<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 March 31, 2000
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 May 11, 2000 was 8,924,909.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at March 31, 2000 3
(Unaudited) and December 31, 1999
Condensed Consolidated Statements of Income for 4
the Three Months Ended March 31, 2000 and 1999
(Unaudited)
Condensed Consolidated Statements of Comprehensive 5
Income for the Three Months Ended March 31, 2000 and
1999 (Unaudited)
Condensed Consolidated Statements of Cash Flows for 6
the Three Months Ended March 31, 2000 and 1999
(Unaudited)
Notes to Condensed Consolidated Financial Statements 7-9
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition 10-15
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15-17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 18
</TABLE>
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PROFESSIONALS GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
Assets 2000 1999
---------- ----------
Investments: (in thousands, except share data)
<S> <C> <C>
Fixed maturities available for sale, at fair value
(amortized cost: $747,530 and $750,548) $730,026 $731,036
Equity securities available for sale, at fair value
(cost: $3,250 and $3,846) 4,183 4,899
Short-term investments, at cost 32,939 19,633
Real estate, at cost, net of accumulated depreciation 2,695 2,700
---------- ----------
Total investments 769,843 758,268
Cash 5,648 13,797
Restricted cash 2,070 2,070
Premiums due from policyholders 47,329 34,951
Reinsurance balances 169,406 168,100
Accrued investment income 9,839 10,087
Deferred federal income taxes 55,341 54,161
Property and equipment, at cost, net of
accumulated depreciation 10,764 10,779
Prepaid reinsurance premiums 10,966 6,667
Other assets 12,916 13,209
---------- ----------
Total assets $1,094,122 $1,072,089
========== ==========
Liabilities and Shareholders' Equity
Liabilities:
Loss and loss adjustment expense reserves $648,776 $631,981
Reserve for extended reporting period claims 27,774 27,674
Unearned premiums 102,814 87,305
Long-term debt 17,500 17,500
Excess of net assets acquired over cost 18,119 18,609
Accrued expenses and other liabilities 34,893 48,400
Minority interest 24,453 23,804
---------- ----------
Total liabilities 874,329 855,273
---------- ----------
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;
8,924,909 and 8,997,709 shares issued and
outstanding in 2000 and 1999, respectively 8,925 8,998
Additional paid-in capital 45,711 47,033
Retained earnings 176,065 172,968
Accumulated other comprehensive income (loss),
net of deferred federal income taxes (10,908) (12,183)
---------- ----------
Total shareholders' equity 219,793 216,816
---------- ----------
Total liabilities and shareholders' equity $1,094,122 $1,072,089
========== ==========
</TABLE>
See accompanying notes to the unaudited condensed consolidated financial
statements.
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PROFESSIONALS GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------------
2000 1999
--------- ---------
Revenues and other income: (in thousands, except share data)
<S> <C> <C>
Net premiums written $ 67,853 $ 55,943
Increase in unearned premiums, net of
prepaid reinsurance premiums (11,210) (17,262)
--------- ---------
Premiums earned, net 56,643 38,681
Net investment income 11,228 9,217
Net realized investment gains 49 1,721
Other 1,168 1,047
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Total revenues and other income 69,088 50,666
--------- ---------
Expenses:
Losses and loss adjustment expenses, net 53,114 32,616
Increase in reserve for extended reporting
period claims 100 250
Policy acquisition and other underwriting expenses 11,607 8,177
Interest expense 290 290
Amortization expense, net (220) 280
Other 512 521
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Total expenses 65,403 42,134
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Income from operations before federal income
taxes (benefit) and minority interest 3,685 8,532
Federal income taxes (benefit) (100) 1,877
--------- ---------
Income before minority interest 3,785 6,655
Minority interest (688) -
--------- ---------
Net income $3,097 $6,655
========= =========
Net income per common share - basic $0.35 $0.72
========= =========
Net income per common share - assuming dilution $0.33 $0.71
========= =========
Weighted average shares outstanding - basic 8,938,161 9,204,394
========= =========
Weighted average shares outstanding - assuming dilution 9,015,246 9,355,796
========= =========
</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
March 31,
-----------------------------
2000 1999
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(in thousands)
<S> <C> <C>
Net income $3,097 $6,655
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Other comprehensive income (loss):
Unrealized holding gains (losses) on securities arising during
the period (net of income taxes (benefit) of $673 and
($2,494) in 2000 and 1999, respectively) 1,307 (4,841)
Less reclassification adjustment for realized gains
included in net income (net of income taxes of $17
and $585 in 2000 and 1999, respectively) (32) (1,136)
------- ------
Other comprehensive income (loss) 1,275 (5,977)
------- ------
Comprehensive income $4,372 $678
======= ======
</TABLE>
See accompanying notes to the unaudited condensed consolidated financial
statements.
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PROFESSIONALS GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------
2000 1999
-------------- ------------
(in thousands)
<S> <C> <C>
Net cash provided by operating activities $3,919 $20,635
-------------- ------------
Cash flows from investing activities:
Proceeds from sale or maturity of short-term investments 105,535 307,577
Purchases of short-term investments (118,744) (346,415)
Proceeds from maturity of securities available for sale 4,762 2,325
Proceeds from sale of securities available for sale 26,251 120,657
Purchases of securities available for sale (27,702) (102,096)
Purchases of real estate, property and equipment (474) (73)
-------------- ------------
Net cash used in investing activities (10,372) (18,025)
-------------- ------------
Cash flows from financing activities:
Common stock repurchased (1,696) -
Cash paid for dissenter's rights - (26)
-------------- ------------
Net cash used in financing activities (1,696) (26)
-------------- ------------
Net increase (decrease) in cash (8,149) 2,584
Cash, beginning of period 13,797 379
-------------- ------------
Cash, end of period $5,648 $2,963
============== ============
Supplemental schedule of noncash investing and financing activities:
Issuance of common stock as compensation $301 $301
============== ============
</TABLE>
See accompanying notes to the unaudited condensed consolidated financial
statements.
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PROFESSIONALS GROUP, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
(1) Basis of Presentation
Professionals Group, Inc. ("Professionals Group") is an insurance holding
company incorporated under Michigan law on January 31, 1996. Professionals
Group owns all of the issued and outstanding common stock of ProNational
Insurance Company ("ProNational"), a Michigan-domiciled property and
casualty insurance company which primarily provides professional liability
insurance coverages and services to health care providers. ProNational owns
77% of MEEMIC Holdings, Inc. ("MEEMIC Holdings"), a publicly traded company
which provides personal auto and homeowners coverages to teachers and other
educational employees through MEEMIC Insurance Company ("MEEMIC"), a
Michigan-domiciled property and casualty insurance company. Professionals
Group and subsidiaries are collectively referred to as "the Company."
The accompanying unaudited condensed consolidated financial statements of
the Company have been prepared in conformity with generally accepted
accounting principles and with the instructions for Form 10-Q and Rule
10-01 of Regulation S-X as they apply to interim financial information.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. All significant intercompany transactions have been eliminated
in consolidation.
In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation of
financial position and results of operations have been included. The
operating results for the three month period ended March 31, 2000 is not
necessarily indicative of the results to be expected for the year ending
December 31, 2000.
Certain 1999 amounts have been reclassified to conform to the 2000
presentation.
(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. The weighted average common shares used for determining basic income
per common share were 8,938,161 and 9,204,394 for the three months ended
March 31, 2000 and 1999, respectively. The effect of dilutive stock options
added 77,085 shares and 151,402 shares for the three months ended March 31,
2000 and 1999, respectively for the computation of diluted income per
common share.
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PROFESSIONALS GROUP, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
(3) 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, 1999. 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>
Three months ended March 31,
--------------------------------------
2000 1999
---------------- -----------------
(in thousands)
<S> <C> <C>
REVENUES:
Professional liability lines $ 28,040 $ 27,520
Personal lines 28,603 11,679
Investment operations 11,277 10,938
Corporate and other 1,168 529
---------------- -----------------
Total revenues $ 69,088 $ 50,666
================ =================
INCOME (LOSS) BEFORE INCOME TAXES:
Professional liability lines $ (10,022) $ (3,487)
Personal lines 1,844 1,441
Investment operations 11,277 10,938
Corporate and other 586 (360)
---------------- -----------------
Total income before income taxes
$ 3,685 $ 8,532
================ =================
IDENTIFIABLE ASSETS:
Property and casualty insurance $1,080,852 $921,388
Corporate and other 13,270 11,501
---------------- -----------------
Total identifiable assets $1,094,122 $932,889
================ =================
</TABLE>
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PROFESSIONALS GROUP, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
(4) Acquisition
On July 1, 1999, Michigan Educational Employees Mutual Insurance Company
completed its conversion to a stock insurance company and changed its name
to MEEMIC Insurance Company ("MEEMIC"). As a result of the conversion,
MEEMIC became a wholly owned subsidiary of MEEMIC Holdings, Inc. ("MEEMIC
Holdings"), a publicly traded Michigan business corporation. As part of
MEEMIC's conversion, the Company acquired 5,065,517 shares, or 77%, of the
outstanding common stock of MEEMIC Holdings, at a cost of $50.6 million. Of
these shares, 2,302,209 shares were acquired upon the conversion of a $21.5
million promissory note (plus accrued interest of $1.5 million) previously
issued by MEEMIC to ProNational. The remaining 2,763,308 shares were
purchased by ProNational for cash of $27.6 million. This acquisition was
accounted for as a purchase business combination. The excess of net assets
acquired over cost was $19.6 million, and is being amortized on the
straight-line method over 10 years. Beginning July 1, 1999, the financial
results of MEEMIC Holdings have been consolidated into the financial
results of the Company. The following unaudited pro forma information
presents a summary of the consolidated results of operations of the Company
for the three months ended March 31, 1999, as if this acquisition had
occurred on January 1, 1999 (in thousands, except per share data):
<TABLE>
<CAPTION>
1999
----
<S> <C>
Total revenues $68,589
Income before extraordinary item 8,208
Net income 8,138
Diluted income per common share before extraordinary item 0.87
Diluted net income per common share 0.86
</TABLE>
These unaudited pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of the results of
operations which would have actually resulted had this acquisition occurred
on January 1, 1999, or of future results of operations of the Company.
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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, 1999. 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, 1999. (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.")
Overview:
Professionals Group is organized and operates principally in the property
and casualty insurance industry and has two insurance product segments. The
professional liability segment provides insurance coverage and services to
health care providers through Professionals Group's wholly owned subsidiary,
ProNational Insurance Company. The personal lines segment provides personal auto
and homeowners coverages primarily to teachers and other educational employees
through Professionals Group's majority owned subsidiary, MEEMIC Holdings, Inc.
and MEEMIC Holdings' wholly owned subsidiary, MEEMIC Insurance Company.
On July 1, 1999, MEEMIC Holdings was consolidated into Professionals
Group's financial statements as a result of Professionals Group obtaining
majority ownership (see also Note 4 to the Company's condensed consolidated
financial statements.) The transaction was accounted for as a purchase business
combination. The 1999 results attributable to MEEMIC were pursuant to the then
existing management services agreement and quota share reinsurance agreement,
both of which were terminated on July 1, 1999.
Financial Condition -- March 31, 2000 Compared to December 31, 1999:
Total assets increased $22.0 million, or 2.1%, to $1,094.1 million at March
31, 2000, compared to $1,072.1 million at December 31, 1999. Invested assets
increased 1.5% to $769.8 million, or approximately 70% of the Company's total
assets at March 31, 2000. This compares to invested assets of $758.3 million, or
approximately 71% of the Company's total assets at December 31, 1999. The
increase in invested assets was due primarily to positive cash flows generated
by operations. Premiums due from policyholders and prepaid reinsurance premiums
also increased due primarily to the timing of renewals of ProNational's
professional liability business, a significant portion of which renews during
the first quarter.
The Company's investment portfolio continues to be dominated by fixed
maturity securities at March 31, 2000, and primarily consists of U.S. government
and agency bonds, high-quality corporate bonds, mortgage-backed and asset-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 March 31,
2000, the fixed maturity portfolio had net unrealized losses of $17.5 million.
At December 31, 1999, the fixed maturity portfolio had net unrealized losses of
$19.5 million. This
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change was due primarily to fluctuating bond market values caused by changes in
interest rates in the marketplace.
Loss and loss adjustment expense reserves represented approximately 74% of
the Company's consolidated liabilities at both March 31, 2000 and December 31,
1999. 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 reserves, and especially
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 within the
range of acceptable values periodically estimated by the Company's consulting
actuary. The Company's carried reserves 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 $16.8 million, or 2.7%,
to $648.8 million at March 31, 2000, from $632.0 million at December 31, 1999.
This increase was due primarily to a general increase in professional liability
reserves (i.e., new reserves recorded exceeded payments on older reserves) as
well as a reduction in the Company's recognition of favorable prior year
professional liability reserve development. The reduction in the recognition of
favorable prior year development was based on a review of the Company's
reserving needs and on medical malpractice trends. The remainder of this
increase was due primarily to general allowances for growth in the number of
insured vehicles and homeowners policies in force in the Company's personal
lines segment.
The unearned premium reserve increased $15.5 million, or 17.8%, to $102.8
million at March 31, 2000, from $87.3 million at December 31, 1999. The increase
was due primarily to the timing of renewals of the Company's professional
liability book of business, a significant portion of which renews during the
first quarter.
Shareholders' equity increased $3.0 million, or 1.4%, to $219.8 million at
March 31, 2000, compared to $216.8 million at December 31, 1999. The increase in
shareholders' equity was due primarily to an increase in accumulated other
comprehensive income, consisting of unrealized gains on the investment portfolio
of $1.3 million and net income of $3.1 million, which was offset by other
decreases in shareholders' equity of $1.4 million (primarily related to the
Company's stock repurchase program) during the three month period ended March
31, 2000. 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 March 31, 2000 Compared to Three
Months Ended March 31, 1999:
Professional Liability Insurance Operations Segment:
Professional liability net premiums written were $39.9 million for the
three months ended March 31, 2000, a decrease of $4.9 million, or 10.8%,
compared to net premiums written of $44.8 million for the three months ended
March 31, 1999. The decrease in professional liability net premiums written was
mainly due to price increases instituted by the Company (and a resulting
decrease in the number of insureds) and as a
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<PAGE> 12
result of the Company's more selective underwriting practices. The Company is
endeavoring to obtain additional premium per unit of risk in what continues to
be a very price competitive professional liability environment. Professional
liability net premiums earned were $28.0 million for the three months ended
March 31, 2000, a slight increase of $0.5 million, or 1.9%, compared to $27.5
million for the three months ended March 31, 1999.
Professional liability insurance incurred losses and loss adjustment
expenses (including the increase in reserve for extended reporting period
claims) totaled $33.1 million for the three months ended March 31, 2000, an
increase of $7.0 million, or 26.9%, compared to $26.1 million for the three
months ended March 31, 1999. As a percentage of premiums earned, the
professional liability insurance incurred loss and loss adjustment expense ratio
(including the increase in reserve for extended reporting period claims)
increased to 118.1% for the three months ended March 31, 2000, compared to 94.8%
for the same period of 1999. The professional liability insurance incurred loss
and loss adjustment expense ratio has increased due primarily to an increase in
the Florida-related professional liability loss ratio as well as a reduction in
the Company's recognition of favorable prior year reserve development (see
previous discussion). In addition, reinsurance benefits derived from a stop loss
reinsurance contract entered into for the 2000 accident year were $0.7 million
lower than the benefits received from the 1999 stop loss contract.
Professional liability policy acquisition and underwriting expenses were
$4.9 million for the three months ended March 31, 2000, an increase of $0.2
million, or 5.0%, compared to policy acquisition and underwriting expenses of
$4.7 million for the same period of 1999. As a percentage of premiums earned,
the underwriting expense ratio increased to 17.7% for the three months ended
March 31, 2000, from 17.1% for the same period of 1999. This increase was due
primarily to an increase in compensation related costs.
Personal Lines Insurance Operations Segment:
Personal lines net premiums written were $27.9 million for the three months
ended March 31, 2000, an increase of $16.8 million, or 150.2%, compared to net
premiums written of $11.1 million for the three months ended March 31, 1999
(pursuant to the then existing quota share reinsurance relationship with
MEEMIC). Personal lines net premiums earned were $28.6 million for the three
months ended March 31, 2000, an increase of $17.4 million, or 156.3%, compared
to net premiums earned of $11.1 million for the three months ended March 31,
1999 (pursuant to the then existing quota share reinsurance relationship with
MEEMIC). The increase in both net premiums written and net premiums earned was
due to the July 1, 1999 acquisition of MEEMIC Holdings.
Personal lines insurance incurred losses and loss adjustment expenses
totaled $20.1 million for the three months ended March 31, 2000, an increase of
$13.3 million, or 196.6%, compared to $6.8 million for the same period of 1999
(pursuant to the then existing quota share reinsurance relationship with
MEEMIC). The increase in incurred losses and loss adjustment expenses was due to
the July 1, 1999 acquisition of MEEMIC Holdings. As a percentage of premiums
earned, the personal lines insurance incurred loss and loss adjustment expense
ratio increased to 70.3% for the three months ended March 31, 2000, compared to
60.7% for the same period of 1999 (pursuant to the then existing quota share
reinsurance relationship with MEEMIC). The personal lines insurance incurred
loss and loss adjustment expense ratio benefited from favorable weather
conditions in both 2000 and 1999.
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<PAGE> 13
Personal lines policy acquisition and underwriting expenses were $6.7
million for the three months ended March 31, 2000, an increase of $3.2 million,
or 92.4%, compared to policy acquisition and underwriting expenses of $3.5
million for the same period of 1999 (pursuant to the then existing quota share
reinsurance relationship with MEEMIC). The increase in policy acquisition and
underwriting expenses was due to the July 1, 1999 acquisition of MEEMIC
Holdings.
General Insurance Operations:
Net investment income, excluding realized investment gains, was $11.2
million for the three months ended March 31, 2000, an increase of $2.0 million,
or 21.8%, compared to net investment income of $9.2 million for the three months
ended March 31, 1999. The increase reflects the addition of MEEMIC's investment
portfolio as of July 1, 1999. The weighted average tax equivalent book yield of
the fixed maturity portfolio was 7.0% and 6.8% as of March 31, 2000 and 1999,
respectively. Net realized investment gains were $0.1 million and $1.7 million
during the three month periods ended March 31, 2000 and 1999, respectively.
Interest expense was $0.3 million during both three month periods ended March
31, 2000 and 1999. See "Liquidity and Capital Resources."
The Company recorded a $0.1 million federal income tax benefit for the
three months ended March 31, 2000, compared to $1.9 million in federal income
tax expense during the same period in 1999. The effective tax (benefit) rate was
(2.7%) for the three months ended March 31, 2000, compared to 22.0% for the
three months ended March 31, 1999. The large amount of tax exempt income
included in the Company's pretax income has caused the effective tax benefit for
the three months ended March 31, 2000 as well as the low effective tax rate for
the three months ended March 31, 1999.
Net income for the three months ended March 31, 2000 was $3.1 million, or
$0.33 per diluted share on revenues of $69.1 million. This compares to net
income of $6.7 million, or $0.71 per diluted share on revenues of $50.7 million,
for the three months ended March 31, 1999. The reduction in earnings was
primarily attributable to the deterioration in the professional liability loss
and loss adjustment expense ratio, as described previously. One additional item
also impacted net income for the three months ended March 31, 2000. This item
reflects the 23% of MEEMIC Holdings not owned by Professionals Group. This
minority interest reduced net income by $0.7 million.
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,
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<PAGE> 14
cash used to pay for these items has been provided by operations. The Company
did not borrow any funds in the three month periods ended March 31, 2000 or
1999. As of March 31, 2000, 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 its
commitments for capital expenditures.
On April 4, 1997, Professionals Group borrowed $22.5 million under a
seven-year unsecured bank term loan, bearing interest at an adjustable rate of
LIBOR plus 62.5 basis points (6.55% at March 31, 2000), and payable quarterly
(the "Credit Agreement"). As of March 31, 2000, the outstanding principal
balance was $17.5 million. The remaining principal payments are due on April 30,
as follows: 2000 - $3.0 million; 2001 - $3.0 million; 2002 - $3.5 million; 2003
- - $3.5 million; and 2004 - $4.5 million. The Company paid the $2.5 million
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 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 March 31, 2000.
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. On
December 11, 1999, the Board of Directors approved an increase in the number of
shares available to be repurchased to 440,000 shares. This increase was approved
to reflect the additional shares outstanding due to the 10% stock dividend
declared on November 15, 1999. The Board also extended the stock repurchase
program from April 28, 2000 to September 30, 2000. The Company repurchased
72,800 shares under this plan at a total cost of $1.7 million during the three
months ended March 31, 2000.
On July 1, 1999, MEEMIC completed its conversion to a stock insurance
company. As a result of the conversion, MEEMIC became a wholly owned subsidiary
of MEEMIC Holdings, Inc., a publicly traded Michigan business corporation
(Nasdaq: MEMH). As part of MEEMIC's conversion, the Company acquired 5,065,517
shares, or 77%, of the outstanding common stock of MEEMIC Holdings, at a cost of
$50.6 million. Of these shares, 2,302,209 shares were acquired upon the
conversion of a $21.5 million promissory note (plus accrued interest of $1.5
million) previously issued by MEEMIC to ProNational. The remaining 2,763,308
shares were purchased by ProNational for cash of $27.6 million. The excess of
net assets acquired over cost was $19.6 million. This acquisition was accounted
for as a purchase business combination. Beginning July 1, 1999, the financial
results of MEEMIC Holdings have been consolidated into the financial results of
the Company (see also Note 4 to the Company's condensed consolidated financial
statements).
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,
-14-
<PAGE> 15
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 has completed an assessment of its computerized information
systems across its entire operation and has determined that all significant
systems are Year 2000 compliant. To date, ProNational has incurred approximately
$0.5 million in connection with its efforts to become Year 2000 compliant. All
of such costs have been expensed as incurred. To date, MEEMIC has incurred
approximately $3.0 million for the purchase of new computerized information and
communication systems. Neither ProNational nor MEEMIC anticipates incurring
additional costs related to the Year 2000. The Company has received written
assurances from the third party vendors of such equipment and software, that
such items are Year 2000 compliant. The Company has also conducted Year 2000
investigation and testing with its major third party vendors' software and
hardware and determined that all significant hardware and software is Year 2000
compliant. While the Company believes that Year 2000 compliance issues have been
reasonably addressed, both internally and externally, no assurances can be given
that all entities with whom the Company does business will be Year 2000
compliant. The foregoing disclosure contains information regarding Year 2000
readiness which constitutes a "Year 2000 Readiness Disclosure" as defined in the
Year 2000 Readiness Disclosure Act.
While the Company has experienced no Year 2000 related problems during the
transition to the Year 2000, it is maintaining its contingency plans in the
event that any problems arise going forward.
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.
As of March 31, 2000, 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 and asset-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 ProNational's duration to a defined
range of 3.5 to 5.5 years and limiting MEEMIC's duration to a maximum of 300% of
the duration of MEEMIC's liabilities. 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
-15-
<PAGE> 16
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 March 31, 2000 were deemed to be temporary.
The Company currently has no market risk exposure to foreign currency
exchange rate risk or commodity price risk.
Quantitative Information About Market Risk:
Financial instruments subject to interest rate risk as of March 31, 2000
and December 31, 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>
Total portfolio value at March 31, 2000 $819,987 $791,553 $762,965 $734,391 $706,191
============= ============= ============== ============= ==============
Total portfolio value at
December 31, 1999 $797,240 $774,165 $750,669 $727,237 $704,158
============= ============= ============== ============= ==============
</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 interest 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.
-16-
<PAGE> 17
Financial instruments subject to equity market risk as of March 31, 2000
and December 31, 1999 were as follows:
<TABLE>
<CAPTION>
Hypothetical Market
Actual Changes
Market ------------------------------
Value +10% -10%
------------ ------------- -------------
(in thousands)
<S> <C> <C> <C>
Common stocks at March 31, 2000 $4,183 $4,601 $3,765
============ ============= =============
Common stocks at December 31, 1999 $4,899 $5,389 $4,409
============ ============= =============
</TABLE>
The table above summarizes the Company's equity price risk as of March 31,
2000 and December 31, 1999 and shows the effects of a hypothetical 10% increase
and 10% decrease in the market prices as of March 31, 2000 and December 31,
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 March 31, 2000 and December 31, 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.
-17
<PAGE> 18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Item 601
Regulation S-K
Exhibit Reference
Number Exhibit Description
---------- -------------------
(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.
(b) Reports on Form 8-K.
No reports were filed during the three months ended March 31, 2000.
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: May 11, 2000 /s/ John F. Lang
--------------------------------------------
John F. Lang
Vice President, Treasurer and
Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer)
-18-
<PAGE> 19
Exhibit Index
-------------
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF PROFESSIONALS GROUP, INC. AS OF MARCH
31, 2000 AND FOR THE THREE MONTHS THEN ENDED (IN THOUSANDS).
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<DEBT-HELD-FOR-SALE> 730,026
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 4,183
<MORTGAGE> 0
<REAL-ESTATE> 2,695
<TOTAL-INVEST> 769,843
<CASH> 5,648
<RECOVER-REINSURE> 5,708
<DEFERRED-ACQUISITION> 3,311
<TOTAL-ASSETS> 1,094,122
<POLICY-LOSSES> 648,776
<UNEARNED-PREMIUMS> 102,814
<POLICY-OTHER> 27,774
<POLICY-HOLDER-FUNDS> 10,094
<NOTES-PAYABLE> 17,500
0
0
<COMMON> 8,925
<OTHER-SE> 210,868
<TOTAL-LIABILITY-AND-EQUITY> 1,094,122
56,643
<INVESTMENT-INCOME> 11,228
<INVESTMENT-GAINS> 49
<OTHER-INCOME> 1,168
<BENEFITS> 53,214
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 11,607
<INCOME-PRETAX> 3,685
<INCOME-TAX> (100)
<INCOME-CONTINUING> 3,097
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,097
<EPS-BASIC> 0.35
<EPS-DILUTED> 0.33
<RESERVE-OPEN> 631,981
<PROVISION-CURRENT> 54,708
<PROVISION-PRIOR> (1,594)
<PAYMENTS-CURRENT> 10,193
<PAYMENTS-PRIOR> 36,742
<RESERVE-CLOSE> 648,776
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
