<PAGE> 1
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, 1998
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 GROUP, INC.
(Exact name of registrant as specified in its charter)
Michigan 38-3273911
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
2600 Professionals Drive 48864
Okemos, Michigan (Zip Code)
(Address of principal executive offices)
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. |X|
The number of the registrant's shares of common stock, no par value per share,
outstanding as of March 15, 1999 was 8,383,924.
Based on the closing price of shares of the registrant's common stock as
reported on The Nasdaq Stock Market on March 15, 1999 ($26.125) the aggregate
market value of the shares of the registrant's common stock held by
non-affiliates of the registrant as of March 15, 1999 was $212,784,729.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Notice of Annual Meeting of Stockholders and Proxy
Statement for its 1999 Annual Meeting of Stockholders are incorporated by
reference in Part III hereof.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
PART I
<S> <C> <C>
Item 1. Business................................................................................... 1
General.................................................................................... 1
Products and Services...................................................................... 1
Marketing.................................................................................. 2
Underwriting............................................................................... 3
Claims Management.......................................................................... 3
Reserves and Losses........................................................................ 4
Investments................................................................................ 7
Reinsurance................................................................................ 8
Competition................................................................................ 10
Regulation................................................................................. 11
Subsidiaries............................................................................... 15
Employees.................................................................................. 16
Forward-Looking Statements................................................................. 16
Glossary of Selected Insurance Terms....................................................... 17
Item 2. Properties................................................................................. 18
Item 3. Legal Proceedings.......................................................................... 18
Item 4. Submission of Matters to a Vote of
Security Holders........................................................................ 18
Executive Officers of Registrant........................................................... 19
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters............................................................. 21
Item 6. Selected Financial Data.................................................................... 22
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................................... 25
Financial Condition........................................................................ 25
Results of Operations...................................................................... 27
Liquidity and Capital Resources............................................................ 32
Impact of Inflation and Changing Prices.................................................... 34
Reinsurance................................................................................ 34
Regulation................................................................................. 36
Effects of New Accounting Pronouncements................................................... 36
Year 2000 Compliance....................................................................... 37
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk....................................................................... 38
Item 8. Financial Statements and Supplementary Data................................................ 40
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.................................................. 76
PART III
Item 10. Directors and Executive Officers of
the Registrant.......................................................................... 76
Item 11. Executive Compensation..................................................................... 76
Item 12. Security Ownership of Certain Beneficial
Owners and Management................................................................... 76
</TABLE>
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<TABLE>
<S> <C> <C>
Item 13. Certain Relationships and Related Transactions............................................. 76
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K................................................................. 76
Signatures ........................................................................................ 81
</TABLE>
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PART I
Item 1. Business
General:
Professionals Group, Inc. (formerly, 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 $889.2 million and $848.0 million at December 31, 1998 and 1997,
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.
On July 1, 1998, Professionals Group consummated its merger with
Physicians Protective Trust Fund, a medical malpractice self-insurance trust
fund located in Coral Gables, Florida ("PPTF"). Pursuant to the merger
agreement, Professionals Group issued 4,087,525 shares of Professionals Group
common stock to the eligible members of PPTF. The transaction has been accounted
for as a "pooling of interests" business combination under generally accepted
accounting principles, whereby Professionals Group has carried forward to its
accounts the assets and liabilities of PPTF at their respective amounts as
reported by PPTF. As a result of this business combination, all prior period
financial information has been restated to reflect the combined operations of
Professionals Group and PPTF.
The Company has experienced significant growth as a result of
acquisitions and business combinations. The Company intends to continue to
pursue transactions of this type to the extent suitable candidates and
acceptable terms may be identified. The Company is unable to predict whether or
when any candidate for a transaction or business relationship will become
available or the likelihood that any transaction or relationship will be
completed.
The Company is organized and operates principally in the property and
casualty insurance industry and has three reportable segments-professional
liability lines property and casualty insurance, personal lines property and
casualty insurance (business assumed from Michigan Educational Employees Mutual
Insurance Company), and investment operations. Segment information, for which
results are regularly reviewed by Company management in making decisions about
resources to be allocated to the segments and assess their performance has been
disclosed in Note 19 to the Company's consolidated financial statements (see
"Item 8. Financial Statements and Supplementary Data").
Products and Services:
The Company primarily offers medical professional liability insurance
to physicians, surgeons, dentists, hospitals and other health care providers
through its wholly-owned subsidiary ProNational Insurance Company (formerly
PICOM Insurance Company), a stock insurance company incorporated under Michigan
law in 1980 ("ProNational"). 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.
ProNational, which is licensed to provide such insurance in 19 states, operates
primarily in Florida, Michigan, Illinois, Indiana, Kentucky, Ohio and
Pennsylvania. The Company has applied for licenses in 3 additional states. There
can be no assurances as to whether or when such licenses will be granted.
ProNational Casualty Company, a stock insurance company incorporated under the
laws of Illinois in 1994 and a wholly owned subsidiary of ProNational
("ProNational Casualty"), is licensed to provide such insurance in Illinois.
Effective July 1, 1997, ProNational 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."
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ProNational also assumes a small amount of lawyers professional
liability, worker's compensation and accident and health insurance from other
insurance companies. This assumed business is not significant to the Company's
overall assumed reinsurance program. See "Reinsurance."
ProNational and ProNational Casualty 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 shareholders.
Marketing:
The Company currently markets its insurance products primarily in
Florida, Michigan, Illinois, Indiana, Kentucky, Ohio and Pennsylvania.
The marketing of the Company's insurance products is conducted through
the Company's offices in Okemos, Michigan, Coral Gables, Florida, Lisle,
Illinois, Indianapolis, Indiana and Columbus, Ohio, and in cooperation 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. In the Florida market,
sales activities are primarily coordinated through direct employees of the
Company. In other markets, sales activities are primarily coordinated through
independent insurance agencies. The 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.
The following table indicates the percentage of the Company's premiums
that are written directly, and the percentage of the Company's premiums that are
written through independent insurance agencies:
% of Direct Premiums Written
----------------------------------------------------
Year Ended
December 31, Directly By Independent Agencies
------------ ----------------- -----------------------
1998 49% 51%
1997 57 43
1996 65 35
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For the years ended December 31, 1998, 1997 and 1996, the Company's top
ten independent insurance agencies accounted for approximately 27%, 28% and 24%,
respectively, 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 provide for
direct billing and collection of all premiums by the Company, provide for
specific commissions payable to the insurance agency, provide for arbitration in
the event of disputes, and 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 assesses the quality and pricing of the
risk, emphasizing 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.
Currently, the majority of medical professional liability policies
issued by the Company are "claims-made" policies, although approximately 10%, 7%
and 6% of the Company's direct medical professional liability premiums during
1998, 1997 and 1996, 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.")
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
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claim is also assigned to outside legal counsel selected by the Company and
specializing in professional liability claims. During 1998, approximately 70% of
the Company's claims were litigated and ultimately resolved through settlement,
dismissal or trial, and approximately 30% of the Company's claims were resolved
outside of the litigation process through pre-litigation 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 reserves based on its estimates of the future
amounts necessary to pay claims and expenses associated with investigation and
settlement of claims. These estimates consist of 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 LAE 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.
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The following table reconciles 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.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Balance, beginning of year $489,207 $501,512 $501,690
Less reinsurance balances
recoverable (80,431) (73,855) (53,264)
------- ------- -------
Net balance, beginning of
year 408,776 427,657 448,426
------- ------- -------
Incurred related to:
Current year 161,417 155,595 138,354
Prior years 9,623 (31,361) (13,593)
------- ------- -------
Total incurred 171,040 124,234 124,761
------- ------- -------
Loss and loss adjustment
expense reserves assumed -- -- 4,119
------- ------- -------
Paid related to:
Current year 26,157 19,679 16,567
Prior years 121,112 123,436 133,082
------- ------- -------
Total paid 147,269 143,115 149,649
------- ------- -------
Net balance, end of year 432,547 408,776 427,657
Plus reinsurance balances
recoverable 108,036 80,431 73,855
------- ------- -------
Balance, end of year $540,583 $489,207 $501,512
======== ======== ========
</TABLE>
The following table presents the development of the net liability of
undiscounted reserves for losses and LAE for the calendar years 1989 through
1998. (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 succeeding year,
followed by a line indicating the change from the original estimate to the most
current re-estimate.
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Analysis of Loss and Loss Adjustment Expense Reserve Development
(in thousands)
<TABLE>
<CAPTION>
December 31,
------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loss & LAE Reserves as
originally reported $310,601 $315,972 $336,907 $401,548 $427,254 $465,571 $501,690 $501,512 $489,207 $540,583
Less reinsurance 45,227 50,016 49,865 53,264 73,855 80,431 108,036
recoverable
Add pro forma change
to reflect elimination
of discount 41,161 32,781 27,839 16,568 12,616 12,310 - - - -
------ -------- -------- -------- -------- -------- -------- -------- -------- --------
Net liability - end of
year $351,762 $348,753 $364,746 $372,889 $389,854 $428,016 $448,426 $427,657 $408,776 $432,547
Cumulative paid as of:
One year later..... 76,275 75,671 93,668 95,487 105,882 124,644 133,082 123,436 121,112
Two years later.... 136,758 145,751 161,794 167,510 187,443 219,466 223,053 211,797
Three years later.. 183,465 188,545 206,119 215,932 239,956 263,515 281,534
Four years later... 205,978 212,083 231,551 244,286 258,242 297,344
Five years later... 220,754 226,977 246,433 254,020 280,113
Six years later.... 229,997 235,345 251,918 260,777
Seven years later.. 236,510 238,096 255,597
Eight years later.. 239,024 240,185
Nine years later... 240,532
Re-estimated net
liability as of:
End of year......... 351,762 348,753 364,746 372,889 389,854 428,016 448,426 427,657 408,776 432,547
One year later...... 327,362 331,263 335,227 344,978 368,231 409,022 434,810 396,296 418,399
Two years later..... 312,632 306,969 317,643 327,746 358,275 395,053 400,149 404,898
Three years later... 287,359 292,899 300,333 322,781 344,771 374,180 414,957
Four years later.... 276,585 273,572 300,030 311,978 327,943 374,167
Five years later.... 263,120 274,770 293,631 303,057 331,814
Six years later..... 266,334 268,343 287,939 298,185
Seven years later... 262,546 261,611 285,053
Eight years later... 262,522 263,834
Nine years later.... 260,587
Net cumulative
redundancy (deficiency) 91,175 84,919 79,693 74,704 58,040 53,849 33,469 22,759 (9,623)
</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 1989 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
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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. The
1997 year has negative reserve development which is mainly attributable to a
loss reserve charge recorded by the Company in 1998 to reflect actuarial
estimates and the application of the Company's reserving practices to the
Florida book of business acquired in July 1998.
The following table reconciles loss and LAE 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, 1998 and 1997.
Reconciliation of SAP Reserves with GAAP Reserves
(in thousands)
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------
1998 1997
---- ----
<S> <C> <C>
Loss and LAE reserves - SAP basis $432,547 $398,118
Add:
Discount....................................................... -- 10,658
Provision for reinsurance on unpaid
losses......................................................... 108,036 80,431
-------- --------
Loss and LAE reserves - GAAP basis.............................. $540,583 $489,207
======== ========
</TABLE>
For SAP reporting through 1997, loss reserves were discounted at a
three percent discount rate, as permitted by insurance regulatory authorities.
The Company eliminated the practice of discounting loss reserves for SAP
reporting during 1998. 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 managers select 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.
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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,
1998, only one of the rated securities in the Company's fixed income portfolio
was rated below investment grade (carrying value was $820,000). See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
As of December 31, 1998 and 1997, 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, as accumulated
other comprehensive income, and have no effect on net income. As of December 31,
1998 and 1997, the estimated fair value of fixed maturity securities exceeded
the aggregate amortized cost by $22.3 million and $14.2 million, respectively,
and stockholders' equity was increased by those amounts, reduced by $7.6 million
and $4.8 million, respectively, in deferred federal income taxes. The increase
in net unrealized gains was due to lower interest rates at year-end 1998 as
compared to year-end 1997. 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, 1998, a one hundred basis
point increase in market interest rates would decrease the value of this
portfolio by approximately 5.0 percent, whereas a one hundred basis point
decrease in market interest rates would increase the value of this portfolio by
approximately 5.0 percent.
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, 1998, the Company had 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), stop loss reinsurance (i.e., reinsurance in which the
Company has ceded to a reinsurer, and such reinsurer has assumed, all losses
incurred during a specific period of time in excess of 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 stop loss reinsurance
agreements. As of December 31, 1998, the maximum current net retention on
business generated by Professionals Group's insurance subsidiaries, subject to
certain adjustments, was $500,000. Individual losses
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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 $20 million, subject to a
$500,000 retention for each claim. See also Note 5 to the Company's consolidated
financial statements.
The Company has three stop loss reinsurance agreements. One provides
coverage on Illinois losses and was purchased in calendar year 1995 to protect
against potential future adverse development. This stop loss contract covered up
to $4.1 million of Illinois loss payments in excess of $7.8 million. The second
provides loss ratio coverage and was purchased in calendar year 1996 to assist
in achieving a targeted premium to surplus leverage ratio. This loss ratio
contract covered 43% of the aggregate net losses on the Florida book of business
in excess of $53.0 million not to exceed $16.9 million. The third provides
coverage on Florida indemnity reserves only and was purchased in calendar year
1998 to protect against potential future adverse development. This stop loss
contract covered up to $14.5 million of Florida indemnity payments in excess of
$140.5 million.
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 1998 and their respective
A.M. Best ratings as of December 31, 1998. No other single reinsurer's
percentage participation in 1998 exceeded 4% of total ceded reinsurance
premiums:
<TABLE>
<CAPTION>
% of 1998
Ceded 1998 Total Total Ceded
A.M. Best Reinsurance Ceded Premiums Premiums
Rating(1) Balances Written Written
--------- ----------- -------------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Underwriters Reinsurance Company............. A+ $ 4,125 $ - -
General Reinsurance Corporation.............. A++ 43,214 4,025 21.6%
TIG Reinsurance Company...................... A 13,843 2,859 15.4%
PMA Reinsurance Corporation.................. A+ 7,172 2,116 11.4%
Scandinavian Reinsurance Company............. A -- 2,000 10.8%
Continental Casualty Company................. A 25,086 1,970 10.6%
Constitution Reinsurance Corporation......... A+ 1,346 1,365 7.3%
Transatlantic Reinsurance Company............ A++ 929 962 5.2%
Odyssey Reinsurance Corporation.............. A- 3,350 962 5.2%
Other........................................ -- 4,974 2,348 12.5%
--------- ----- -------
$ 104,039 $18,607 100.0%
- ------------------------------------------------- ========= ======= ======
</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, 1998 and 1997, the Company concluded that
there was no material exposure to uncollectible reinsurance balances payable to
the Company by its reinsurers. The Company has not
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<PAGE> 13
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.
Effective July 1, 1997, ProNational 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 were $42.7 million and $20.1 million and the assumed losses and
loss adjustment expenses incurred in connection with the MEEMIC reinsurance
agreement were $28.0 million and $13.1 million, respectively, for the years
ended December 31, 1998 and 1997.
The Company also assumes a small amount of lawyers professional
liability, worker's compensation and accident and health insurance from other
insurance companies. This assumed business is not significant to the Company's
overall assumed reinsurance program.
Competition:
The Company competes with numerous insurance companies and various
self-insurance mechanisms. Principal competitors in Florida and the Midwest
consist of local or regional insurance companies (including Florida Physicians
Insurance Company, Mutual Insurance Corporation of America, Illinois State
Medical Inter-Insurance Exchange and Michigan Hospital Association Insurance
Company) and national insurance companies (including The St. Paul Companies, The
Medical Protective Company, American International Group, MMI Companies,
Cincinnati Insurance Company and CNA Insurance Companies). Many 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 by
emphasizing a high level of customer service to insureds, and, especially in its
Midwest markets, 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 medical malpractice market share in a
very competitive insurance market. 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 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.
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<PAGE> 14
Regulation:
General. Insurance holding companies and insurance companies are
extensively regulated. Such regulation has had significant effects 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.
Insurance companies are subject to regulation by government agencies in
the states in which they are licensed. ProNational is domiciled in Michigan and
is licensed as a property and casualty insurer in 19 states. ProNational
Casualty is domiciled and licensed as a property and casualty insurer in
Illinois. The nature and extent of such regulation varies from jurisdiction to
jurisdiction, but typically involves 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 shareholders.
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 ProNational was based on its December 31, 1995 statutory
financial statements and a report was issued on October 15, 1996. The last
periodic examination of ProNational Casualty was based on its December 31, 1997
statutory financial statements and a report was issued on July 28, 1998. 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. ProNational underwent a
market conduct examination in Florida during 1998. ProNational Casualty has not
undergone a market conduct examination. Neither ProNational nor ProNational
Casualty was required to make any financial adjustments or change any market
conduct procedures as a result of any of these examinations.
ProNational 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, claim 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.
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<PAGE> 15
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 ProNational 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,
ProNational 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 ProNational 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. ProNational 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 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 both 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
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<PAGE> 16
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 1998, 1997 or 1996. 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. ProNational does not currently offer any of these
insurance lines directly, but does provide reinsurance to MEEMIC, which does
offer such insurance lines. Moreover, ProNational 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 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
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:
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<PAGE> 17
Ratio of Total Adjusted Capital
to Authorized Control Level RBC
Level (Less Than or Equal To)
----- --------------------------------
Company action level 2.0
Regulatory action level 1.5
Authorized control level 1.0
Mandatory control level 0.7
ProNational and ProNational Casualty have calculated their ratios of
total adjusted capital to authorized control level RBC and each were in excess
of 5:1 at December 31, 1998. At December 31, 1998, ProNational's total adjusted
capital was $193.9 million, and its authorized control level RBC was $37.2
million, and ProNational Casualty's total adjusted capital was $10.6 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 and 1996, ProNational did not have any ratios which varied from
the "usual value" range.
In 1998, ProNational had one ratio which varied from the "usual value"
range as follows:
<TABLE>
<CAPTION>
Ratio Usual Range ProNational Value
----- ----------- -----------------
<S> <C> <C>
Change in surplus (10%) to 50% (11%)
</TABLE>
The 1998 "unusual value" for ProNational was mainly caused by a $25.6
million loss reserve charge (See "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations - Financial Condition") and
ProNational's elimination of its practice of discounting loss reserves for SAP
reporting during 1998.
In both 1997 and 1996, ProNational Casualty had two ratios which varied
from the "usual value" range. In 1998, ProNational Casualty did not have any
ratios which varied from the "usual value" range.
At present, no inquiries have been received from any state insurance
commissioner as a result of the "unusual values" for ProNational or ProNational
Casualty.
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<PAGE> 18
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), the taxation of insurers
and reinsurers, minimum levels of liability insurance and safety regulations.
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 ProNational could
be at a competitive disadvantage because 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, three
indirect wholly-owned subsidiaries and one direct 80% owned subsidiary. The
direct wholly-owned subsidiaries are: ProNational, PICOM Insurance Agency, Inc.
("PIA"), Professionals Group Services Corporation ("PGSC") and American
Insurance Management Corporation ("AIMC"). The indirect wholly-owned entities,
all of which are wholly-owned subsidiaries of ProNational, are: PICOM Claims
Services Corporation ("PCSC"), ProNational Casualty, and Physicians Protective
Plan, Inc. ("PPP"). The direct 80% owned subsidiary is MedAdvantage, Inc. ("Med-
Advantage").
ProNational is a stock, property and casualty insurer incorporated
under the laws of the State of Michigan in 1980. ProNational primarily offers
professional liability insurance for physicians, surgeons, dentists, hospitals
and other health care providers and acts as a reinsurer to MEEMIC. The Company
is licensed to provide such insurance products in 19 states and currently
provides such insurance in Michigan, Florida, Illinois, Indiana, Kentucky, Ohio
and Pennsylvania. PIA is an inactive Michigan insurance agency incorporated
under the laws of the State of Michigan on March 31, 1981. PGSC is a business
corporation incorporated under the laws of the State of Michigan on May 29, 1986
that administers certain benefit plans for ProNational employees. AIMC is an
Indiana corporation that serves as the attorney-in-fact for
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<PAGE> 19
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
that is currently not issuing policies. MedAdvantage provides credentialing
verification services for medical service providers.
Employees:
The Company had 179 full-time employees and five part-time employees as
of December 31, 1998. 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:
We make forward-looking statements in this Annual Report on Form 10-K
and may make such statements in future filings with the SEC. We may also make
forward-looking statements in our press releases or other public or stockholder
communications. Our forward-looking statements, which are subject to risks and
uncertainties, include information about our expectations and possible or
assumed future results of our operations. When we use any of the words
"believes," "expects," "anticipates," "estimates" or similar expressions, we are
making forward-looking statements.
We claim the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995 for
all of our forward-looking statements. While we believe that our forward-looking
statements are reasonable, you should not place undue reliance on any such
forward-looking statements, which speak only as of the date made. You should
understand that a number of factors, all of which are difficult to predict and
many of which are beyond our control, could affect our future results and
performance and any other expectations expressed in our forward-looking
statements. This could cause our actual results, performance and experience to
differ materially from those expressed in our forward-looking statements.
Factors that might cause such a difference include the following:
- - significantly increased industry consolidation and competition that
causes lower premiums and reduced profitability;
- - inflation and changes in the interest rate environment that increase
our loss costs, or reduce the fair value of our financial instruments,
or otherwise adversely impact our operations;
- - underwriting losses on the risks we insure are greater than we expect;
- - general economic conditions, either nationally or in our market areas,
that are worse than expected;
- - adverse changes in the securities markets;
- - legislative or regulatory changes that adversely affect our business;
- - restrictions on our ability to achieve continued growth through
successful identification and completion of acquisitions or business
combinations;
- - restrictions on our ability to execute our strategy of geographic and
product diversification;
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<PAGE> 20
- - restrictions on our ability to enter new markets successfully and
capitalize on growth opportunities; and
- - technological changes, including "Year 2000" data systems compliance
issues, that are more difficult or expensive than we expect.
We do not undertake, and we specifically disclaim, any obligation to
update any forward-looking statements to reflect the occurrence of unanticipated
events or circumstances after the date of such statements.
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
associated with a given policy 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.
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.
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<PAGE> 21
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 Financial Strength
Ratings are divided into "Secure Range" and "Vulnerable Range" groupings as
follows. Secure Range: AAA (Extremely Strong); AA (Very Strong); A (Strong);
and BBB (Good). Vulnerable Range: BB (Marginal); B (Weak); CCC (Very Weak);
CC (Extremely Weak) 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 practices.
Stop Loss reinsurance. A form of reinsurance in which the insurer
cedes to a reinsurer, and such reinsurer assumes, all losses incurred during a
specific period of time in excess of a predetermined limit.
Item 2. Properties
The Company owns its principal executive offices in Okemos, Michigan.
The Company also owns, primarily for investment purposes, an office building in
Williamston, Michigan. The Company leases office facilities in Coral Gables, Ft.
Lauderdale, Jacksonville, Orlando and Tampa, Florida, 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 1998.
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<PAGE> 22
Executive Officers of Registrant:
As of March 15, 1999, 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>
Victor T. Adamo, Esq., CPCU 51 Chairman, President and Chief
Executive Officer
R. Kevin Clinton, FCAS, MAAA 44 Chief Financial Officer
Annette E. Flood, Esq., R.N. 40 Vice President and Secretary
John F. Lang, CPA 34 Vice President, Treasurer and
Chief Accounting Officer
Joseph O. Marker, FCAS, MAAA 50 Chief Actuary
William P. Sabados 48 Chief Information Officer
Steven L. Salman, Esq. 51 Chief Operating Officer
</TABLE>
Victor T. Adamo, Esq., has been the President and Chief Executive
Officer and a director of Professionals Group since 1996, and the Chairman of
Professionals Group since October 1998. Mr. Adamo has been a director of
ProNational since 1990, and was its Chief Executive Officer from 1987 to 1998.
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
ProNational, Mr. Adamo was in private legal practice from 1975 to 1985 and
represented ProNational in corporate legal matters. Mr. Adamo is a graduate of
The University of Michigan and New York University School of Law and is a
Chartered Property Casualty Underwriter (CPCU). Mr. Adamo, Mr. R. Kevin Clinton
and Mr. Steven L. Salman 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
(MEEMIC), since May 1997. Mr. Clinton has been the 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
ProNational from 1990 through June 1997. Prior to becoming an officer of
ProNational, Mr. Clinton was ProNational's consulting actuary from 1986 to 1990.
He formerly served as 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 an M.A. in actuarial
science. Mr. Clinton, Mr. Victor T. Adamo and Mr.
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<PAGE> 23
Steven L. Salman 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 a Vice President and Secretary
of Professionals Group since 1996. Ms. Flood is Vice President, Corporate
Secretary and Legal Counsel of ProNational. Ms. Flood has been a director of
MEEMIC since May 1997. Prior to joining ProNational in 1992, Ms. Flood was
employed by Lansing General Hospital, Lansing, Michigan, from 1986 to 1992, most
recently in the capacity of Vice President, Legal Services and Quality
Management. Prior to joining the Lansing General Hospital staff, Ms. Flood was
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.
John F. Lang, has been a Vice President, Treasurer and Chief Accounting
Officer of Professionals Group since July 1998. Mr. Lang served as Treasurer of
ProNational from August 1996 through June 1998 and as Chief Financial Officer of
ProNational from July 1997 through June 1998. Prior to joining ProNational in
1996, Mr. Lang was a senior manager on the audit staff of Coopers & Lybrand LLP
where he was employed since 1986. Mr. Lang is a CPA and has a B.S.B.A. degree in
accounting from Central Michigan University.
Joseph O. Marker, FCAS, MAAA, has been the Chief Actuary of
Professionals Group since March 1999. Mr. Marker is also Senior Vice President
and Chief Actuary of ProNational. Prior to joining Professionals Group, Mr.
Marker served in an actuarial capacity for Allmerica Financial Corporation in
Howell, Michigan from 1986 through 1999, most recently as Vice President,
Actuarial. Prior to 1986, Mr. Marker was an actuary for Westfield Companies and
St. Paul Companies. Mr. Marker is a Fellow of the Casualty Actuarial Society and
a member of the American Academy of Actuaries. Mr. Marker is a graduate of the
University of Michigan where he received a Bachelors degree in mathematics and a
Masters degree from the University of Minnesota in Mathematics.
William P. Sabados, has been the Chief Information Officer of
Professionals Group since July 1998. Mr. Sabados is also Chief Information
Officer of ProNational. Mr. Sabados has been a Vice President and Chief
Information Officer of MEEMIC since February 1997. From 1987 to 1997, Mr.
Sabados was Vice President of Information Systems for the Investor Insurance
Group. Prior to that, Mr. Sabados served as Director of Membership/Billing for
Blue Cross/Blue Shield North East Ohio in Cleveland, Ohio since 1984. Mr.
Sabados is a graduate of David M. Meyers College.
Steven L. Salman, Esq., has been the Chief Operating Officer and a
director of Professionals Group, and the President and Chief Executive Officer
of ProNational, since July 1, 1998. He was the President and Chief Executive
Officer of PPTF from October 1, 1996 to June 30, 1998. 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
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<PAGE> 24
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. Mr. Salman, Mr. Victor T. Adamo and Mr. R. Kevin
Clinton are the only directors of Professionals Group who are also employees of
Professionals Group or a subsidiary of Professionals Group.
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 on The Nasdaq Stock Market under the symbol "PICM" since
September 3, 1996. Prior to Professionals Group's formation, the stock traded
under the name of PICOM Insurance Company on The Nasdaq Stock Market, which
also used the symbol "PICM".
The table below sets forth the high and low sale prices for the common
stock, no par value per share, of Professionals Group on 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 23, 1998 had occurred
prior to such quarters. 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.
<TABLE>
<CAPTION>
Common Stock
------------
High Low
---- ---
1998
- ----
<S> <C> <C>
First Quarter.................................................................. $ 40.45 $ 35.23
Second Quarter................................................................. 38.64 30.23
Third Quarter.................................................................. 34.55 21.93
Fourth Quarter................................................................. 35.25 22.73
1997
- ----
First Quarter.................................................................. $ 22.95 $ 18.18
Second Quarter................................................................. 26.82 20.00
Third Quarter.................................................................. 36.36 24.55
Fourth Quarter................................................................. 40.45 29.77
</TABLE>
As of March 15, 1999 there were 4,906 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
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<PAGE> 25
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 December 5, 1998 which was
paid on December 23, 1998 to stockholders of record as of December 7, 1998.
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
ProNational). The ability of those subsidiaries to pay dividends is subject to
regulatory restrictions that generally 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. (See "Item 1. Business - Regulation -
Restrictions on Dividends.") As of January 1, 1999, approximately $19.4 million
of dividends could be paid by Professionals Group's direct insurance
subsidiaries without prior regulatory approval. In 1998, 1997 and 1996,
Professionals Group's insurance subsidiaries paid cash dividends aggregating
$12.3 million, $4.7 million and $3.5 million, respectively, to Professionals
Group. 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. As a result
of the "pooling of interests" business combination with PPTF, all prior period
financial data has been restated to reflect the combined operations of
Professionals Group and PPTF (See also Note 1 to the Company's consolidated
financial statements.). (All such information is in thousands, except per share
data.)
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<PAGE> 26
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income Statement Data(1):
Gross premiums written $ 162,529 $ 181,170 $ 154,739 $ 171,413 $ 154,417
Net premiums written 143,922 163,014 124,183 155,658 148,081
Net premiums earned 153,449 132,026 125,406 156,191 147,793
Net investment income 38,443 39,521 39,051 37,779 33,397
Total revenues and other income 203,669 181,542 170,106 199,352 187,883
Losses and loss adjustment expenses(2)(4) 171,040 124,234 124,761 156,154 156,880
Total expenses 213,032 151,273 144,043 173,774 173,694
Income (loss) before cumulative effect of change in
accounting method (3,231) 22,428 18,961 18,902 11,533
Cumulative effect of change in accounting
method(2) -- -- -- (8,125) --
--------- --------- --------- --------- ---------
Net income (loss) ($ 3,231) $ 22,428 $ 18,961 $ 10,777 $ 11,533
========= ========= ========= ========= =========
Weighted average shares outstanding(3) 8,369 8,353 8,334 8,280 8,404
========= ========= ========= ========= =========
Weighted average shares outstanding -
assuming dilution(3) 8,369 8,355 8,334 8,280 8,404
========= ========= ========= ========= =========
Earnings per share(3):
Income (loss) before cumulative effect of change in
accounting method ($ 0.39) $ 2.68 $ 2.28 $ 2.28 $ 1.37
Cumulative effect of change in accounting
method(2) -- -- -- (0.98) --
--------- --------- --------- --------- ---------
Net income (loss) per common share ($ 0.39) $ 2.68 $ 2.28 $ 1.30 $ 1.37
========= ========= ========= ========= =========
Net income (loss) per common share -
assuming dilution ($ 0.39) $ 2.68 $ 2.28 $ 1.30 $ 1.37
========= ========= ========= ========= =========
Cash dividends declared per share $ -- $ -- $ -- $ -- $ --
========= ========= ========= ======== =========
As of December 31,
-----------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Balance Sheet Data:
Total investments $ 691,033 $ 678,642 $ 644,992 $ 664,656 $ 567,264
Total assets 889,211 847,990 774,904 768,828 696,975
Loss and loss adjustment expense reserves(2) 540,583 489,207 501,512 501,690 465,571
Reserve for extended reporting period claims 26,674 25,628 23,420 22,017 19,927
Unearned premiums 48,201 56,047 21,945 23,122 24,557
Long-term debt 20,000 22,500 -- -- --
Stockholders' equity 222,097 219,880 190,157 180,327 142,052
Book value per common share(3) 26.49 26.32 22.76 21.78 16.90
Years Ended December 31,
-----------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Selected Statutory Data:
Loss ratio(4) 119.1% 95.8% 99.9% 101.8% 106.2%
Expense ratio(1) 24.6% 14.6% 12.0% 9.9% 9.3%
--------- --------- --------- --------- ---------
Combined ratio 143.7% 110.4% 111.9% 111.7% 115.5%
========= ========= ========= ========= =========
Statutory surplus $ 193,894 $ 221,487 $ 185,648 $ 159,376 $ 133,489
Net premiums written to statutory surplus .74x .74x .67x .98x 1.11x
Selected GAAP Data:
GAAP combined ratio(4) 137.1% 113.7% 114.9% 111.3% 117.5%
========= ========= ========= ========= =========
- --------------------------------
</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 Michigan
Educational Employees Mutual
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<PAGE> 27
Insurance Company, a Michigan mutual
insurance company ("MEEMIC"). The business assumed from MEEMIC has
increased the expense ratio because of the higher ceding commission
associated with this personal lines business.
(2) The Company discounted loss and loss adjustment expense reserves
through 1994. 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 23, 1998, December 16, 1996 and December 1, 1994,
respectively.
(4) In 1995 the Company reduced its estimated liability for loss and loss
adjustment expense reserves by $12.3 million for redundancies. In 1998
the Company increased its estimated liability for loss and loss
adjustment expense reserves by $25.6 million to reflect actuarial
estimates and the application of the Company's reserving practices to
its Florida book of business. The ratio includes the increase in
reserve for extended reporting period claims.
-24-
<PAGE> 28
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. The following discussion of the financial condition
and results of operations of the Company contains certain forward-looking
statements relating to anticipated future financial conditions and operating
results of the Company and its current business plans. In the future, the
financial condition and operating results of the Company could differ materially
from those discussed herein and its current business plans could be altered in
response to market conditions and other factors beyond the Company's control.
Important factors that could cause or contribute to such differences or changes
include those discussed elsewhere in this report (e.g., see the disclosures
under "Item 1. Business -- Forward Looking Statements").
Financial Condition:
On July 1, 1998, Professionals Group consummated its merger with
Physicians Protective Trust Fund, a medical malpractice self-insurance trust
fund located in Coral Gables, Florida ("PPTF"). The transaction has been
accounted for as a "pooling of interests" business combination under generally
accepted accounting principles, whereby Professionals Group has carried forward
to its accounts the assets and liabilities of PPTF at their respective amounts
as reported by PPTF. As a result of this business combination, all prior period
financial information has been restated to reflect the combined operations of
Professionals Group and PPTF (see also Note 1 to the Company's consolidated
financial statements.)
The Company's total assets were $889.2 million and $848.0 million as of
December 31, 1998 and 1997, respectively, an increase of $41.2 million, or 4.9%.
The increase in total assets as of December 31, 1998 was due mainly to increases
in invested assets and reinsurance balances, which was offset somewhat by a
decrease in premiums due from policyholders. Reinsurance balances have increased
mainly due to increased business in Ohio and Illinois which have higher limits,
therefore, the reinsurance recoverables have increased as well. Premiums due
from policyholders has decreased because during the last half of 1997,
approximately half of the Company's Florida policyholders were issued policies
with a one-time coverage term of eighteen months as part of a plan to stagger
renewals more evenly throughout the year. Prior to 1997 all Florida policies
were issued on a calendar year basis with all policies renewing January 1st of
each year. The issuance of eighteen month policies in 1997 resulted in a one
time increase in premiums written (and premiums due from policyholders) for
1997. An offsetting decrease in premiums written resulted in 1998 because
these policies will not be renewed until 1999.
As of December 31, 1998 and 1997, the Company had invested assets of
$691.0 million and $678.6 million, respectively. This 1.8% increase in invested
assets resulted mainly from a $6.7 million increase in unrealized gains on the
investment portfolio and cash flows from operations. Invested assets represented
approximately 78% and 80% of the Company's total assets as of December 31, 1998
and 1997, respectively.
As of December 31, 1998 and 1997, the Company's investment portfolio
was dominated by fixed maturity securities and primarily consisted of U.S.
government and agency bonds, high-
-25-
<PAGE> 29
quality corporate bonds, mortgage-backed securities, redeemable preferred
stocks, and tax-exempt U.S. municipal bonds. As of December 31, 1998 and 1997,
these fixed maturity securities aggregated $669.1 million and $603.4 million,
respectively. Approximately $633.0 million of the fixed maturity portfolio was
comprised of rated securities of which 99.9% were rated investment grade or
better at December 31, 1998. Approximately 59.5% of the non-rated fixed maturity
portfolio was comprised of the surplus note investment in MEEMIC. (See
"Liquidity and Capital Resources.")
The following table provides a profile of the Company's fixed maturity
portfolio by rating as of December 31, 1998:
<TABLE>
<CAPTION>
Fair Value (As Reflected Percent of
S&P/Moody's Rating on Balance Sheet Portfolio
- ------------------ ---------------- ---------
<S> <C> <C>
(Amounts in thousands)
AAA/Aaa (including U.S. Governments of
$77,234) $ 363,407 54.3%
AA/Aa 142,491 21.3%
A/A 117,169 17.5%
BBB/Baa 9,101 1.4%
Not rated 36,130 5.4%
All other 820 0.1%
--------- -------
Total $ 669,118 100.0%
========= =======
</TABLE>
All fixed maturity securities are classified as available-for-sale and
are carried at fair value as of December 31, 1998 and 1997. As a result, the
Company's fixed maturity investment portfolio is sensitive to interest rate
changes. As of December 31, 1998 and 1997, the fixed maturity portfolio had net
unrealized gains of approximately $22.3 million and $14.2 million, respectively.
The increase in net unrealized gains was due to lower interest rates at year-end
1998 compared to year-end 1997. As of December 31, 1998, the fixed maturity
portfolio had a weighted average modified duration of approximately 5.0 years. A
one hundred basis point increase in market interest rates would decrease the
value of this portfolio by approximately 5.0 percent, whereas a one hundred
basis point decrease in market interest rates would increase the value of this
portfolio by approximately 5.0 percent.
As of December 31, 1998 and 1997, equity securities totaled $3.9
million and $28.4 million, respectively, and primarily consisted of high-quality
U.S. corporate common stocks as well as 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. The U.S. corporate common stock portfolio was reduced in 1998, at a
net gain of approximately $3.4 million, due to the Company's desire to maximize
after tax
-26-
<PAGE> 30
investment yield in 1998 and future years. As of December 31, 1998 and 1997,
equity securities had net unrealized gains (losses) of ($0.1 million) and $1.2
million, respectively.
Loss and loss adjustment expense reserves represented approximately 81%
and 78% of the Company's consolidated liabilities at December 31, 1998 and 1997,
respectively. These reserves are determined on the basis of individual claims
and actuarially determined estimates of future losses based on the Company's
past loss experience and projections as to future claims frequency, severity,
inflationary trends and settlement patterns. Estimating professional liability
reserves is a complex process which is heavily dependent on judgment and
involves many uncertainties. As a result, reserve estimates may vary
significantly from the eventual outcome. It has been the practice of the Company
to establish its loss and loss adjustment expense reserves conservatively, as it
relates to immaturely developed accident years, to minimize potential
uncertainties. The Company's carried reserves have been established within the
range of acceptable values periodically 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.
Loss and loss adjustment expense reserves increased by $51.4 million,
or 10.5%, to $540.6 million at December 31, 1998 from $489.2 million at December
31, 1997. This increase was mainly due to increased business in Ohio and
Illinois, as well as a $25.6 million increase in loss reserves to reflect
actuarial estimates and the application of the Company's reserving practices to
the Florida book of business it acquired from PPTF. There has also been an $8.2
million increase in the reserves assumed from MEEMIC to $14.0 million at
December 31, 1998, from $5.8 million at December 31, 1997 as the business
assumed from MEEMIC continues to increase.
Unearned premiums decreased by $7.8 million, or 14.0%, to $48.2 million
at December 31, 1998 from $56.0 million at December 31, 1997. This decrease was
mainly due to the run-off of Florida policies issued in the last half of 1997
that had a term of eighteen months to convert policy renewal dates from a common
renewal date of January 1st (as discussed previously).
Shareholders' equity increased by 1.0% to $222.1 million at December
31, 1998, compared to $219.9 million at December 31, 1997. The increase in
shareholders' equity was due to a net loss of $3.2 million, primarily as a
result of a loss reserve charge and merger expenses (see "Results of Operations
- -- Year Ended December 31, 1998 Compared to Year Ended December 31, 1997.") This
decrease was offset by an increase in accumulated other comprehensive income,
consisting of unrealized gains on the investment portfolio of $4.4 million and
other increases in shareholders' equity of $1.0 million during the year ended
December 31, 1998. The Company expects to use retained earnings to increase its
capital base and finance future growth and, therefore, there can be no assurance
as to any future cash dividends by the Company.
Results of Operations -- Year Ended December 31, 1998 Compared to Year Ended
December 31, 1997:
Total net premiums written were $143.9 million for the year ended
December 31, 1998, a decrease of $19.1 million, or 11.7%, compared to net
premiums written of $163.0 million for the
-27-
<PAGE> 31
year ended December 31, 1997. This decrease was mainly due to the Florida
policies issued in the last half of 1997 that had a term of eighteen months to
convert policy renewal dates from a common renewal date of January 1st (as
discussed previously). This decrease was offset somewhat by an increase in
assumed reinsurance premiums from MEEMIC.
Total net premiums earned were $153.4 million for 1998, an increase of
$21.4 million, or 16.2%, compared to net premiums earned of $132.0 million for
1997. Professional liability related net premiums earned were $110.7 million in
1998, a decrease of $1.1 million, or 1.0%, compared to professional liability
net premiums earned of $111.9 million in 1997. The decrease in professional
liability net premiums earned was primarily due to lower premiums earned in
Michigan and Florida resulting from price-based competition. This decrease in
professional liability net premiums earned was offset somewhat by increased
business in Illinois and Ohio, expansion of business into Pennsylvania and an
increase in the Company's net retention from $250,000 to $500,000, effective
January 1, 1998. The earned reinsurance premiums assumed from MEEMIC were $42.7
million in 1998, an increase of $22.6 million, or 112.2%, compared to net
premiums earned of $20.1 million in 1997 (the MEEMIC reinsurance agreement was
not in force during the first six months of 1997.)
During 1998 and 1997, the Company continued to balance its need for
rate adjustments with the goal of maintaining medical malpractice market share
in very competitive environments in Florida, Michigan, Illinois, Indiana, Ohio
and Pennsylvania. 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 in the long run.
Net investment income, excluding net realized investment gains, was
$38.4 million for 1998, a decrease of $1.1 million, or 2.7%, compared to net
investment income of $39.5 million for 1997. The decrease in net investment
income mainly resulted from a reduction in current yield because of declining
interest rates (e.g., as investments mature, the cash generated is reinvested in
lower yielding securities because of the declining interest rate environment).
The weighted average tax equivalent book yield of the fixed maturity portfolio
was 6.9% and 7.1% as of December 31, 1998 and 1997, respectively. Net realized
investment gains were $4.8 million and $3.9 million during 1998 and 1997,
respectively.
Reinsurance experience refunds were $3.1 million and $4.2 million in
1998 and 1997, respectively. Through 1995, reinsurance agreements on the Florida
business included profit sharing provisions whereby premiums were refunded to
the Company after an established period of time if they exceeded actual losses
incurred plus an allowance for expenses. Interest income also accrued on excess
premiums paid. In prior years, the amount of profit recognized in income was
based on ultimate loss projections established by the Company's independent
actuary. Reinsurance profits were recognized by the Company when losses
developed favorably. During 1998, reinsurance contracts covering claims prior to
1991 were commuted. Therefore, any deferred reinsurance profits from these
contracts were recognized in 1998. Reinsurance experience refunds subsequent to
1998 are not expected to be material.
Total incurred losses and loss adjustment expenses (including the
increase in reserve for extended reporting period claims) totaled $172.1 million
in 1998, an increase of $45.7 million, or 36.1%, compared to $126.4 million in
1997. The increase was primarily due to a $25.6 million increase to loss
reserves to reflect actuarial estimates and the application of the Company's
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<PAGE> 32
reserving practices to the Florida book of business as well as a $9.5 million
excess limits verdict on one Florida claim. Excluding these charges, as a
percentage of premiums earned, the total incurred loss and loss adjustment
expense ratio (including the increase in reserve for extended reporting period
claims) improved to 88.1% in 1998, compared to 95.8% in 1997. This decrease
arose from both the professional liability and MEEMIC books of business, as
further discussed below.
Excluding the charges mentioned above, professional liability insurance
incurred losses and loss adjustment expenses (including the increase in reserve
for extended reporting period claims) for 1998 totaled $109.0 million, a
decrease of $4.4 million, or 3.9%, compared to professional liability insurance
incurred losses and loss adjustment expenses of $113.3 million for 1997.
Excluding the charges mentioned above, 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 to 96.7% in 1998, compared to 101.3% in 1997. The decrease in the
professional liability loss and loss adjustment expense ratio was mainly
attributable to favorable development of prior years' loss reserves related to
the Company's book of business in the Midwest.
Incurred losses and loss adjustment expenses related to the personal
automobile and homeowners insurance assumed from MEEMIC (the "personal liability
insurance") totaled $28.0 million for 1998, an increase of $14.9 million, or
114.1%, compared to $13.1 million for 1997 (the MEEMIC reinsurance agreement was
not in force during the first six months of 1997). As a percentage of premiums
earned, the personal liability insurance generated an incurred loss and loss
adjustment expense ratio of 65.6% and 65.0% in 1998 and 1997, respectively. The
Company believes that the personal liability insurance produced a low loss ratio
primarily due to less severe weather-related incidents in Michigan during both
1998 and 1997.
Policy acquisition and underwriting expenses were $38.2 million in
1998, an increase of $14.5 million, or 61.1%, compared to policy acquisition and
underwriting expenses of $23.7 million in 1997. As a percentage of premiums
earned, the underwriting expense ratio increased to 24.9% during 1998, from
18.0% during 1997. Underwriting expenses for 1998 included a third quarter
pretax charge of $2.3 million related to expenses associated with the closing of
the PPTF merger and an additional $1.0 million of merger-related expenses
incurred prior to the third quarter of 1998. Underwriting expenses also
increased due to $13.0 million of ceding commission attributable to the MEEMIC
reinsurance agreement compared to $6.6 million for 1997 (the MEEMIC reinsurance
agreement was not in force during the first six months of 1997). Underwriting
expenses during 1998 also included $1.2 million of additional compensation
expense recognized on stock grants issued to directors and management of PPTF,
as contemplated by the merger agreement. In addition, 1997 expenses were offset
by a one-time premium tax refund which reduced 1997 underwriting expenses by
$2.6 million. Interest expense was $1.3 million and $1.1 million during 1998 and
1997, respectively. See "Liquidity and Capital Resources."
Due to the pretax loss reported in 1998, the Company recorded a $6.1
million tax benefit compared to $7.8 million in federal income tax expense in
1997. The Company's effective federal income tax (benefit) rate was (65.5%) in
1998 compared to 25.9% in 1997. The large amount of tax exempt income in
relation to the small pretax loss has caused the unusually high effective tax
(benefit) rate in 1998.
-29-
<PAGE> 33
The net loss for 1998 was $3.2 million (primarily due to the loss
reserve charge and excess limits verdict mentioned previously), or $0.39 per
share (assuming dilution), on revenues of $203.7 million. This compares to net
income of $22.4 million, or $2.68 per share (assuming dilution), on revenues of
$181.5 million in 1997.
Results of Operations -- Year Ended December 31, 1997 Compared to Year Ended
December 31, 1996:
Total net premiums written were $163.0 million for the year ended
December 31, 1997, an increase of $38.8 million, or 31.3%, compared to net
premiums written of $124.2 million for the year ended December 31, 1996. The
increase was mainly due to the Florida policies issued in the last half of 1997
that had a term of eighteen months to convert policy renewal dates from a common
renewal date of January 1st (as discussed previously) as well as an increase in
reinsurance premiums assumed from MEEMIC.
Total net premiums earned were $132.0 million for 1997, an increase of
$6.6 million, or 5.3%, compared to net premiums earned of $125.4 million for
1996. Professional liability related net premiums earned were $111.9 million in
1997, a decrease of $13.5 million, or 10.8%, compared to professional liability
net premiums earned of $125.4 million in 1996. The decrease in professional
liability net premiums earned was primarily due to lower premiums earned in
Florida, Michigan and Illinois resulting from price-based competition. The
earned reinsurance premiums assumed from MEEMIC were $20.1 million in 1997 (the
MEEMIC reinsurance agreement was not in force during 1996.)
Net investment income, excluding net realized investment gains, was
$39.5 million for 1997, an increase of $0.4 million, or 1.2%, compared to net
investment income of $39.1 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 7.1% and 6.9% as of December 31,
1997 and 1996, respectively. Net realized investment gains were $3.9 million and
$1.5 million during 1997 and 1996, respectively.
Reinsurance experience refunds were $4.2 million and $3.3 million in
1997 and 1996, respectively. Through 1995, reinsurance agreements on the Florida
business included profit sharing provisions whereby premiums were refunded to
the Company after an established period of time if they exceeded actual losses
incurred plus an allowance for expenses. Interest income also accrued on excess
premiums paid. In prior years, the amount of profit recognized in income was
based on ultimate loss projections established by the Company's independent
actuary. Reinsurance profits were recognized by the Company when losses
developed favorably. Claims experience under these reinsurance arrangements have
been lower than projected, resulting in reinsurance experience refunds to the
Company.
Total incurred losses and loss adjustment expenses (including the
increase in reserve for extended reporting period claims) totaled $126.4 million
in 1997, an increase of $0.3 million, or less than 1%, compared to $126.1
million in 1996. As a percentage of premiums earned, the total incurred loss and
loss adjustment expense ratio (including the increase in reserve for
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<PAGE> 34
extended reporting period claims) improved to 95.8% in 1997, compared to 100.6%
in 1996. This decrease arose mainly from the MEEMIC book of business and was
offset somewhat by the professional liability book of business, as further
discussed below.
Professional liability insurance incurred losses and loss adjustment
expenses (including the increase in reserve for extended reporting period
claims) for 1997 totaled $113.3 million, a decrease of $12.8 million, or 10.1%,
compared to professional liability insurance incurred losses and loss adjustment
expenses of $126.1 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)
increased slightly to 101.3% in 1997, compared to 100.6% 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 relatively 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 (the MEEMIC reinsurance agreement was
not in force during 1996). As a percentage of premiums earned, the personal
liability insurance generated an incurred loss and loss adjustment expense ratio
of 65.0% in 1997. The Company believes that the 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 $23.7 million in
1997, an increase of $5.8 million, or 32.7%, compared to policy acquisition and
underwriting expenses of $17.9 million in 1996. As a percentage of premiums
earned, the underwriting expense ratio increased to 18.0% during 1997, from
14.3% during 1996. The increase in expenses was mainly due to $2.6 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
(the MEEMIC reinsurance agreement was not in force during 1996). In addition,
1997 expenses were offset by a one-time premium tax refund which reduced 1997
underwriting expenses by $2.6 million as well as $0.8 million in reinsurance
ceding commissions (no ceding commissions were received in 1996). 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 $7.8 million in federal income tax expense in 1997
compared to $7.1 million in 1996. The Company's effective federal income tax
rate was 25.9% in 1997 compared to 27.2% in 1996. The decrease in the effective
income tax rate is due mainly to increased holdings in tax exempt municipal
bonds in 1997 compared to 1996 which was offset somewhat by certain merger and
acquisition expenses which are not deductible for federal income tax purposes.
Net income for 1997 was $22.4 million, or $2.68 per share (assuming
dilution), on revenues of $181.5 million. This compares to net income of $19.0
million, or $2.28 per share (assuming dilution), on revenues of $170.1 million
in 1996. The increased 1997 earnings were attributable to the factors described
above.
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<PAGE> 35
Liquidity and Capital Resources:
Liquidity describes the ability to generate sufficient cash flows to
meet the cash requirements of continuing operations. Liquidity, in the context
of insurance operations, is typically determined by two distinct operations:
underwriting and investing. Net cash flows from underwriting operations are used
to build an investment portfolio, which in turn produces future cash from
investment income. The Company continuously monitors available cash and
short-term investment balances in relation to projected cash needs to maintain
adequate balances for current payments while maximizing cash available for
longer term investment opportunities.
The payment of losses, loss adjustment expenses and operating expenses
in the ordinary course of business represents the Company's principal need for
liquid funds. Payments for losses and loss adjustment expenses are distributed
fairly evenly throughout the year. Payments for reinsurance are generally made
within thirty days subsequent to the end of each quarter, with adjustments made
after each reinsurance year. Historically, cash used to pay for these items has
been provided by operations. The Company did not borrow any funds in 1998, 1997
or 1996, other than as described in the following paragraph. 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, 1998, no material commitments for capital expenditures
existed, and management believes the Company's present liquidity, together with
its expected cash flow from operations, will be sufficient to fund any future
potential commitments for capital expenditures.
On April 4, 1997, Professionals Group borrowed $22.5 million under a
seven-year unsecured bank term loan, bearing interest at an adjustable rate of
LIBOR plus 62.5 basis points (5.87% at December 31, 1998), and payable quarterly
(the "Credit Agreement"). The remaining principal payments are due on April 30
of each year as follows: 1999 - $2,500,000; 2000 - $3,000,000; 2001 -
$3,000,000; 2002 - $3,500,000; 2003 - $3,500,000; and 2004 - $4,500,000. The
principal payment of $2.5 million due on April 30, 1998 was paid timely.
Professionals Group used $20.0 million of the proceeds of this loan to make a
capital contribution to ProNational, which in turn, used the proceeds to
purchase a $21.5 million Surplus Note from MEEMIC.
The Credit Agreement contains a covenant which prohibits the payment of
cash dividends on Professionals Group's common stock (except for cash paid in
lieu of fractional shares related to stock dividends declared). Additional
covenants also require the Company to, among other things, maintain total
consolidated 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 as of December 31, 1998.
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
ProNational). 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
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<PAGE> 36
sales of investments), or ten percent of policyholders' surplus as of the end of
the preceding year. As of January 1, 1999, approximately $19.4 million of
dividends could be paid by Professionals Group's direct insurance subsidiaries
without prior regulatory approval. In 1998, 1997 and 1996, Professionals Group's
insurance subsidiaries paid cash dividends aggregating $12.3 million, $4.7
million and $3.5 million, respectively, to Professionals Group. 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).
On April 4, 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 (which increases by 5% each year); (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.
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 obligation 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 ProNational.
On November 2, 1998, MEEMIC, through the newly formed MEEMIC Holdings,
Inc., filed a registration statement on Form S-1 with the Securities and
Exchange Commission for the purpose of registering shares of its common stock to
be issued in connection with the proposed demutualization of MEEMIC. Subject to
the approval of the policyholders of MEEMIC, MEEMIC would convert to a stock
insurance company and a wholly owned subsidiary of MEEMIC Holdings, Inc., using
a subscription rights method of demutualization. MEEMIC's plan of
demutualization contemplates the conversion of the $21.5 million Surplus Note of
MEEMIC owned by Professionals Group into shares of MEEMIC Holdings, Inc. and the
purchase by Professionals Group, as the standby purchaser, of any unexercised
subscription rights. After the completion of MEEMIC's plan of demutualization,
Professionals Group
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<PAGE> 37
expects to own at least 51% of the stock of MEEMIC Holdings, Inc. The
registration statement of MEEMIC Holdings, Inc. (registration statement no.
333-66671) should be consulted for a description of the proposed demutualization
and the expected role of Professionals Group.
On July 1, 1998, Professionals Group consummated its merger with
Physicians Protective Trust Fund, a medical malpractice self-insurance trust
fund located in Coral Gables, Florida ("PPTF"). Pursuant to the merger
agreement, Professionals Group issued 4,087,525 shares of Professionals Group
common stock to the eligible members of PPTF and paid cash of approximately
$67,000 in lieu of fractional shares. Additionally, 30,594 shares (representing
20% of the 153,000 total shares to be issued over a period of five years) of
Professionals Group common stock were issued to directors and management of
PPTF, as contemplated by the merger agreement (see also Note 1 to the Company's
consolidated financial statements.)
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 excess of loss
and stop 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
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<PAGE> 38
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, 1998, 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 Premium
Reinsurer Ceded A.M. Best Rating
- --------- ------------------- ----------------
(Amounts in thousands)
<S> <C> <C>
General Reinsurance Corporation $ 4,025 A++
TIG Reinsurance Company 2,859 A
PMA Reinsurance Corporation 2,116 A+
Scandinavian Reinsurance Company 2,000 A
Continental Casualty Company 1,970 A
Constitution Reinsurance Corporation 1,365 A+
Transatlantic Reinsurance Company 962 A++
Odyssey Reinsurance Corporation 962 A-
Other 2,348 --
-----
$ 18,607
========
</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 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."
Effective July 1, 1997, ProNational began assuming, on a quota-share
basis, 40% of the net personal automobile and homeowners insurance risks of
MEEMIC. The assumed premiums earned were $42.7 million and $20.1 million and the
assumed losses and loss adjustment expenses incurred in connection with the
MEEMIC reinsurance agreement were $28.0 million and $13.1 million, respectively,
for the years ended December 31, 1998 and 1997.
The Company also assumes a small amount of lawyers professional
liability, worker's compensation and accident and health insurance from other
insurance companies. This assumed business is not significant to the Company's
overall assumed reinsurance program.
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<PAGE> 39
Regulation:
Certain regulations that affect the Company's insurance subsidiaries
are promulgated by the 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 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, 1998, 1997 and 1996, ProNational 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 codified statutory accounting practices (the
"Codification") that provide for state insurance commissioner discretion in the
determination of appropriate statutory accounting for insurers. The NAIC has
established an effective date of January 1, 2001 for the Codification. Actual
implementation of the Codification will be determined by an insurer's state of
domicile.
Many issues remain to be resolved during the implementation phase;
however, its completion will likely change the definitions of what comprised
prescribed versus permitted statutory accounting practices, and may result in
changes to the accounting policies that insurance enterprises use to prepare
their statutory financial statements. Currently, permitted statutory accounting
practices encompass all accounting practices not so prescribed and differ from
state to state, may differ from company to company within a state and may change
in the future. Management has not determined the effects, if any, of applying
Codification to its insurance subsidiaries' statutory carrying value of assets
and liabilities. See "Item 1. Business-- Regulation."
Effects of New Accounting Pronouncements:
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive Income." This
standard establishes new rules for the reporting and display of comprehensive
income and its components; however, the adoption of SFAS No. 130 had no impact
on the Company's results of operations or shareholders' equity. SFAS No. 130
requires unrealized gains or losses on the Company's available-for-sale
securities, which prior to adoption were reported separately in shareholders'
equity, to be included in accumulated other comprehensive income. Prior period
financial statements have been reclassified to conform to the requirements of
SFAS No. 130.
The Company also adopted SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related Information" in 1998. This standard required 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
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<PAGE> 40
resources to segments. The Company has made all required disclosures due to the
adoption of SFAS No. 131.
Year 2000 Compliance:
The Company utilizes computerized information systems across its entire
operation. The inability of any of the Company's systems to recognize a date
using "00" as the year 2000 could result in information system errors or
failures. Accordingly, the Company has been working to resolve the potential
impact of the year 2000 on the ability of those systems to accurately process
information that may be date-sensitive. Subject to the discussion that follows,
and based on the information thus far available to the Company, the Company
currently believes that the costs expected to be incurred by it in connection
with its efforts to become Year 2000-compliant will not have a material adverse
impact on the Company's operating results or financial position.
The Company has developed and followed a plan to ensure all
modifications and conversions to its primary computerized information systems
are implemented and thoroughly tested on a timely basis. The Company estimates
that 90% of such modifications and conversions have been made to date.
Management anticipates that the remaining modifications and conversions will be
completed by June 30, 1999 and that the Company's primary computerized
information systems will be Year 2000-compliant by that date.
Although the Company has established a contingency plan for critical
computerized information systems to mitigate potential delays or other problems
associated with such modifications or conversions deemed necessary by
management, the Company continues to bear some risk related to the Year 2000
issue due to its voluntary interaction with other persons and entities not
affiliated with the Company (e.g., vendors and customers) who must address their
own Year 2000 issues. For this reason, the Company has been monitoring the Year
2000 issues of certain third parties with which it interacts. The Company has
asked such third parties to demonstrate, or give some indication as to, their
ability to become Year 2000-compliant by June 30, 1999. With respect to any
third party who appears unlikely to remedy its Year 2000 issues, the Company
intends to take appropriate steps to mitigate the exposure to the risk posed by
such third party's failure to timely address its Year 2000 issues. However, due
to the uncertainty inherent in both the Year 2000 problem and the efforts of
third parties to timely resolve their own Year 2000 issues, there can be no
assurances that the Company's mitigation efforts will be successful or that the
failure of any third party to timely resolve its Year 2000 issues will not have
a material adverse impact on the Company's operations, operating results or
financial position.
Both internal and external resources will be utilized in the Company's
efforts to become Year 2000-compliant. During 1998 and 1997, approximately
$160,000 and $150,000, respectively, of costs were incurred by the Company in
connection with its efforts to become Year 2000-compliant. The total costs of
the Company's efforts to become Year 2000-compliant are not expected to exceed
$500,000. All of such costs have been, and will continue to be, expensed as
incurred.
The costs expected to be incurred in connection with the Company's
efforts to become Year 2000-compliant, as well as the date by which the Company
is expected to be Year 2000-
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<PAGE> 41
compliant, are based on management's best estimates. Because such estimates were
derived utilizing numerous assumptions of future events (including the
availability of certain resources, third party modifications and other factors),
there can be no assurance that these estimates will be achieved and actual
results could differ materially from those plans. Specific factors that might
cause material differences include, but are not limited to, the availability and
cost of personnel trained in this area, the ability to locate and correct all
relevant computer codes and similar uncertainties.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
General:
The Company invests in fixed maturity, equity and short-term
securities. The Company's investment strategy recognizes the need to maintain
capital adequate to support its insurance operations. The Company evaluates the
risk/reward trade-off of investment opportunities, measuring their effects on
yield, stability, diversity, overall quality and liquidity of the investment
portfolio.
As of December 31, 1998, the majority of the Company's investment
portfolio was invested in fixed maturity securities and short-term investments.
The fixed maturity securities 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 (see also "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Financial Condition").
Qualitative Information About Market Risk:
Investments in the Company's portfolio have varying degrees of risk.
The primary market risk exposure to the fixed maturity portfolio is interest
rate risk, which is limited somewhat by managing duration to a defined range of
3.5 to 5.5 years. The distribution of maturities and sector concentrations are
monitored on a regular basis. Equity securities (common stocks), which generally
have greater risk and volatility of market value are not significant to the
Company's overall investment portfolio, therefore, exposure to equity price risk
is not significant. However, market values of equity securities are monitored
regularly.
The Company regularly examines the quality distribution of its
investment portfolio for evidence of impairment. In such cases, changes in
market value are evaluated to determine the extent to which such changes are
attributable to: (i) interest rates, (ii) market-related factors other than
interest rates and (iii) financial conditions, business prospects and other
fundamental factors specific to the issuer. Declines attributable to issuer
fundamentals are reviewed in further detail. Available evidence is considered to
estimate the realizable value of the investment. When a security in the
Company's investment portfolio has a decline in market value which is other than
temporary, the Company is required by GAAP to reduce the carrying value of such
security to its net realizable value.
The Company currently has no market risk exposure to foreign currency
exchange rate risk or commodity price risk.
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<PAGE> 42
Quantitative Information About Market Risk:
Financial instruments subject to interest rate risk as of December 31, 1998 were
as follows:
<TABLE>
<CAPTION>
Market Value (in thousands)
---------------------------------------------------------------
-200 bps -100 bps +100 bps +200 bps
Change Change Actual Change Change
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury securities and obligations of U.S.
government corporations and agencies $ 86,790 $ 81,776 $ 77,234 $ 73,087 $ 69,205
Debt securities issued by states of the United
States and political subdivisions of the states 334,655 316,794 299,342 282,159 265,333
Corporate debt securities 150,453 141,675 133,519 126,228 118,778
Mortgage-backed securities 110,475 108,531 103,851 101,183 96,424
Asset-backed securities 42,047 40,545 38,716 36,823 35,198
Redeemable preferred stocks 16,803 16,652 16,456 16,200 15,749
Short-term investments 17,593 17,593 17,593 17,593 17,593
---------------------------------------------------------------
$ 758,816 $ 723,566 $ 686,711 $ 653,273 $ 618,280
===============================================================
</TABLE>
The Company does not invest in fixed maturity securities for trading
purposes. Exposure to risk is represented in terms of changes in fair value due
to selected hypothetical movements in market rates. Bonds and preferred stocks
are individually priced to yield to the worst case scenario. Securities issued
by states of the United States and political subdivisions of the states are
assumed to hold their prepayment patterns. Mortgage-backed and asset-backed
securities are priced assuming deal specific prepayment scenarios, considering
the deal structure, prepayment penalties, yield maintenance agreements and the
underlying collateral. All of the preferred stocks have mechanisms that are
expected to provide an opportunity to liquidate at par.
Financial instruments subject to equity market risk as of December 31, 1998 were
as follows:
<TABLE>
<CAPTION>
Actual Hypothetical Market
Market Changes
Value --------------------------
+10% -10%
--------------------------------------------------
<S> <C> <C> <C>
Common stocks (in thousands) $3,901 $4,291 $ 3,511
==================================================
</TABLE>
The table above summarizes the Company's equity price risk as of
December 31, 1998 and shows the effects of a hypothetical 10% increase and 10%
decrease in the market prices as of December 31, 1998. The selected hypothetical
change does not reflect what could be considered the best or worst case
scenarios.
The Company generally does not invest in equity securities for trading
purposes. As of December 31, 1998, equity securities represented less than 1% of
the Company's total assets. The carrying values of publicly traded investments
subject to equity price risk are based on quoted market prices as of the balance
sheet date. Market prices are subject to fluctuation and, consequently, the
amount realized in the subsequent sale of the investment may significantly
differ from the reported market value. Fluctuation in the market price of a
security may result from perceived changes in the underlying economic
characteristics of the investee, the relative
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<PAGE> 43
prices of alternative investments and general market conditions. Furthermore,
amounts realized in the sale of a particular security may be affected by the
relative quantity of the security being sold. The carrying values of privately
held investments are subject to equity price risk which are based on the
forgoing market price considerations and also on the underlying value of the
issuer and other buyer's perceptions of such value, as well as lack of liquidity
considerations.
Item 8. Financial Statements and Supplementary Data
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<PAGE> 44
PROFESSIONALS GROUP, INC.
AND SUBSIDIARIES
(FORMERLY PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP)
Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
(AS RESTATED, NOTE 1)
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Investments (note 4):
Available for sale, at fair value:
Fixed maturities (amortized cost $646,864 and
$589,200 in 1998 and 1997, respectively).............. $669,118 603,423
Equity securities (cost $4,035 and $27,254
in 1998 and 1997, respectively)....................... 3,901 28,440
Short-term investments, at cost, which approximates
fair value............................................ 17,593 46,337
Real estate, at cost, net of accumulated depreciation
of $111 and $90 in 1998 and 1997, respectively........ 421 442
-------- -------
Total investments................................. 691,033 678,642
Cash........................................................ 379 2,636
Restricted cash (note 3).................................... 2,070 2,070
Premiums due from policyholders............................. 27,580 37,360
Reinsurance balances (note 5)............................... 106,692 75,326
Accrued investment income................................... 10,743 9,521
Deferred Federal income taxes (note 6)...................... 24,501 21,448
Property and equipment, at cost, net of
accumulated depreciation (note 7)......................... 9,117 9,835
Deferred policy acquisition costs (note 8).................. 1,500 1,376
Prepaid reinsurance premiums (note 5)....................... 4,917 3,236
Other assets................................................ 10,679 6,540
-------- -------
Total assets...................................... $889,211 847,990
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Loss and loss adjustment expense reserves (note 9)........ $540,583 489,207
Reserve for extended reporting period claims.............. 26,674 25,628
Unearned premiums......................................... 48,201 56,047
Long-term debt (note 10).................................. 20,000 22,500
Surplus contributions (note 3)............................ 10,094 10,094
Accrued expenses and other liabilities.................... 21,562 24,634
-------- -------
Total liabilities................................. 667,114 628,110
-------- -------
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; 8,383,924 and 7,593,275 shares issued
and outstanding in 1998 and 1997, respectively.......... 8,384 7,593
Additional paid-in capital................................ 33,982 10,482
Retained earnings......................................... 165,132 191,635
Accumulated other comprehensive income, net of
deferred Federal income taxes........................... 14,599 10,170
-------- -------
Total shareholders' equity........................ 222,097 219,880
-------- -------
Commitments and contingencies (notes 5 and 18)
Total liabilities and shareholders' equity........ $889,211 847,990
======== =======
</TABLE>
See accompanying notes to the consolidated financial statements.
41
<PAGE> 45
PROFESSIONAL GROUP, INC.
AND SUBSIDIARIES
(FORMERLY PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
(as restated, note 1)
(In thousands, except share data)
<S> <C> <C> <C>
Revenues and other income:
Premiums written, including $47,781 and
$21,871 of premiums assumed in 1998
and 1997, respectively (note 5) $162,529 181,170 154,739
Premiums ceded (note 5) (18,607) (18,156) (30,556)
-------- ------- -------
Net premiums written 143,922 163,014 124,183
Decrease (increase) in unearned premiums,
net of prepaid reinsurance premiums 9,527 (30,988) 1,223
-------- ------- -------
Premiums earned, net 153,449 132,026 125,406
Net investment income (note 4) 38,443 39,521 39,051
Net realized investment gains (note 4) 4,810 3,913 1,531
Reinsurance experience refunds (note 3) 3,071 4,236 3,325
Other 3,896 1,846 793
-------- ------- -------
Total revenues and other income 203,669 181,542 170,106
-------- ------- -------
Expenses:
Losses and loss adjustment expenses,
net (notes 5 and 9) 171,040 124,234 124,761
Increase in reserve for extended
reporting period claims 1,046 2,208 1,403
Policy acquisition and other
underwriting expenses 38,234 23,733 17,879
Interest expense 1,313 1,098 --
Other 1,399 -- --
-------- ------- -------
Total expenses 213,032 151,273 144,043
-------- ------- -------
Income (loss) from operations before
Federal income taxes (benefit) (9,363) 30,269 26,063
Federal income taxes (benefit)(note 6) (6,132) 7,841 7,102
-------- ------ -------
Net income (loss)(note 14) $ (3,231) 22,428 18,961
======== ======= =======
Net income (loss) per common share --
basic $ (0.39) 2.68 2.28
======== ======= =======
Net income (loss) per common share --
assuming dilution $ (0.39) 2.68 2.28
======== ======= =======
</TABLE>
See accompanying notes to the consolidated financial statements.
42
<PAGE> 46
PROFESSIONAL GROUP, INC.
AND SUBSIDIARIES
(FORMERLY PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP)
Consolidated Statements of Comprehensive Income
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(AS RESTATED, NOTE 1)
(IN THOUSANDS)
<S> <C> <C> <C>
Net income (loss) $ (3,231) 22,428 18,961
--------- -------- --------
Other comprehensive income (loss):
Unrealized holding gains (losses) on securities arising during the
period (net of income taxes of $3,917, $5,089 and $5,011
in 1998, 1997 and 1996, respectively) 7,604 9,878 (9,727)
Less reclassification adjustment for realized gains included in
net income (loss)(net of income taxes of $1,635, $1,330 and
$521 in 1998, 1997 and 1996, respectively) (3,175) (2,583) (1,010)
--------- -------- --------
Other comprehensive income (loss) 4,429 7,295 (10,737)
--------- -------- --------
Comprehensive income $ 1,198 29,723 8,224
========= ======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
43
<PAGE> 47
PROFESSIONALS GROUP, INC.
AND SUBSIDIARIES
(Formerly Professionals Insurance Company Management Group)
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Common Stock
-----------------------------------
Shares Additional
----------------------- Paid-In
Issued In Treasury Amount Capital
---------- ----------- ------ ---------
<S> <C> <C> <C> <C>
Balances, December 31, 1995
as previously reported 3,238,959 123,244 $3,239 8,417
Cumulative effect of pooling
of interests business
combination (note 1) 4,087,525 -- 4,087 (4,087)
---------- ------- ------ ---------
Balances, December 31, 1995
as restated (note 1) 7,326,484 123,244 7,326 4,330
Net income -- -- -- --
Issuance of common stock
(note 1) 1 -- -- --
Issuance of treasury shares
as stock bonus (note 12) -- (28,430) -- 207
Issuance of treasury shares
in purchase of subsidiary
(note 12) -- (44,000) -- 178
Retirement and cancellation
of treasury shares
(note 12) (50,814) (50,814) (51) (823)
Issuance of 10% stock
dividend 317,604 -- 318 6,590
Net depreciation on debt
and equity securities -- -- -- --
---------- ------- ------ ---------
Balances, December 31, 1996 7,593,275 -- 7,593 10,482
Net income -- -- -- --
Net appreciation on debt
and equity securities -- -- -- --
---------- ------- ------ ---------
Balances, December 31, 1997 7,593,275 -- 7,593 10,482
Net loss -- -- -- --
Issuance of common stock
(note 1) 30,594 -- 31 1,126
Issuance of 10% stock
dividend 760,055 -- 760 22,374
Net appreciation on debt and
equity securities -- -- -- --
---------- ------- ------ ---------
Balances, December 31, 1998 8,383,924 -- $8,384 33,982
========== ======= ====== =========
<CAPTION>
Accumulated
Other
Comprehensive
Income, Net Cost of
of Deferred Common Total
Retained Federal Stock in Shareholders'
Earnings Income Taxes Treasury Equity
-------- ------------- -------- -------------
<S> <C> <C> <C> <C>
Balances, December 31, 1995
as previously reported 66,994 1,882 (2,121) 78,411
Cumulative effect of pooling
of interests business
combination (note 1) 90,186 11,730 -- 101,916
------- ------- ------ -------
Balances, December 31, 1995
as restated (note 1) 157,180 13,612 (2,121) 180,327
Net income 18,961 -- -- 18,961
Issuance of common stock
(note 1) -- -- -- --
Issuance of treasury shares
as stock bonus (note 12) -- 490 697
Issuance of treasury shares
in purchase of subsidiary
(note 12) -- -- 757 935
Retirement and cancellation
of treasury shares
(note 12) -- -- 874 --
Issuance of 10% stock
dividend (6,934) -- -- (26)
Net depreciation on debt
and equity securities -- (10,737) -- (10,737)
------- ------- ------ -------
Balances, December 31, 1996 169,207 2,875 -- 190,157
Net income 22,428 -- -- 22,428
Net appreciation on debt and
equity securities -- 7,295 -- 7,295
------- ------- ------ -------
Balances, December 31, 1997 191,635 10,170 -- 219,880
Net loss (3,231) -- -- (3,231)
Issuance of common stock
(note 1) -- -- -- 1,157
Issuance of 10% stock
dividend (23,272) -- -- (138)
Net appreciation on debt and
equity securities -- 4,429 -- 4,429
------- ------- ------ -------
Balances, December 31, 1998 165,132 14,599 -- 222,097
======= ======= ====== =======
</TABLE>
See accompanying notes to the consolidated financial statements.
44
<PAGE> 48
PROFESSIONALS GROUP, INC.
AND SUBSIDIARIES
(FORMERLY PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(as restated, note 1)
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (3,231) 22,428 18,961
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 4,311 3,470 2,877
Realized gains on investments (4,810) (3,913) (1,531)
Deferred Federal income taxes (5,335) 2,353 5,046
Stock bonus -- -- 697
Common stock issued as compensation 1,157 -- --
Changes in assets and liabilities:
Restricted cash -- (66) (2,004)
Premiums due from policyholders 9,780 (29,696) 913
Reinsurance balances (31,366) (4,916) (23,380)
Accrued investment income (1,222) 333 291
Prepaid reinsurance premiums (1,681) (3,114) (46)
Deferred policy acquisition costs (124) (378) 94
Other assets (4,818) (1,318) (1,247)
Loss and loss adjustment expense reserves 51,376 (12,305) (178)
Reserve for extended reporting period claims 1,046 2,208 1,403
Unearned premiums (7,846) 34,102 (1,177)
Accrued expenses and other liabilities (7,730) (2,388) 6,142
-------- -------- --------
Net cash provided by (used in) operating activities (493) 6,800 6,861
-------- -------- --------
Cash flows from investing activities:
Proceeds from sale or maturity of short-term investments 602,999 581,257 468,056
Purchases of short-term investments (573,550) (613,658) (446,517)
Proceeds from maturity of securities available for sale 12,440 10,836 22,145
Proceeds from sale of securities available for sale 201,311 269,399 251,183
Purchases of securities available for sale (240,420) (268,070) (291,443)
Payable for securities -- -- (3,205)
Purchases of property and equipment (1,306) (7,771) (1,007)
Payment on liability for purchased book of business (600) (754) (894)
-------- -------- --------
Net cash provided by (used in) investing activities 874 (28,761) (1,682)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of long-term debt -- 22,500 --
Repayment of long-term debt (2,500) -- --
Book overdrafts -- -- (4,335)
Cash paid in lieu of fractual shares (138) -- (26)
-------- -------- --------
Net cash provided by (used in) financing activities (2,638) 22,500 (4,361)
-------- -------- --------
Net increase (decrease) in cash (2,257) 539 818
Cash, beginning of year 2,636 2,097 1,279
-------- -------- --------
Cash, end of year $ 379 2,636 2,097
======== ======== ========
Supplemental disclosure of cash flow information:
Federal income taxes paid $ 4,701 4,259 1,659
Interest paid 1,384 730 --
Supplemental schedule of noncash investing and financing activities:
Purchase of book of business:
Intangible assets required $ -- -- 400
Amount due -- -- (400)
Issuance of treasury shares as stock bonus (note 12) -- -- 697
Issuance of treasury shares for acquired company (note 12) -- -- 935
Issuance of common stock as compensation 1,157 -- --
Liability incurred in acquisition of subsidiary 313 -- --
======== ======== ========
</TABLE>
See accompanying notes to the consolidated financial statements
45
<PAGE> 49
PROFESSIONALS GROUP, INC.
AND SUBSIDIARIES
(FORMERLY PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP)
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(1) FORMATION OF COMPANY AND DESCRIPTION OF BUSINESS
GENERAL
Professionals Group, Inc. (Professionals Group), formerly
Professionals Insurance Company Management 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 ProNational Insurance Company (ProNational), formerly known as PICOM
Insurance Company, a stock insurance company incorporated under Michigan
law. Professionals Group and subsidiaries are collectively referred to
as "the Company." ProNational is a Michigan-domiciled property and
casualty insurance company licensed in nineteen states which primarily
provides professional liability insurance for physicians, surgeons,
dentists, hospitals, and other health care providers and acts as a
reinsurer to Michigan Educational Employees Mutual Insurance Company
(MEEMIC) (see note 18).
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 (INSCO), a stock insurance
company incorporated under Michigan law and a wholly-owned subsidiary of
Professionals Group, and ProNational, Professionals Group acquired all
of the outstanding capital stock of ProNational through the merger of
INSCO with and into ProNational (the ProNational Merger). As a result of
the Merger: (1) INSCO was merged into ProNational and INSCO ceased to
exist; (2) ProNational, as the surviving corporation, became a
wholly-owned subsidiary of Professionals Group; (3) each issued and
outstanding share of common stock of ProNational (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
ProNational.
The ProNational Merger has been accounted for in a manner similar to a
"pooling of interests" business combination, whereby Professionals Group
has carried forward to its accounts the assets and liabilities of
ProNational at their respective amounts as reported by ProNational.
On July 1, 1998, Professionals Group consummated its merger with
Physicians Protective Trust Fund, a medical malpractice self-insurance
trust fund located in Coral Gables, Florida (PPTF). Pursuant to the
merger agreement, Professionals Group issued 4,087,525 shares of
Professionals Group common stock to the eligible members of PPTF and
paid cash of approximately $67,000 in lieu of fractional shares.
Additionally, 30,594 shares (representing 20% of the 153,000 total
shares to be issued over a period of five years) of Professionals Group
common stock were issued to directors and management of PPTF, as
contemplated by the merger agreement. The transaction has been accounted
for as a "pooling of interests" business combination under generally
accepted accounting principles, whereby Professionals Group has carried
forward to its accounts the assets and liabilities of PPTF at their
respective amounts as reported by PPTF. As a result of this business
combination, all prior period financial information has been restated to
reflect the combined operations of Professionals Group and PPTF.
Following is a description of the most significant risks facing
property/casualty insurers and how the Company mitigates those risks:
-46-
<PAGE> 50
PROFESSIONALS GROUP, INC.
AND SUBSIDIARIES
(FORMERLY PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP)
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
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. Additionally, by writing
business in multiple jurisdictions, the Company minimizes the effect
that changes in a single jurisdiction could have on its operations.
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 credit 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, 1998, the estimated market value of the
Company's fixed maturity portfolio was greater than its amortized cost
(see note 4).
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:
- ProNational, including ProNational's three wholly-owned
subsidiaries, PICOM Claims Services Corporation-a provider of
claims processing services to nonaffiliated professional liability
companies; Physicians Protective Plan, Inc. - a Florida insurance
agency; and ProNational Casualty Company (ProNational Casualty),
an Illinois-domiciled property and casualty insurance company
which provided professional liability insurance for physicians and
surgeons in the State of Illinois through 1997.
- MedAdvantage, Inc. - a provider of credentialing verification
services for medical service providers.
-47-
<PAGE> 51
PROFESSIONALS GROUP, INC.
AND SUBSIDIARIES
(FORMERLY PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP)
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
- Professionals Group Services Corporation - a Michigan business
corporation that administers certain benefit plans for ProNational
employees.
- PICOM Insurance Agency, Inc. - an inactive Michigan 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, 1998 and 1997, all of the
Company's securities are classified as available for sale which
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 securities are excluded from income and
recorded as other comprehensive income. Transfers of securities
between categories are recorded at fair value at the date of
transfer.
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 1998,
1997 or 1996 were deemed to be temporary.
Investments in preferred stock and common stock of nonaffiliates
are stated at fair value. Fair values for all investments 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.
-48-
<PAGE> 52
PROFESSIONALS GROUP, INC.
AND SUBSIDIARIES
(FORMERLY PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP)
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
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.
Through 1995, reinsurance agreements on the Company's Florida
business included profit sharing provisions whereby premiums were
refunded to the Company after an established period of time if
they exceeded actual losses incurred plus an allowance for
expenses. Interest income also accrued on excess premiums paid. In
prior years, the amount of profit recognized in income was based
on ultimate loss projections established by the Company's
independent actuary. Reinsurance profits were recognized by the
Company when losses developed favorably. During 1998, 1991 and
prior reinsurance contracts were commuted and deferred reinsurance
profits thereon were recognized.
(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. Additionally, the
Company provides for loss and loss adjustment expense reserves on
assumed business based on information received from the ceding
companies. 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.
(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 believed to be
adequate to pay for estimated future claims reported subsequent to
a current policyholder's death, disability or retirement. Changes
in this reserve are charged or credited to income.
(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.
-49-
<PAGE> 53
PROFESSIONALS GROUP, INC.
AND SUBSIDIARIES
(FORMERLY PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP)
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
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. Intangible
assets 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, 1998.
(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 and stock grants) outstanding during
each year after giving effect to stock dividends and treasury
shares.
A reconciliation of the numerators and denominators of the "income
(loss) per share - basic" and "income (loss) per share - assuming
dilution" is presented below:
-50-
<PAGE> 54
PROFESSIONALS GROUP, INC.
AND SUBSIDIARIES
(FORMERLY PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP)
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------- --------------- ----------
<S> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1998
Loss per share - basic $( 3,231,000) 8,368,753 $(0.39)
======
Effect of dilutive securities - stock options
and stock grants -- --
------------ ----------
Loss per share - assuming dilution $ (3,231,000) 8,368,753 $(0.39)
============ ========== ======
FOR THE YEAR ENDED DECEMBER 31, 1997
Income per share - basic $ 22,428,000 8,353,330 $ 2.68
======
Effect of dilutive securities - stock options -- 2,011
------------ ----------
Income per share - assuming dilution $ 22,428,000 8,355,341 $ 2.68
============ ========== ======
FOR THE YEAR ENDED DECEMBER 31, 1996
Income per share - basic $ 18,961,000 8,334,278 $ 2.28
======
Effect of dilutive securities - stock options -- 25
------------- ----------
Income per share - assuming dilution $ 18,961,000 8,334,303 $ 2.28
============= ========== ======
</TABLE>
(L) COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 130 "Reporting
Comprehensive Income." This standard establishes new rules for the
reporting and display of comprehensive income and its components;
however, the adoption of SFAS No. 130 had no impact on the
Company's results of operations or shareholders' equity. SFAS No.
130 requires unrealized gains or losses on the Company's
available-for-sale securities, which prior to adoption were
reported separately in shareholders' equity, to be included in
other comprehensive income. Prior period financial statements have
been reclassified to conform to the requirements of SFAS No. 130.
(M) 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.
(N) SURPLUS CONTRIBUTIONS
From 1984 through 1990, new Florida policyholders were required to
make a contribution to surplus. The contributions were required
during a high growth period in Florida and were intended to help
maintain the Company's premium to surplus ratio. When the
contribution was
-51-
<PAGE> 55
PROFESSIONALS GROUP, INC.
AND SUBSIDIARIES
(FORMERLY PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP)
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
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 discretion of the board of
directors and upon prior approval of the Michigan Insurance
Commissioner. The Company does not plan to refund surplus
contributions at this time.
(O) RECLASSIFICATIONS
Certain prior year amounts have been reclassified in order to
conform with the current year presentation format.
(4) INVESTMENTS
A summary of amortized cost, gross unrealized gains and losses and
estimated fair value of investments in securities available for sale as
of December 31, 1998 and 1997 follows:
<TABLE>
<CAPTION>
1998
---------------------------------------------------------
GROSS UNREALIZED ESTIMATED
AMORTIZED ------------------------ FAIR
COST GAINS LOSSES VALUE
-------------- ------------ --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturities:
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies $ 73,529 3,705 -- 77,234
Debt securities issued by states of the United
States and political subdivisions of the states 288,172 11,468 298 299,342
Debt securities issued by foreign governments 3,734 540 -- 4,274
Corporate debt securities 128,423 5,175 79 133,519
Mortgage-backed securities:
Government 98,422 1,245 90 99,577
Other 38,779 342 405 38,716
Redeemable preferred stocks 15,805 651 -- 16,456
--------- ------- ---- --------
$ 646,864 23,126 872 669,118
========= ======= ==== ========
Equity securities $ 4,035 147 281 3,901
========= ======= ==== ========
<CAPTION>
1997
---------------------------------------------------------
GROSS UNREALIZED ESTIMATED
AMORTIZED ------------------------ FAIR
COST GAINS LOSSES VALUE
-------------- ------------ --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Fixed maturities:
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies $135,650 1,242 217 136,675
Debt securities issued by states of the United
States and political subdivisions of the states 187,793 8,063 1 195,855
Debt securities issued by foreign governments 3,734 776 -- 4,510
Corporate debt securities 128,845 3,234 86 131,993
Mortgage-backed securities:
Government 87,964 653 179 88,438
Other 30,639 195 5 30,829
Redeemable preferred stocks 14,575 548 -- 15,123
-------- ------ ------ --------
$589,200 14,711 488 603,423
======== ====== ====== ========
Equity securities $ 27,254 2,616 1,430 28,440
======== ====== ====== ========
</TABLE>
-52-
<PAGE> 56
PROFESSIONALS GROUP, INC.
AND SUBSIDIARIES
(FORMERLY PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP)
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
The amortized cost and estimated fair value of fixed maturities at
December 31, 1998, by contractual maturity, are shown below. Expected
maturities on certain corporate and mortgage-backed securities may
differ from contractual maturities because borrowers may have the right
to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
------------------ ----------------
(IN THOUSANDS)
<S> <C> <C>
Due in one year or less $ 7,432 7,519
Due after one year through five years 140,699 144,759
Due after five years through ten years 162,384 169,448
Due after ten years 183,343 192,643
--------- --------
493,858 514,369
Mortgage-backed securities:
Government 98,422 99,577
Other 38,779 38,716
Redeemable preferred stocks 15,805 16,456
--------- --------
$ 646,864 669,118
========= ========
</TABLE>
Proceeds and related gross realized gains and gross realized losses on
sales of fixed maturities and equity securities follow:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Proceeds $ 213,751 277,610 271,961
========= ======== =========
Gross realized gains $ 5,906 5,400 3,730
Gross realized losses (1,096) (1,487) (2,199)
--------- -------- ---------
Net realized gains $ 4,810 3,913 1,531
========= ======== =========
</TABLE>
-53-
<PAGE> 57
PROFESSIONALS GROUP, INC.
AND SUBSIDIARIES
(FORMERLY PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP)
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
A summary of the sources of net investment income follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturities $ 38,584 38,662 38,153
Equity securities 151 203 33
Short-term investments, cash and cash
equivalents 1,308 1,969 2,228
Real estate 298 147 86
Other invested assets 65 268 181
-------- ------- -------
Gross investment income 40,406 41,249 40,681
Less investment expenses 1,963 1,728 1,630
-------- ------- -------
Net investment income $ 38,443 39,521 39,051
======== ======= =======
</TABLE>
Net realized gains and net appreciation (depreciation) in fair value of
available for sale securities follow:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net realized gains:
Fixed maturities $ 1,369 3,802 1,516
Equity securities 3,441 111 15
-------- ------- --------
Net realized gains $ 4,810 3,913 1,531
======== ======= ========
Net appreciation (depreciation) in fair value of available
for sale securities:
Fixed maturities $ 8,031 9,929 (16,328)
Equity securities (1,320) 1,124 29
-------- ------- --------
Net appreciation (depreciation) $ 6,711 11,053 (16,299)
======== ======= ========
</TABLE>
At December 31, 1998, U.S. Treasury notes and certificates of deposit
with a carrying value of $3,584,000 were on deposit with regulatory
authorities, as required by law.
-54-
<PAGE> 58
PROFESSIONALS GROUP, INC.
AND SUBSIDIARIES
(FORMERLY PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP)
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(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 reinsurance agreements. As of
December 31, 1998, 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 $500,000.
The Company continually reviews its reinsurers, considering a number of
factors, the most critical of which is their financial stability. Based
on these reviews, the Company evaluates its position with reinsurers
with respect to existing and future reinsurance.
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, ProNational began assuming, on
a quota-share basis, 40% of MEEMIC's net business.
At December 31, 1998, amounts related to reinsurance balances and
prepaid reinsurance premiums follow:
<TABLE>
<CAPTION>
PREPAID
REINSURANCE REINSURANCE
BALANCES PREMIUMS
---------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
TIG Reinsurance Company $ 13,843 865
General Reinsurance Corporation 43,214 1,790
PMA Reinsurance Corporation 7,172 679
Continental Casualty Company 25,086 621
MEEMIC 2,168 --
Odyssey Reinsurance Corporation 3,350 309
Underwriters Reinsurance Company 4,125 --
Other 7,734 653
--------- ------
$ 106,692 4,917
========= ======
</TABLE>
-55-
<PAGE> 59
PROFESSIONALS GROUP, INC.
AND SUBSIDIARIES
(FORMERLY PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP)
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
Reinsurance balances consisted of amounts related to:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1998 1997
---------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Recoverables:
Paid losses and loss adjustment expenses $ 577 502
Unpaid losses and loss adjustment expenses 108,036 80,431
--------- -------
Total reinsurance recoverables 108,613 80,933
Ceded reinsurance premiums payable (5,172) (5,550)
Assumed reinsurance premiums receivable 6,255 6,278
Ceded reinsurance commissions receivable 599 386
Assumed reinsurance commissions payable (3,603) (3,673)
Experience refunds -- (3,048)
--------- -------
$ 106,692 75,326
========= =======
</TABLE>
Premiums earned and losses and loss adjustment expenses are net of the
following reinsurance ceded amounts:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
------------ ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Premiums earned $ 16,926 15,043 30,510
Losses and loss adjustment expenses 31,973 13,720 36,659
======== ======= =======
</TABLE>
Premiums earned and losses and loss adjustment expenses have been
increased by the following reinsurance assumed amounts:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1998 1997
------------------------------- ---------------------------------
MEEMIC OTHER MEEMIC OTHER
------------- -------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Premiums earned $ 42,693 5,135 20,115 756
Losses and loss adjustment expenses 28,000 4,208 13,078 717
======== ====== ======= =====
</TABLE>
-56-
<PAGE> 60
PROFESSIONALS GROUP, INC.
AND SUBSIDIARIES
(FORMERLY PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP)
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(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 (benefit) consists of the
following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
------------ ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Current $ (797) 5,488 2,056
Deferred (5,335) 2,353 5,046
------- ------ ------
$(6,132) 7,841 7,102
======= ====== ======
</TABLE>
The significant components of Federal income tax expense (benefit) are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
------------ ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Continuing operations $(6,132) 7,841 7,102
Shareholders' equity 2,282 3,759 (5,524)
------- ------- ------
$(3,850) 11,600 1,578
======= ======= =====
</TABLE>
Actual Federal income taxes (benefit) vary from amounts computed by
applying the current Federal income tax rate of 34% to income or loss
before Federal income taxes (benefit). For the years ended December 31,
1998, 1997 and 1996, the reasons for these differences, and the tax
effects thereof, are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Expected tax expense (benefit) $(3,183) 10,291 8,862
Dividends received deduction (202) (138) (11)
Tax-exempt interest (3,733) (2,611) (2,242)
Non deductible merger expenses 801 272 --
Adjustment to prior years' tax liability 515 (399) (913)
Other, net (330) 426 1,406
------- ------- -------
Actual tax expense (benefit) $(6,132) 7,841 7,102
======= ======= =======
</TABLE>
-57-
<PAGE> 61
PROFESSIONALS GROUP, INC.
AND SUBSIDIARIES
(FORMERLY PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP)
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
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,
---------------------------------
1998 1997
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Deferred Federal income tax assets arising from:
Loss and loss adjustment expense reserves $ 21,519 23,274
Unearned premium reserves 2,943 3,591
Alternative minimum tax credits -- 348
Deferred reinsurance experience credit -- 763
Net operating loss carryforwards 8,952 --
Other 458 231
-------- -------
Total deferred Federal income tax assets 33,872 28,207
-------- -------
Deferred Federal income tax liabilities arising from:
Deferred policy acquisition costs 510 468
Net unrealized gains on investments 7,523 5,241
Other 1,338 1,050
-------- -------
Total deferred Federal income tax liabilities 9,371 6,759
-------- -------
Net deferred Federal income taxes $ 24,501 21,448
======== =======
</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 had not
incurred an operating loss for either financial or Federal income tax
reporting purposes from 1987 through 1997, 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.
-58-
<PAGE> 62
PROFESSIONALS GROUP, INC.
AND SUBSIDIARIES
(FORMERLY PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP)
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(7) PROPERTY AND EQUIPMENT
At December 31, 1998 and 1997, property and equipment consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Real estate $ 5,552 6,739
Data processing equipment, including software 4,378 4,084
Furniture, fixtures and equipment 3,804 3,608
------- ------
13,734 14,431
Accumulated depreciation (4,617) (4,596)
------- ------
Total property and equipment, net $ 9,117 9,835
======= ======
</TABLE>
(8) DEFERRED POLICY ACQUISITION COSTS
Changes in deferred policy acquisition costs are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
------------ ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Net asset balance, beginning of year $1,376 998 1,092
------ ------ ------
Amount deferred:
Agent commissions and ceding commission expense 4,953 3,539 2,873
Ceding commission income (2,092) (1,323) (1,229)
------ ------ ------
Net amounts deferred 2,861 2,216 1,644
Net amortization (2,737) (1,838) (1,738)
------ ------ ------
Net asset balance, end of year $1,500 1,376 998
====== ====== ======
</TABLE>
-59-
<PAGE> 63
PROFESSIONALS GROUP, INC.
AND SUBSIDIARIES
(FORMERLY PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP)
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(9) LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
Activity in loss and loss adjustment expense reserves is summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1998 1997 1996
------------- -------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year $489,207 501,512 501,690
Less reinsurance balances recoverable (80,431) (73,855) (53,264)
-------- -------- --------
Net balance, beginning of year 408,776 427,657 448,426
-------- -------- --------
Incurred related to:
Current year 161,417 155,595 138,354
Prior years 9,623 (31,361) (13,593)
-------- -------- --------
Total incurred 171,040 124,234 124,761
-------- -------- --------
Loss and loss adjustment expense reserves
assumed (see note 5) -- -- 4,119
-------- -------- --------
Paid related to:
Current year 26,157 19,679 16,567
Prior years 121,112 123,436 133,082
-------- -------- --------
Total paid 147,269 143,115 149,649
-------- -------- --------
Net balance, end of year 432,547 408,776 427,657
Plus reinsurance balances recoverable 108,036 80,431 73,855
-------- -------- --------
Balance, end of year $540,583 489,207 501,512
======== ======== ========
</TABLE>
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 estimates for
loss and loss adjustment expense reserves are reviewed regularly and
adjusted as necessary which resulted in favorable reserve development of
prior years' reserves through 1997. The unfavorable reserve development
in 1998 was mainly attributable to a $25.6 million reserve charge
recorded in 1998 to reflect actuarial estimates and the application of
the Company's reserving practices to the Florida book of business
acquired as part of the merger with PPTF in July 1998 as well as a
$9.5 million excess limits verdict on one Florida claim. The unfavorable
reserve development was offset somewhat by $25.5 million of favorable
reserve development related to the Company's Midwest book of business.
-60-
<PAGE> 64
PROFESSIONALS GROUP, INC.
AND SUBSIDIARIES
(FORMERLY PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP)
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(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 (5.87% at December 31, 1998), and
payable quarterly (the "Credit Agreement"). Remaining principal payments
are due on April 30 of each year, as follows: 1999 - $2,500,000; 2000 -
$3,000,000; 2001 - $3,000,000; 2002 - $3,500,000; 2003 - $3,500,000; and
2004 - $4,500,000.
The Credit Agreement contains a covenant which prohibits the payment of
cash dividends on Professionals Group's common stock (except for cash
paid in lieu of fractional shares related to stock dividends declared).
Additional covenants also require the Company to, among other things,
maintain total consolidated shareholders' equity of at least $80.0
million plus 50% of the preceding fiscal year's consolidated net income,
maintain a ratio of debt to equity of not more than 0.5:1 and maintain a
fixed charges coverage ratio and an interest coverage ratio (as defined
by the Credit Agreement) of not less than 1.5:1 and 2.5:1, respectively.
The Company was in compliance with, or has received waivers of, all
required covenants as of December 31, 1998.
(11) EMPLOYEE BENEFIT PLANS
The Company currently maintains two defined contribution employee
benefit plans--a 401(k) plan and an ESOP, both of which cover
substantially all employees meeting certain eligibility requirements.
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 1998, 1997 and 1996, the Company's expense
under the 401(k) plan was $604,000, $370,000 and $295,000, respectively.
With respect to the ESOP, the Company annually contributes 3% of an
employee's salary. During 1998, 1997 and 1996, the Company's expense
under the ESOP was $208,000, $145,000 and $112,000, respectively.
The Company has a stock purchase plan through which employees and
directors of the Company and its wholly-owned subsidiaries may purchase
Professionals Group 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 Professionals Group 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 1998, 1997 and 1996, the
Company incurred expenses of $601,000, $250,000 and $215,000,
respectively, under this plan.
Prior to the PPTF merger on July 1, 1998 (see note 1), employees who
worked for PPTF were covered under a simplified employee pension plan
(SEP), which was a non-contributory defined contribution plan. The PPTF
employees became eligible to participate in all three benefit plans
described above on July 1, 1998, and as a result, the SEP was
discontinued. During 1998, 1997 and 1996, the Company's expense under
the SEP was $176,000, $351,000 and $363,000, respectively.
(12) SHAREHOLDERS' EQUITY
Approximately $724.0 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
-61-
<PAGE> 65
PROFESSIONALS GROUP, INC.
AND SUBSIDIARIES
(FORMERLY PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP)
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
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, 1999, approximately $19,389,000 could be paid by
Professionals Group's insurance subsidiaries without prior regulatory
approval. In 1998, 1997 and 1996, Professionals Group's insurance
subsidiaries paid dividends of $12,316,000, $4,717,049 and $3,530,334,
respectively.
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 business combination. 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 December 5, 1998, the Company declared a 10% stock dividend, issued
on December 23, 1998 to shareholders of record as of December 7, 1998.
All per-share information in the accompanying consolidated financial
statements has been adjusted to give retroactive effect to this stock
dividend.
(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 the Company,
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 Incentive Plan options were
granted in 1998 or 1996. No charges to operations are recorded with
respect to authorization, grant or exercise of options. Proceeds
received upon exercise are credited to shareholders' equity.
The Company 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.
-62-
<PAGE> 66
PROFESSIONALS GROUP, INC.
AND SUBSIDIARIES
(FORMERLY PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP)
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
Option information regarding the Incentive Plan for the years ending
December 31, 1998, 1997 and 1996 follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year 146,500 $ 37.00 -- $ -- -- $ --
Granted -- -- 146,500 37.00 -- --
Stock dividend adjustment 14,650 33.64 -- -- -- --
Exercised -- -- -- -- -- --
Canceled -- -- -- -- -- --
------- ------- ------
Outstanding at end of year 161,150 33.64 146,500 37.00 -- --
======= ======= ======
Options exercisable at end
of year 32,230 -- --
======= ======= ======
Weighted average fair value
of options granted during
the year $ -- $ 21.14 $ --
======= ======== ========
</TABLE>
Options outstanding as of December 31, 1998 under the Incentive Plan
consisted of the following:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------------------------------------- --------------------------
WEIGHTED
RANGE AVERAGE WEIGHTED WEIGHTED
OF REMAINING AVERAGE AVERAGE
EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICES NUMBER LIFE PRICE NUMBER PRICE
------------------------------------- ----------- ------------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
$33.64 161,150 8.1 years $33.64 32,230 $ 33.64
======== =======
Options available for grant at end
of year 138,850
========
</TABLE>
-63-
<PAGE> 67
PROFESSIONALS GROUP, INC.
AND SUBSIDIARIES
(FORMERLY PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP)
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
Option information regarding the Directors Plan for the years ending
December 31, 1998, 1997 and 1996 follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ ------------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- ----------- --------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year 9,450 $22.38 4,500 $21.63 -- $ --
Granted 4,500 39.75 4,500 25.38 4,500 21.63
Stock dividend adjustment 1,395 25.44 450 19.66 -- --
Exercised -- -- -- -- -- --
Canceled -- -- -- -- -- --
------ ------ ------
Outstanding at end of year 15,345 25.44 9,450 22.38 4,500 21.63
======= ====== ======
Options exercisable at end
of year 10,395 4,950 --
======= ======= ======
Weighted average fair value
of options granted during
the year $19.46 $12.90 $10.35
====== ====== ======
</TABLE>
Options outstanding as of December 31, 1998 under the Directors Plan
consisted of the following:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------------------------------- --------------------------
WEIGHTED
RANGE AVERAGE WEIGHTED WEIGHTED
OF REMAINING AVERAGE AVERAGE
EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICES NUMBER LIFE PRICE NUMBER PRICE
------------------------------------ --------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
$17.87 5,445 4.5 years $ 17.87 5,445 $ 17.87
$23.07 4,950 5.5 years 23.07 4,950 23.07
$36.14 4,950 6.5 years 36.14 -- --
------ ------
15,345 5.5 years 25.44 10,395 20.35
====== ======
Options available for grant at end
of year 34,655
======
</TABLE>
The Company applies APB Opinion 25 and related Interpretations in
accounting for these plans. Accordingly, no compensation cost has been
recognized for these stock option plans. Had compensation cost for these
plans been determined based on the fair value at the grant dates for
awards under those plans consistent with the method of SFAS No. 123, the
Company's net income (loss) (in thousands) and net income (loss) per
common share - assuming dilution would have been reduced to the proforma
amounts below:
-64-
<PAGE> 68
PROFESSIONALS GROUP, INC.
AND SUBSIDIARIES
(FORMERLY PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP)
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net income (loss):
As reported $(3,231) 22,428 18,961
Proforma (3,289) 19,926 18,924
Net income (loss) per common share - assuming dilution:
As reported $ (0.39) 2.68 2.28
Proforma (0.39) 2.39 2.27
</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 1998, 1997 and 1996: dividend yield of
0%; expected volatility of 35.6%, 35.7% and 30.4%; risk-free interest
rate of 6.29% for the Incentive Plan (1997 only); risk free interest
rate of 5.69%, 6.62% and 6.75% for the Directors Plan; expected lives
of 9 years for the Incentive Plan (1997 only); and expected lives of 7
years for the Directors Plan. The proforma effect on net income for
1998, 1997 and 1996 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
ProNational 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 methods utilized by ProNational that are
permitted rather than prescribed are the discounting of its loss
reserves through December 31, 1997 and recording the merger transaction
with PPTF as a "pooling of interests" business combination for statutory
reporting, which did not provide explicit guidance on the accounting for
this transaction. The impact of the permitted practice of discounting
loss reserves was to increase the statutory policyholders' surplus of
ProNational by approximately $10,658,000 at December 31, 1997.
ProNational eliminated the practice of discounting loss reserves for SAP
reporting during 1998. As a result of applying "pooling of interests"
accounting to the statutory financial statements, all prior periods have
been restated to reflect the combined operations of ProNational and
PPTF. 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, 1998 and 1997, and
statutory net income (loss) for the years ended December 31, 1998, 1997
and 1996, of ProNational and ProNational Casualty, as applicable (as
filed with their respective insurance regulatory authorities), to the
amounts shown in the accompanying consolidated financial statements
follows:
-65-
<PAGE> 69
PROFESSIONALS GROUP, INC.
AND SUBSIDIARIES
(FORMERLY PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP)
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1998 1997
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Statutory capital and surplus $193,894 221,487
Add (deduct) adjustments to statutory capital and
surplus to convert to GAAP:
Net unrealized appreciation on securities available for sale 21,889 14,241
Deferred policy acquisition costs 1,500 1,376
Deferred Federal income taxes 24,501 21,448
Nonadmitted assets 3,845 2,378
Loss and loss adjustment expense reserve discount -- (10,658)
Deferred reinsurance experience refund -- (2,244)
Liabilities for GAAP in excess of SAP (1,800) (2,250)
Provisions for unauthorized reinsurance 3,560 887
Accumulated intercompany dividends 11,533 6,717
Accumulated deficit attributable to Professionals Group (7,127) (4,035)
Intercompany paid-in capital (20,000) (20,000)
Surplus contributions (10,094) (10,094)
Common stock issued 1,157 --
Other, net (761) 627
-------- -------
Total shareholders' equity per accompanying consolidated
balance sheets $222,097 219,880
======== =======
</TABLE>
-66-
<PAGE> 70
PROFESSIONALS GROUP, INC.
AND SUBSIDIARIES
(FORMERLY PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP)
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
------------ ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Statutory net income (loss) $(18,964) 21,825 26,962
Add (deduct) adjustments to statutory net income (loss)
to convert to GAAP:
Deferred Federal income tax expense 5,335 (2,353) (5,046)
Deferred reinsurance experience refund 2,244 5,040 (522)
Change in loss and loss adjustment expense
reserve discount 10,658 -- (1,265)
Change in liabilities for GAAP in excess of SAP 450 450 --
Other, net 89 437 269
------- ------- -------
Combined net income (loss) of insurance companies
based on GAAP (188) 25,399 20,398
Net income (loss) attributable to non-insurance
subsidiaries 49 (223) (150)
Net loss attributable to Professionals Group (3,092) (2,748) (1,287)
------- ------- -------
Net income (loss) per accompanying consolidated
statements of operations $(3,231) 22,428 18,961
======= ======= =======
</TABLE>
Certain regulations that affect ProNational, 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.
ProNational 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
Premiums written through independent agents approximated 51%, 43% and
35% of direct written premiums in 1998, 1997 and 1996, respectively. In
1998, 1997 and 1996, the top ten agents produced, in aggregate,
approximately 27%, 28% and 24%, respectively, 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. Premiums are collected in advance
of being earned. 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.
-67-
<PAGE> 71
PROFESSIONALS GROUP, INC.
AND SUBSIDIARIES
(FORMERLY PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP)
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(16) QUARTERLY FINANCIAL DATA (UNAUDITED)
The unaudited operating results by quarter for 1998 and 1997 are
summarized below:
<TABLE>
<CAPTION>
NET INCOME
(LOSS) PER
TOTAL INCOME (LOSS) COMMON
REVENUES BEFORE NET SHARE -
AND OTHER INCOME INCOME ASSUMING
INCOME TAXES (LOSS) DILUTION
-------------- -------------- -------------- -------------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
1998:
1st Quarter $ 52,601 8,529 6,320 0.76
2nd Quarter 48,519 (30,343) (20,879) (2.50)
3rd Quarter 51,872 4,765 4,423 0.52
4th Quarter 50,677 7,686 6,905 0.81
-------- ------- ------- ======
Year $203,669 (9,363) (3,231)
======== ======= =======
1997:
1st Quarter $ 39,838 6,549 4,847 0.58
2nd Quarter 39,439 6,373 4,605 0.55
3rd Quarter 49,527 8,118 6,075 0.73
4th Quarter 52,738 9,229 6,901 0.83
-------- ------- ------- ======
Year $181,542 30,269 22,428
======== ======= =======
</TABLE>
Net income (loss) per common share amounts for the first three quarters
of 1998 and all four quarters of 1997 have been restated from those
originally reported to reflect the 10% stock dividend declared in 1998
(see note 12).
The sum of quarterly net income (loss) per common share data for 1998
and 1997 does not equal the annual amount due to changes in the weighted
average number of common shares outstanding during the respective
periods.
(17) 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 and long-term debt constitute financial
instruments. The carrying amounts of all financial instruments--other
-68-
<PAGE> 72
PROFESSIONALS GROUP, INC.
AND SUBSIDIARIES
(FORMERLY PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP)
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
than investment securities, which are presented in note 4--approximated
their fair values at December 31, 1998 and 1997.
(18) RELATED PARTY TRANSACTIONS
On April 4, 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
service agreement for a base fee of $2.0 million (which increases by 5%
each year); (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.
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 obligation would become payable is
minimal.
On November 2, 1998, MEEMIC, through the newly formed MEEMIC Holdings,
Inc., filed a registration statement on Form S-1 with the Securities and
Exchange Commission for the purpose of registering shares of its common
stock to be issued in connection with the proposed demutualization of
MEEMIC. Subject to the approval of the policyholders of MEEMIC, MEEMIC
would convert to a stock insurance company and a wholly owned subsidiary
of MEEMIC Holdings, Inc., using a subscription rights method of
demutualization. MEEMIC's plan of demutualization contemplates the
conversion of the $21.5 million Surplus Note of MEEMIC owned by
Professionals Group into shares of MEEMIC Holdings, Inc. and the
purchase by Professionals Group, as the standby purchaser, of any
unexercised subscription rights. After the completion of MEEMIC's plan
of demutualization, Professionals Group expects to own at least 51% of
the stock of MEEMIC Holdings, Inc. The registration statement of MEEMIC
Holdings, Inc. (registration statement no. 333-66671) should be
consulted for a description of the proposed demutualization of MEEMIC
and the expected role of Professionals Group.
-69-
<PAGE> 73
PROFESSIONALS GROUP, INC.
AND SUBSIDIARIES
(FORMERLY PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP)
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(19) SEGMENT INFORMATION
The Company is organized and operates principally in the property and
casualty insurance industry and has three reportable segments -
professional liability lines property and casualty insurance, personal
lines property and casualty insurance and investment operations. The
accounting policies of the segments are the same as those described in
the basis of presentation. Revenue is primarily from unaffiliated
customers. Identifiable assets by segment are those assets, including
investment securities, used in the Company's operations. Corporate and
other identifiable assets are principally cash and marketable
securities. Segment information, for which results are regularly
reviewed by Company management in making decisions about resources to be
allocated to the segments and assess their performance, is summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
------------ ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Professional liability lines $ 113,827 116,147 128,731
Personal lines 42,693 20,115 --
Investment operations 43,253 43,434 40,582
Corporate and other 3,896 1,846 793
--------- -------- --------
Total revenues $ 203,669 181,542 170,106
========= ======== ========
Income (loss) before income taxes:
Professional liability lines $ (52,716) (14,513) (12,155)
Personal lines 1,698 460 --
Investment operations 43,253 43,434 40,582
Corporate and other (1,598) 888 (2,364)
--------- -------- --------
Total income (loss) before income taxes $ (9,363) 30,269 26,063
========= ======== ========
Identifiable assets:
Property and casualty insurance $ 881,866 841,187 770,614
Corporate and other 7,345 6,803 4,290
--------- -------- --------
Total identifiable assets $ 889,211 847,990 774,904
========= ======== ========
</TABLE>
-70-
<PAGE> 74
Independent Auditors' Report
----------------------------
The Board of Directors and Shareholders
Professionals Group, Inc.:
We have audited the accompanying consolidated balance sheets of Professionals
Group, Inc. (formerly Professionals Insurance Company Management Group)
and subsidiaries (the Company) as of December 31, 1998 and 1997, and the related
consolidated statements of operations, comprehensive income, shareholders'
equity and cash flows for each of the years in the three year period ended
December 31, 1998. In connection with our audits of the consolidated financial
statements, we also have audited the financial statement schedule as of December
31, 1998 and 1997 and for each of the years in the three year period ended
December 31, 1998. 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 Group, Inc. and subsidiaries as of December 31, 1998 and 1997, and
the consolidated results of their operations and their cash flows for each of
the years in the three year period ended December 31, 1998 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.
The consolidated financial statements give retroactive effect to the merger of
the Company and Physicians Protective Trust Fund, on July 1, 1998, which has
been accounted for as a pooling of interests business combination, as described
in the notes to the consolidated financial statements.
KPMG LLP
East Lansing, Michigan
February 23, 1999
-71-
<PAGE> 75
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PROFESSIONALS GROUP, INC. (PARENT COMPANY)
CONDENSED BALANCE SHEETS
December 31, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
1998 1997
---- ----
Assets: (As Restated, Note 3)
<S> <C> <C>
Investment in subsidiaries $241,043 $238,440
Short-term investments, at cost, which
approximates fair value 1,331 3,866
Cash 14 3
Other assets 1,018 1,336
--------------- --------------
Total assets $243,406 $243,645
=============== ==============
Liabilities and Shareholders' Equity:
Liabilities:
Long-term debt $20,000 $22,500
Accrued expenses and other liabilities 1,309 1,265
--------------- --------------
21,309 23,765
--------------- --------------
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; 8,383,924 and 7,593,275 shares
issued and outstanding in 1998 and 1997 8,384 7,593
Additional paid-in capital 33,982 10,482
Retained earnings 165,132 191,635
Accumulated other comprehensive income,
net of deferred federal income taxes 14,599 10,170
--------------- --------------
Total shareholders' equity 222,097 219,880
--------------- --------------
Total liabilities and shareholders' equity $243,406 $243,645
=============== ==============
</TABLE>
These condensed financial statements should be read in conjunction with the
accompanying consolidated financial statements and notes thereto of
Professionals Group, Inc. and subsidiaries.
See accompanying notes to the condensed financial information of registrant.
72
<PAGE> 76
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT, CONTINUED
PROFESSIONALS GROUP, INC. (PARENT COMPANY)
CONDENSED STATEMENTS OF OPERATIONS
Years Ended December 31, 1998, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Revenues: (As Restated, Note 3)
<S> <C> <C> <C>
Dividend income from subsidiary $4,816 $4,717 $3,530
Investment income 109 106 30
Other income 2,073 1,005 -
------------- ------------- -------------
Total revenues 6,998 5,828 3,560
------------- ------------- -------------
Expenses:
Operating and administrative 3,806 2,761 1,317
Interest expense 1,468 1,098 30
------------- ------------- -------------
Total expenses 5,274 3,859 1,347
------------- ------------- -------------
Income before federal income taxes and
equity in undistributed income of subsidiaries 1,724 1,969 2,213
Federal income taxes 0 0 0
------------- ------------- -------------
Income before equity in undistributed
income (loss) of subsidiaries 1,724 1,969 2,213
Equity in undistributed income (loss) of subsidiaries (4,955) 20,459 14,199
------------- ------------- -------------
Net income (loss) ($3,231) $22,428 $16,412
============= ============= =============
</TABLE>
These condensed financial statements should be read in conjunction with the
accompanying consolidated financial statements and notes thereto of
Professionals Group, Inc. and subsidiaries.
See accompanying notes to the condensed financial information of registrant.
-73-
<PAGE> 77
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT, CONTINUED
PROFESSIONALS GROUP, INC. (PARENT COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Cash flows from operating activities: (As Restated, Note 3)
<S> <C> <C> <C>
Net income (loss) ($3,231) $22,428 $16,412
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Equity in undistributed (income) loss of subsidiaries 4,955 (20,459) (14,199)
Dividend of investment from subsidiary (2,816) (1,217) -
Amortization 259 183 -
Non-cash compensation 1,157 - -
Increase in other assets (26) (1,594) -
Decrease in accrued expenses and other liabilities (269) (78) 1,343
------------ ------------ -----------
Net cash provided by (used in) operating activities 29 (737) 3,556
------------ ------------ -----------
Cash flows from investing activities:
Proceeds from sale or maturity of short-term
investments 40,381 32,578 6,048
Purchases of short-term investments (37,761) (34,338) (8,078)
Capital contribution to consolidated subsidiary - (20,000) (1,500)
------------ ------------ -----------
Net cash provided by (used in) investing activities 2,620 (21,760) (3,530)
------------ ------------ -----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt - 22,500 1,500
Cash paid in lieu of fractional shares (138) - (26)
Repayment of long-term debt (2,500) - (1,500)
------------ ------------ -----------
Net cash provided by (used in) financing activities (2,638) 22,500 (26)
------------ ------------ -----------
Net change in cash 11 3 0
Cash, beginning of period 3 - -
------------ ------------ -----------
Cash, end of period $14 $3 $-
============ ============ ===========
Supplemental disclosure of non-cash financing activities:
Issuance of common stock as compensation $1,157 - -
============ ============ ===========
Liability incurred in acquisition of subsidiary $313 - -
============ ============ ===========
</TABLE>
These condensed financial statements should be read in conjunction with the
accompanying consolidated financial statements and notes thereto of
Professionals Group, Inc. and subsidiaries.
See accompanying notes to the condensed financial information of registrant.
-74-
<PAGE> 78
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT, CONTINUED
PROFESSIONALS GROUP, INC. (PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Years Ended December 31, 1998, 1997 and 1996
(1) Description of Business
Professionals Group, Inc. (formerly 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:
ProNational Insurance Company (formerly PICOM Insurance Company) - a stock
insurance company incorporated under Michigan law.
Professionals Group Services Corporation - a business corporation that
administers certain benefit plans for ProNational Insurance Company
employees.
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.
Professionals Group also owns 80% of the issued and outstanding common
stock of MedAdvantage, Inc., which was purchased on June 1, 1998.
MedAdvantage, Inc. provides credentialing verification services for
medical service providers.
(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.
(3) Business Combination
On July 1, 1998, Professionals Group consummated its merger with
Physicians Protective Trust Fund, a medical malpractice self-insurance
trust fund located in Coral Gables, Florida ("PPTF"). Pursuant to the
merger agreement, Professionals Group issued 4,087,525 shares of
Professionals Group common stock to the eligible members of PPTF and paid
cash of approximately $67,000 in lieu of fractional shares. Additionally,
30,594 shares (representing 20% of the 153,000 total shares to be issued
over a period of five years) of Professionals Group common stock were
issued to directors and management of PPTF, as contemplated by the merger
agreement. The transaction has been accounted for as a "pooling of
interests" business combination under generally accepted accounting
principles, whereby Professionals Group has carried forward to its
accounts the assets and liabilities of PPTF at their respective amounts as
reported by PPTF. As a result of this business combination, all prior
period financial information has been restated to reflect the combined
operations of Professionals Group and PPTF.
-75-
<PAGE> 79
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 1999 Annual Meeting
of Stockholders under the caption "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, 1998.
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 1999 Annual
Meeting of Stockholders under the caption "Information Regarding Executive
Officers," and 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 1999 Annual Meeting of Stockholders
under the caption "Voting Securities and Certain Holders Thereof."
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 1999 Annual Meeting of Stockholders under the captions
"Election of Directors," "Compensation Committee Interlocks and Insider
Participation," and "Related Party Transactions." Such information is herein
incorporated by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Exhibits:
Item 601
Regulation S-K
Exhibit Reference
Number Exhibit Description
------------ -------------------
(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)).
-76-
<PAGE> 80
Item 601
Regulation S-K
Exhibit Reference
Number Exhibit Description
------------ -------------------
(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 registrant's 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)(e) Specimen stock option issued under the
Professionals Insurance Company Management
Group 1996 Long Term Incentive Plan
(incorporated by reference to Exhibit (4)(e)
of the registrant's Annual Report on Form
10-K for the year ended December 31, 1997 as
filed with the Securities and Exchange
Commission on March 31, 1998 (file no.
0-21223)).
(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)).
77
<PAGE> 81
Item 601
Regulation S-K
Exhibit Reference
Number Exhibit Description
------------ -------------------
(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)).
(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)).
(10)(k) Employment Agreement effective October 1,
1996 between Physicians Protective Trust
Fund and Steven L. Salman.*
(10)(l) Assignment and Assumption Agreement among
Physicians Protective Trust Fund, the
registrant, PICOM Insurance Company, and
Steven L. Salman effective July 1, 1998.*
(10)(m) Confidentiality, Noncompetition and Stock
Grant Agreement dated July 1, 1998 between
the registrant and Steven L. Salman.*
(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 LLP, independent certified
public accountants.*
(24) Powers of attorney.*
(27) Financial Data Schedule of registrant.*
- --------------------------
* 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.
78
<PAGE> 82
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.
Employment Agreement effective October 1, 1996 between Physicians
Protective Trust Fund and Steven L. Salman.
Assignment and Assumption Agreement among Physicians Protective Trust
Fund, the registrant, PICOM Insurance Company, and Steven L. Salman
effective July 1, 1998.
Confidentiality, Noncompetition and Stock Grant Agreement dated July 1,
1998 between the registrant and Steven L. Salman.
-79-
<PAGE> 83
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, 1998 and 1997................................ 41
Consolidated statements of operations for each of the years ended December 31, 1998, 1997
and 1996.................................................................................... 42
Consolidated statements of comprehensive income for each of the years ended December 31, 1998,
1997 and 1996............................................................................... 43
Consolidated statements of shareholders' equity for each of the years ended December 31, 1998,
1997 and 1996............................................................................... 44
Consolidated statements of cash flows for each of the years ended December 31, 1998, 1997 and
1996........................................................................................ 45
Notes to consolidated financial statements.................................................. 46
Report of independent auditors.............................................................. 71
Financial Statement Schedules:
II. Condensed financial information of registrant....................................... 72
</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 November 2, 1998
disclosing, among other things and under Item 5 (Other Events), the proposed
demutualization of Michigan Educational Employees Mutual Insurance Company
("MEEMIC") and the registering of certain shares of common stock of MEEMIC
Holdings, Inc., to be issued in connection with the proposed demutualization of
MEEMIC and the expected role of Professionals Group, Inc. in such proposed
demutualization.
No other reports were filed during the three months ended December 31,
1998.
-80-
<PAGE> 84
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 Group, Inc.
Date: March 26, 1999 By: /s/ Victor T. Adamo
------------------------------------
Victor T. Adamo
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ John F. Lang
------------------------------------
John F. Lang
Vice President, Treasurer and
Chief Accounting 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>
Director, President and
and Chief Executive
/s/ Victor T. Adamo Officer (Principal March 26, 1999
- ------------------------------
Victor T. Adamo Executive Officer)
Director, Vice
/s/ R. Kevin Clinton President and Chief March 26, 1999
- ------------------------------
R. Kevin Clinton Financial Officer
Director, Vice
/s/ Steven L. Salman President and Chief March 26, 1999
- ------------------------------
Steven L. Salman Operating Officer
Richard G. Alper* Director March 26, 1999
- ------------------------------
Richard G. Alper
Eliot H. Berg* Director March 26, 1999
- ------------------------------
Eliot H. Berg
</TABLE>
-81-
<PAGE> 85
<TABLE>
<S> <C> <C>
Louis P. Brady* Director March 26, 1999
- ------------------------------
Louis P. Brady
Jerry D. Campbell* Director March 26, 1999
- ------------------------------
Jerry D. Campbell
John F. Dodge, Jr.* Director March 26, 1999
- ------------------------------
John F. Dodge, Jr.
H. Harvey Gass* Director March 26, 1999
- ------------------------------
H. Harvey Gass
John F. McCaffrey* Director March 26, 1999
- ------------------------------
John F. McCaffrey
Isaac J. Powell* Director March 26, 1999
- ------------------------------
Isaac J. Powell
Ann F. Putallaz* Director March 26, 1999
- ------------------------------
Ann F. Putallaz
Edward S. Truppman* Director March 26, 1999
- ------------------------------
Edward S. Truppman
William H. Woodhams* Director March 26, 1999
- ------------------------------
William H. Woodhams
Donald S. Young* Director March 26, 1999
- ------------------------------
Donald S. Young
</TABLE>
*By: /s/ Victor T. Adamo
--------------------
Victor T. Adamo, as attorney-in-fact for the persons indicated
-82-
<PAGE> 86
Exhibit Index
Item 601
Regulation S-K
Exhibit Reference
Number Exhibit Description
------------ -------------------
(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)).
<PAGE> 87
Item 601
Regulation S-K
Exhibit Reference
Number Exhibit Description
------------ -------------------
(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 registrant's 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)(e) Specimen stock option issued under the
Professionals Insurance Company Management
Group 1996 Long Term Incentive Plan
(incorporated by reference to Exhibit (4)(e)
of the registrant's Annual Report on Form
10-K for the year ended December 31, 1997 as
filed with the Securities and Exchange
Commission on March 31, 1998 (file no.
0-21223)).
(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)).
<PAGE> 88
Item 601
Regulation S-K
Exhibit Reference
Number Exhibit Description
------------ -------------------
(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)).
(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)).
<PAGE> 89
Item 601
Regulation S-K
Exhibit Reference
Number Exhibit Description
------------ -------------------
(10)(k) Employment Agreement effective October 1,
1996 between Physicians Protective Trust
Fund and Steven L. Salman.*
(10)(l) Assignment and Assumption Agreement among
Physicians Protective Trust Fund, the
registrant, PICOM Insurance Company, and
Steven L. Salman effective July 1, 1998.*
(10)(m) Confidentiality, Noncompetition and Stock
Grant Agreement dated July 1, 1998 between
the registrant and Steven L. Salman.*
(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 LLP, independent certified
public accountants.*
(24) Powers of attorney.*
(27) Financial Data Schedule of registrant.*
- --------------------------
* Filed herewith.
<PAGE> 1
EXHIBIT 10(k)
EMPLOYMENT AGREEMENT
Employment Agreement ("Agreement") effective as of October 1, 1996
between Physicians Protective Trust Fund (the "Company") and Steven L. Salman
(the "Executive").
RECITALS
A. The Company desires to employ the Executive for the period set forth
in this Agreement to obtain services from the Executive, and the Executive is
willing to be employed by the Company for that period on the terms and
conditions set forth below.
B. The Executive acknowledges that his expertise will contribute
significantly to the financial success of the business of the Company and
acknowledges that the covenants not to compete and confidentiality provisions in
this Agreement are reasonable.
AGREEMENT
1. Term of Employment. The Company will employ the Executive for a term
commencing on October 1, 1996 and ending on September 30, 2001 (the "Term"),
subject to the renewal provisions of Section 2 and the earlier termination
provisions of Section 6.
2. Automatic Annual Renewal. If this Agreement is still in full force
and effect at the end of the Term, it will be automatically renewed at that time
for an additional two-year period (the "Renewal Term") and at the end of each
Renewal Term thereafter, unless (a) terminated by the Executive or by the
Company upon written notice given at least 120 days prior to the end of the Term
or the Renewal Term, or (b) otherwise terminated pursuant to Section 6. Except
as otherwise specifically provided, the Renewal Term shall be on the same terms
and conditions as the Term.
3. Duties. The Executive's job title will be President and Chief
Executive Officer. The Executive will report directly to, and work to the
direction of, the Company's Board of Trustees. The Executive's duties generally
will include management of and strategic planning for the Company, and other
duties assigned to the Executive by the Board of Trustees. The Executive's
duties may change from time to time on reasonable notice based on the needs of
the Company and the Executive's skills, consistent with the Executive's
background and experience, as determined by the Company's Board of Trustees.
As an exempt employee, the Executive will be required to exercise his
specialized expertise, independent judgment and discretion to provide
high-quality services. The Executive will follow office policies and procedures
adopted from time to time by the Company and take such general direction as the
Executive may be given from time to time by the Board of Trustees. The Company
reserves the right to change these policies and procedures at any time. The
Executive will devote its full energies, efforts and abilities to his employment
with the Company, unless the Company expressly agrees otherwise.
<PAGE> 2
The Executive, at his discretion, may participate in not for profit
activities outside his employment with the Company so long as such outside
activities do not interfere with the Executive's ability to carry out his duties
under this Agreement.
4. Hours of Work. As an exempt employee, the Executive will be expected
to work the number of hours required to get the job done. The Executive
generally is expected to be present during normal business hours of the Company.
Normal business hours will be established by the Company and may be changed as
needed to meet the needs of the business.
5. Compensation.
(a) Base Salary. The Company will pay the Executive compensation
every two weeks at a rate of $325,000 per year ("Salary").
(b) Bonus Compensation. In addition to the Salary, the
Executive will be eligible for an annual cash bonus ("Bonus"), up to a maximum
of 50% of the Salary, to be paid within the discretion and subject to the
approval of the Company's Board of Trustees and computed in the manner set forth
in Exhibit A to this Agreement. The first bonus will be based on the financial
results of the Company for the calendar year ending December 31, 1997. The
Executive will be paid 125% of the amount of the Bonus determined for this first
Bonus period to reflect the fact that the Executive will have been employed for
the fifteen months from October 1, 1996 through December 31, 1997. All
subsequent Bonuses will be based on the financial results of the Company for the
applicable calendar year and the Executive will be paid 100% of the amount of
the bonus determined for the applicable period. A minimum of 25% of the maximum
available Bonus will be payable with the Executive's Salary every two weeks
beginning on October 1, 1996 and the remaining amount of the Bonus will be
payable in a lump sum on March 31, 1998 for the first year and on March 31 of
each year thereafter during the Term and each Renewal Term of this Agreement.
(c) Insurance Benefits. The Company will provide health
insurance and other benefits to the Executive on a basis consistent with that
provided by the Company to its other senior executive officers.
(d) Vacation. The Executive will be entitled to 25 paid
vacation days in each calendar year in accordance with the Company's policies,
as modified on a periodic basis. The Executive will also be entitled to all paid
holidays given by the Company to its employees generally. The Executive agrees
(i) to limit his vacation during his first six months of employment with the
Company, (ii) to give one month prior notice of his intent to take vacation to
the Chairman of the Company's Board of Trustees and (iii) not to take a vacation
exceeding two consecutive weeks without prior approval by the Company's Board of
Trustees, which approval shall not be unreasonably withheld.
(e) Personal Days. The Executive may take one personal
day during 1996 and two personal days in each year thereafter during the Term
and each Renewal Term.
2
<PAGE> 3
(f) Sick Days. The Executive may take up to ten sick days per
year. Additional sick days may be provided to the Executive at the discretion
of the Company's Board of Trustees.
(g) Business Expenses. The Company will reimburse the
Executive, within 30 days after the Executive submits expense receipts to the
Company, for all reasonable out-of-pocket expenses that are paid by the
Executive in performing the services set forth in Section 3. The Company also
agrees to pay reasonable expenses related to travel by the Executive's spouse to
major Physician Insurers Association of America events, if attendance by spouses
is customary at such events, and expenses related to subscriptions to trade
publications, dues for membership in trade associations and membership dues
required for the Executive to remain a member of the Kentucky, Ohio and Colorado
Bars.
(h) Moving Expenses. The Company will pay all reasonable
relocation expenses for the Executive and his family including, but no limited
to, broker's fees (not to exceed the standard prevailing broker fee in Kentucky)
incurred in the sale of the Executive's primary residence in Kentucky; expenses
incurred in connection with the purchase of a home in the Miami, Florida area;
fees incurred in connecting utility services; expenses related to packing,
shipping and unpacking household goods, furniture and two automobiles; expenses
relating to temporary housing for the Executive and his family for up to 6
months after the date of this Agreement; and prior to the Executive's permanent
relocation to the Miami, Florida area, travel expenses of the Executive and his
family for a reasonable number of round trips between Miami, Florida and
Louisville, Kentucky. The Company agrees to gross up all non-deductible moving
expenses.
(i) Housing Allowance. The Company agrees to pay the
Executive a housing allowance (the "Housing Allowance") of $45,000 per year
during the Term of this Agreement. The Housing Allowance shall be payable every
two weeks in addition to and with the Executive's Salary. The Company agrees to
pay the Executive's mortgage payments on his home in Louisville, Kentucky up to
six months after the Executive purchases a home in the Miami, Florida area if
his Louisville, Kentucky home remains unsold during those six months. The
Company agrees to lend to the Executive up to 20% of the purchase price of the
home the Executive purchases in the Miami, Florida area (the "Loan") for up to
six months interest free. If the Loan is not repaid within six months after it
is made, the Executive agrees to repay the Loan to the Company with interest on
the principal at the prime rate published form time to time by The Wall Street
Journal from the date that is six months after the date of the Loan until the
date the Loan is repaid in full. The Executive agrees to execute a promissory
note evidencing the Loan.
(j) Automobile. The Company agrees to pay for leasing of
an automobile by the Executive beginning August 24, 1996 up to (1) a monthly
lease payment of $675 per month and (2) costs at inception of the lease of
$3,750. The Company agrees to pay the premiums for insurance on the Executive's
automobile.
(k) Club Dues. The Company agrees to pay the membership
dues for the Executive's membership in the Bankers Club in Miami, Florida. The
Company also agrees to
3
<PAGE> 4
pay up to $20,000 for initiation fees and up to $5,000 for annual membership
dues at a country club located in South Florida.
(l) Severance Pay. If the Company terminates the
Executive not for cause (as defined in Section 6(d)) during the term or any
Renewal Term, the Executive will receive severance pay in accordance with
Section 7(a) of this Agreement. If the Company elects not to renew this
Agreement (i) at the end of the Term, the Executive will receive severance pay
equal to 15 months' Salary, (ii) at the end of the first Renewal Term, the
Executive will receive severance pay equal to 21 months' Salary or (iii) at the
end of the second or any subsequent Renewal Terms, the Executive will receive
severance pay equal to 24 months' Salary.
(m) Miscellaneous. The Executive will receive free
covered parking at the Company's principal office, free checking account
privileges at SunTrust Bank, South Florida, N.A., and electronic payroll
transfers.
(n) Pension Plan. The Executive will be entitled to
participate in the Company's Pension Plan in accordance with the terms of that
plan. The Company will make an additional contribution to the Pension Plan for
the Executive on December 31, 1998 in respect of 1998 and will make a
contribution each year thereafter. The annual contributions of the Company to
the Pension Plan will equal 9% of the first $40,000 of Total Compensation plus
14% of Total Compensation between $40,001 and $150,000. For purposes of this
Agreement, "Total Compensation" means the compensation to be paid to the
Executive pursuant to Sections 5(a)-(m) of this Agreement for the year in
question.
6. Termination. This Agreement may be terminated prior to the
expiration of the Term as follows:
(a) This Agreement shall terminate upon the Executive's death.
(b) The Company has the right to terminate this Agreement
if, by reason of Disability, the Executive has been unable to perform his duties
under this Agreement for a period of 180 consecutive days. For purposes of this
Agreement, "Disability" means physical or mental disability, which disability is
expected to be of long or indefinite duration and prevents the Executive from
performing his duties under this Agreement. All determinations of Disability
made by the Company pursuant to the Company's Long Term Disability Insurance
Policy, if any, shall be determinative of Disability under this Agreement. If
the Company does not have a Long Term Disability Insurance Policy, Disability
shall be determined by the Board of Trustees upon the basis of the evidence the
Board deems appropriate.
(c) The Executive may terminate his employment under this
Agreement if his health (either physical or mental) becomes impaired to an
extent that makes the continued performance of the duties under this Agreement
hazardous to the Executive's physical or mental health or his life.
(d) The Company may terminate the Executive's employment
under this Agreement for Cause at any time. For purposes of this Section 6(d),
the Company shall have
4
<PAGE> 5
"Cause" to terminate the Executive's employment if (i) the executive engages in
one or more acts constituting a felony; (ii) the Executive willfully engages in
one or more acts involving fraud; (iii) the Executive willfully misappropriates
Company assets with more than nominal value or willfully engages in misconduct
materially injurious to the Company or its affiliates; or (iv) the Board
determines that the Executive has materially and willfully failed to perform his
duties under this Agreement. For purposes of this Section 6(d) "willful" means
an act done, or omitted to be done, by the Executive in bad faith, provided that
the Executive knew or reasonably should have known that the acts or omission was
not in the best interest of the Company. The Company agrees not to invoke the
provisions of Section 6(d)(iv) unless the Board has previously given the
Executive written notice that his performance has been unsatisfactory and has
afforded the Executive at least 60 days to improve his performance.
(e) The Executive may terminate his employment under this
Agreement if, after a Change in Control of the Company (as defined below), the
Company (i) assigns to the Executive any duties that are inconsistent with the
duties described in Section 3 of this Agreement, (ii) diminishes significantly
the Executive's then existing duties without the Executive's written consent,
(iii) removes the Executive from or fails to re-elect the Executive to the
position described in Section 3 of this Agreement, (iv) reduces the Executive's
Salary, (v) materially fails to comply with Section 5 of this Agreement, (vi)
fails to obtain the assumption of this Agreement by a successor as provided in
Section 20 of this Agreement, (vii) relocates the Executive's office more than
50 miles from the location of the Executive's office upon execution of this
Agreement, (viii) fails to continue in effect any incentive compensation plan
(or any substitute comparable arrangement) or to continue the Executive's
participation in such plan or (ix) breaches this Agreement. For purposes of this
Agreement, "Change in Control" means (1) a merger, consolidation, stock swap or
other acquisition of beneficial ownership, direct or indirect, of securities of
the Company by any person (as that term is defined in Section 13(d) and 14(d) of
the Securities Exchange Ac of 1934, as amended) which (a) would have to be
reported under the Securities Exchange Act of 1934, as amended, or the Florida
Insurance Code or any regulations promulgated thereunder and (b) when combined
with all other securities of the Company beneficially owned, directly or
indirectly, by that person, equals or exceeds 33% of the combined voting power
of the Company's then outstanding securities or (2) during any period of two
consecutive years (the "Period"), individuals who at the beginning of the first
year of the Period constitute the Board of Trustees cease for any reason (other
than resignation) to constitute at least a majority of the Board of Trustees
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.
(f) Termination of the Executive's employment under this
Agreement shall be communicated by the terminating party by written notice of
termination ("Notice of Termination") that shall include (i) the specific
termination provision in Section 6 upon which the terminating party has relied
and (ii) except for a termination under Section 6(a), the facts and
circumstances claimed by the terminating party that provide a basis for the
termination of the Executive's employment.
7. Compensation Upon Termination.
5
<PAGE> 6
(a) For purposes of this Agreement, the "Termination
Date" means (i) if the Executive's employment is terminated pursuant to Section
6(a) of this Agreement, the date of his death, or (ii) if the Executive's
employment is terminated for any other reason, the date on which the Notice of
Termination is delivered to the non-terminating party. Upon termination of the
Executive's employment not for cause or under Sections 6(a), 6(b), or 6(c), the
Executive (or his estate) shall be paid the Salary in accordance with Section
5(a) for two years after the Termination Date, and all other payments and
benefits accrued and due and payable to the Executive prior to the Termination
Date. Upon termination of the Executive" employment under section 6(d), the
Company shall have no further obligation under this Agreement to make any
payments to the Executive or to bestow any benefits on the Executive after the
Termination Date, other than payments and benefits accrued and due and payable
to the Executive prior to the Termination Date.
(b) Upon termination by the Executive of his employment
after a Change in Control of the Company pursuant to Section 6(e) of this
Agreement or upon termination by the Company of the Executive's employment
within two years after a Change in Control not for Cause or under Section 6(b),
in addition to payments and benefits accrued and due and payable to the
Executive prior to the Termination Date, the Company shall pay to the Executive,
within five days after the Termination Date, a lump sum payment equal to: 3 x
(AAC - $1). In this formula, AAC means the Average Annualized Compensation (and
includes Salary, Bonus, and all amounts paid by the Company on the Executive's
behalf or with respect to the Executive for all group insurance plans and
retirement plans) from the Company includable in the Executive's gross income
over the most recent fiscal years of the Executive's employment (not to exceed
five fiscal years) preceding the fiscal year in which the Change in Control of
the Company occurs. This lump sum payment shall be reduced by the present value
of all other payments made to the Executive or on the Executive's behalf that
would constitute a "parachute payment" as defined in Section 280G of the
Internal Revenue Code of 1986, as amended. The Executive shall not be required
to mitigate the amount of any payment provided for in this Section 7(b) by
seeking other employment or otherwise, nor shall the amount of any payment
provided for in this Section 7(b) be reduced by any compensation earned by the
Executive as the result of employment by another employer after the Termination
Date, or otherwise.
(c) The Company shall maintain in full force and effect
until the Termination Date all group insurance plans (the "Plans") in which the
Executive was a participant immediately prior to the date of the Notice of
Termination, provided that the Executive's continued participation is permitted
under the terms of the Plans. If the Executive's continued participation is not
permitted after the Notice of Termination under the terms of a Plan, the Company
shall arrange to provide the Executive with alternative benefits substantially
similar to those provided under that Plan until the later of (i) the Termination
Date and (ii) the date the payments made pursuant to Section 7(a) cease.
(d) For the purposes of all retirement plans of the
Company applicable to the Executive and in effect on the date of the Notice of
Termination, the Company shall provide for payment of retirement or death
benefits to the executive or the Executive's surviving spouse that are
calculated to reflect service credits for the period ending on the Termination
Date as though the Executive were an employee of the Company through this
period. The Company shall offer
6
<PAGE> 7
without cost or charge to the Executive the right to assume ownership of all
policies of life insurance purchased on the Executive's life.
8. Confidentiality.
(a) The Executive acknowledges that as a result of his
employment by the Company, the Executive has and will become informed of, and
have access to, valuable and confidential information of the Company, including
inventions, trade secrets, technical information know-how, plans,
specifications, and the identity of customers and suppliers (collectively,
"Confidential Information"), and that this Confidential Information, even though
it may be contributed, developed or acquired by the Executive, is the exclusive
property of the Company to be held by the Executive in trust and solely for the
Company's benefit. Accordingly, the Executive shall not at any time during or
subsequent to the Term use, reveal, report, publish, transfer or otherwise
disclose to any person, corporation or other entity, any of the Confidential
Information without the prior written consent of the Company, except to officers
and employees of the Company, vendors or consultants to the Company that have
executed nondisclosure agreements in favor of the Company, and other persons
whom the Company agrees are in a contractual or fiduciary relationship with the
Company or who have a need for this information for purposes that are in the
best interests of the Company. This provision does to prohibit the Executive
from disclosing information which legally is or becomes of general public
knowledge from authorized sources other than the Executive.
(b) If the Confidential Information known to the
Executive or in his possession is subpoenaed, subject to a demand for
production, or any other form of legal process issued with respect to the
Confidential Information by any judicial, regulatory, administrative,
legislative or governmental authority, or any other person or entity, the
Executive agrees to notify the Company promptly that such subpoena, demand or
other legal process has been received. The Executive agrees to use his best
efforts, consistent with the requirements of applicable law, to protect the
Confidential Information from disclosure and to cooperate with the Company in
seeking protection from disclosure of the Confidential Information. If the
Executive is required to disclose the Confidential Information, the Executive
agrees, at the Company's request and expense, to use his best efforts to obtain
assurances that the Confidential Information will be maintained on a
confidential basis and not be disclosed to a greater degree that legally
required.
(c) Upon the termination of this Agreement, the Executive shall
promptly deliver to the Company all originals and all copies that are in the
Executive's possession or control of the following: all customer lists,
drawings, manuals, letters, notes, notebooks, reports and all other materials,
including those of a secret or confidential nature, relating to the Company's
business. The Executive agrees to represent to the Company that he has complied
with the provisions of this Section at the time the Executive ceases to be an
employee of the Company.
7
<PAGE> 8
9. Noncompetition and Nonsolicitation.
(a) Noncompetition. The Executive agrees that during the Term and
for two years after the Termination Date, the Executive shall not, directly or
indirectly, engage, participate, or assist in any business organization whose
activities or products are directly competitive with the activities or products
of the Company, or any subsidiary or parent of the Company, in areas where the
Company does business, whether as owner, part-owner, stockholder, partner,
director, officer, trustee, employee, agent, consultant or in any other
capacity, on his own behalf or on behalf of any corporation, partnership or
other business organization. The Executive may make passive investments in a
competitive enterprise the shares of which are publicly traded, provided that
the Executive's holdings in such enterprise, together with the holdings of any
of the Executive's affiliates (as that term is defined in Rule 405 of the Rules
under the Securities Exchange Act of 1934, as amended), do not exceed 5% of the
outstanding shares of the stock of such enterprise comparable to the stock owned
by the Executive.
(b) Nonsolicitation. The Executive agrees that during the Term and
for two years after the Termination Date, he shall not (a) directly or
indirectly solicit any person (natural or otherwise) to purchase or sell
products directly or indirectly competitive with the Company's products if the
person is or had been a vendor or purchaser or the Company's products during the
12 months prior to the termination of this Agreement or (b) recruit or otherwise
solicit or induce any person who is at the time an employee or consultant of the
Company to terminate his employment with, or otherwise cease his relationship
with the Company, or hire any such employee or consultant who has left the
employ of the Company within one year after termination of that employee's or
consultant's employment with the Company.
(c) Restrictions Reasonable. The restrictions against competition
and solicitation set forth above are considered by the parties to be reasonable
for the purposes of protecting the business of the Company. If any restriction
is found by a court of competent jurisdiction to be unenforceable because it
extends for too long a period of time, over too broad a range of activities or
in too large a geographic area, that restriction shall be interpreted to extend
only over the maximum period of time, rang of activities or geographic area as
to which it may be enforceable.
10. Remedies. The Executive and the Company acknowledge that the
Company would not have an adequate remedy at law for money damages if the
covenants contained in Sections 8 or 9 were not complied with in accordance with
their terms. The Executive and the Company therefore agree that in the event of
an anticipated breach or actual breach by the Executive of the provisions of
Sections 8 or 9, the Company shall be entitled to inform in writing all of the
Executive's potential or new employers, partners, shareholders, officers,
directors or borrowers of the terms of this Agreement. Because the breach or
threatened breach of any of the covenants in Sections 8 or 9 will result in
immediate and irreparable injury to the Company, the Executive agrees that (in
the event of a violation or threatened violation of Sections 8 or 9 to the
fullest extent allowed by law. The Executive covenants and agrees that if the
Executive violates any of the covenants and agreements in Sections 8 and 9, the
Company shall be entitled to an accounting and repayment of all profits,
compensation, commissions, remuneration or benefits
8
<PAGE> 9
which the Executive directly or indirectly realizes or may realize as a result
of or in connection with a violation. Nothing in this Agreement shall prohibit
the Company from pursuing all other legal or equitable remedies that may be
available to it or a breach or threatened breach, including the recovery of
damages.
11. Dispute Resolution Procedure. The parties agree that any dispute
arising out of the employment relationship between them, including the
termination of that relationship, shall be resolved under the following
procedures:
(a) The party claiming to be aggrieved shall furnish to
the other party a written statement of the grievance identifying any witnesses
or documents that support the grievance and the relief requested or proposed.
(b) If the other party does not agree within five business
days after receipt of the statement to furnish promptly the relief requested
or proposed, or otherwise does not satisfy the demand of the party claiming to
be aggrieved within five business days after receipt of the statement, the
parties shall promptly submit the dispute to nonbinding mediation before a
mediator to be jointly selected by the parties.
The Company will pay the cost of the mediation.
(c) If the mediation does not produce a resolution of the
dispute within five business days after mediation commences, the parties agree
that the dispute shall be promptly resolved by final and binding arbitration by
an arbitrator mutually selected by the parties or, if no agreement as to the
selection of an arbitrator is reached, selection shall be made pursuant to the
Expedited Labor Arbitration Rules of the American Arbitration Association,
except that the arbitrator shall be selected by alternately striking names from
a panel of five neutral labor or employment arbitrators designated by the
American Arbitration Association.
The arbitrator shall have the authority to grant any relief
authorized by law, provided, however, that nothing herein shall limit the right
of the Company to obtain injunctive relief from a court for violation of the
provisions of this Agreement relating to confidentiality and noncompetition. The
arbitrator shall not have the authority to modify, change or refuse to enforce
the terms of this Agreement. In addition, the arbitrator shall not have the
authority to require the Company to change any lawful policy or benefit plan.
The final arbitration hearing shall be transcribed. The
non-prevailing party shall bear the costs of the arbitration, including the
prevailing party's attorneys' fees.
(d) Except as otherwise provided in this Agreement, arbitration
shall be the exclusive final remedy for all disputes between the parties, and
the parties agree that no dispute shall be submitted to arbitration if the party
claiming to be aggrieved has not complied with the preliminary steps in
paragraphs (a) and (b) above.
12. Survival. The provisions of Sections 8, 9, 10 and 11 shall survive
the termination of this Agreement and shall inure to the benefit of the Company,
its successors and assigns.
9
<PAGE> 10
13 Third-Party Agreements and Rights. The Executive confirms that he is
not bound by any agreement with a previous employer or other party that would
restrict employment of the Executive in any business or the Executive's use or
disclosure of information, except the agreements disclosed on Schedule 1 to this
Agreement and delivered to the Company prior to its acceptance by the Company.
The Executive represents that his execution of this Agreement, employment with
the Company and performance of the duties in this Agreement will not violate any
obligations the Executive may have to a former employer or other person or
entity. The Executive shall not disclose or make use of information in violation
of any agreements with or rights of his former employers or other person or
entity, and shall not bring to the Company's premises copies or other tangible
embodiments of non-public information belonging to or obtained from any previous
employer or other person or entity.
14. Federal Income Tax Withholding. The Company may withhold from
benefits payable under this Agreement, or arrange for the payment of, federal,
state, local or other taxes as required pursuant to governmental regulation or
ruling.
15. Assurances. The Executive and the Company agree to execute,
acknowledge, deliver and file, or cause to be executed, acknowledged, delivered
and filed, all further instruments, agreements or documents as may be necessary
to consummate the transactions provided for in this Agreement and to do all
further acts necessary to carry out the purpose and intent of this Agreement.
16. Waiver. No term or condition of this Agreement shall be deemed to
have been waived, nor shall there be any estoppel against the enforcement of any
provision of this Agreement, except by written instrument of the party charged
with the waiver or estoppel. No written waiver shall be deemed a continuing
waiver unless specifically stated therein, and each waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
the term or condition for the future or as to any act other than that
specifically waived.
17. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida without reference to its
conflicts of law principles.
18. Attorneys' 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 immediately pay upon
demand, all reasonable attorneys' fees and expenses of the prevailing party.
19. Notices. Notices required or permitted to be given under this
Agreement shall be in writing and effective upon delivery in person or by
certified mail, return receipt requested, to the parties at the addresses below
or to another address as either party shall direct by notice to the other party
in accordance with this Section.
10
<PAGE> 11
(a) If to the Company:
Physicians Protective Trust Plan
2121 Ponce de Leon Boulevard
P.O. Box 149001
Coral Gables, Florida 33114
Facsimile: 305-443-5250
Attn: Chairman
With a copy to:
Thomas G. O'Brien III
Steel Hector & Davis LLP
1900 Phillips Point West
777 South Flagler Drive
West Palm Beach, Florida 33401-6198
Facsimile: 561-655-1509
(b) If to the Executive:
Steven L. Salman
5003 Old Federal Road
Louisville, Kentucky 40207
Facsimile: 502-897-7798
20. Assignment.
(a) This Agreement and all of the Executive's rights, duties and
obligations under this Agreement are personal in nature and shall not be
assignable by the Executive. A purported assignment shall not be valid or
binding on the Company.
(b) This Agreement shall inure to the benefit of and be legally
binding upon all successors and assigns of the Company. The Company will require
a successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company, by agreement in form and substance satisfactory to the executive, to
expressly assume and agree to perform this Agreement in the same manner and to
the same extent that the Company would be required to perform it if no such
succession had taken place. For purposes of this Section 20, "Company" shall
mean the Company as defined above and all successors to its business or assets
that execute and deliver the agreement provided for in this Section 20 or that
otherwise become bound by the terms and provisions of this Agreement by
operation of law.
21. Entire Agreement. This Agreement constitutes the entire
understanding of the parties and supersedes all prior discussions, negotiations,
agreements and understandings, whether oral or written, with respect to its
subject matter. This Agreement may be modified only by a written instrument
properly executed by the Executive and the Company.
11
<PAGE> 12
22. Severability. If any one or more of the provisions of this
Agreement is held invalid, illegal or unenforceable, the remaining provisions of
this Agreement shall be unimpaired, and the invalid, illegal or unenforceable
provision shall be replaced by a mutually acceptable valid, legal and
enforceable provision which comes closest to the intent of the parties.
PHYSICIANS PROTECTIVE
TRUST FUND
By /s/ Eliot H. Berg /s/ Steven L. Salman
------------------------------------ -------------------------------------
Eliot H. Berg, M.D., Chairman of Steven L. Salman, Individually
the Board
12
<PAGE> 13
PPTF CEO BONUS ALLOCATION CHART
YEAR 1 (1997)
<TABLE>
<CAPTION>
REDUCE COMBINED
PERFORMANCE GOAL FOR INCREASE MED-MAL RATIO BY 10 TIMELY IMPLEMENTATION
YEAR REVENUES BY MORE PERCENTAGE POINTS OR OF COMPLETED BUSINESS
1 THAN 10 PERCENT MORE PLAN
<S> <C> <C> <C>
PERCENTAGE
WEIGHTING FOR 25% 25% 10%
EACH GOAL
1.5% for each 1.5% for each point
percent increase up decrease up to and
PARTIALLY to and equal to equal to 4.00% and
ATTAINED GOALS 4.00% and 2.5%for 2.5% for each
WILL BE each percent percentage point N/A
ALLOCATED AS increase above decrease above 4.00%
FOLLOWS 4.00% and up to or and up to or equal
equal to 10.00% and to 10.00% and all
all 25% if revenues 25% if the combined
increase by 10.01% ratio decreases by
or more. 10.01 points or more.
<CAPTION>
CONVERT TRUST TO STOCK COMPANY
PERFORMANCE GOAL FOR & CREATE STOCK OPTION PLAN FOR
YEAR EXEC. STAFF IMPLEMENT NEW ESOP MANAGEMENT
1 AND RETIREMENT PLAN EFFECTIVENESS TOTAL
<S> <C> <C> <C>
PERCENTAGE
WEIGHTING FOR 15% 25% 100%
EACH GOAL
PARTIALLY
ATTAINED GOALS
WILL BE N/A PER BOARD
ALLOCATED AS
FOLLOWS
</TABLE>
13
<PAGE> 14
PPTF CEO BONUS ALLOCATION CHART
YEAR 2 (1998) GOALS WILL BE REVIEWED AT THE BEGINNING OF EACH YEAR AND ANY
CHANGES WILL BE AGREED BY AND SIGNED BY PPTF AND THE CEO.
<TABLE>
<CAPTION>
PERFORMANCE MORE THAN 10% OF WRITTEN INCREASE MED-MAL REDUCE COMBINED RATIO BY 10
GOAL FOR YEAR A.M. BEST PREMIUM FROM OTHER LINES REVENUES BY MORE THAN POINTS OR ACHIEVE AN
2 RATING OF A- OF COVERAGE* 10 PERCENT UNDERWRITING GAIN
<S> <C> <C> <C> <C>
PERCENTAGE
WEIGHTING FOR
EACH GOAL 15% 15% 20% 20%
PARTIALLY ATTAINED 10% for B++ 1.0% for each percent 1.0% for each percent 1.0% for each point decrease up
GOALS WILL BE increase up to or equal increase up to or to or equal to 4.00% and 2% for
ALLOCATED AS FOLLOWS 5% for B+ to 3.00% and 1.5% for equal to 4.00% and 2% each point decrease above 4.00%
each percent increase for each percent up to or equal to 10.00% and all
above 3.00% and up to or increase above 4.00% 20% if the combined ratio
equal to 10.00% and all and up to or equal to decreases by 10.01 points or an
15% if written premiums 10.00% and all 20% if underwriting gain is achieved.
from other lines revenues increase by
increases by 10.01% or 10.01% or more.
more.
<CAPTION>
MORE THAN $100,000
PERFORMANCE IN PROFIT FROM
GOAL FOR YEAR NON-RISK BEARING MANAGEMENT TOTAL
2 VENTURES EFFECTIVENESS
<S> <C> <C> <C>
PERCENTAGE
WEIGHTING FOR
EACH GOAL 10% 20% 100%
PARTIALLY ATTAINED .7% for each
GOALS WILL BE $10,000 in profit
ALLOCATED AS FOLLOWS up to $30,000 and
1.0% for each PER BOARD
$10,000 in profit
above $30,000 but
below $100,001 and
all 10% if profit
from non risk
bearing ventures
exceeds $100,000.
</TABLE>
*Other Lines of coverage include general liability, dentists, lawyers,
engineers, provider stop loss, etc. (anything other than medical malpractice for
physicians and surgeons).
14
<PAGE> 15
PPTF CEO BONUS ALLOCATION CHART
YEAR 3 (1999) GOALS WILL BE REVIEWED AT THE BEGINNING OF EACH YEAR AND ANY
CHANGES WILL BE AGREED BY AND SINGED BY PPTF AND THE CEO.
<TABLE>
<CAPTION>
INCREASE WRITTEN
PREMIUMS FROM
OTHER LINES OF REDUCING COMBINED
PERFORMANCE SUCCESSFUL IPO, COVERAGE BY MORE INCREASE MED-MAL RATIO BY 10 POINTS
GOAL FOR YEAR ACQUISITION OR THAN $5,000,000 REVENUES 10 OR ACHIEVE AN
2 MERGER OVER PRIOR YEAR.* PERCENT UNDERWRITING GAIN
<S> <C> <C> <C> <C>
PERCENTAGE
WEIGHTING FOR
EACH GOAL 20% 15% 15% 15%
PARTIALLY ATTAINED A IPO or merger 15% for achieving 1.0% for each 1.0% for each
GOALS WILL BE is considered goal 2.5% for percent increase percentage point
ALLOCATED AS FOLLOWS successful if each additional up to or equal to decrease up to or
the stock price $1,000,000 5.00% and 2% for equal to 5.00% and
or purchase written over each percent 2% for each point
price of the prior year. increase above decrease above
company is 20% 5.00% and up to 5.00% up to or
above book or equal to equal to 10.00% and
value. Each 10.00% and all all 15% if the
percent above 15% if revenues combined ratio
book value will increase by decreases by 10.01
be worth 1% up 10.01% or more. points or an
to 20%. underwriting gain
is achieved.
<CAPTION>
INCREASE PROFIT
FROM NON-RISK
PERFORMANCE BEARING VENTURES
GOAL FOR YEAR BY MORE THAN MANAGEMENT
2 $100,000. EFFECTIVENESS TOTAL
<S> <C> <C> <C>
PERCENTAGE
WEIGHTING FOR
EACH GOAL 10% 25% 100%
PARTIALLY ATTAINED 10% for achieving
GOALS WILL BE goal 1% for each
ALLOCATED AS FOLLOWS $10,000 above PER BOARD
$29,999 nothing
for less than
$29,999.
</TABLE>
*Other Lines of coverage include general liability, dentists, lawyers,
engineers, provider stop loss, etc. (anything other than medical malpractice for
physicians and surgeons).
15
<PAGE> 1
EXHIBIT (10)(l)
ASSIGNMENT AND ASSUMPTION AGREEMENT
This Assignment and Assumption Agreement (the "Agreement") among
Physicians Protective Trust Fund (the "Company"), Professionals Insurance
Company Management Group ("Professionals Group"), PICOM Insurance Company
("PICOM") and Steven L. Salman (the "Executive") is effective as of July 1, 1998
(the "Effective Date").
WITNESSETH:
WHEREAS, the Company and the Executive entered into an Employment
Agreement effective as of October 1, 1996 (the "Executive Agreement"); and
WHEREAS, on the Effective Date of this Agreement, the Company is being
merged with and into PICOM, a wholly-owned subsidiary of Professionals Group;
and
WHEREAS, capitalized terms not otherwise defined in this Agreement
shall have the meanings given to them in the First Amended and Restated
Agreement and Plan of Merger dated October 3, 1997 (the "Merger Agreement")
among Professionals Group, PICOM and the Company.
NOW, THEREFORE, for other good and valuable consideration (the receipt
and sufficiency of which is hereby acknowledged), the parties hereto agree as
follows:
1. The term of the Executive's employment under the Executive Agreement
is hereby extended from September 30, 2001 to January 31, 2002.
2. Professionals Group hereby expressly assumes the obligations of the
Company under the Executive Agreement. Professionals Group hereby guarantees the
performance of all obligations of the Company under the Executive Agreement. To
the fullest extent permitted under the Michigan Insurance Code of 1956, as
amended (the "Michigan Insurance Code"), PICOM hereby expressly assumes the
obligations of the Company under the Executive Agreement; provided, however,
that to the extent that PICOM is prohibited under the Michigan Insurance Code
from assuming or performing the obligations of the Company under the Michigan
Insurance Code, PICOM shall not be bound or obligated under the Executive
Agreement.
3. The Executive's job title will be President and Chief Executive
Officer of PICOM. The Executive shall be a member of the Board of Directors of
PICOM. The Executive will report directly to, and work at the direction of, the
Board of Directors of PICOM. The Executive's duties (a) generally will include
management of and strategic planning for PICOM, and other duties assigned to the
Executive by the Board of Directors of PICOM, and (b) may change from time to
time on reasonable notice based on the needs of PICOM and the Executive's
skills, consistent with the Executive's background and experience, as determined
by the Board of Directors of PICOM. Upon execution of this Agreement, Executive
shall be appointed to the Board of Directors of Professionals Group and to the
position of Chief Operating Officer of Professionals Group.
1
<PAGE> 2
4. In consideration of the Executive's covenants in the Executive
Agreement and in this Assignment and Assumption Agreement, and pursuant to the
Stock Grant Agreement dated July 1, 1998 executed by and between Professionals
Group and Executive pursuant to Section 1.28 of the Merger Agreement,
Professionals Group shall issue and deliver to the Executive 28,180 shares of
Professionals Group Common Stock in four equal and annual installments;
provided, however, that the last such installment shall be made and delivered on
or before January 30, 2002. The stock need not be registered with the Securities
and Exchange Commission and need not be freely tradeable by the Executive. The
Executive agrees to comply with all securities laws in connection with the
retention, sale or disposition of Professionals Group Common Stock received
pursuant to this Agreement.
5. In all other respects, the Executive Agreement is ratified and
confirmed.
PHYSICIANS PROTECTIVE
TRUST FUND
By /s/ Eliot H. Berg, M.D. /s/ Steven L. Salman
---------------------------- ----------------------------------
Eliot H. Berg, M.D. Steven L. Salman, individually
Chairman of the Board
PROFESSIONALS INSURANCE COMPANY PICOM INSURANCE COMPANY
MANAGEMENT GROUP
By /s/ Victor T. Adamo By /s/ Steven L. Salman
---------------------------- --------------------------------
Victor T. Adamo Victor T. Adamo
President and Chief President and Chief
Executive Officer Executive Officer
2
<PAGE> 1
EXHIBIT (10)(m)
CONFIDENTIALITY, NONCOMPETITION AND STOCK GRANT AGREEMENT
THIS CONFIDENTIALITY, NONCOMPETITION AND STOCK GRANT AGREEMENT
("Agreement") is made and entered into as of the first day of July, 1998 by and
between Professionals Insurance Company Management Group, Inc., a Michigan
corporation ("Professionals Group"), and Steven L. Salman (the "Executive").
W I T N E S S E T H :
WHEREAS, Executive is currently an employee of PICOM Insurance Company,
a wholly-owned subsidiary of Professionals Group ("PICOM"); and
WHEREAS, Executive acknowledges (i) that as a result of Executive's
prior employment with Physicians Protective Trust Fund ("PPTF") and Executive's
employment with PICOM, Executive has obtained and will obtain confidential and
proprietary information relating to the business of Professionals Group and its
subsidiaries and (ii) that the compensation, covenants not to compete and
confidentiality provisions in this Agreement are reasonable.
NOW, THEREFORE, in consideration of the premises, as well as for other
good and valuable consideration (the receipt and sufficiency of which is hereby
acknowledged), the parties hereby agree as follows:
1. Definitions. Capitalized terms not otherwise defined in this
Agreement shall have the meanings given to them in the First Amended and
Restated Agreement and Plan of Merger dated October 3, 1997 among Professionals
Group, PICOM and PPTF (the "Merger Agreement").
2. Confidentiality.
a Executive acknowledges (i) that as a result of Executive's
prior employment with PPTF and Executive's employment with PICOM, Executive has
and will become informed of, and has had and will have access to, valuable and
confidential information of Professionals Group and its subsidiaries including,
but not limited to, trade secrets, technical information, know-how, plans,
specifications, marketing and sales information, claims handling information,
investment information, and the identity of stockholders, policyholders and
reinsurers (collectively, "Confidential Information"), (ii) that the
Confidential Information is the exclusive property of Professionals Group and
its subsidiaries, and (iii) that the Confidential Information is to be held by
Executive in trust and solely for the benefit of Professionals Group and its
subsidiaries. Accordingly, Executive shall not at any time subsequent to the
date of this Agreement use reveal, report, publish, transfer or otherwise
disclose to any person or entity any of the Confidential Information without the
prior consent of Professionals Group, except to officers and employees of
Professionals Group or any of its subsidiaries, and other persons or entities
whom Professionals Group agrees are in a contractual or fiduciary relationship
with Professionals Group and its subsidiaries. This provision does not prohibit
Executive from
1
<PAGE> 2
disclosing information which legally is or becomes of general public knowledge
from authorized sources other than Executive.
b. If the Confidential Information known to Executive or in
Executive's possession is subpoenaed, is subject to a demand for production, or
is subject to any other form of legal process, by any judicial, regulatory,
administrative, legislative or governmental authority, or any other person or
entity, Executive agrees to notify Professionals Group promptly that such
subpoena, demand or other legal process has been received. Executive agrees to
use Executive's best efforts, consistent with the requirements of applicable
law, to protect the Confidential Information from disclosure and to cooperate
with Professionals Group and its subsidiaries in seeking protection from
disclosure of the Confidential Information. If Executive is required to disclose
the Confidential Information, Executive agrees, at Professionals Group's request
and expense, to use Executive's best efforts to obtain assurances that the
Confidential Information will be maintained on a confidential basis and not be
disclosed to a greater degree than legally required.
c. Upon the termination of Executive's employment with
Professionals Group or any of its subsidiaries, Executive shall promptly deliver
to Professionals Group all originals and all copies that are in Executive's
possession or control of the following: all customer lists, stockholder lists,
lists of names of beneficial owners, policyholder lists, manuals, letters,
notes, notebooks, reports and all other materials relating to the business of
Professionals Group and its subsidiaries. Executive shall represent to
Professionals Group that Executive has complied with the provisions of this
Section 2 at the time Executive ceases to be an employee of Professionals Group
or any of its subsidiaries.
3. Noncompetition and Nonsolicitation.
a. Executive agrees that during Executive's employment with
Professionals Group or any of its subsidiaries and for two years after
termination of such employment (for whatever reason), Executive shall not,
directly or indirectly, engage, participate, or assist in any business
organization by performing services related to the providing of malpractice
insurance to physicians, dentists and other persons or entities insured by
Professionals Group or any of its subsidiaries (the "Proscribed Activities") in
the states in which Professionals Group or any of its subsidiaries is then
conducting the Proscribed Activities, whether as owner, part-owner, stockholder,
partner, director, officer, trustee, employee, agent, consultant or in any other
capacity, on Executive's own behalf or on behalf of any person or entity.
Executive may make passive investments in a competitive enterprise the voting
equity interests of which are publicly traded, so long as Executive's holdings
in such enterprise, together with the holdings of any of Executive's affiliates
(as that term is defined in Rule 405 under the Securities Exchange Act of 1934,
as amended (the "Exchange Act")), do not to exceed 3% of the outstanding voting
equity interests of such enterprise.
b. Executive agrees that during Executive's employment with
Professionals Group or any of its subsidiaries and for two years after
Executive's termination (for whatever reason), Executive shall not (i) directly
or indirectly solicit any person or entity in the states in which Professionals
Group or any of its subsidiaries is then conducting the Proscribed Activities to
purchase insurance products or services competitive with the Proscribed
Activities, (ii) directly or indirectly solicit any person or entity to purchase
or sell insurance products or
2
<PAGE> 3
services relating to the Proscribed Activities, or (iii) recruit or otherwise
solicit or induce any person who is at the time an employee or consultant with
Professionals Group or any of its subsidiaries to terminate such person's
employment or consulting relationship with Professionals Group or any of its
subsidiaries.
4. Restrictions Reasonable. The restrictions against competition and
solicitation set forth in this Agreement are considered by the parties to be
reasonable for the purposes of protecting the business of Professionals Group
and its subsidiaries. If any restriction is found by a court of competent
jurisdiction to be unenforceable because it extends for too long a period of
time, or over too broad a range of activities, or in too large a geographic
area, then that restriction shall be interpreted to extend only over the maximum
period of time, or range of activities, or geographic area, as to which it may
be enforceable.
5. Remedies. Executive and Professionals Group acknowledge that
Professionals Group and its subsidiaries would not have an adequate remedy at
law for money damages if the covenants contained in Sections 2 or 3 of this
Agreement were not complied with in accordance with their terms. Because the
breach or threatened breach of any of the covenants in Sections 2 or 3 of this
Agreement will result in immediate and irreparable injury to Professionals Group
and its subsidiaries, Executive agrees that Professionals Group and its
subsidiaries shall be entitled to an injunction restraining Executive from
violating Sections 2 and 3 to the fullest extent allowed by law. Nothing in this
Agreement shall prohibit Professionals Group or any of its subsidiaries from
pursuing all other legal or equitable remedies that may be available to it for a
breach or threatened breach, including the recovery of damages.
6. Stock Grant. In consideration of, among other things, Executive's
covenants regarding confidentiality and noncompetition, Professionals Group has
granted and allocated to Executive 35,224 shares of Professionals Group Common
Stock (the "Shares").
a. The grant and allocation of Shares to Executive shall be
provisional, and subject to the vesting requirements of this Agreement. Any
Shares that do not vest pursuant to the terms of this Agreement shall be
canceled and forfeited.
b. The Shares granted and allocated to Executive shall vest in
accordance with the schedule that follows: (i) one-fifth of the Shares granted
and allocated to Executive shall vest on the date of the first meeting of the
Board of Directors of Professionals Group following the INSCO Effective Time
provided Executive is then in the employ of Professionals Group or its
subsidiaries; (ii) one-fifth of the Shares granted and allocated to Executive
shall vest on June 2, 1999 provided that certain "Employment Agreement"
effective October 1, 1996 between Executive and PPTF shall not have been
terminated prior to June 2, 1999; (iii) one-fifth of the Shares granted and
allocated to Executive shall vest on June 7, 2000 provided that certain
"Employment Agreement" effective October 1, 1996 between Executive and PPTF
shall not have been terminated prior to June 7, 2000; (iv) one-fifth of the
Shares granted and allocated to Executive shall vest on June 6, 2001 provided
that certain "Employment Agreement" effective October 1, 1996 between Executive
and PPTF shall not have been terminated prior to June 6, 2001; and (v) one-fifth
of the Shares granted and allocated to Executive shall vest on January 1, 2002
provided Executive shall have remained in the continuous employ of Professionals
Group or any of its subsidiaries from the date first above written to January 1,
2002. Notwithstanding anything to the contrary express or implied in this
Agreement or the Merger Agreement, and
3
<PAGE> 4
provided Executive is then in the employ of Professionals Group or any of its
subsidiaries, all Shares granted and allocated to Executive shall automatically
vest (y) upon the death of Executive while in the employ of Professionals Group
or any of its subsidiaries, or (z) upon a change of control of Professionals
Group.
c. All Shares granted and allocated to Executive that vest shall
cease to be subject to cancellation and forfeiture and, except to the extent
that Executive may have pledged or otherwise encumbered such vested Shares,
Executive shall be the full record and beneficial owner of such vested Shares.
Within 30 days of the date of vesting of any of the Shares granted and allocated
to Executive, Professionals Group shall deliver to Executive certificates
evidencing full legal and beneficial ownership of the Shares vesting on such
date. Those Shares granted and allocated to Executive that vest need not, at the
time of such vesting, be registered with the Securities and Exchange Commission
and need not be freely tradeable by Executive. Executive agrees to comply with
all securities laws in connection with the retention, sale or disposition of any
Shares of Professionals Group Common Stock received by Executive.
d. For purposes of this Agreement: A change of control shall be
deemed to have occurred if (i) any person or entity (other than a person or
entity in control of Professionals Group as of the date of this Agreement, or
other than a trustee or other fiduciary holding securities under an employee
benefit plan of Professionals Group or any of its subsidiaries, or an entity
owned directly or indirectly by the stockholders of Professionals Group in
substantially the same proportions as their ownership of stock of Professionals
Group) becomes the "beneficial owner" (defined herein as in Rule 13d-3 under the
Exchange Act) of securities of Professionals Group representing more than 24.9%
of the combined voting power of Professionals Group's then outstanding voting
securities; or (ii) during any period of two consecutive years commencing after
the date of this Agreement 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 PICOM so as to cause PICOM 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 the 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. Notwithstanding anything to the
contrary express or implied in this Agreement, in no event shall a change of
control be deemed to have occurred, with respect to Executive, if Executive is
part of a group which effects the change of control. Executive shall be deemed
"part of a group" for purposes of the preceding sentence if Executive is an
equity participant or has agreed to become an equity participant in such group
(except for passive ownership of less than 5% of the stock of such group or
ownership of equity participation in such group which is otherwise deemed not to
be significant, as determined prior to the change of control by a majority of
the nonemployee continuing directors of Professionals Group).
4
<PAGE> 5
e. Upon the occurrence after the date first above written of any
dividend or other distribution (whether in the form of cash, shares, other
securities, or other property), change in the capital or shares of capital
stock, recapitalization, stock split, reverse stock split, reorganization,
merger, consolidation, split-up, spin-off, combination, repurchase, or exchange
of shares or other securities of Professionals Group, issuance of warrants or
other rights to purchase shares or other securities of Professionals Group, or
extraordinary transaction or event which affects Professionals Group Common
Stock, then the Board of Directors shall have the authority to make such
adjustment, if any, in such manner as it deems appropriate, to the number of
shares of Professionals Group Common Stock granted and allocated to Executive;
provided, however, (i) that the number of shares of Professionals Group Common
Stock granted and allocated to Executive shall always be a whole number; and
(ii) in the event that any award under the Professionals Group 1996 Long Term
Incentive Plan is adjusted by the Board of Directors of Professionals Group
pursuant to Section 4(b) thereof, then an appropriate adjustment shall be made
to the number of shares of Professionals Group Common Stock granted and
allocated to Executive.
f. It is understood and agreed that Executive is responsible
for all tax payments. If Professionals Group, in its sole discretion, shall
determine that Professionals Group or any of its subsidiaries has incurred or
will incur any liability to withhold any federal, state or local income or other
taxes by reason of the grant and allocation of shares of Professionals Group
Common Stock to Executive then Professionals Group may effect such withholding.
7. Right of Employment. It is understood and agreed (i) that except as
otherwise provided in this Agreement, no person or entity other than Executive
shall have any claim or right to be granted, or to be allocated, or to receive,
any Shares of Professionals Group Common Stock under this Agreement or
otherwise; and (ii) that neither this Agreement nor any action taken or not
taken pursuant to this Agreement shall be construed as giving Executive any
right to be retained in the employ of PICOM or Professionals Group or any of its
subsidiaries. Nothing in this Agreement shall modify, or constitute a waiver of,
either that certain "Executive Termination Following Change In Control
Agreement" dated October 1, 1996 by and between Executive and PPTF or that
certain "Employment Agreement" effective October 1, 1996 between Executive and
PPTF.
8. No Funding. This Agreement shall be unfunded. Professionals Group
shall not be required to establish any special or separate fund or to make any
other segregation of assets to assure the vesting of any of the Shares;
provided, however, that Professionals Group has reserved for issuance pursuant
to this Agreement that number of shares of Professionals Group Common Stock that
is equivalent to the number of shares of Professionals Group Common Stock
granted and allocated to Executive pursuant to this Agreement.
9. Survival. The provisions of Sections 2, 3 and 4 of this Agreement
shall survive the termination of this Agreement and shall insure to the benefit
of Professionals Group, its successors and assigns.
10. Further Assurances. Executive and Professionals Group agree to
execute, acknowledge, deliver and file, or cause to be executed, acknowledged,
delivered and filed, all further instruments, agreements or documents as may be
necessary to consummate the
5
<PAGE> 6
transactions provided for in this Agreement and to do all further acts necessary
to carry out the purpose and intent of this Agreement.
11. No Waiver. No term or condition of this Agreement shall be deemed
to have been waived, nor shall there by any estoppel against the enforcement of
any provision of this Agreement, except by written instrument of the party
charged with the waiver or estoppel. No written waiver shall be deemed a
continuing waiver unless specifically stated therein, and each waiver shall
operate only as to the specific term or condition waived and shall not
constitute a waiver of the term or condition for the future or as to any act
other than that specifically waived. The waiver by any party of any other
party's breach of any provision of this Agreement shall not operate or be
construed as a waiver of any subsequent breach, and the failure of any party to
exercise any right or remedy shall not operate or be construed as a waiver or
bar to the exercise of such right or remedy upon the occurrence of any
subsequent breach. No delay on the part of a party in exercising a right, power
or privilege hereunder shall operate as a waiver thereof. No waiver on the part
of a party of a right, power or privilege, or a single or partial exercise of a
right, power or privilege, shall preclude further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies of this
Agreement are cumulative and are not exclusive of the rights or remedies that a
party may otherwise have at law or in equity.
12. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Michigan without reference to its
conflicts of law principles.
13. Notices. Notices required or permitted to be given under this
Agreement 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 addresses below (or at such other address for a party as
shall be specified by like notice):
a. If to Professionals Group:
Professionals Insurance Company Management Group
2600 Professionals Drive
P.O. Box 150
Okemos, Michigan 48805-0150
Attention: President
Facsimile: 517-349-3127
with a copy to:
Brad B. Arbuckle, Esq.
Miller, Canfield, Paddock and Stone, P.L.C.
Suite 100
1400 North Woodward
Bloomfield Hills, Michigan 48304
Facsimile: 248-258-3036
b. If to Executive:
6
<PAGE> 7
Steven L. Salman
12225 Vista Lane
Pinecrest, Florida 33156
Facsimile: 305-669-9938
with a copy to:
Thomas G. O'Brien III, Esq.
Steel Hector & Davis LLP
1900 Phillips Point West
777 South Flagler Drive
West Palm Beach, Florida 33401-6198
Facsimile: 561-655-1509
14. Assignment.
a. This Agreement and all of Executive's rights, duties and
obligations under this Agreement are personal in nature and shall not be
assignable by Executive. A purported assignment shall not be valid or binding on
Professionals Group.
b. This Agreement shall inure to the benefit of and be legally
binding upon all successors and assigns of Professionals Group. Professionals
Group will require a successor (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business and/or
assets of Professionals Group, by agreement in form and substance satisfactory
to Executive, to expressly assume and agree to perform this Agreement in the
same manner and to the same extent that Professionals Group would be required to
perform it if no such succession had taken place. For purposes of this Section
14, "Professionals Group" shall mean Professionals Group as defined above and
all successors to its business or assets that execute and deliver the agreement
provided for in this Section 14 or that otherwise become bound by the terms and
provisions of this Agreement by operation of law.
15. Attorneys' 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
the expiration of all appeals immediately pay upon demand all reasonable
attorneys' fees and expenses of the prevailing party.
16. Entire Agreement. This Agreement, that certain "Executive
Termination Following Change In Control Agreement" dated October 1, 1996 by and
between Executive and PPTF, that certain "Employment Agreement" effective
October 1, 1996 between Executive and PPTF, and that certain Assignment and
Assumption Agreement of even date herewith among Executive, Professionals Group,
PICOM and PPTF, constitute the entire understanding of the parties and
supersedes all prior discussions, negotiations, agreements and understandings,
whether oral or written, with respect to the subject matter thereof. This
Agreement may be modified only by a written instrument properly executed by
Executive and Professionals Group.
17. Severability. If any one or more of the provisions of this
Agreement is held invalid, illegal or unenforceable, the remaining provisions of
this Agreement shall be
7
<PAGE> 8
unimpaired, and the invalid, illegal or unenforceable provision shall be
replaced by a mutually acceptable valid, legal and enforceable provision which
comes closest to the intent of the parties.
18. Counterparts. This Agreement may be executed by the parties in
separate counterparts, each of which when so executed and delivered shall be an
original, but all such counterparts shall together constitute one and the same
instrument.
The parties have executed this Agreement effective as of the day and
year first written above.
PROFESSIONALS INSURANCE COMPANY
MANAGEMENT GROUP EXECUTIVE
By: /s/ Victor T. Adamo /s/ Steven L. Salman
---------------------------- --------------------------------
Victor T. Adamo Name: Steven L. Salman
Its: President and
Chief Executive Officer
------------------------------
Taxpayer identification number
8
<PAGE> 1
Exhibit 23
The Board of Directors
Professionals Group, Inc.:
We consent to incorporation by reference in the registration statements (Nos.
333-34359 and 333-34361) on Forms S-8 of Professionals Group, Inc. (formerly
known as Professionals Insurance Company Management Group) of our report dated
February 23, 1999, relating to the consolidated balance sheets of Professionals
Group, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, comprehensive income, shareholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1998, and the related financial statement schedule, which report
appears in the December 31, 1998 annual report on Form 10-K of Professionals
Group, Inc.
The consolidated financial statements and related financial statement schedule
give retroactive effect to the merger of Professionals Group, Inc. and
Physicians Protective Trust Fund on July 1, 1998, which has been accounted for
as a pooling of interests business combination.
KPMG LLP
East Lansing, Michigan
March 26, 1999
<PAGE> 1
EXHIBIT (24)
PROFESSIONALS GROUP, INC.
KNOW ALL MEN by these presents that each of the undersigned hereby
make, constitute and appoint Victor T. Adamo, R. Kevin Clinton, Steven L. Salman
and Annette E. Flood, and each of them, the true and lawful attorney-in-fact of
the undersigned, with full power of substitution and revocation, for and in the
name, place and stead of the undersigned, to execute, deliver and file (with the
Securities and Exchange Commission or any other appropriate governmental
authority) the Annual Report on Form 10-K of Professionals Group, Inc. for the
year ended December 31, 1998, and any and all amendments thereto; such Form 10-K
and each such amendment to be in such form and to contain such terms and
provisions as said attorney or substitute shall deem necessary or desirable;
giving and granting unto said attorney, or to such person or persons as in any
case may be appointed pursuant to the power of substitution herein given, full
power and authority to do and perform any and every act and thing whatsoever
requisite, necessary or, in the opinion of said attorney or substitute, able to
be done in and about the premises as fully and to all intents and purposes as
the undersigned might or could do if personally present, hereby ratifying and
confirming all that said attorney for such substitute shall lawfully do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has duly executed this
instrument as of the 24th day of March, 1999.
/s/ Victor T. Adamo /s/ H. Harvey Gass
- ------------------------- ---------------------------
Victor T. Adamo H. Harvey Gass
/s/ Richard G. Alper /s/ John F. McCaffery
- ------------------------- ---------------------------
Richard G. Alper John F. McCaffery
/s/ Eliot H. Berg /s/ Isaac J. Powell
- ------------------------- ---------------------------
Eliot H. Berg Isaac J. Powell
/s/ Louis P. Brady /s/ Ann F. Putallaz
- ------------------------- ---------------------------
Louis P. Brady Ann F. Putallaz
/s/ Jerry D. Campbell /s/ Steven L. Salman
- ------------------------- ---------------------------
Jerry D. Campbell Steven L. Salman
/s/ R. Kevin Clinton /s/ Edward S. Truppman
- ------------------------- ---------------------------
R. Kevin Clinton Edward S. Truppman
/s/ John F. Dodge, Jr. /s/ William H. Woodhams
- ------------------------- ---------------------------
John F. Dodge, Jr. William H. Woodhams
/s/ Donald S. Young
---------------------------
Donald S. Young
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF PROFESSIONALS GROUP, INC. (FORMERLY
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP) AS OF DECEMBER 31, 1998 AND
FOR THE YEAR THEN ENDED (IN THOUSANDS).
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 669,118
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 3,901
<MORTGAGE> 0
<REAL-ESTATE> 421
<TOTAL-INVEST> 691,033
<CASH> 379
<RECOVER-REINSURE> 577
<DEFERRED-ACQUISITION> 1,500
<TOTAL-ASSETS> 889,211
<POLICY-LOSSES> 540,583
<UNEARNED-PREMIUMS> 48,201
<POLICY-OTHER> 26,674
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 20,000
0
0
<COMMON> 8,384
<OTHER-SE> 213,713
<TOTAL-LIABILITY-AND-EQUITY> 889,211
153,449
<INVESTMENT-INCOME> 38,443
<INVESTMENT-GAINS> 4,810
<OTHER-INCOME> 6,967
<BENEFITS> 172,085
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 38,234
<INCOME-PRETAX> (9,363)
<INCOME-TAX> (6,132)
<INCOME-CONTINUING> (3,231)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,231)
<EPS-PRIMARY> (0.39)
<EPS-DILUTED> (0.39)
<RESERVE-OPEN> 489,207
<PROVISION-CURRENT> 161,417
<PROVISION-PRIOR> 9,623
<PAYMENTS-CURRENT> 26,157
<PAYMENTS-PRIOR> 121,112
<RESERVE-CLOSE> 540,583
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
