<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
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, Okemos, Michigan 48864
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (517) 349-6500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
The number of shares outstanding of the registrant's common stock, no par value
per share, as of August 12, 1999 was 8,332,195.
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<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at June 30, 1999 3
(Unaudited) and December 31, 1998
Condensed Consolidated Statements of Operations for the Three 4
Months and Six Months Ended June 30, 1999 and 1998 (Unaudited)
Condensed Consolidated Statements of Comprehensive Income for 5
the Three Months and Six Months Ended June 30, 1999 and 1998
(Unaudited)
Condensed Consolidated Statements of Cash Flows for the Six 6
Months Ended June 30, 1999 and 1998 (Unaudited)
Notes to Condensed Consolidated Financial Statements (Unaudited) 7-10
Item 2. Management's Discussion and Analysis of Financial Condition and 11-19
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19-22
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 22-23
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
</TABLE>
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<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PROFESSIONALS GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
Assets 1999 1998
--------------- ---------------
(Unaudited)
<S> <C> <C>
Investments:
Fixed maturities available for sale, at fair value
(amortized cost: $622,330,000 and $646,864,000) $618,152,000 $669,118,000
Equity securities available for sale, at fair value
(cost: $4,100,000 and $4,035,000) 4,496,000 3,901,000
Short-term investments, at cost 51,642,000 17,593,000
Real estate, at cost, net of accumulated depreciation 410,000 421,000
--------------- ---------------
Total investments 674,700,000 691,033,000
Cash 744,000 379,000
Restricted cash 2,070,000 2,070,000
Premiums due from policyholders 29,789,000 27,580,000
Reinsurance balances 134,725,000 106,692,000
Accrued investment income 10,922,000 10,743,000
Deferred federal income taxes 29,871,000 24,501,000
Property and equipment, at cost, net of
accumulated depreciation 9,754,000 9,117,000
Prepaid reinsurance premiums 7,117,000 4,917,000
Deferred policy acquisition costs 1,004,000 1,500,000
Other assets 10,111,000 10,679,000
--------------- ---------------
Total assets $910,807,000 $889,211,000
=============== ===============
Liabilities and Shareholders' Equity
Liabilities:
Loss and loss adjustment expense reserves $563,684,000 $540,583,000
Reserve for extended reporting period claims 27,174,000 26,674,000
Unearned premiums 58,713,000 48,201,000
Long-term debt 17,500,000 20,000,000
Surplus contributions 10,094,000 10,094,000
Accrued expenses and other liabilities 17,860,000 21,562,000
--------------- ---------------
Total liabilities 695,025,000 667,114,000
--------------- ---------------
Shareholders' equity:
Preferred stock, no par value; 5,000,000 shares authorized;
no shares issued and outstanding - -
Common stock, no par value; 25,000,000 shares authorized;
8,351,183 and 8,383,924 shares issued and
outstanding in 1999 and 1998, respectively 8,351,000 8,384,000
Additional paid-in capital 33,062,000 33,982,000
Retained earnings 176,865,000 165,132,000
Accumulated other comprehensive income (loss),
net of deferred federal income taxes (2,496,000) 14,599,000
--------------- ---------------
Total shareholders' equity 215,782,000 222,097,000
--------------- ---------------
Total liabilities and shareholders' equity $910,807,000 $889,211,000
=============== ===============
</TABLE>
See accompanying notes to the unaudited condensed consolidated financial
statements.
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PROFESSIONALS GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- ------------------------------
1999 1998 1999 1998
---- ---- ---- ----
(As Restated) (As Restated)
<S> <C> <C> <C> <C>
Revenues and other income:
Net premiums written $30,895,000 $22,024,000 $ 86,839,000 $ 70,024,000
Decrease (increase) in unearned premiums, net of
prepaid reinsurance premiums 8,950,000 13,268,000 (8,312,000) 3,047,000
----------- ------------ ------------ --------------
Premiums earned, net 39,845,000 35,292,000 78,527,000 73,071,000
Net investment income 9,387,000 9,730,000 18,604,000 19,408,000
Net realized investment gains 949,000 23,000 2,670,000 4,061,000
Reinsurance experience refunds - 2,695,000 - 3,095,000
Other 1,191,000 779,000 2,238,000 1,485,000
----------- ------------ ------------ --------------
Total revenues and other income 51,372,000 48,519,000 102,039,000 101,120,000
----------- ------------ ------------ --------------
Expenses:
Losses and loss adjustment expenses, net 31,706,000 69,600,000 64,323,000 104,392,000
Increase (decrease) in reserve for extended reporting
period claims 250,000 (108,000) 500,000 245,000
Policy acquisition and other underwriting expenses 11,934,000 9,036,000 20,313,000 17,603,000
Interest expense 264,000 334,000 554,000 694,000
Other 477,000 - 1,075,000 -
----------- ------------ ------------ --------------
Total expenses 44,631,000 78,862,000 86,765,000 122,934,000
----------- ------------ ------------ --------------
Income (loss) from operations before federal income
taxes (benefit) 6,741,000 (30,343,000) 15,274,000 (21,814,000)
Federal income taxes (benefit) 1,637,000 (9,464,000) 3,515,000 (7,255,000)
----------- ------------ ------------ -------------
Net income (loss) $ 5,104,000 ($20,879,000) $ 11,759,000 ($ 14,559,000)
=========== ============ ============ =============
Net income (loss) per common share - basic $ 0.61 ($ 2.50) $ 1.40 ($ 1.74)
=========== ============ ============ =============
Net income (loss) per common share - assuming dilution $ 0.60 ($ 2.50) $ 1.38 ($ 1.74)
=========== ============ ============ =============
Weighted average shares outstanding - basic 8,372,115 8,353,330 8,377,878 8,353,330
=========== ============ ============ =============
Weighted average shares outstanding - assuming dilution 8,479,825 8,353,330 8,500,553 8,353,330
=========== ============ ============ =============
</TABLE>
See accompanying notes to the unaudited condensed consolidated financial
statements.
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PROFESSIONALS GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ -------------------------------
1999 1998 1999 1998
---- ---- ---- ----
(As Restated) (As Restated)
<S> <C> <C> <C> <C>
Net income (loss) $ 5,104,000 ($20,879,000) $11,759,000 ($14,559,000)
------------ ----------- ----------- ------------
Other comprehensive income (loss):
Unrealized holding gains (losses) on securities arising
during the period (net of income taxes of $5,405,000 and
$1,309,000 for three months in 1999 and 1998, respectively
and $7,899,000 and $1,865,000 for six months in 1999 and
1998, respectively) (10,492,000) 2,541,000 (15,333,000) 3,621,000
Less reclassification adjustment for realized gains
included in net income (loss) (net of income taxes of
$323,000 and $8,000 for three months in 1999 and 1998,
respectively and $908,000 and $1,381,000 for six months
in 1999 and 1998, respectively) (626,000) (15,000) (1,762,000) (2,680,000)
------------ ----------- ----------- ------------
Other comprehensive income (loss) (11,118,000) 2,526,000 (17,095,000) 941,000
------------ ----------- ----------- ------------
Comprehensive income (loss) ($ 6,014,000) ($18,353,000) ($5,336,000) ($13,618,000)
============ ============ =========== ============
</TABLE>
See accompanying notes to the unaudited condensed consolidated financial
statements.
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<PAGE> 6
PROFESSIONALS GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------------------
1999 1998
--------------- ---------------
(As Restated)
<S> <C> <C>
Net cash provided by (used in) operating activities $ 12,263,000 $ (2,932,000)
--------------- ---------------
Cash flows from investing activities:
Proceeds from sale or maturity of short-term investments 665,042,000 367,853,000
Purchases of short-term investments (698,091,000) (354,458,000)
Proceeds from maturity of securities available for sale 500,000 2,941,000
Proceeds from sale of securities available for sale 163,714,000 126,075,000
Purchases of securities available for sale (138,112,000) (142,805,000)
Purchases of property and equipment (1,290,000) (594,000)
Payment on liability for purchased book of business (637,000) (600,000)
--------------- ---------------
Net cash used in investing activities (8,874,000) (1,588,000)
--------------- ---------------
Cash flows from financing activities:
Repayment of long-term debt (2,500,000) (2,500,000)
Book overdrafts 996,000 6,375,000
Common stock repurchased (1,494,000) -
Cash paid for dissenter's rights (26,000) -
--------------- ---------------
Net cash provided by (used in) financing activities (3,024,000) 3,875,000
--------------- ---------------
Net increase (decrease) in cash 365,000 (645,000)
Cash, beginning of period 379,000 2,636,000
-------------- ---------------
Cash, end of period $ 744,000 $ 1,991,000
=============== ===============
Supplemental schedule of noncash financing activities -
Issuance of common stock as compensation $ 541,000 -
=============== ===============
</TABLE>
See accompanying notes to the unaudited condensed consolidated financial
statements.
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<PAGE> 7
PROFESSIONALS GROUP, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
(1) Basis of Presentation
Professionals Group, Inc. ("Professionals Group," and with its direct
and indirect subsidiaries, the "Company") is a business corporation
that was incorporated under the laws of the State of Michigan on
January 31, 1996 and functions as an insurance holding company.
Professionals Group has four direct wholly-owned subsidiaries; three
indirect wholly-owned subsidiaries and one direct eighty percent owned
subsidiary. The direct wholly-owned subsidiaries are ProNational
Insurance Company ("ProNational"), ProNational 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
Company ("ProNational Casualty") and Physicians Protective Plan, Inc.
("PPP"). The direct eighty percent owned subsidiary is MedAdvantage,
Inc. ("MedAdvantage").
ProNational is a stock, property and casualty insurer that offers
professional liability insurance to providers of health care services
in Florida, Michigan, Illinois, Indiana, Kentucky, Ohio and
Pennsylvania. PIA is an inactive Michigan insurance agency. PGSC is a
Michigan business corporation that administers certain benefit plans
for ProNational employees. AIMC is an Indiana corporation that serves
as the attorney-in-fact for American Medical Insurance Exchange, an
inactive Indiana interinsurance reciprocal exchange. PCSC provides
claims management services on a fee for service basis. ProNational
Casualty is a stock, property and casualty insurer that is currently
not issuing policies. PPP is a Florida insurance agency. MedAdvantage
provides credentialing verification services for medical service
providers.
As more fully described in Note 3 to the accompanying financial
statements, 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").
This 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 accompanying unaudited condensed consolidated financial statements
of the Company have been prepared in conformity with generally accepted
accounting principles and with the instructions for Form 10-Q and Rule
10-01 of Regulation S-X as they apply to interim financial information.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. All significant intercompany transactions have
been eliminated in consolidation.
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<PAGE> 8
PROFESSIONALS GROUP, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
(1) Basis of Presentation, continued
In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation of
financial position and results of operations have been included. The
operating results for the three month and six month periods ended June
30, 1999 are not necessarily indicative of the results to be expected
for the year ending December 31, 1999.
(2) Net Income Per Share
Net income per share is computed by dividing net income by the weighted
average number of shares of common stock and common stock equivalents
(stock options and stock awards) outstanding during each period after
giving effect to stock dividends and treasury shares, calculated on a
daily basis.
(3) Business Combination
On July 1, 1998, Professionals Group consummated its merger with 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.
(4) 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 footnote of the Company's consolidated
financial statements included in its Annual Report on Form 10-K for the
year ended December 31, 1998. 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:
-8-
<PAGE> 9
PROFESSIONALS GROUP, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
(4) Segment Information, continued
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
------------------------------------- --------------------------------------
1999 1998 1999 1998
------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
REVENUES:
Professional liability lines $ 28,493 $ 27,544 $ 56,014 $ 55,280
Personal lines 11,900 10,942 23,579 21,878
Investment operations 10,336 9,753 21,274 23,469
Corporate and other 643 280 1,172 493
---------------- ---------------- ----------------- -----------------
Total revenues $ 51,372 $ 48,519 $ 102,039 $ 101,120
================ ================ ================= =================
INCOME (LOSS) BEFORE INCOME TAXES:
Professional liability lines $ (6,485) $ (40,505) $ (9,972) $ (45,914)
Personal lines 2,988 463 4,429 832
Investment operations 10,336 9,753 21,274 23,469
Corporate and other (98) (54) (457) (201)
---------------- ---------------- ----------------- -----------------
Total income (loss) before income taxes
$ 6,741 $ (30,343) $ 15,274 $ (21,814)
================ ================ ================= =================
IDENTIFIABLE ASSETS:
Property and casualty insurance $ 902,487 $ 845,757
Corporate and other 8,320 14,807
---------------- ----------------
Total identifiable assets $ 910,807 $ 860,564
================ ================
</TABLE>
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<PAGE> 10
PROFESSIONALS GROUP, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
(5) Subsequent Event
On July 1, 1999, Michigan Educational Employees Mutual Insurance
Company ("MEEMIC"), a Michigan domiciled insurance company that
provides personal automobile and homeowners coverages to teachers and
other educational employees in the state of Michigan, completed its
conversion to a stock insurance company. As a result of the conversion,
MEEMIC became a wholly-owned subsidiary of MEEMIC Holdings, Inc.
("MEEMIC Holdings"), a publicly traded Michigan business corporation
(Nasdaq: MEMH). As part of MEEMIC's conversion, the Company acquired
5,065,517 shares, or 76.8%, of the outstanding common stock of MEEMIC
Holdings, at a price of $10 per share. Of these shares, 2,302,209
shares were acquired upon the conversion of a $21.5 million promissory
note (plus accrued interest of $1,522,090) previously issued by MEEMIC
to ProNational. The remaining 2,763,308 shares were purchased by
ProNational for cash of $27.6 million. The registration statement of
MEEMIC Holdings (registration statement no. 333-66671) should be
consulted for additional information concerning the conversion and the
role of Professionals Group. Pro forma financial information with
respect to this acquisition is not available at the present time.
Beginning with the third quarter of 1999, the financial results of
MEEMIC Holdings will be consolidated into the financial results of the
Company.
(6) Effects of New Accounting Pronouncements
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting
for Derivative Instruments and Hedging Activities", which is effective
for fiscal quarters of all fiscal years beginning after June 15, 2000
(as amended by SFAS No. 137). SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at fair value. Changes in
the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction, and if it is,
the type of hedge transaction. As the Company currently does not use
derivative instruments, we anticipate that the adoption of SFAS No. 133
will not affect the results of operations or financial position of the
Company.
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<PAGE> 11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis should be read in conjunction with
the condensed consolidated financial statements and the notes thereto included
elsewhere in this report and the Company's Annual Report on Form 10-K for the
year ended December 31, 1998. The following discussion of the financial
condition and results of operations of the Company contains certain
forward-looking statements relating to anticipated future financial conditions
and operating results of the Company and its current business plans. In the
future, the financial condition and operating results of the Company could
differ materially from those discussed herein and its current business plans
could be altered in response to market conditions and other factors beyond the
Company's control. Important factors that could cause or contribute to such
differences or changes include those discussed in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998. (See the disclosures under "Item
1. Business - Forward Looking Statements" and under "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations.")
Financial Condition -- June 30, 1999 Compared to December 31, 1998:
On July 1, 1998, Professionals Group consummated its merger with
Physicians Protective Trust Fund, a medical malpractice self-insurance trust
fund located in Coral Gables, Florida ("PPTF"). 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 3 to the Company's condensed
consolidated financial statements contained herein).
Total assets increased by $21.6 million, or 2.4%, to $910.8 million at
June 30, 1999, compared to $889.2 million at December 31, 1998, primarily due to
increases in reinsurance balances and prepaid reinsurance premiums. Invested
assets decreased 2.4% to $674.7 million, or approximately 74% of the Company's
total assets at June 30, 1999. This compares to invested assets of $691.0
million, or approximately 78% of the Company's total assets at December 31,
1998. The decrease in invested assets was primarily due to a reduction in the
fair value of the fixed maturity portfolio, as further discussed below.
Reinsurance balances have increased due to increased business in states that
have higher limits, resulting in higher reinsurance coverage, therefore the
reinsurance recoverables have continued to increase. The increase in prepaid
reinsurance premiums reflect the timing of renewals for the Company's Illinois
professional liability book of business, which have a common renewal date of
January 1.
The Company's investment portfolio continues to be dominated by fixed
maturity securities at June 30, 1999, and primarily consists of U.S. government
and agency bonds, high-quality corporate bonds, mortgage-backed securities,
redeemable preferred stocks and tax-exempt U.S. municipal bonds. The entire
fixed maturity portfolio, which is classified as available-for-sale, and is
carried at fair value, is sensitive to interest rate changes. At June 30, 1999,
the fixed maturity portfolio had a fair value that was $4.2 million less than
the $622.3 million amortized cost of such portfolio. At December 31, 1998, the
fixed maturity portfolio had a fair value that was $22.3 million higher than the
$646.9 million amortized cost of such portfolio. The reduction of fair value
resulted from higher interest rates, particularly in the U.S. Treasury sector.
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<PAGE> 12
Loss and loss adjustment expense reserves represented approximately 81% of
the Company's consolidated liabilities at both June 30, 1999 and December 31,
1998. 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 that 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 $23.1 million, or
4.3%, to $563.7 million at June 30, 1999, from $540.6 million at December 31,
1998. This increase was primarily attributable to increased professional
liability business in states that have higher limits, therefore loss and loss
adjustment expense reserves have continued to increase.
The unearned premium reserve increased by $10.5 million, or 21.8%, to
$58.7 million at June 30, 1999, from $48.2 million at December 31, 1998. The
increase was due mainly to the timing of renewals for the Company's Illinois
professional liability book of business, which have a common renewal date of
January 1.
Shareholders' equity decreased by 2.8% to $215.8 million at June 30, 1999,
compared to $222.1 million at December 31, 1998. The decrease in shareholders'
equity was due to a decrease in accumulated other comprehensive income,
consisting of unrealized losses on the investment portfolio of $17.1 million and
other decreases in shareholders' equity of $1.0 million, which was offset by net
income of $11.8 million during the six month period ended June 30, 1999. The
Company expects to use retained earnings to increase its capital base and
finance future growth and, therefore, there can be no assurance as to any future
cash dividends by the Company.
Results of Operations -- Three Months Ended June 30, 1999 Compared to Three
Months Ended June 30, 1998:
Total net premiums written were $30.9 million for the three months ended
June 30, 1999, an increase of $8.9 million, or 40.3%, compared to net premiums
written of $22.0 million for the three months ended June 30, 1998. Professional
liability related net premiums written were $19.5 million for the three months
ended June 30, 1999, an increase of $7.9 million, or 68.8%, compared to net
premiums written of $11.6 million for the three months ended June 30, 1998. The
increase in professional liability net premiums written was mainly due to
Florida policies issued in the last half of 1997 that had a one-time coverage
term of eighteen months to convert policy renewal dates from a common renewal
date of January 1. The issuance of these eighteen month policies in 1997
resulted in a decrease in premiums written in 1998 because these policies were
not renewed until 1999. The increase in professional liability net premiums
written was offset somewhat by continued price-based competition. The
reinsurance premiums assumed from MEEMIC were $11.3 million
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<PAGE> 13
for the three months ended June 30, 1999, an increase of $0.9 million, or 8.7%,
compared to net premiums written of $10.4 million for the three months ended
June 30, 1998.
Total net premiums earned were $39.8 million for the three months ended
June 30, 1999, an increase of $4.5 million, or 12.9%, compared to net premiums
earned of $35.3 million for the three months ended June 30, 1998. Professional
liability net earned premiums were $28.5 million for the three months ended June
30, 1999, an increase of $3.6 million, or 14.7%, compared to $24.9 million for
the three months ended June 30, 1998. Net earned reinsurance premiums assumed
from MEEMIC were $11.3 million for the three months ended June 30, 1999, an
increase of $0.9 million, or 8.7%, compared to $10.4 million for the three
months ended June 30, 1998.
The Company continued to balance its need for rate adjustments with a goal
of maintaining market share in a very competitive professional liability
environment. 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 realized investment gains, was $9.4
million for the three months ended June 30, 1999, a decrease of $0.3 million, or
3.5%, compared to net investment income of $9.7 million for the three months
ended June 30, 1998. The decrease in net investment income resulted as average
fixed maturity invested assets were lower during the three months ended June 30,
1999 compared to the three months ended June 30, 1998 and due to lower
prevailing interest rates, particularly in the spread-products sector. The
weighted average tax equivalent book yield of the fixed maturity portfolio was
6.8% and 7.0% as of June 30, 1999 and 1998, respectively. Net realized
investment gains were $1.0 million during the three months ended June 30, 1999
and were negligible during the three months ended June 30, 1998.
Reinsurance experience refunds were $2.7 million for the three months
ended June 30, 1998. 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 paid to 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 $32.0 million for the
three months ended June 30, 1999, a decrease of $37.5 million, or 54.0%,
compared to $69.5 million for the same period of 1998. The decrease was
primarily due to a $25.6 million increase to loss reserves to reflect actuarial
estimates and the application of the Company's reserving practices to the
Florida book of business as well as a $9.5 million excess limits verdict on one
Florida claim, both of which occurred during the three months ended June 30,
1998. 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) decreased to 80.2% for the three months ended June 30,
1999, compared to 92.2% (excluding the reserve charges) for the same period of
1998. This decrease arose from both the professional liability and MEEMIC books
of business, as further discussed below.
-13-
<PAGE> 14
Professional liability insurance incurred losses and loss adjustment
expenses (including the increase in reserve for extended reporting period
claims) totaled $26.3 million for the three months ended June 30, 1999, a
decrease of $0.8 million, or 3.0%, compared to $27.1 million (excluding the
reserve charges) for the three months ended June 30, 1998. 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) decreased to 92.4% for the three months ended June 30,
1999, compared to 101.1% for the same period of 1998 (excluding the reserve
charges). The professional liability insurance incurred loss and loss adjustment
expense ratio has decreased due mainly to reinsurance benefits derived from a
stop loss reinsurance contract entered into for the 1999 accident year and
favorable development of prior years' loss reserves related to the Company's
book of business in the Midwest. The stop loss reinsurance contract has reduced
the loss and loss adjustment expense ratio by approximately 7.0 percentage
points.
Incurred losses and loss adjustment expenses related to the personal
automobile and homeowners insurance assumed from MEEMIC (the "personal liability
insurance") totaled $5.6 million for the three months ended June 30, 1999, a
decrease of $1.6 million, or 22.4%, compared to $7.2 million for the same period
of 1998. As a percentage of premiums earned, the personal liability insurance
generated an incurred loss and loss adjustment expense ratio of 49.5% for the
three months ended June 30, 1999, compared to 69.3% for the same period of 1998.
The decrease in the personal liability insurance loss and loss adjustment
expense ratio was attributable to a reduction in IBNR reserves recorded by
Professionals Group and mild weather during the second quarter of 1999.
Policy acquisition and underwriting expenses were $11.9 million for the
three months ended June 30, 1999, an increase of $2.9 million, or 32.1%,
compared to policy acquisition and underwriting expenses of $9.0 million for the
same period of 1998. As a percentage of premiums earned, the underwriting
expense ratio increased to 30.0% for the three months ended June 30, 1999, from
25.6% for the same period of 1998. The increase was mainly attributable to $2.0
million in severance expenses incurred during the three months ended June 30,
1999 due to the resignation of three executives that joined Professionals Group
from PPTF. Excluding these severance expenses, the expense ratio was 25.0% for
the three months ended June 30, 1999. Interest expense was $0.3 million during
both three month periods ended June 30, 1999 and 1998. See "Liquidity and
Capital Resources."
The Company recorded $1.6 million in federal income tax expense for the
three months ended June 30, 1999, compared to a $9.5 million tax benefit during
the same period in 1998 (due to the pretax loss generated). The effective tax
rate was 24.3% for the three months ended June 30, 1999, compared to a tax
benefit rate of (31.2%) for the three months ended June 30, 1998. The Company's
relatively low effective tax rate for the three months ended June 30, 1999 was
due primarily to an increase in the percentage of tax-exempt municipal bonds
held in 1999.
Net income for the three months ended June 30, 1999 was $5.1 million, or
$0.60 per share (assuming dilution) on revenues of $51.4 million. This compares
to a net loss of $20.9 million, or a loss of $2.50 per share (assuming dilution)
on revenues of $48.5 million, for the three months ended June 30, 1998 (caused
by the loss reserve charge and excess limits verdict mentioned previously). The
improvement in earnings was primarily attributable to the improvement in the
loss and loss adjustment expense ratio, as described previously.
-14-
<PAGE> 15
Results of Operations -- Six Months Ended June 30, 1999 Compared to Six Months
Ended June 30, 1998:
Total net premiums written were $86.8 million for the six months ended
June 30, 1999, an increase of $16.8 million, or 24.0%, compared to net premiums
written of $70.0 million for the six months ended June 30, 1998. Professional
liability related net premiums written were $64.3 million for the six months
ended June 30, 1999, an increase of $15.2 million, or 30.9%, compared to net
premiums written of $49.1 million for the six months ended June 30, 1998. The
increase in professional liability net premiums written was mainly due to
Florida policies issued in the last half of 1997 that had a one-time coverage
term of eighteen months to convert policy renewal dates from a common renewal
date of January 1. The issuance of these eighteen month policies in 1997
resulted in a decrease in premiums written in 1998 because these policies were
not renewed until 1999. The increase in professional liability net premiums
written was offset somewhat by continued price-based competition. The
reinsurance premiums assumed from MEEMIC were $22.5 million for the six months
ended June 30, 1999, an increase of $1.6 million, or 7.8%, compared to net
premiums written of $20.9 million for the six months ended June 30, 1998.
Total net premiums earned were $78.5 million for the six months ended June
30, 1999, an increase of $5.4 million, or 7.5%, compared to net premiums earned
of $73.1 million for the six months ended June 30, 1998. Professional liability
net earned premiums were $56.0 million for the six months ended June 30, 1999,
an increase of $3.8 million, or 7.3%, compared to $52.2 million for the six
months ended June 30, 1998. Net earned reinsurance premiums assumed from MEEMIC
were $22.5 million for the six months ended June 30, 1999, an increase of $1.6
million, or 7.8%, compared to $20.9 million for the six months ended June 30,
1998.
The Company continued to balance its need for rate adjustments with a goal
of maintaining market share in a very competitive professional liability
environment. 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 realized investment gains, was $18.6
million for the six months ended June 30, 1999, a decrease of $0.8 million, or
4.1%, compared to net investment income of $19.4 million for the six months
ended June 30, 1998. The decrease in net investment income resulted as average
fixed maturity invested assets were lower during the six months ended June 30,
1999 compared to the six months ended June 30, 1998 and due to lower prevailing
interest rates, particularly in the spread-products sector. The weighted average
tax equivalent book yield of the fixed maturity portfolio was 6.8% and 7.0% as
of June 30, 1999 and 1998, respectively. Net realized investment gains were $2.7
million and $4.1 million during the six months ended June 30, 1999 and 1998,
respectively. The significant amount of investment gains recorded in the first
six months of 1998 was attributable to the sale of a majority of the Company's
common stock portfolio due to the Company's desire to maximize after-tax
investment yield in 1998 and future years.
Reinsurance experience refunds were $3.1 million for the six months ended
June 30, 1998. 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 paid to the Company when losses developed favorably. During 1998,
reinsurance contracts covering claims prior to 1991 were commuted. Therefore,
any deferred
-15-
<PAGE> 16
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 $64.8 million for the
six months ended June 30, 1999, a decrease of $39.8 million, or 38.1%, compared
to $104.6 million for the same period of 1998. The decrease was primarily due to
a $25.6 million increase to loss reserves to reflect actuarial estimates and the
application of the Company's reserving practices to the Florida book of business
as well as a $9.5 million excess limits verdict on one Florida claim, both of
which occurred during the six months ended June 30, 1998. 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)
decreased to 82.6% for the six months ended June 30, 1999, compared to 92.6%
(excluding the reserve charges) for the same period of 1998. This decrease arose
from both the professional liability and MEEMIC books 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) totaled $52.4 million for the six months ended June 30, 1999, a decrease
of $2.5 million, or 4.6%, compared to $55.0 million (excluding the reserve
charges) for the six months ended June 30, 1998. 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) decreased to 93.6% for the six months ended June 30, 1999, compared to
101.4% for the same period of 1998 (excluding the reserve charges). The
professional liability insurance incurred loss and loss adjustment expense ratio
has decreased due mainly to reinsurance benefits derived from a stop loss
reinsurance contract entered into for the 1999 accident year and favorable
development of prior years' loss reserves related to the Company's book of
business in the Midwest. The stop loss reinsurance contract has reduced the loss
and loss adjustment expense ratio by approximately 7.0 percentage points.
Incurred losses and loss adjustment expenses related to the personal
automobile and homeowners insurance assumed from MEEMIC (the "personal liability
insurance") totaled $12.4 million for the six months ended June 30, 1999, a
decrease of $2.2 million, or 14.9%, compared to $14.6 million for the same
period of 1998. As a percentage of premiums earned, the personal liability
insurance generated an incurred loss and loss adjustment expense ratio of 55.1%
for the six months ended June 30, 1999, compared to 69.8% for the same period of
1998. The decrease in the personal liability insurance loss and loss adjustment
expense ratio was attributable to a reduction in IBNR reserves recorded by
Professionals Group and mild weather during 1999.
Policy acquisition and underwriting expenses were $20.3 million for the
six months ended June 30, 1999, an increase of $2.7 million, or 15.4%, compared
to policy acquisition and underwriting expenses of $17.6 million for the same
period of 1998. As a percentage of premiums earned, the underwriting expense
ratio increased to 25.9% for the six months ended June 30, 1999, from 24.1% for
the same period of 1998. The increase was mainly attributable to $2.0 million in
severance expenses incurred during the six months ended June 30, 1999 due to the
resignation of three executives that joined Professionals Group from PPTF.
Excluding these severance expenses, the expense ratio was 23.4% for the six
months ended June 30, 1999. Interest expense was $0.6 million and $0.7 million
during the six month periods ended June 30, 1999 and 1998, respectively. See
"Liquidity and Capital Resources."
-16-
<PAGE> 17
The Company recorded $3.5 million in federal income tax expense for the
six months ended June 30, 1999, compared to a $7.3 million tax benefit during
the same period in 1998 (due to the pretax loss generated). The effective tax
rate was 23.0% for the six months ended June 30, 1999, compared to a tax benefit
rate of (33.3%) for the six months ended June 30, 1998. The Company's relatively
low effective tax rate for the six months ended June 30, 1999 was due primarily
to an increase in the percentage of tax-exempt municipal bonds held in 1999.
Net income for the six months ended June 30, 1999 was $11.8 million, or
$1.38 per share (assuming dilution) on revenues of $102.0 million. This compares
to a net loss of $14.6 million, or a loss of $1.74 per share (assuming dilution)
on revenues of $101.1 million, for the six months ended June 30, 1998 (caused by
the loss reserve charge and excess limits verdict mentioned previously). The
improvement in earnings was primarily attributable to the improvement in the
loss and loss adjustment expense ratio, as described previously.
Liquidity and Capital Resources:
Liquidity describes the ability to generate sufficient cash flows to meet
the cash requirements of continuing operations. Liquidity, in the context of
insurance operations, is typically determined by two distinct operations:
underwriting and investing. Net cash flows from underwriting operations are used
to build an investment portfolio, which in turn produces future cash from
investment income. The Company continuously monitors available cash and
short-term investment balances in relation to projected cash needs to maintain
adequate balances for current payments while maximizing cash available for
longer term investment opportunities.
The payment of losses, loss adjustment expenses and operating expenses in
the ordinary course of business represents the Company's principal need for
liquid funds. Payments for losses and loss adjustment expenses are distributed
fairly evenly throughout the year. Payments for reinsurance are made within
thirty days subsequent to the end of each quarter, with adjustments made after
each reinsurance year. Historically, cash used to pay for these items has been
provided by operations. The Company did not borrow any funds in the six month
periods ended June 30, 1999 or 1998. As of June 30, 1999, 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 (5.69% at June 30, 1999), and payable quarterly
(the "Credit Agreement"). As of June 30, 1999, the outstanding principal balance
was $17.5 million. The remaining principal payments are due on April 30, as
follows: 2000 - $3,000,000; 2001 - $3,000,000; 2002 - $3,500,000; 2003 -
$3,500,000; and 2004 - $4,500,000. The Company paid the $2,500,000 principal
amount due on April 30, 1999.
The Credit Agreement contains a covenant that 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
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<PAGE> 18
interest coverage ratio (as defined by the Credit Agreement) of not less than
1.5:1 and 2.5:1, respectively. The Company was in compliance with, or had
received waivers of, all required covenants at June 30, 1999.
On April 14, 1999, Professionals Group's Board of Directors authorized
management to repurchase up to 400,000 shares of the Company's common stock in
open market transactions over the next twelve months. This repurchase plan
represents approximately 5% of the issued and outstanding common stock of the
Company. The Company repurchased 50,792 shares under this plan at an average
cost of $29.42 per share during the second quarter of 1999.
On July 1, 1999, MEEMIC, a Michigan domiciled insurance company that
provides personal automobile and homeowners coverages to teachers and other
educational employees in the state of Michigan, completed its conversion to a
stock insurance company. As a result of the conversion, MEEMIC became a
wholly-owned subsidiary of MEEMIC Holdings, Inc. ("MEEMIC Holdings"), a publicly
traded Michigan business corporation (Nasdaq: MEMH). As part of MEEMIC's
conversion, the Company acquired 5,065,517 shares, or 76.8%, of the outstanding
common stock of MEEMIC Holdings, at a price of $10 per share. Of these shares,
2,302,209 shares were acquired upon the conversion of a $21.5 million promissory
note (plus accrued interest of $1,522,090) previously issued by MEEMIC to
ProNational. The remaining 2,763,308 shares were purchased by ProNational for
cash of $27.6 million. The registration statement of MEEMIC Holdings
(registration statement no. 333-66671) should be consulted for additional
information concerning the conversion and the role of Professionals Group. Pro
forma financial information with respect to this acquisition is not available at
the present time. Beginning with the third quarter of 1999, the financial
results of MEEMIC Holdings will be consolidated into the financial results of
the Company.
Effects of New Accounting Pronouncements:
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative
Instruments and Hedging Activities", which is effective for fiscal quarters of
all fiscal years beginning after June 15, 2000 (as amended by SFAS No. 137).
SFAS No. 133 requires that all derivative instruments be recorded on the balance
sheet at fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction, and if it is, the type
of hedge transaction. As the Company currently does not use derivative
instruments, we anticipate that the adoption of SFAS No. 133 will not affect the
results of operations or financial position of the Company.
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.
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<PAGE> 19
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 95% of such
modifications and conversions have been made to date. Management anticipates
that the remaining modifications and conversions will be completed by September
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. During the six months
ended June 30, 1999, approximately $90,000 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 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-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 3. 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.
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<PAGE> 20
As of June 30, 1999, 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.
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 is
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. All declines in market values of the Company's investment
securities at June 30, 1999 were deemed to be temporary.
The Company currently has no market risk exposure to foreign currency
exchange rate risk or commodity price risk.
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<PAGE> 21
Quantitative Information About Market Risk:
Financial instruments subject to interest rate risk as of June 30, 1999
were as follows:
<TABLE>
<CAPTION>
Market Value
--------------------------------------------------------------------
-200 bps -100 bps +100 bps +200 bps
Change Change Actual Change Change
--------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
U.S. Treasury securities and obligations of U.S.
government corporations and agencies $ 38,413 $ 36,487 $ 34,947 $ 33,654 $ 32,493
Debt securities issued by states of the United
States and political subdivisions of the states 339,595 319,477 300,459 282,430 265,470
Corporate debt securities 121,651 115,667 110,479 105,968 101,998
Mortgage-backed securities 129,270 125,784 120,530 114,236 108,034
Asset-backed securities 38,291 36,966 35,625 34,214 32,790
Redeemable preferred stocks 17,135 16,511 16,112 15,726 15,352
Short-term investments 51,642 51,642 51,642 51,642 51,642
-------------- ------------ ------------- -------------- -------------
$ 735,997 $ 702,534 $ 669,794 $ 637,870 $ 607,779
============== ============ ============= ============== =============
</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.
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<PAGE> 22
Financial instruments subject to equity market risk as of June 30, 1999
were as follows:
<TABLE>
<CAPTION>
Hypothetical Market
Actual Changes
Market ------------------------------
Value +10% -10%
------------ ------------- -------------
<S> <C> <C> <C>
Common stock (in thousands) $ 4,496 $ 4,946 $ 4,046
============ ============= =============
</TABLE>
The table above summarizes the Company's equity price risk as of June 30,
1999 and shows the effects of a hypothetical 10% increase and 10% decrease in
the market prices as of June 30, 1999. 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 June 30, 1999, 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 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.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On June 2, 1999, at the 1999 Annual Meeting of Stockholders of
Professionals Group, the stockholders elected Louis P. Brady, M.D., Mr. Jerry
D. Campbell, Richard P. Horsch, M.D., William H. Woodhams, M.D., and Donald S.
Young, Esq. to the Professionals Group Board for three year terms expiring in
the year 2002 and upon the re-election and qualification of their respective
successors or upon their earlier resignation or removal.
The vote of shareholders with respect to the election of directors was as
follows: Louis P. Brady, M.D. received 5,177,124 shares for election and 75,283
shares were withheld; Mr. Jerry D. Campbell received 5,222,251 shares for
election and 31,156 shares were withheld; Richard P. Horsch, M.D. received
5,213,070 shares for election and 40,337 shares were withheld; William H.
Woodhams, M.D. received 5,219,494 shares for election and 33,913 shares were
withheld; and Donald S. Young, Esq. received 5,218,584 shares for election and
34,823 shares were withheld.
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<PAGE> 23
In addition, incumbent directors Victor T. Adamo, Esq., Eliot H. Berg,
M.D., John F. McCaffrey, Isaac J. Powell, M.D., Edward S. Truppman, M.D.,
Richard G. Alper, M.D., R. Kevin Clinton, John F. Dodge, Jr., Esq., H.
Harvey Gass, M.D., and Ann F. Putallaz, Ph.D., continued in office.
The above matters are more fully described in Professionals Group's
Proxy Statement dated May 7, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
<TABLE>
<CAPTION>
Item 601
Regulation S-K
Exhibit Reference
Number Exhibit Description
----------------------- --------------------------
<S> <C>
(11) No statement re: computation of per share
earnings is required to be filed because
the computations can be clearly
determined from the materials contained
herein.
(27) Financial Data Schedule of registrant.*
</TABLE>
- -----------------------------------
* Filed herewith.
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K dated July 1, 1999
disclosing (i) under Item 2 (Acquisition or Disposition of Assets) of Form
8-K the Company's acquisition of 76.8% of the outstanding common stock of
MEEMIC Holdings, Inc., and under Item 7 (Financial Statements, Pro Forma
Financial Information and Exhibits) the required financial statements and
pro forma financial information would be filed as an amendment to this
Current Report on Form 8-K no later than September 14, 1999.
No other reports were filed during the three months ended June
30, 1999.
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<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PROFESSIONALS GROUP, INC.
DATE: August 12, 1999 /s/ John F. Lang
--------------------------------------------
John F. Lang
Vice President, Treasurer and
Chief Accounting Officer (Principal Financial
Officer and Principal Accounting Officer)
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<PAGE> 25
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
Item 601
Regulation S-K
Exhibit Reference
Number Exhibit Descriiption
------ --------------------
(11) No statement re: computation of per share earnings is
required to be filed because the computations can be
clearly determined from the materials contained herein.
(27) Financial Data Schedule of registrant.*
- ----------------------------
*Filed herewith.
-25-
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF PROFESSIONALS GROUP,
INC. AS OF JUNE 30, 1999 AND FOR THE SIX MONTH PERIOD THEN ENDED.
(IN THOUSANDS)
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<DEBT-HELD-FOR-SALE> 618,152
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 4,496
<MORTGAGE> 0
<REAL-ESTATE> 410
<TOTAL-INVEST> 674,700
<CASH> 744
<RECOVER-REINSURE> 943
<DEFERRED-ACQUISITION> 1,004
<TOTAL-ASSETS> 910,807
<POLICY-LOSSES> 563,684
<UNEARNED-PREMIUMS> 58,713
<POLICY-OTHER> 27,174
<POLICY-HOLDER-FUNDS> 10,094
<NOTES-PAYABLE> 17,500
0
0
<COMMON> 8,351
<OTHER-SE> 207,431
<TOTAL-LIABILITY-AND-EQUITY> 910,807
78,527
<INVESTMENT-INCOME> 18,604
<INVESTMENT-GAINS> 2,670
<OTHER-INCOME> 2,238
<BENEFITS> 64,823
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 20,313
<INCOME-PRETAX> 15,274
<INCOME-TAX> 3,515
<INCOME-CONTINUING> 11,759
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,759
<EPS-BASIC> 1.40
<EPS-DILUTED> 1.38
<RESERVE-OPEN> 540,583
<PROVISION-CURRENT> 80,171
<PROVISION-PRIOR> (15,848)
<PAYMENTS-CURRENT> 9,639
<PAYMENTS-PRIOR> 57,328
<RESERVE-CLOSE> 563,684
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
