1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number 0-21223
PROFESSIONALS GROUP, INC.
(Exact name of registrant as specified in its charter)
Michigan 38-3273911
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
2600 Professionals Drive, Okemos, Michigan 48864
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (517) 349-6500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
The number of shares outstanding of the registrant's common stock, no par value
per share, as of May 11, 2001 was 8,851,223.
-1-
2
TABLE OF CONTENTS
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at March 31, 2001 3
(Unaudited) and December 31, 2000
Condensed Consolidated Statements of Income for the Three 4
Months Ended March 31, 2001 and 2000 (Unaudited)
Condensed Consolidated Statements of Comprehensive Income for 5
the Three Months Ended March 31, 2001 and 2000 (Unaudited)
Condensed Consolidated Statements of Cash Flows for the Three 6
Months Ended March 31, 2001 and 2000 (Unaudited)
Notes to Condensed Consolidated Financial Statements (Unaudited) 7-9
Item 2. Management's Discussion and Analysis of Financial Condition and 10-15
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15-17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
-2-
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PROFESSIONALS GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
March 31, December 31,
Assets 2001 2000
------
---------------- ----------------
Investments: (in thousands, except share data)
Fixed maturities available for sale, at fair value
(amortized cost: $683,013 and $676,088) $698,937 $683,298
Equity securities available for sale, at fair value
(cost: $2,619 and $2,618) 4,893 4,935
Short-term investments, at cost 109,764 90,408
Real estate, at cost 2,300 2,300
---------------- ----------------
Total investments 815,894 780,941
Cash 11,054 22,667
Restricted cash - 2,070
Premiums due from policyholders 55,040 38,942
Reinsurance balances 193,373 195,559
Accrued investment income 8,820 8,650
Deferred federal income taxes 50,100 49,690
Property and equipment, at cost, net of
accumulated depreciation 10,895 11,052
Prepaid reinsurance premiums 10,327 7,394
Other assets 19,674 19,788
---------------- ----------------
Total assets $1,175,177 $1,136,753
================ ================
Liabilities and Shareholders' Equity
Liabilities:
Loss and loss adjustment expense reserves $690,952 $683,113
Reserve for extended reporting period claims 28,174 28,074
Unearned premiums 113,705 93,825
Long-term debt 14,500 14,500
Excess of net assets acquired over cost 16,161 16,650
Accrued expenses and other liabilities 41,379 39,381
Minority interest 18,099 17,634
---------------- ----------------
Total liabilities 922,970 893,177
---------------- ----------------
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 8,851,223 shares issued and
outstanding in 2001 and 2000, respectively 8,851 8,851
Additional paid-in capital 44,173 43,864
Retained earnings 187,353 184,667
Accumulated other comprehensive income,
net of deferred federal income taxes 11,830 6,194
---------------- ----------------
Total shareholders' equity 252,207 243,576
---------------- ----------------
Total liabilities and shareholders' equity $1,175,177 $1,136,753
================ ================
See accompanying notes to the unaudited condensed consolidated financial
statements.
-3-
4
PROFESSIONALS GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)
Three Months Ended
March 31,
--------------------------------------------
2001 2000
------------------- --------------------
Revenues and other income: (in thousands, except share data)
Net premiums written $79,903 $67,853
Increase in unearned premiums, net of
prepaid reinsurance premiums (16,901) (11,210)
------------------- --------------------
Premiums earned, net 63,002 56,643
Net investment income 11,788 11,228
Net realized investment gains 456 49
Other 1,243 1,168
------------------- --------------------
Total revenues and other income 76,489 69,088
------------------- --------------------
Expenses:
Losses and loss adjustment expenses, net 62,253 53,114
Increase in reserve for extended reporting
period claims 100 100
Policy acquisition and other underwriting expenses 12,660 11,607
Interest expense 268 290
Amortization expense, net (302) (220)
Other 697 512
------------------- --------------------
Total expenses 75,676 65,403
------------------- --------------------
Income from operations before federal income
taxes (benefit) and minority interest 813 3,685
Federal income taxes (benefit) (2,338) (100)
------------------- --------------------
Income before minority interest 3,151 3,785
Minority interest (465) (688)
------------------- --------------------
Net income $2,686 $3,097
=================== ====================
Net income per common share - basic $0.30 $0.35
=================== ====================
Net income per common share - assuming dilution $0.29 $0.33
=================== ====================
Weighted average shares outstanding - basic 8,851,223 8,938,161
=================== ====================
Weighted average shares outstanding - assuming dilution 8,961,415 9,015,246
=================== ====================
See accompanying notes to the unaudited condensed consolidated financial
statements.
-4-
5
PROFESSIONALS GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended
March 31,
-----------------------------
2001 2000
------------ ------------
(in thousands)
Net income $2,686 $3,097
------------ ------------
Other comprehensive income:
Unrealized holding gains on securities arising
during the period (net of income taxes of $3,194 and
$673 in 2001 and 2000, respectively) 5,932 1,307
Less reclassification adjustment for realized gains
included in net income (net of income taxes of $160 and
$17 in 2001 and 2000, respectively) (296) (32)
------------ ------------
Other comprehensive income 5,636 1,275
------------ ------------
Comprehensive income $8,322 $4,372
============ ============
See accompanying notes to the unaudited condensed consolidated financial
statements.
-5-
6
PROFESSIONALS GROUP, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended March 31,
------------------------------------
2001 2000
-------------- --------------
(in thousands)
Net cash provided by operating activities $13,857 $3,919
-------------- --------------
Cash flows from investing activities:
Proceeds from sale or maturity of short-term investments 405,524 105,535
Purchases of short-term investments (423,782) (118,744)
Proceeds from maturity of securities available for sale 18,024 4,762
Proceeds from sale of securities available for sale 35,941 26,251
Purchases of securities available for sale (60,685) (27,702)
Purchases of real estate, property and equipment (492) (474)
-------------- --------------
Net cash used in investing activities (25,470) (10,372)
-------------- --------------
Cash flows from financing activities:
Common stock repurchased - (1,696)
-------------- --------------
Net cash used in financing activities 0 (1,696)
-------------- --------------
Net decrease in cash (11,613) (8,149)
Cash, beginning of period 22,667 13,797
-------------- --------------
Cash, end of period $11,054 $5,648
============== ==============
Supplemental schedule of noncash investing and financing activities:
Issuance of common stock as compensation $309 $301
============== ==============
See accompanying notes to the unaudited condensed consolidated financial
statements.
-6-
7
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 March 31, 2001, ProNational owns 84.2% 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 accounting
principles generally accepted in the United States of America and with
the instructions for Form 10-Q and Rule 10-01 of Regulation S-X as they
apply to interim financial information. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. All
significant intercompany transactions have been eliminated in
consolidation.
In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation of
financial position and results of operations have been included. The
operating results for the three month period ended March 31, 2001 are
not necessarily indicative of the results to be expected for the year
ending December 31, 2001.
(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 8,851,223 and 8,938,161 for the
three months ended March 31, 2001 and 2000, respectively. The effect of
dilutive stock options added 110,192 shares and 77,085 shares for the
three months ended March 31, 2001 and 2000, 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/A for
the year ended December 31, 2000. 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 March 31,
--------------------------------------
2001 2000
---------------- -----------------
(in thousands)
REVENUES:
Professional liability lines $ 31,829 $ 28,040
Personal lines 31,173 28,603
Investment operations 12,244 11,277
Corporate and other 1,243 1,168
---------------- -----------------
Total revenues $ 76,489 $ 69,088
================ =================
INCOME (LOSS) BEFORE INCOME TAXES:
Professional liability lines $(13,192) $ (10,022)
Personal lines 1,181 1,844
Investment operations 12,244 11,277
Corporate and other 580 586
---------------- -----------------
Total income before income taxes
$ 813 $ 3,685
================ =================
IDENTIFIABLE ASSETS:
Property and casualty insurance $1,158,279 $1,080,852
Corporate and other 16,898 13,270
---------------- -----------------
Total identifiable assets $1,175,177 $1,094,122
================ =================
-8-
9
PROFESSIONALS GROUP, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
(4) Proposed Business Combination
On June 22, 2000, Professionals Group entered into a definitive
agreement to consolidate with Medical Assurance, Inc. (NYSE: MAI) and
form a new holding company, ProAssurance Corporation ("ProAssurance"),
that would be the nation's third largest writer of liability insurance
for health care professionals and facilities. Subject to certain
adjustments, Professionals Group shareholders would 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 June 2001. A registration statement on Form S-4, as
amended (Registration No. 333-49378), has been filed by ProAssurance
with the Securities and Exchange Commission regarding the transactions
contemplated by the agreement and plan of consolidation.
-9-
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/A for the
year ended December 31, 2000. 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/A for the year ended December 31, 2000. (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.
Financial Condition -- March 31, 2001 Compared to December 31, 2000:
Total assets increased $38.4 million, or 3.4%, to $1,175.2 million at
March 31, 2001, compared to $1,136.8 million at December 31, 2000. Invested
assets increased 4.5% to $815.9 million, or approximately 69% of the Company's
total assets at March 31, 2001. This compares to invested assets of $780.9
million, or approximately 69% of the Company's total assets at December 31,
2000. The increase in invested assets was due primarily to positive cash flows
from operations and an increase in the fair value of the fixed maturity
portfolio, as further discussed below. Premiums due from policyholders and
prepaid reinsurance premiums also increased due primarily to the timing of
renewals of ProNational's professional liability business, a significant portion
of which renews during the first quarter.
The Company's investment portfolio continues to be dominated by fixed
maturity securities at March 31, 2001, and primarily consists of U.S. government
and agency bonds, high-quality corporate bonds, mortgage-backed and asset-backed
securities, redeemable preferred stocks and tax-exempt U.S. municipal bonds. The
entire fixed maturity portfolio, which is classified as available-for-sale, and
is carried at fair value, is sensitive to interest rate changes. At March 31,
2001, the fixed maturity portfolio had net unrealized gains of $15.9 million. At
December 31, 2000, the fixed maturity portfolio had net unrealized gains of $7.2
million. This change was due primarily to fluctuating bond market values caused
by changes in interest rates in the marketplace (see also "Item 3. Quantitative
and Qualitative Disclosures About Market Risk").
-10-
11
Loss and loss adjustment expense reserves represented approximately 75%
and 76% of the Company's consolidated liabilities at March 31, 2001 and December
31, 2000, 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 $7.9 million, or 1.1%,
to $691.0 million at March 31, 2001, from $683.1 million at December 31, 2000.
This increase was due primarily to a general increase in professional liability
reserves resulting from an increase in medical malpractice premiums written. 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 $19.9 million, or 21.2%, to $113.7
million at March 31, 2001, from $93.8 million at December 31, 2000. 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 $8.6 million, or 3.5%, to $252.2 million at
March 31, 2001, compared to $243.6 million at December 31, 2000. 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 $5.6 million and net income of $2.7 million during the three month period
ended March 31, 2001. The Company expects to use retained earnings to increase
its capital base and finance future growth and, therefore, there can be no
assurance as to any future cash dividends by the Company.
Results of Operations - Three Months Ended March 31, 2001 Compared to Three
Months Ended March 31, 2000:
Professional Liability Insurance Operations Segment:
Professional liability net premiums written were $48.9 million for the
three months ended March 31, 2001, an increase of $9.0 million, or 22.4%,
compared to net premiums written of $39.9 million for the same period of 2000.
The increase in professional liability net premiums written was mainly due to
price increases instituted by the Company, which increased premiums written, but
these premium increases were mitigated by a loss of insureds caused by the rate
increases, as well as more selective underwriting practices utilized by the
Company. Net premiums written for the three months ended March 31, 2000 also
included $1.8 million of ceded premiums related to a stop loss reinsurance
contract and retrospectively-rated reinsurance contracts from older coverage
years, neither of which existed during the three months ended March 31, 2001.
The Company is endeavoring to obtain additional premium per unit of risk in what
continues to be a price competitive professional liability environment.
Professional liability net premiums earned were $31.8 million
-11-
12
for the three months ended March 31, 2001, an increase of $3.8 million, or
13.5%, compared to $28.0 million for the same period of 2000. The increase in
professional liability net premiums earned was due primarily to the factors
mentioned above, but were lower than the written premium increase 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 $39.7 million for the three months ended March 31, 2001, an
increase of $6.6 million, or 19.9%, compared to $33.1 million for the same
period of 2000. 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 124.7%
for the three months ended March 31, 2001, compared to 118.1% for the same
period of 2000. The professional liability insurance incurred loss and loss
adjustment expense ratio has increased due primarily to increases in claims
costs, as well as no recognition of favorable prior year reserve development.
The increase in claims costs and the non-recognition of favorable prior year
development were based on a review of the Company's reserving needs and on
medical malpractice trends. The Company believes the medical malpractice trends
being experienced include increases in the frequency of reported claims and
increases in the severity of settled claims. The Company further believes that
these trends are being experienced on a national basis and is not specific to
any particular geographic region in which it writes business. Accordingly, the
Company did not recognize any favorable prior year development on its
professional liability segment during the three months ended March 31, 2001,
compared to $1.5 million of favorable prior year development during the same
period of 2000. In addition, reinsurance benefits derived from a stop loss
reinsurance contract entered into for the 2000 accident year reduced incurred
losses for the three months ended March 31, 2000 by $2.3 million. No stop loss
reinsurance contract was in place for the 2001 accident year. A premium
deficiency on these insurance contracts has not been recorded because the
operating ratio, after considering investment income attributable to the
professional liability insurance contracts, is 96.7%.
Professional liability policy acquisition and underwriting expenses were
$5.3 million for the three months ended March 31, 2001, an increase of $0.4
million, or 7.7%, compared to policy acquisition and underwriting expenses of
$4.9 million for the same period of 2000. As a percentage of premiums earned,
the underwriting expense ratio decreased to 16.7% for the three months ended
March 31, 2001, from 17.7% for the same period of 2000. The underwriting expense
ratio has decreased due primarily to the increase in net premiums earned.
Personal Lines Insurance Operations Segment:
Personal lines net premiums written were $31.0 million for the three
months ended March 31, 2001, an increase of $3.1 million, or 11.2%, compared to
net premiums written of $27.9 million for the same period of 2000. Personal
lines net premiums earned were $31.2 million for the three months ended March
31, 2001, an increase of $2.6 million, or 9.0%, compared to net premiums earned
of $28.6 million for the same period of 2000. The increase in both net premiums
written and net premiums earned for personal lines insurance 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 $22.7 million for the three months ended March 31, 2001, an increase of
$2.6 million, or 12.7%, compared to $20.1 million for the same period of 2000.
As a percentage of premiums earned, the personal lines insurance incurred loss
and loss
-12-
13
adjustment expense ratio increased to 72.7% for the three months ended March 31,
2001, compared to 70.3% for the same period of 2000. The increase in the
personal lines insurance incurred loss and loss adjustment expense ratio was due
primarily to more severe winter weather during the three months ended March 31,
2001 compared to the same period of 2000.
Personal lines policy acquisition and underwriting expenses were $7.3
million for the three months ended March 31, 2001, an increase of $0.7 million,
or 10.1%, compared to policy acquisition and underwriting expenses of $6.6
million for the same period of 2000. As a percentage of premiums earned, the
underwriting expense ratio increased modestly to 23.5% for the three months
ended March 31, 2001, from 23.3% for the same period of 2000.
General Insurance Operations:
Net investment income, excluding net realized investment gains, was $11.8
million for the three months ended March 31, 2001, an increase of $0.6 million,
or 5.0%, compared to net investment income of $11.2 million for the three months
ended March 31, 2000. The increase in net investment income was due primarily to
an increase in average invested assets during the three months ended March 31,
2001, compared to the same period of 2000. The weighted average tax equivalent
book yield of the fixed maturity portfolio was 7.1% and 7.0% as of March 31,
2001 and 2000, respectively. Net realized investment gains were $0.5 million and
$0.1 million during the three month periods ended March 31, 2001 and 2000,
respectively. Interest expense was $0.3 million during both three month periods
ended March 31, 2001 and 2000. See "Liquidity and Capital Resources."
The Company recorded a $2.3 million federal income tax benefit for the
three months ended March 31, 2001, compared to a $0.1 million federal income tax
benefit during the same period in 2000. The increase in the federal income tax
benefit was due primarily to a larger amount of tax exempt income included in
the Company's pretax income during the three months ended March 31, 2001,
compared to the same period of 2000, as well as adjustments attributable to
prior periods.
Net income for the three months ended March 31, 2001 was $2.7 million, or
$0.29 per diluted share on revenues of $76.5 million. This compares to net
income of $3.1 million, or $0.33 per diluted share on revenues of $69.1 million,
for the three months ended March 31, 2000. The reduction in earnings was
primarily attributable to the deterioration in the professional liability loss
and loss adjustment expense ratio, as described previously. Net income for 2001
and 2000 has also been reduced to reflect the minority interest of MEEMIC
Holdings not owned by Professionals Group during the three month periods ended
March 31, 2001 and 2000.
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.
-13-
14
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 three month
periods ended March 31, 2001 or 2000. As of March 31, 2001, 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 (7.38% at March 31, 2001),
and payable quarterly (the "Credit Agreement"). As of March 31, 2001, 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, 2001.
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 March 31, 2001.
In 1999, Professionals Group's Board of Directors authorized management to
repurchase up to 440,000 shares of the Company's common stock. The Company
repurchased 72,800 shares under this plan at a total cost of $1.7 million during
the three months ended March 31, 2000. As of December 31, 2000, all 440,000
shares have been repurchased and the stock repurchase program has been
completed.
On June 22, 2000, Professionals Group entered into a definitive agreement
to consolidate with Medical Assurance, Inc. (NYSE: MAI) and form a new holding
company, ProAssurance Corporation, that would be the nation's third largest
writer of liability insurance for health care professionals and facilities.
Subject to certain adjustments, Professionals Group shareholders would 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.
A registration statement on Form S-4, as amended (Registration No. 333-49378),
has been filed by ProAssurance with the Securities and Exchange Commission
regarding the transactions contemplated by the agreement and plan of
consolidation. Individuals are urged to read the registration statement and the
documents included or incorporated by reference therein (including the
respective Annual Reports on Form 10-K of Professionals Group and Medical
Assurance) because they contain important information regarding the
consolidation and the legal rights of security holders. ProAssurance's
registration statement, as well as other documents filed by Professionals Group
and Medical Assurance with the SEC are available from the SEC's website
(http://www.sec.gov).
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 $135 million as dividends from
Medical Assurance and Professionals Group payable to ProAssurance
-14-
15
immediately upon completion of the consolidation; and (ii) approximately $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 was approved by the Michigan Commissioner of Insurance on November 28,
2000, and 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. 138 ("SFAS No. 138"), "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," which amends SFAS No.
133 "Accounting for Derivative Instruments and Hedging Activities", and 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. SFAS No. 138
addresses a limited number of issues that have caused problems for enterprises
applying SFAS No. 133. As the Company currently does not use derivative
instruments, the adoption of SFAS No. 133 and No. 138 did 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 March 31, 2001, the majority of the Company's investment portfolio
was invested in fixed maturity securities and short-term investments. The fixed
maturity securities primarily consisted of U.S. government and agency bonds,
high-quality corporate bonds, mortgage-backed and asset-backed securities,
redeemable preferred stocks and tax-exempt U.S. municipal bonds.
Qualitative Information About Market Risk:
Investments in the Company's portfolio have varying degrees of risk. The
primary market risk exposure to the fixed maturity portfolio is interest rate
risk, which is limited somewhat by managing ProNational's duration to a defined
range of 3.5 to 5.5 years and limiting MEEMIC's duration to a maximum of 300% of
the duration of MEEMIC's liabilities. The distribution of maturities and sector
concentrations is monitored on a regular basis. Equity securities (common
stocks), which generally have greater risk and volatility of 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.
-15-
16
The Company regularly examines the quality distribution of its investment
portfolio for evidence of impairment. In such cases, changes in market value are
evaluated to determine the extent to which such changes are attributable to: (i)
interest rates, (ii) market-related factors other than interest rates and (iii)
financial conditions, business prospects and other fundamental factors specific
to the issuer. Declines attributable to issuer fundamentals are reviewed in
further detail. Available evidence is considered to estimate the realizable
value of the investment. When a security in the Company's investment portfolio
has a decline in market value which is other than temporary, the Company is
required by GAAP to reduce the carrying value of such security to its net
realizable value. All declines in market values of the Company's investment
securities at March 31, 2001 were deemed to be temporary.
The Company currently has no market risk exposure to foreign currency
exchange rate risk or commodity price risk.
Quantitative Information About Market Risk:
Financial instruments subject to interest rate risk as of March 31, 2001
and December 31, 2000 were as follows:
Market Value
-------------------------------------------------------------------------------------
-200 bps -100 bps +100 bps +200 bps
Change Change Actual Change Change
-------------------------------------------------------------------------------------
(in thousands)
Total portfolio value at
March 31, 2001 $875,664 $841,397 $808,701 $776,228 $745,384
============== ============= ============== ============= ==============
Total portfolio value at
December 31, 2000 $839,029 $805,761 $773,706 $742,285 $712,490
============== ============= ============== ============= ==============
The Company does not invest in fixed maturity securities for trading
purposes. Exposure to risk is represented in terms of changes in fair value due
to selected hypothetical movements in market interest rates. Bonds and preferred
stocks are individually priced to yield to the worst case scenario. Securities
issued by states of the United States and political subdivisions of the states
are assumed to hold their prepayment patterns. Mortgage-backed and asset-backed
securities are priced assuming deal specific prepayment scenarios, considering
the deal structure, prepayment penalties, yield maintenance agreements and the
underlying collateral. All of the preferred stocks have mechanisms that are
expected to provide an opportunity to liquidate at par.
-16-
17
Financial instruments subject to equity market risk as of March 31, 2001
and December 31, 2000 were as follows:
Hypothetical Market
Actual Changes
Market ------------------------------
Value +10% -10%
------------ ------------- -------------
(in thousands)
Common stocks at March 31, 2001 $4,893 $5,382 $4,404
============ ============= =============
Common stocks at December 31, 2000 $4,935 $5,429 $4,442
============ ============= =============
The table above summarizes the Company's equity price risk as of March 31,
2001 and December 31, 2000 and shows the effects of a hypothetical 10% increase
and 10% decrease in the market prices as of March 31, 2001 and December 31,
2000. The selected hypothetical change does not reflect what could be considered
the best or worst case scenarios.
The Company generally does not invest in equity securities for trading
purposes. As of March 31, 2001 and December 31, 2000, 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.
-17-
18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Item 601
Regulation S-K
Exhibit Reference
Number Exhibit Description
----------------- -------------------
(11) No statement re: computation of per share earnings is required to be filed
because the computations can be clearly determined from the materials
contained herein.
----------------------
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K dated April 12,
2001 disclosing under Item 9 (Regulation FD Disclosure) of Form 8-K that
its 2000 Summary Annual Report to Shareholders had been mailed to
shareholders and that such information shall not be deemed to be "filed"
for purposes of Section 18 of the Exchange Act or otherwise subject to the
liabilities of that section.
The Company filed a Current Report on Form 8-K dated May 8, 2001
disclosing under Item 9 (Regulation FD Disclosure) of Form 8-K that it had
issued its earnings press release for the quarterly period ended March 31,
2001 and that such press release shall not be deemed to be "filed" for
purposes of Section 18 of the Exchange Act or otherwise subject to the
liabilities of that section.
The Company filed a Current Report on Form 8-K dated May 10, 2001
disclosing under Item 9 (Regulation FD Disclosure) of Form 8-K that it had
issued a press release regarding the financing for the cash portion of the
consideration to be issued in connection with its proposed consolidation
with Medical Assurance, Inc. and that such press release shall not be
deemed to be "filed" for purposes of Section 18 of the Exchange Act or
otherwise subject to the liabilities of that section.
No other reports were filed during the three months ended March
31, 2001.
-18-
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PROFESSIONALS GROUP, INC.
DATE: May 11, 2001 /s/ John F. Lang
-----------------------------------------------------
John F. Lang
Vice President, Secretary, Treasurer and
Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer)
-19-