY,
JUNE 3, 1998
The Stockholder executing this Proxy appoints Victor T. Adamo, W. Peter
McCabe, M.D., and Isaac J. Powell, M.D., and each of them, each with full power
to appoint his substitute, attorneys and proxies to represent the Stockholder
and to vote and act with respect to all shares of common stock, no par value per
share, of Professionals Insurance Company Management Group ("Professionals
Group") that the Stockholder would be entitled to vote on all matters which come
before the 1998 Annual Meeting of Stockholders of Professionals Group referred
to above (the "Professionals Group Annual Meeting") and at any adjournment(s) or
postponement(s) of the Professionals Group Annual Meeting. The affirmative vote
of a majority of the shares represented at the Professionals Group Annual
Meeting may authorize the adjournment or postponement of the meeting; provided,
however, that no proxy which is voted against any proposal will be voted in
favor of adjournment or postponement to solicit further proxies for such
proposal.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF PROFESSIONALS
GROUP. IF THIS PROXY IS PROPERLY EXECUTED, THE SHARES OF PROFESSIONALS GROUP
COMMON STOCK REPRESENTED BY THIS PROXY WILL BE VOTED AS SPECIFIED. IF NO
SPECIFICATION IS MADE, SUCH SHARES WILL BE VOTED FOR THE ELECTION OF ALL OF THE
NOMINEES FOR DIRECTOR LISTED ABOVE, FOR THE APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT AND ALL OF THE TRANSACTIONS CONTEMPLATED THEREBY, AND FOR THE NAME
CHANGE AMENDMENT. THE SHARES OF PROFESSIONALS GROUP COMMON STOCK REPRESENTED BY
THIS PROXY WILL BE VOTED IN THE DISCRETION OF THE PROXIES ON ANY OTHER MATTERS
WHICH MAY COME BEFORE THE PROFESSIONALS GROUP ANNUAL MEETING.
PLEASE MARK, SIGN AND DATE THIS PROXY.
RETURN THIS PROXY PROMPTLY USING THE ENCLOSED POSTAGE PAID RETURN ENVELOPE
(Continued and to be signed on reverse side.)
<PAGE> 340
1.The election of four directors to the Board of Directors of Professionals
Group for three year terms expiring at the Annual Meeting of Stockholders to
be held in the year 2001 and upon the election and qualification of their
successors or upon their earlier resignation or removal, namely: Mr. R. Kevin
Clinton, John F. Dodge, Jr., Esq., H. Harvey Gass, M.D., and Ann F. Putallaz,
Ph.D.
YOUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR ALL DIRECTOR NOMINEES
LISTED ABOVE.
[ ] Vote for all nominees listed above.
[ ] Withhold authority to vote for all nominees listed above.
Instruction: To withhold authority for any nominee(s) listed above, list name(s)
of nominee(s) in the space below provided:
- -------------------------------------------------------------------------------
2.Approval and adoption of the First Amended and Restated Agreement and Plan of
Merger dated as of October 3, 1997, as amended (the "Merger Agreement"),
among Professionals Group, PICOM Insurance Company and Physicians Protective
Trust Fund ("PPTF"), and all of the transactions contemplated by the Merger
Agreement (including, without limitation, the issuance of shares of common
stock, no par value per share, of Professionals Group ("Professionals Group
Common Stock") to eligible members of PPTF).
YOUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THIS PROPOSAL.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3.Approval and adoption of an amendment to Article I of the First Amended and
Restated Articles of Incorporation of Professionals Group to change the name
of Professionals Group to "Professionals Group, Inc." (the "Name Change
Amendment").
YOUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THIS PROPOSAL.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
The undersigned Stockholder hereby (i) revokes any and all proxies
previously executed with respect to the Professionals Group Annual Meeting, and
(ii) acknowledges receipt of the Notice and Joint Proxy Statement/Prospectus for
the Professionals Group Annual Meeting.
Dated: , 1998
------------------------------
Signature
---------------------------------------------------
Title
-------------------------------------------------------
Signature
---------------------------------------------------
Please sign exactly as name appears on this proxy.
When shares are held by joint tenants, both should
sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full
title as such. If a corporation, please sign in full
corporate name by an authorized officer. If a
partnership, please sign in partnership name by
authorized person.
