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 September 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
of Incorporation or Organization) Identification No.)
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 November 10, 2000 was 8,851,223.
2
TABLE OF CONTENTS
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at September 30, 2000 3
(Unaudited) and December 31, 1999
Condensed Consolidated Statements of Income for the Three 4
Months and Nine Months Ended September 30, 2000 and 1999
(Unaudited)
Condensed Consolidated Statements of Comprehensive Income for 5
the Three Months and Nine Months Ended September 30, 2000 and
1999 (Unaudited)
Condensed Consolidated Statements of Cash Flows for the Nine 6
Months Ended September 30, 2000 and 1999 (Unaudited)
Notes to Condensed Consolidated Financial Statements 7-9
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition 10-17
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17-19
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 20
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PROFESSIONALS GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
September 30, December 31,
Assets 2000 1999
----------- -----------
Investments: (in thousands, except share data)
Fixed maturities available for sale, at fair value
(amortized cost: $750,856 and $750,548) $ 742,755 $ 731,036
Equity securities available for sale, at fair value
(cost: $2,623 and $3,846) 3,055 4,899
Short-term investments, at cost 28,199 19,633
Real estate, at cost, net of accumulated depreciation 2,685 2,700
----------- -----------
Total investments 776,694 758,268
Cash 6,515 13,797
Restricted cash 2,070 2,070
Premiums due from policyholders 46,055 34,951
Reinsurance balances 205,345 168,100
Accrued investment income 9,413 10,087
Deferred federal income taxes 52,880 54,161
Property and equipment, at cost, net of
accumulated depreciation 11,519 10,779
Prepaid reinsurance premiums 8,530 6,667
Other assets 17,501 13,209
----------- -----------
Total assets $ 1,136,522 $ 1,072,089
=========== ===========
Liabilities and Shareholders' Equity
Liabilities:
Loss and loss adjustment expense reserves $ 686,217 $ 631,981
Reserve for extended reporting period claims 27,974 27,674
Unearned premiums 100,991 87,305
Long-term debt 14,500 17,500
Excess of net assets acquired over cost 17,140 18,609
Accrued expenses and other liabilities 39,014 48,400
Minority interest 19,802 23,804
----------- -----------
Total liabilities 905,638 855,273
----------- -----------
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;
8,851,223 and 8,997,709 shares issued and
outstanding in 2000 and 1999, respectively 8,851 8,998
Additional paid-in capital 43,345 47,033
Retained earnings 183,741 172,968
Accumulated other comprehensive income (loss),
net of deferred federal income taxes (5,053) (12,183)
----------- -----------
Total shareholders' equity 230,884 216,816
----------- -----------
Total liabilities and shareholders' equity $ 1,136,522 $ 1,072,089
=========== ===========
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)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
Revenues and other income: (in thousands, except share data)
Net premiums written $ 65,523 $ 62,753 $ 182,063 $ 149,592
Increase in unearned premiums, net of
prepaid reinsurance premiums (7,869) (4,675) (11,824) (12,987)
----------- ----------- ----------- -----------
Premiums earned, net 57,654 58,078 170,239 136,605
Net investment income 11,649 11,504 34,408 30,108
Net realized investment gains (losses) (362) (81) (210) 2,588
Other 765 776 3,222 3,014
----------- ----------- ----------- -----------
Total revenues and other income 69,706 70,277 207,659 172,315
----------- ----------- ----------- -----------
Expenses:
Losses and loss adjustment expenses, net 51,213 45,360 154,919 109,682
Increase in reserve for extended reporting
period claims 100 250 300 750
Policy acquisition and other underwriting expenses 13,410 13,376 36,158 33,284
Interest expense 265 254 837 808
Amortization expense, net (302) (209) (824) 352
Other 515 477 1,631 1,397
----------- ----------- ----------- -----------
Total expenses 65,201 59,508 193,021 146,273
----------- ----------- ----------- -----------
Income from operations before federal income
taxes, minority interest and extraordinary item 4,505 10,769 14,638 26,042
Federal income taxes 249 3,014 769 6,528
----------- ----------- ----------- -----------
Income before minority interest and
extraordinary item 4,256 7,755 13,869 19,514
Minority interest (1,127) (1,280) (3,096) (1,280)
----------- ----------- ----------- -----------
Income before extraordinary item 3,129 6,475 10,773 18,234
Extraordinary item - gain on early extinguishment
of debt, net of taxes of $681 -- 1,322 -- 1,322
----------- ----------- ----------- -----------
Net income $ 3,129 $ 7,797 $ 10,773 $ 19,556
=========== =========== =========== ===========
Net income per common share - basic:
Income before extraordinary item $ 0.35 $ 0.71 $ 1.21 $ 1.99
Income from extraordinary item -- 0.14 -- 0.14
----------- ----------- ----------- -----------
Net income per common share - basic $ 0.35 $ 0.85 $ 1.21 $ 2.13
=========== =========== =========== ===========
Net income per common share - assuming dilution:
Income before extraordinary item $ 0.34 $ 0.69 $ 1.18 $ 1.94
Income from extraordinary item -- 0.14 -- 0.14
--------------------------------------------------------------------
Net income per common share - assuming dilution $ 0.34 $ 0.83 $ 1.18 $ 2.08
====================================================================
Weighted average shares outstanding - basic 8,859,098 9,138,349 8,908,425 9,178,274
=========== =========== =========== ===========
Weighted average shares outstanding - assuming dilution 8,968,170 9,224,340 8,994,535 9,296,898
=========== =========== =========== ===========
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)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
(In thousands)
Net income $ 3,129 $ 7,797 $ 10,773 $ 19,556
-------- -------- -------- --------
Other comprehensive income (loss):
Unrealized holding gains (losses) on securities arising
during the period (net of income taxes (benefit) of $3,185 and
($2,128) for three months in 2000 and 1999, respectively and
$3,601 and ($10,027) for nine months in 2000 and 1999, respectively) 6,183 (4,130) 6,991 (19,464)
Less reclassification adjustment for realized (gains) losses
included in net income (net of income taxes (benefit) of ($123) and
($28) for three months in 2000 and 1999, respectively and
($71) and $880 for nine months in 2000 and 1999, respectively) 239 53 139 (1,708)
-------- -------- -------- --------
Other comprehensive income (loss) 6,422 (4,077) 7,130 (21,172)
-------- -------- -------- --------
Comprehensive income (loss) $ 9,551 $ 3,720 $ 17,903 $ (1,616)
======== ======== ======== ========
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)
Nine Months Ended September 30,
---------------------------------
2000 1999
--------- ---------
(in thousands)
Net cash provided by operating activities $ 11,136 $ 28,396
--------- ---------
Cash flows from investing activities:
Proceeds from sale or maturity of short-term investments 560,216 838,472
Purchases of short-term investments (568,101) (838,962)
Proceeds from maturity of securities available for sale 24,435 3,556
Proceeds from sale of securities available for sale 133,739 220,834
Purchases of securities available for sale (158,567) (237,933)
Purchases of real estate, property and equipment (2,384) (1,576)
Cash acquired in excess of cash paid related to MEEMIC acquisition -- 20,338
Payment on liability for purchased book of business -- (637)
--------- ---------
Net cash provided by (used in) investing activities (10,662) 4,092
--------- ---------
Cash flows from financing activities:
Repayment of long-term debt (3,000) (2,500)
Common stock repurchased (4,730) (4,330)
Repayment of payable related to an acquisition (26) (12,502)
Cash paid for dissenter's rights -- (26)
--------- ---------
Net cash used in financing activities (7,756) (19,358)
--------- ---------
Net increase (decrease) in cash (7,282) 13,130
Cash, beginning of period 13,797 379
--------- ---------
Cash, end of period $ 6,515 $ 13,509
========= =========
Supplemental schedule of noncash investing and financing activities:
Issuance of common stock as compensation $ 895 $ 727
========= =========
Exchange of assets for ownership interest in MEEMIC -- $ 23,022
========= =========
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. As of September
30, 2000, ProNational owns 82.5% 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 nine month periods ended
September 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 8,859,098 and 9,138,349 for the three months
ended September 30, 2000 and 1999, respectively, and 8,908,425 and
9,178,274 for the nine months ended September 30, 2000 and 1999,
respectively. The effect of dilutive stock options added 109,072 shares
and 85,991 shares for the three months ended September 30, 2000 and 1999,
respectively, and 86,110 shares and 118,624 shares for the nine months
ended September 30, 2000 and 1999, respectively for the computation of
diluted income per common share.
-7-
8
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:
Three months ended Nine months ended
September 30, September 30,
------------------------------ ------------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
(in thousands)
REVENUES:
Professional liability lines $ 27,491 $ 28,543 $ 82,386 $ 84,557
Personal lines 30,163 29,535 87,853 52,048
Investment operations 11,287 11,423 34,198 32,696
Corporate and other 765 776 3,222 3,014
----------- ----------- ----------- -----------
Total revenues $ 69,706 $ 70,277 $ 207,659 $ 172,315
=========== =========== =========== ===========
INCOME (LOSS) BEFORE INCOME TAXES:
Professional liability lines $ (12,130) $ (2,942) $ (33,129) $ (12,914)
Personal lines 5,061 2,440 11,991 5,803
Investment operations 11,287 11,423 34,198 32,696
Corporate and other 287 (152) 1,578 457
----------- ----------- ----------- -----------
Total income before income taxes $ 4,505 $ 10,769 $ 14,638 $ 26,042
=========== =========== =========== ===========
IDENTIFIABLE ASSETS:
Property and casualty insurance $ 1,128,951 $ 1,097,762
Corporate and other 7,571 7,416
----------- -----------
Total identifiable assets $ 1,136,522 $ 1,105,178
=========== ===========
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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 nine months ended September 30, 1999, as if this
acquisition had occurred on January 1, 1999 (in thousands, except per
share data):
Total revenues $208,403
Income before extraordinary item 21,547
Net income 22,996
Diluted income per common share before extraordinary item 2.30
Diluted net income per common share 2.45
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, ProAssurance Corporation
("ProAssurance"), 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 either $12.00 in cash and
shares of ProAssurance stock initially valued at $14.00, 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. ProAssurance filed a Form S-4
Registration Statement with the Securities and Exchange Commission on
November 6, 2000 regarding the transactions contemplated by the agreement
and plan of consolidation.
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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, 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), at which time, both the then existing management services
agreement and quota share reinsurance agreement were terminated. The transaction
was accounted for as a purchase business combination.
Financial Condition -- September 30, 2000 Compared to December 31, 1999:
Total assets increased $64.4 million, or 6.0%, to $1,136.5 million at
September 30, 2000, compared to $1,072.1 million at December 31, 1999. Invested
assets increased 2.4% to $776.7 million, or approximately 68% of the Company's
total assets at September 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 and third quarters.
The Company's investment portfolio continues to be dominated by fixed
maturity securities at September 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
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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 September 30, 2000, the fixed maturity portfolio had net unrealized
losses of $8.1 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 76%
and 74% of the Company's consolidated liabilities at September 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 $54.2 million, or
8.6%, to $686.2 million at September 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 $13.7 million, or 15.7%, to $101.0
million at September 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 and third quarters.
Shareholders' equity increased $14.1 million, or 6.5%, to $230.9 million
at September 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 $7.1 million and net income of $10.8 million, which was offset by
other decreases in shareholders' equity of $3.8 million (primarily related to
the Company's stock repurchase program) during the nine month period ended
September 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 September 30, 2000 Compared to Three
Months Ended September 30, 1999:
Professional Liability Insurance Operations Segment:
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Professional liability net premiums written were $34.1 million for the
three months ended September 30, 2000, an increase of $1.8 million, or 5.5%,
compared to net premiums written of $32.3 million for the three months ended
September 30, 1999. The increase in professional liability net premiums written
was mainly due to price increases instituted by the Company which was offset
somewhat by 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 $27.5 million for the three months ended
September 30, 2000, a decrease of $1.0 million, or 3.7%, compared to $28.5
million for the three months ended September 30, 1999. The decrease in
professional liability net premiums earned occurred because the rate increases
mentioned above will be earned over a one-year period instead of being reflected
immediately as is the case with written premiums.
Professional liability insurance incurred losses and loss adjustment
expenses (including the increase in reserve for extended reporting period
claims) totaled $33.9 million for the three months ended September 30, 2000, an
increase of $8.7 million, or 34.5%, compared to $25.2 million for the three
months ended September 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 123.4% for the three months ended September 30, 2000, compared to
88.3% 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 caused by an
increase in claims costs, 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 $1.1 million lower than the benefits received
during the same period of 1999 caused by less favorable reinsurance terms.
Professional liability policy acquisition and underwriting expenses were
$5.7 million for the three months ended September 30, 2000, a decrease of $1.0
million, or 14.6%, compared to policy acquisition and underwriting expenses of
$6.7 million for the same period of 1999. As a percentage of premiums earned,
the underwriting expense ratio decreased to 20.7% for the three months ended
September 30, 2000, from 23.4% for the same period of 1999. This decrease was
due primarily to a reduction in salaries and policy acquisition costs in 2000
caused by a lower number of employees compared to the same period of 1999.
Personal Lines Insurance Operations Segment:
Personal lines net premiums written were $31.4 million for the three
months ended September 30, 2000, an increase of $1.0 million, or 3.3%, compared
to net premiums written of $30.4 million for the three months ended September
30, 1999. Personal lines net premiums earned were $30.2 million for the three
months ended September 30, 2000, an increase of $0.7 million, or 2.1%, compared
to net premiums earned of $29.5 million for the three months ended September 30,
1999. The increase in both personal lines net premiums written and net premiums
earned was due to an increase in the number of policyholders and an increase in
the value of autos and homes being insured.
Personal lines insurance incurred losses and loss adjustment expenses
totaled $17.4 million for the three months ended September 30, 2000, a decrease
of $3.0 million, or 14.7%, compared to $20.4 million for the same period of
1999. The decrease in incurred losses and loss adjustment expenses was due to
continued favorable loss experience during the current accident year and the
reduction of $1.6 million of prior accident
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years' auto liability reserves. As a percentage of premiums earned, the personal
lines insurance incurred loss and loss adjustment expense ratio decreased to
57.7% for the three months ended September 30, 2000, compared to 69.1% for the
same period of 1999. The decrease in the personal lines insurance incurred loss
and loss adjustment expense ratio was also due to the factors mentioned above.
Personal lines policy acquisition and underwriting expenses were $7.7
million for the three months ended September 30, 2000, an increase of $1.0
million, or 15.1%, compared to policy acquisition and underwriting expenses of
$6.7 million for the same period of 1999. As a percentage of premiums earned,
the underwriting expense ratio increased to 25.6% for the three months ended
September 30, 2000, from 22.7% for the same period of 1999. The increase in
policy acquisition and underwriting expenses and the underwriting expense ratio
was due to consulting fees related to MEEMIC's increased investments in
technology and increases in statutory assessments and employee incentive
programs.
General Insurance Operations:
Net investment income, excluding net realized investment gains, was $11.6
million for the three months ended September 30, 2000, an increase of $0.1
million, or 1.3%, compared to net investment income of $11.5 million for the
three months ended September 30, 1999. The weighted average tax equivalent book
yield of the fixed maturity portfolio was 7.4% and 6.8% as of September 30, 2000
and 1999, respectively. Net realized investment losses were $0.4 million and
$0.1 million during the three month periods ended September 30, 2000 and 1999,
respectively. Interest expense was $0.3 million during both three month periods
ended September 30, 2000 and 1999. See "Liquidity and Capital Resources."
The Company recorded $0.3 million of federal income tax expense for the
three months ended September 30, 2000, compared to $3.0 million in federal
income tax expense during the same period in 1999. The effective tax rate was
5.5% for the three months ended September 30, 2000, compared to 28.0% for the
three months ended September 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 September 30, 2000
compared to the same period of 1999.
Net income for the three months ended September 30, 2000 was $3.1 million,
or $0.34 per diluted share on revenues of $69.7 million. This compares to net
income of $7.8 million, or $0.83 per diluted share on revenues of $70.3 million,
for the three months ended September 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. The 1999
results also include a one-time $1.3 million gain on early extinguishment of
debt due to MEEMIC's conversion to a stock company. Net income has also been
reduced to reflect the 17.5% and 23% minority interest of MEEMIC Holdings not
owned by Professionals Group during the three month periods ended September 30,
2000 and 1999, respectively.
Results of Operations - Nine Months Ended September 30, 2000 Compared to Nine
Months Ended September 30, 1999:
Professional Liability Insurance Operations Segment:
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Professional liability net premiums written were $91.3 million for the
nine months ended September 30, 2000, a decrease of $5.4 million, or 5.6%,
compared to net premiums written of $96.7 million for the nine months ended
September 30, 1999. The decrease in professional liability net premiums written
was mainly due to price increases instituted by the Company which was offset by:
(i) the anticipated decrease in the number of policyholders caused by the rate
increases and (ii) 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 $82.4 million for the nine
months ended September 30, 2000, a decrease of $2.2 million, or 2.6%, compared
to $84.6 million for the nine months ended September 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 $99.5 million for the nine months ended September 30, 2000, an
increase of $21.9 million, or 28.1%, compared to $77.6 million for the nine
months ended September 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 120.8% for the nine months ended September 30, 2000, compared to
91.8% 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 caused by an
increase in claims costs, 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 $3.2 million lower than the benefits received
during the same period of 1999 caused by less favorable reinsurance terms.
Professional liability policy acquisition and underwriting expenses were
$16.0 million for the nine months ended September 30, 2000, a decrease of $3.8
million, or 19.2%, compared to policy acquisition and underwriting expenses of
$19.8 million for the same period of 1999. As a percentage of premiums earned,
the underwriting expense ratio decreased to 19.4% for the nine months ended
September 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 nine
months ended September 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 $90.8 million for the nine months
ended September 30, 2000, an increase of $37.9 million, or 71.6%, compared to
net premiums written of $52.9 million for the nine months ended September 30,
1999. Personal lines net premiums earned were $87.8 million for the nine months
ended September 30, 2000, an increase of $35.8 million, or 68.8%, compared to
net premiums earned of $52.0 million for the nine months ended September 30,
1999. 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 $55.7 million for the nine months ended September 30, 2000, an increase
of $22.9 million, or 69.9%, compared to $32.8 million for the same period of
1999. 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 63.4% for the nine months ended September 30,
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2000, compared to 63.0% for the same period of 1999. The personal lines
insurance incurred loss and loss adjustment expense ratio benefited from
continued favorable loss experience due to favorable weather conditions in both
2000 and 1999.
Personal lines policy acquisition and underwriting expenses were $20.1
million for the nine months ended September 30, 2000, an increase of $6.7
million, or 49.7%, compared to policy acquisition and underwriting expenses of
$13.4 million for the same period of 1999. 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 $34.4
million for the nine months ended September 30, 2000, an increase of $4.3
million, or 14.3%, compared to net investment income of $30.1 million for the
nine months ended September 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 7.4% and 6.8% as of
September 30, 2000 and 1999, respectively. Net realized investment gains
(losses) were ($0.2 million) and $2.6 million during the nine month periods
ended September 30, 2000 and 1999, respectively. Interest expense was $0.8
million during both nine month periods ended September 30, 2000 and 1999. See
"Liquidity and Capital Resources."
The Company recorded $0.8 million of federal income tax expense for the
nine months ended September 30, 2000, compared to $6.5 million in federal income
tax expense during the same period in 1999. The effective tax rate was 5.3% for
the nine months ended September 30, 2000, compared to 25.1% for the nine months
ended September 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 nine months ended September 30, 2000 compared to the
same period of 1999.
Net income for the nine months ended September 30, 2000 was $10.8 million,
or $1.18 per diluted share on revenues of $207.7 million. This compares to net
income of $19.6 million, or $2.08 per diluted share on revenues of $172.3
million, for the nine months ended September 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. The
1999 results also include a one-time $1.3 million gain on early extinguishment
of debt due to MEEMIC's conversion to a stock company. Net income has also been
reduced to reflect the 17.5% and 23% minority interest of MEEMIC Holdings not
owned by Professionals Group during the nine month periods ended September 30,
2000 and 1999, respectively.
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.
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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 nine month
periods ended September 30, 2000 or 1999. As of September 30, 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.
Professionals Group has an unsecured bank term loan, bearing interest at
an adjustable rate of LIBOR plus 62.5 basis points (7.15% at September 30,
2000), and payable quarterly (the "Credit Agreement"). As of September 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 September 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
200,352 shares under this plan at a total cost of $4.7 million during the nine
months ended September 30, 2000. As of September 30, 2000, all 440,000 shares
have been repurchased and the stock repurchase program has been completed.
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). ProNational has continued to purchase additional shares of MEEMIC
Holdings in open market transactions to increase its ownership position.
ProNational has purchased 357,212 shares of MEEMIC Holdings at a total cost of
$7.1
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million during the nine months ended September 30, 2000, increasing its
ownership position to 82.5%. Additional purchases are anticipated to be made as
shares become available and as market conditions warrant.
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, ProAssurance Corporation, 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 either $12.00 in cash and ProAssurance stock initially valued at
$14.00, 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. ProAssurance filed a Form S-4
Registration Statement with the Securities and Exchange Commission on November
6, 2000 regarding the transactions contemplated by the agreement and plan of
consolidation.
Assuming the consolidation is completed, ProAssurance will derive the cash
needed to pay the Professionals Group shareholders in the consolidation from the
following sources: (i) up to approximately $110 million as dividends from
Medical Assurance and Professionals Group payable to ProAssurance immediately
upon completion of the consolidation; and (ii) up to $110 million from a bank
term loan to be made to ProAssurance and funded concurrently upon completion of
the consolidation. The dividend from Professionals Group will be funded in part
with the proceeds of an extraordinary dividend from ProNational. ProNational
filed a Form D Notice with the Michigan Commissioner of Insurance in support of
its request for approval of the payment of an extraordinary dividend of
approximately $50 million. The payment of this dividend is subject to approval
by the Michigan Commissioner of Insurance, and if approved, will be paid to
Professionals Group upon completion of the consolidation.
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 various 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 September 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.
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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 value of such security to its net
realizable value. All declines in market values of the Company's investment
securities at September 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 September 30,
2000 and December 31, 1999 were as follows:
Market Value
--------------------------------------------------------------------
-200 bps -100 bps +100 bps +200 bps
Change Change Actual Change Change
--------------------------------------------------------------------
(in thousands)
Total portfolio value at
September 30, 2000 $843,768 $806,866 $770,954 $736,436 $704,170
======== ======== ======== ======== ========
Total portfolio value at
December 31, 1999 $797,240 $774,165 $750,669 $727,237 $704,158
======== ======== ======== ======== ========
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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.
Financial instruments subject to equity market risk as of September 30,
2000 and December 31, 1999 were as follows:
Hypothetical Market
Actual Changes
Market ------------------------------
Value +10% -10%
------------ ------------- -------------
(in thousands)
Common stocks at September 30, 2000 $3,055 $3,361 $2,750
============ ============= =============
Common stocks at December 31, 1999 $4,899 $5,389 $4,409
============ ============= =============
The table above summarizes the Company's equity price risk as of September
30, 2000 and December 31, 1999 and shows the effects of a hypothetical 10%
increase and 10% decrease in the market prices as of September 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 September 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. Fluctuations
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.
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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 September 30,
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: November 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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EXHIBIT INDEX
-------------
Exhibit No, Description
- ----------- -----------
27 Financial Data Schedule