<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, 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 August 10, 2000 was 8,851,223.
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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 June 30, 3
2000 (Unaudited) and December 31, 1999
Condensed Consolidated Statements of Income for the 4
Three Months and Six Months Ended June 30, 2000
and 1999 (Unaudited)
Condensed Consolidated Statements of 5
Comprehensive Income for the Three Months and Six
Months Ended June 30, 2000 and 1999 (Unaudited)
Condensed Consolidated Statements of Cash Flows 6
for the Six Months Ended June 30, 2000 and 1999
(Unaudited)
Notes to Condensed Consolidated Financial 7-9
Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial 10-17
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market 17-19
Risk
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 19-20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
</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)
June 30, December 31,
Assets 2000 1999
------ --------------- ---------------
(in thousands, except share data)
<S> <C> <C>
Investments:
Fixed maturities available for sale, at fair value
(amortized cost: $748,682 and $750,548) $730,863 $731,036
Equity securities available for sale, at fair value
(cost: $2,623 and $3,846) 3,015 4,899
Short-term investments, at cost 40,770 19,633
Real estate, at cost, net of accumulated depreciation 2,690 2,700
--------------- ---------------
Total investments 777,338 758,268
Cash 4,774 13,797
Restricted cash 2,070 2,070
Premiums due from policyholders 40,117 34,951
Reinsurance balances 185,277 168,100
Accrued investment income 9,445 10,087
Deferred federal income taxes 56,401 54,161
Property and equipment, at cost, net of
accumulated depreciation 11,909 10,779
Prepaid reinsurance premiums 8,678 6,667
Other assets 14,911 13,209
--------------- ---------------
Total assets $1,110,920 $1,072,089
=============== ===============
Liabilities and Shareholders' Equity
Liabilities:
Loss and loss adjustment expense reserves $663,832 $631,981
Reserve for extended reporting period claims 27,874 27,674
Unearned premiums 93,270 87,305
Long-term debt 14,500 17,500
Excess of net assets acquired over cost 17,630 18,609
Accrued expenses and other liabilities 44,624 48,400
Minority interest 25,636 23,804
--------------- ---------------
Total liabilities 887,366 855,273
--------------- ---------------
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;
8,917,810 and 8,997,709 shares issued and
outstanding in 2000 and 1999, respectively 8,918 8,998
Additional paid-in capital 45,499 47,033
Retained earnings 180,612 172,968
Accumulated other comprehensive income (loss),
net of deferred federal income taxes (11,475) (12,183)
--------------- ---------------
Total shareholders' equity 223,554 216,816
--------------- ---------------
Total liabilities and shareholders' equity $1,110,920 $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 Six Months Ended
June 30, June 30,
------------------------------------ ------------------------------------
2000 1999 2000 1999
---------------- --------------- ---------------- ---------------
(in thousands, except share data)
<S> <C> <C> <C> <C>
Revenues and other income:
Net premiums written $48,687 $30,895 $116,539 $86,839
Decrease (increase) in unearned premiums, net of
prepaid reinsurance premiums 7,255 8,950 (3,954) (8,312)
---------------- --------------- ---------------- ---------------
Premiums earned, net 55,942 39,845 112,585 78,527
Net investment income 11,531 9,387 22,759 18,604
Net realized investment gains 103 949 152 2,670
Other 1,289 1,191 2,457 2,238
---------------- --------------- ---------------- ---------------
Total revenues and other income 68,865 51,372 137,953 102,039
---------------- --------------- ---------------- ---------------
Expenses:
Losses and loss adjustment expenses, net 50,592 31,706 103,706 64,323
Increase in reserve for extended reporting
period claims 100 250 200 500
Policy acquisition and other underwriting expenses 11,141 11,731 22,748 19,908
Interest expense 282 264 572 554
Amortization expense, net (302) 281 (522) 561
Other 604 399 1,116 919
---------------- --------------- ---------------- ---------------
Total expenses 62,417 44,631 127,820 86,765
---------------- --------------- ---------------- ---------------
Income from operations before federal income
taxes and minority interest 6,448 6,741 10,133 15,274
Federal income taxes 620 1,637 520 3,515
---------------- --------------- ---------------- ---------------
Income before minority interest 5,828 5,104 9,613 11,759
Minority interest (1,281) - (1,969) -
---------------- --------------- ---------------- --------------
Net income $4,547 $5,104 $7,644 $11,759
================ =============== ================ ===============
Net income per common share - basic $0.51 $0.56 $0.86 $1.28
================ =============== ================ ===============
Net income per common share - assuming dilution $0.50 $0.55 $0.84 $1.26
================ =============== ================ ===============
Weighted average shares outstanding - basic 8,928,559 9,192,803 8,933,360 9,198,566
================ =============== ================ ===============
Weighted average shares outstanding - assuming dilution 9,000,730 9,311,284 9,007,988 9,333,508
================ =============== ================ ===============
</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,
-------------------------- --------------------------
2000 1999 2000 1999
------------ ------------ ----------- ------------
(in thousands)
<S> <C> <C> <C> <C>
Net income $4,547 $5,104 $7,644 $11,759
------------ ------------ ------------ -----------
Other comprehensive income (loss):
Unrealized holding gains (losses) on securities arising
during the period (net of income taxes (benefit) of ($257) and
($5,405) for three months in 2000 and 1999, respectively and
$416 and ($7,899) for six months in 2000 and 1999, respectively) (499) (10,492) 808 (15,333)
Less reclassification adjustment for realized gains
included in net income (net of income taxes of $35 and
$323 for three months in 2000 and 1999, respectively and
$52 and $908 for six months in 2000 and 1999, respectively) (68) (626) (100) (1,762)
------------ ------------ ------------ -----------
Other comprehensive income (loss) (567) (11,118) 708 (17,095)
------------ ------------ ------------ -----------
Comprehensive income (loss) $3,980 ($6,014) $8,352 ($5,336)
============ ============ ============ ===========
</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)
[CAPTION]
<TABLE>
Six Months Ended June 30,
-------------------------------
2000 1999
------------ ------------
(in thousands)
<S> <C> <C>
Net cash provided by operating activities $16,451 $12,263
------------ ------------
Cash flows from investing activities:
Proceeds from sale or maturity of short-term investments 436,224 665,042
Purchases of short-term investments (456,955) (698,091)
Proceeds from maturity of securities available for sale 15,805 500
Proceeds from sale of securities available for sale 95,519 163,714
Purchases of securities available for sale (108,719) (138,112)
Purchases of real estate, property and equipment (2,132) (1,290)
Payment on liability for purchased book of business - (637)
------------ ------------
Net cash used in investing activities (20,258) (8,874)
------------ ------------
Cash flows from financing activities:
Repayment of long-term debt (3,000) (2,500)
Book overdrafts - 996
Common stock repurchased (2,216) (1,494)
Cash paid for dissenter's rights - (26)
------------ ------------
Net cash used in financing activities (5,216) (3,024)
------------ ------------
Net increase (decrease) in cash (9,023) 365
Cash, beginning of period 13,797 379
------------ ------------
Cash, end of period $4,774 $744
============ ============
Supplemental schedule of noncash investing and financing activities:
Issuance of common stock as compensation $602 $541
============ ============
</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 insurance holding company which provides
personal auto, homeowners, boat and umbrella coverages primarily for
educational employees and their families 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 and six month periods ended June
30, 2000 are 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 8,928,559 and 9,192,803 for the
three months ended June 30, 2000 and 1999, respectively, and 8,933,360
and 9,198,566 for the six months ended June 30, 2000 and 1999,
respectively. The effect of dilutive stock options added 72,171 shares
and 118,481 shares for the three months ended June 30, 2000 and 1999,
respectively, and 74,628 shares and 134,942 shares for the six months
ended June 30, 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 June 30, Six months ended June 30,
-------------------------------------- ------------------------------------
2000 1999 2000 1999
---------------- ----------------- --------------- -----------------
(in thousands)
<S> <C> <C> <C> <C>
REVENUES:
Professional liability lines $ 26,855 $ 28,493 $ 54,895 $ 56,014
Personal lines 29,087 11,900 57,690 23,579
Investment operations 11,634 10,336 22,911 21,274
Corporate and other 1,289 643 2,457 1,172
----------------- ----------------- --------------- -----------------
Total revenues $ 68,865 $ 51,372 $137,953 $102,039
================= ================= =============== =================
INCOME (LOSS) BEFORE INCOME TAXES:
Professional liability lines $ (10,977) $ (6,485) $(20,999) $ (9,972)
Personal lines 5,086 2,988 6,930 4,429
Investment operations 11,634 10,336 22,911 21,274
Corporate and other 705 (98) 1,291 (457)
---------------- ----------------- --------------- -----------------
Total income before income taxes $ 6,448 $ 6,741 $ 10,133 $ 15,274
================= ================= =============== =================
IDENTIFIABLE ASSETS:
Property and casualty insurance $1,097,650 $902,487
Corporate and other 13,270 8,320
----------------- -----------------
Total identifiable assets $1,110,920 $910,807
================= =================
</TABLE>
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<PAGE> 9
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 six months ended June 30, 1999, as if
this acquisition had occurred on January 1, 1999 (in thousands, except
per share data):
<TABLE>
<CAPTION>
1999
----
<S> <C>
Total revenues $138,126
Income before extraordinary item 15,402
Net income 15,530
Diluted income per common share before extraordinary item 1.64
Diluted net income per common share 1.65
</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.
(5) Proposed Business Combination
On June 22, 2000, Professionals Group entered into a definitive
agreement with Medical Assurance, Inc. (NYSE: MAI) to consolidate the
two companies. The two parties will form a new holding company, Medical
and Professionals Assurance, Inc., making it the nation's third largest
writer of liability insurance for health care professionals and
facilities. Professionals Group shareholders will receive their choice
of $12.00 of cash and $14.00 worth of shares of stock in the new
holding company, or $26.00 in cash, for each share of Professionals
Group stock they own. The agreement is subject to required regulatory
and shareholder approvals and is expected to be completed in early
2001. The Company filed a Current Report on Form 8-K with the
Securities and Exchange Commission on June 30, 2000 regarding the
agreement and plan of consolidation.
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<PAGE> 10
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, homeowners, boat and umbrella coverages primarily for educational
employees and their families 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 three and six month 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 -- June 30, 2000 Compared to December 31, 1999:
Total assets increased $38.8 million, or 3.6%, to $1,110.9 million at June
30, 2000, compared to $1,072.1 million at December 31, 1999. Invested assets
increased 2.5% to $777.3 million, or approximately 70% of the Company's total
assets at June 30, 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. Reinsurance balances have increased due primarily to an increase
of medical malpractice business sold at higher limits, resulting in greater
reinsurance participation, therefore reinsurance recoverables have continued to
increase. 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 June 30, 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
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<PAGE> 11
to interest rate changes. At June 30, 2000, the fixed maturity portfolio had net
unrealized losses of $17.8 million. At December 31, 1999, the fixed maturity
portfolio had net unrealized losses of $19.5 million. This 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 75%
and 74% of the Company's consolidated liabilities at June 30, 2000 and December
31, 1999, respectively. These reserves are determined on the basis of individual
claims and actuarially determined estimates of future losses based on the
Company's past loss experience and projections as to future claims frequency,
severity, inflationary trends and settlement patterns. Estimating 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 $31.8 million, or
5.0%, to $663.8 million at June 30, 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 $6.0 million, or 6.8%, to $93.3
million at June 30, 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 $6.7 million, or 3.1%, to $223.5 million at
June 30, 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 $0.7 million and net income of $7.6 million, which was offset by other
decreases in shareholders' equity of $1.6 million (primarily related to the
Company's stock repurchase program) during the six month period ended June 30,
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 June 30, 2000 Compared to Three
Months Ended June 30, 1999:
Professional Liability Insurance Operations Segment:
Professional liability net premiums written were $17.2 million for the
three months ended June 30, 2000, a decrease of $2.3 million, or 12.0%, compared
to net premiums written of $19.5 million for the three months
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<PAGE> 12
ended June 30, 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 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 $26.8 million for the three months ended June 30, 2000, a
decrease of $1.7 million, or 5.7%, compared to $28.5 million for the three
months ended June 30, 1999. The decrease in professional liability net premiums
earned was also due to the factors mentioned above.
Professional liability insurance incurred losses and loss adjustment
expenses (including the increase in reserve for extended reporting period
claims) totaled $32.5 million for the three months ended June 30, 2000, an
increase of $6.2 million, or 23.3%, compared to $26.3 million for the three
months ended June 30, 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
120.9% for the three months ended June 30, 2000, compared to 92.4% 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 $0.9 million
lower than the benefits received from the 1999 accident year stop loss
reinsurance contract.
Professional liability policy acquisition and underwriting expenses were
$5.3 million for the three months ended June 30, 2000, a decrease of $3.1
million, or 36.4%, compared to policy acquisition and underwriting expenses of
$8.4 million for the same period of 1999. As a percentage of premiums earned,
the underwriting expense ratio decreased to 20.0% for the three months ended
June 30, 2000, from 29.6% for the same period of 1999. This decrease was due
primarily to $2.0 million in severance expenses incurred during the three months
ended June 30, 1999 in connection with the resignation of three executives.
Policy acquisition costs have also decreased in 2000 due to the reduction of
written premiums.
Personal Lines Insurance Operations Segment:
Personal lines net premiums written were $31.5 million for the three
months ended June 30, 2000, an increase of $20.2 million, or 177.4%, compared to
net premiums written of $11.3 million for the three months ended June 30, 1999
(pursuant to the then existing quota share reinsurance relationship with
MEEMIC). Personal lines net premiums earned were $29.1 million for the three
months ended June 30, 2000, an increase of $17.8 million, or 156.2%, compared to
net premiums earned of $11.3 million for the three months ended June 30, 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 $18.2 million for the three months ended June 30, 2000, an increase of
$12.6 million, or 224.4%, compared to $5.6 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 62.7% for the three months ended June 30, 2000, compared to
49.5% for the same period of 1999 (pursuant to the then existing quota share
reinsurance relationship with MEEMIC). The
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<PAGE> 13
personal lines insurance incurred loss and loss adjustment expense ratio
benefited from favorable weather conditions in both 2000 and 1999.
Personal lines policy acquisition and underwriting expenses were $5.8
million for the three months ended June 30, 2000, an increase of $2.5 million,
or 75.3%, compared to policy acquisition and underwriting expenses of $3.3
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 net realized investment gains, was $11.5
million for the three months ended June 30, 2000, an increase of $2.1 million,
or 22.8%, compared to net investment income of $9.4 million for the three months
ended June 30, 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 7.1% and 6.8% as of June 30, 2000 and 1999,
respectively. Net realized investment gains were $0.1 million and $0.9 million
during the three month periods ended June 30, 2000 and 1999, respectively.
Interest expense was $0.3 million during both three month periods ended June 30,
2000 and 1999. See "Liquidity and Capital Resources."
The Company recorded $0.6 million of federal income tax expense for the
three months ended June 30, 2000, compared to $1.6 million in federal income tax
expense during the same period in 1999. The effective tax rate was 9.6% for the
three months ended June 30, 2000, compared to 24.3% for the three months ended
June 30, 1999. The decrease in the effective tax rate was due primarily to the
large amount of tax exempt income included in the Company's pretax income during
the three months ended June 30, 2000 compared to the three months ended June 30,
1999.
Net income for the three months ended June 30, 2000 was $4.5 million, or
$0.50 per diluted share on revenues of $68.9 million. This compares to net
income of $5.1 million, or $0.55 per diluted share on revenues of $51.4 million,
for the three months ended June 30, 1999. The reduction in earnings was
primarily attributable to the deterioration in the professional liability loss
and loss adjustment expense ratio, as discussed previously, which was partially
offset by an increase in earnings from the personal lines segment. Net income
has also been reduced to reflect the 23% minority interest of MEEMIC Holdings
not owned by Professionals Group.
Results of Operations - Six Months Ended June 30, 2000 Compared to Six Months
Ended June 30, 1999:
Professional Liability Insurance Operations Segment:
Professional liability net premiums written were $57.1 million for the six
months ended June 30, 2000, a decrease of $7.2 million, or 11.2%, compared to
net premiums written of $64.3 million for the six months ended June 30, 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 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 $54.9 million for
the six months ended June 30, 2000, a
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<PAGE> 14
decrease of $1.1 million, or 2.0%, compared to $56.0 million for the six months
ended June 30, 1999. The decrease in professional liability net premiums earned
was also due to the factors mentioned above.
Professional liability insurance incurred losses and loss adjustment
expenses (including the increase in reserve for extended reporting period
claims) totaled $65.6 million for the six months ended June 30, 2000, an
increase of $13.2 million, or 25.1%, compared to $52.4 million for the six
months ended June 30, 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
119.5% for the six months ended June 30, 2000, compared to 93.6% 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 $1.6 million
lower than the benefits received from the 1999 accident year stop loss
reinsurance contract.
Professional liability policy acquisition and underwriting expenses were
$10.3 million for the six months ended June 30, 2000, a decrease of $2.9
million, or 21.6%, compared to policy acquisition and underwriting expenses of
$13.2 million for the same period of 1999. As a percentage of premiums earned,
the underwriting expense ratio decreased to 18.8% for the six months ended June
30, 2000, from 23.5% for the same period of 1999. This decrease was due
primarily to $2.0 million in severance expenses incurred during the six months
ended June 30, 1999 in connection with the resignation of three executives.
Policy acquisition costs have also decreased in 2000 due to the reduction of
written premiums.
Personal Lines Insurance Operations Segment:
Personal lines net premiums written were $59.4 million for the six months
ended June 30, 2000, an increase of $36.9 million, or 164.0%, compared to net
premiums written of $22.5 million for the six months ended June 30, 1999
(pursuant to the then existing quota share reinsurance relationship with
MEEMIC). Personal lines net premiums earned were $57.7 million for the six
months ended June 30, 2000, an increase of $35.2 million, or 156.3%, compared to
net premiums earned of $22.5 million for the six months ended June 30, 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 $38.3 million for the six months ended June 30, 2000, an increase of
$25.9 million, or 209.2%, compared to $12.4 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 66.4% for the six months ended June 30, 2000, compared to
55.1% 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.
Personal lines policy acquisition and underwriting expenses were $12.4
million for the six months ended June 30, 2000, an increase of $5.7 million, or
84.1%, compared to policy acquisition and underwriting
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<PAGE> 15
expenses of $6.7 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 net realized investment gains, was $22.8
million for the six months ended June 30, 2000, an increase of $4.2 million, or
22.3%, compared to net investment income of $18.6 million for the six months
ended June 30, 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 7.1% and 6.8% as of June 30, 2000 and 1999,
respectively. Net realized investment gains were $0.2 million and $2.7 million
during the six month periods ended June 30, 2000 and 1999, respectively.
Interest expense was $0.6 million during both six month periods ended June 30,
2000 and 1999. See "Liquidity and Capital Resources."
The Company recorded $0.5 million of federal income tax expense for the
six months ended June 30, 2000, compared to $3.5 million in federal income tax
expense during the same period in 1999. The effective tax rate was 5.1% for the
six months ended June 30, 2000, compared to 23.0% for the six months ended June
30, 1999. The decrease in the effective tax rate was due primarily to the large
amount of tax exempt income included in the Company's pretax income during the
six months ended June 30, 2000 compared to the six months ended June 30, 1999.
Net income for the six months ended June 30, 2000 was $7.6 million, or
$0.84 per diluted share on revenues of $138.0 million. This compares to net
income of $11.8 million, or $1.26 per diluted share on revenues of $102.0
million, for the six months ended June 30, 1999. The reduction in earnings was
primarily attributable to the deterioration in the professional liability loss
and loss adjustment expense ratio, as discussed previously, which was partially
offset by an increase in earnings from the personal lines segment. Net income
has also been reduced to reflect the 23% minority interest of MEEMIC Holdings
not owned by Professionals Group.
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, 2000 or 1999. As of June 30, 2000, no material
commitments for
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<PAGE> 16
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.
Professionals Group has an unsecured bank term loan, bearing interest at
an adjustable rate of LIBOR plus 62.5 basis points (7.15% at June 30, 2000), and
payable quarterly (the "Credit Agreement"). As of June 30, 2000, the outstanding
principal balance was $14.5 million. The remaining principal payments are due on
April 30, as follows: 2001 - $3.0 million; 2002 - $3.5 million; 2003 - $3.5
million; and 2004 - $4.5 million. The Company paid the $3.0 million principal
amount due on April 30, 2000.
The Credit Agreement prohibits the payment of cash dividends on
Professionals Group's common stock (except for cash paid in lieu of fractional
shares related to stock dividends declared). The Credit Agreement also requires
the Company to, among other things, maintain total consolidated shareholders'
equity of at least $80.0 million plus 50% of the preceding fiscal year's
consolidated net income, maintain a ratio of debt to equity of not more than
0.5:1 and maintain a fixed charges coverage ratio and an interest coverage ratio
(as defined by the Credit Agreement) of not less than 1.5:1 and 2.5:1,
respectively. The Company was in compliance with, or had received waivers of,
all required covenants at June 30, 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
95,435 shares under this plan at a total cost of $2.2 million during the six
months ended June 30, 2000. As of June 30, 2000, 104,917 shares were available
to be repurchased under this program; and the Company did repurchase all of such
shares for $2.5 million and completed the stock repurchase program on July 13,
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).
On June 22, 2000, Professionals Group entered into a definitive agreement
with Medical Assurance, Inc. (NYSE: MAI) to consolidate the two companies. The
two parties will form a new holding company, Medical and Professionals
Assurance, Inc., making it the nation's third largest writer of liability
insurance for health care professionals and facilities. Professionals Group
shareholders will receive their choice of $12.00 of cash and $14.00 worth of
shares of stock in the new holding company, or $26.00 in cash, for each share of
Professionals Group stock they own. The agreement is subject to required
regulatory and shareholder approvals and is expected to be completed in early
2001. The Company filed a Current Report on Form 8-K with the Securities and
Exchange Commission on June 30, 2000 regarding the agreement and plan of
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<PAGE> 17
consolidation. It is currently anticipated that the cash payable to shareholders
of Professionals Group will be financed from cash on hand and/or privately
placed indebtedness.
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.
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 June 30, 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 managed somewhat by limiting the duration of ProNational's
portfolio to a defined range of 3.5 to 5.5 years and limiting the duration of
MEEMIC's portfolio 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 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
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<PAGE> 18
value of such security to its net realizable value. All declines in market
values of the Company's investment securities at June 30, 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 June 30, 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 June 30, 2000 $839,291 $805,230 $771,633 $738,790 $707,757
============== ============= ============== ============= ==============
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.
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<PAGE> 19
Financial instruments subject to equity market risk as of June 30, 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 June 30, 2000 $3,015 $3,317 $2,714
============ ============= =============
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 June 30,
2000 and December 31, 1999 and shows the effects of a hypothetical 10% increase
and 10% decrease in the market prices as of June 30, 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 June 30, 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.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On May 24, 2000, at the 2000 Annual Meeting of Stockholders of
Professionals Group, Inc., the stockholders elected Victor T. Adamo, Esq., Eliot
H. Berg, M.D., Joseph C. Cauthen, M.D., and John F. Dodge, Jr., Esq. to the
Professionals Group Board for three year terms expiring in the year 2003 and
upon the re-election and qualification of their respective successors or upon
their earlier resignation or removal. The stockholders also elected H. Harvey
Gass, M.D. to the Professionals Group Board for a two year term expiring in the
year 2002 and upon the re-election and qualification of his successor or upon
his earlier resignation or removal. The stockholders also elected Isaac J.
Powell, M.D. to the Professionals Group Board for a one year term expiring in
the year 2001 and upon the re-election and qualification of his successor or
upon his earlier resignation or removal.
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<PAGE> 20
The vote of shareholders with respect to the election of directors was as
follows: Victor T. Adamo, Esq. received 5,536,159 shares for election and 79,636
shares were withheld; Eliot H. Berg, M.D. received 5,528,289 shares for election
and 87,506 shares were withheld; Joseph C. Cauthen, M.D. received 5,531,226
shares for election and 84,569 shares were withheld; John F. Dodge, Jr., Esq.
received 5,533,958 shares for election and 81,837 shares were withheld; H.
Harvey Gass, M.D. received 5,501,398 shares for election and 114,397 shares were
withheld; and Isaac J. Powell, M.D. received 5,529,033 shares for election and
86,762 shares were withheld.
In addition, incumbent directors R. Kevin Clinton, Ann F. Putallaz, Ph.D.,
Richard P. Horsch, M.D., William H. Woodhams, M.D. and Donald S. Young, Esq.,
continued in office.
The above matters are more fully described in Professionals Group's Proxy
Statement dated April 12, 2000.
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>
(10) (a) Severance Agreement dated May 4, 2000 between the
registrant and Victor T. Adamo.*
(10) (b) Form of Consulting, Confidentiality and NonCompetition
Agreement dated April 24, 2000 between the registrant, certain
of the registrants directors and other consultants.*
(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 June 22, 2000
disclosing under Item 5 (Other Events) of Form 8-K the Company's entering
into a definitive agreement to consolidate with Medical Assurance, Inc.
(NYSE: MAI).
No other reports were filed during the three months ended June 30,
2000.
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<PAGE> 21
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 10, 2000 /s/ John F. Lang
-------------------------------------------------
John F. Lang
Vice President, Treasurer and
Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer)
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<PAGE> 22
Exhibit Index
-------------
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
(10)(a) Severance Agreement dated May 4, 2000 between the
registrant and Victor T. Adamo.*
(10)(b) Form of Consulting, Confidentiality and NonCompetition
Agreement dated April 24, 2000 between the registrant,
certain of the registrants directors and other
consultants.*
(27) Financial Data Schedule of registrant.*
</TABLE>
