1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): August 31, 1996
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
(Exact name of registrant as specified in its charter)
Michigan 0-21223 38-3273911
(State or other (Commission (IRS Employer
jurisdiction of File No.) Identification No.)
incorporation)
4295 Okemos Road, Okemos, Michigan 48864
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (517) 349-6500
Not Applicable
(Former name or former address, if changed since last report)
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Item 2. Acquisition or Disposition of Assets.
Effective August 31, 1996, the registrant ("Holding Company") acquired all of
the outstanding capital stock of PICOM Insurance Company, a Michigan stock
insurance corporation ("PICOM").
PICOM was incorporated under the laws of the State of Michigan in 1980 and is
licensed as a property and casualty insurer in Michigan, Illinois, Indiana,
Iowa, Ohio and Pennsylvania. The principal product currently offered by PICOM
is professional liability insurance for providers of health care services in
Michigan, Illinois and Indiana.
PICOM has six wholly-owned subsidiaries: PICOM Insurance Agency ("PIA"),
PICOM Claims Services Corporation ("PCSC"), PICOM Financial Services
Corporation ("PFSC"), PICOM Insurance Company of Illinois ("PICOM-Illinois"),
R. Hardy & Associates, Inc. ("R. Hardy"), and American Insurance Management
Corporation ("AIMC"). PIA is an inactive Michigan insurance agency
incorporated under the laws of the State of Michigan on March 31, 1981. PCSC
provides claims management services on a fee for service basis and was
incorporated under the laws of the State of Michigan on December 10, 1985.
PFSC is an inactive business corporation incorporated under the laws of the
State of Michigan on May 29, 1986. PICOM-Illinois is a stock, property and
casualty insurer incorporated under the laws of the State of Illinois on
December 5, 1994. PICOM-Illinois provides medical malpractice insurance to
physicians and clinics in the State of Illinois. R. Hardy is an inactive
Illinois insurance agency incorporated under the laws of the State of Illinois
on December 22, 1994. Prior to its acquisition by PICOM, R. Hardy served as an
agent for, and received certain insurance commissions from, PICOM-Illinois.
PICOM-Illinois ceased paying such commissions to R. Hardy as of January 1,
1996. AIMC is an Indiana corporation that serves as the attorney-in-fact for
American Medical Insurance Exchange, an Indiana interinsurance reciprocal
exchange.
Holding Company's acquisition of PICOM was consummated pursuant to (i) the
Reorganization Agreement dated May 13, 1996 (the "Reorganization Agreement")
executed by and among PICOM, Holding Company, and PICOM Interim Insurance
Company, a Michigan stock insurance company and wholly-owned subsidiary of
Holding Company ("INSCO"), and (ii) the Agreement and Plan of Merger dated May
13, 1996 among PICOM, Holding Company and INSCO. Following consummation of the
merger of INSCO with and into PICOM, INSCO ceased to exist and PICOM, as the
surviving corporation in the Merger, became a wholly-owned subsidiary of
Holding Company. In addition, each issued and outstanding share of common
stock of PICOM was converted into one share of common stock of Holding Company.
In connection with the transactions contemplated by the Reorganization
Agreement and the Plan of Merger, PICOM loaned
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$1,500,000 to Holding Company for the purpose of enabling Holding Company to
form and capitalize INSCO in accordance with the Michigan Insurance Code of
1956, as amended (the "Michigan Insurance Code"). Holding Company invested all
of that sum in INSCO in exchange for all of the issued and outstanding shares
of capital stock of INSCO. INSCO invested the $1,500,000 in United States
government obligations with maturities of less than one year (the "INSCO
Investment"). The loan from PICOM to Holding Company was evidenced by a
short-term, non-renewable, interest bearing promissory note having a stated
principal amount of $1,500,000 and a stated maturity date (the "Note"). The
Note was secured by a pledge of all of the issued and outstanding shares of
INSCO. Interest on the Note accrued at a rate equivalent to the rate of
interest paid on the INSCO Investment. Upon consummation of the Merger, the
INSCO Investment, and all interest accrued thereon, became the property of
PICOM. Following consummation of the Merger, PICOM declared and paid to
Holding Company certain cash dividends. One of these dividends was in the
amount of $2,000,000 and will be used primarily to pay certain anticipated
operating costs of Holding Company, such as legal and accounting costs,
investment banking fees and expenses, and directors fees. (It is anticipated
that the proceeds of this dividend will be reinvested by Holding Company until
so expended.) The other dividend was in an amount equal to the amount then
outstanding under the Note, and Holding Company repaid the proceeds of
such dividend to PICOM in full satisfaction of the Note. It is to be noted
that on April 12, 1996 the Financial Analysis Division of the Michigan
Insurance Bureau determined (i) that the $1,500,000 loan from PICOM to Holding
Company was not material, (ii) that such post-Merger dividends were not
extraordinary, and (iii) that neither such loan nor such post-Merger dividends
required the prior approval of the Michigan Insurance Commissioner.
Prior to the consummation of the Merger, the Board of Directors of Holding
Company (the "Holding Company Board") was expanded and now consists of ten
directors who are divided into three classes as follows:
Name Class Term Expiring
---- ----- -------------
Victor T. Adamo, Esq., CPCU I 1997
John F. McCaffery I 1997
Isaac J. Powell, M.D. I 1997
John F. Dodge, Jr., Esq. II 1998
H. Harvey Gass, M.D. II 1998
Ann F. Putallaz, Ph.D II 1998
Jerry D. Campbell III 1999
W. Peter McCabe, M.D. III 1999
Donald S. Young, Esq. III 1999
William H. Woodhams, M.D. III 1999
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In connection with the consummation of the Merger, the following committees
of the Holding Company Board were established: (i) an Executive Committee (the
"Holding Company Executive Committee"), (ii) an Audit Committee (the "Holding
Company Audit Committee"), and (iii) a Compensation Committee (the "Holding
Company Compensation Committee"). The members of the Holding Company Executive
Committee are W. Peter McCabe, M.D. (Chairman), Victor T. Adamo, Esq., CPCU,
John F. Dodge, Jr., Esq., H. Harvey Gass, M.D. and Donald S. Young, Esq. The
members of the Holding Company Audit Committee are Isaac J. Powell, M.D.
(Chairman), William H. Woodhams, M.D., Donald S. Young, Esq. and W. Peter
McCabe, M.D. (ex officio). The members of the Holding Company Compensation
Committee are H. Harvey Gass, M.D. (Chairman), Jerry D. Campbell, John F.
Dodge, Jr., Esq., John F. McCaffery, and W. Peter McCabe, M.D. (ex officio).
The Holding Company Executive Committee is authorized to exercise the powers
and authority of the Holding Company Board in the management and affairs of
Holding Company, if the Holding Company Board is not meeting, except as limited
by the Michigan Business Corporation Act, as amended, and the First Amended and
Restated Articles of Incorporation and Bylaws of Holding Company. The Holding
Company Audit Committee is authorized to confer with the auditors and financial
officers of Holding Company and its subsidiaries, review reports submitted by
the auditors, establish or review, and monitor compliance with, codes of
conduct of Holding Company and its subsidiaries, inquire about procedures for
compliance with laws and regulations relating to the management of Holding
Company and its subsidiaries, and report and make recommendations to the
Holding Company Board. The Holding Company Compensation Committee is
responsible for recommending to the Holding Company Board policies and levels
of compensation with respect to compensation and benefits of all executive
officers of Holding Company and all key employees of Holding Company and its
subsidiaries. Except as otherwise described in the applicable plan document,
the Holding Company Compensation Committee will also serve as the
administrative committee under Holding Company's 1996 Long Term Stock Incentive
Plan and Holding Company's 1996 Non-Employee Directors Stock Option Plan, and
will be responsible for administering such plans, including designating
employees to be granted options, prescribing the terms and conditions of
options granted under the plans, interpreting the plans and making all other
determinations deemed necessary for the administration of the plans.
The officers of Holding Company are W. Peter McCabe, M.D. (Chairman), Victor
T. Adamo, Esq., CPCU (President and Chief Executive Officer), R. Kevin
Clinton, FCAS, MAAA (Vice President, Treasurer and Chief Financial Officer),
and Annette E. Flood, Esq., R.N. (Secretary).
As indicated above, upon consummation of the Merger, INSCO was merged with
and into PICOM, with PICOM being the surviving
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insurance corporation. PICOM, as the surviving insurance corporation, will
operate with PICOM's current directors and executive officers. The directors
of PICOM are Victor T. Adamo, Esq., CPCU, John F. Dodge, Jr., Esq., H. Harvey
Gass, M.D., David W. Heeke, D.D.S., Richard P. Horsch, M.D., W. Peter McCabe,
M.D., Robert E. Paxton, M.D., Isaac J. Powell, M.D., Sharon S. Smith, M.D., and
William H. Woodhams, M.D. The executive officers of PICOM are Victor T. Adamo,
Esq., CPCU (President and Chief Executive Officer), John O. Bashant (Vice
President, Marketing & Sales), R. Kevin Clinton, FCAS, MAAA (Vice President,
Chief Financial Officer, Actuary), Annette E. Flood, Esq., RN (Vice President,
Corporate Secretary, Legal Counsel), Darryl K. Thomas, Esq. (Vice President,
Claims).
It is currently anticipated that Holding Company's 1997 Annual Meeting of
Shareholders will be held on or about June 4, 1997. Any Holding Company
shareholder who wishes to submit a proposal for presentation to such annual
meeting, and for inclusion, if appropriate, in Holding Company's proxy
statement and the form of proxy relating to such annual meeting, must comply
with the rules and regulations of the Securities and Exchange Commission (the
"Commission") then in effect and the First Amended and Restated Articles of
Incorporation and the Bylaws of Holding Company and must submit such proposal
to the Secretary of Holding Company at the principal office of Holding Company.
Any non-binding shareholder proposal submitted pursuant to Rule 14a-8 of the
Commission's rules and regulations must be received by the Secretary of Holding
Company a reasonable time before the solicitation of proxies for such annual
meeting is made. (Holding Company will consider a non-binding shareholder
proposal submitted pursuant to said Rule 14a-8 to have been received a
reasonable time before any such solicitation if such proposal was received at
least sixty days prior to the commencement of such solicitation.) Under
Holding Company's First Amended and Restated Articles of Incorporation, all
other shareholder proposals must be delivered to and received at Holding
Company's principal executive offices not later than February 1, 1997.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements of Business Acquired.
Filed herewith are the financial statements of PICOM Insurance Company that
follow:
Independent Auditors' Report -- KPMG Peat Marwick LLP . . . . . . . . FS-1
Independent Auditors' Report -- Coopers & Lybrand LLP . . . . . . . . FS-2
Consolidated Balance Sheets as of December 31, 1995 and 1994 . . . . FS-3
Consolidated Statements of Income for the Years Ended
December 31, 1995, 1994 and 1993 . . . . . . . . . . . . . . . . . FS-4
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31 1995, 1994 and 1993 . . . . . . . . . . . . FS-5
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Consolidated Statements of Cash Flows for the Years
Ended December 31 1995, 1994 and 1993 . . . . . . . . . FS-6
Notes to Consolidated Financial Statements for the years
ended December 31, 1995, 1994 and 1993. . . . . . . . . FS-7
Condensed Consolidated Balance Sheets as of June 30, 1996
(unaudited) and December 31, 1995 . . . . . . . . . . FS-27
Condensed Consolidated Statements of Income for
the Six Months Ended June 30, 1996 and 1995
(unaudited) . . . . . . . . . . . . . . . . . . . . . FS-28
Condensed Consolidated Statements of Shareholders'
Equity for the Six Months Ended June 30, 1996
and 1995 (unaudited) . . . . . . . . . . . . . . . . FS-29
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1996 and 1995 (unaudited) . FS-30
Notes to Condensed Consolidated Financial Statements for
the Six Months Ended June 30, 1996 and 1995
(unaudited), and December 31, 1995 . . . . . . . . . FS-31
(b) Pro Forma Financial Information.
The Merger will be accounted for in a manner similar to a pooling of
interests, and Holding Company will carry forward to its accounts the assets
and liabilities of PICOM at their respective amounts as reported by PICOM.
Moreover, because Holding Company did not exist for the periods that would
normally be presented and its assets are insignificant in comparison to the
assets of PICOM, the Merger did not result in a material change to either the
consolidated balance sheets or the consolidated statements of income of PICOM.
Accordingly, and in reliance on Rule 11-02(b)(1) of Regulation S-X, no pro
forma consolidated financial information for Holding Company and PICOM is
provided.
(c) Exhibits.
Item 601
Regulation S-K
Exhibit Reference
Number Exhibit Description
----------------- -------------------
(27) Financial Data Schedule of
PICOM Insurance Company.*
-----------------
*Filed herewith
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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 hereunder duly authorized.
PROFESSIONALS INSURANCE COMPANY
MANAGEMENT GROUP
Date: September 12, 1996 By /s/ Victor T. Adamo
-------------------------------------------
Victor T. Adamo
Its President and Chief
Executive Officer
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Independent Auditors' Report
The Board of Directors and Shareholders
Professionals Insurance Company Management Group:
We have audited the accompanying consolidated balance sheet of PICOM Insurance
Company and subsidiaries as of December 31, 1995, and the related consolidated
statements of income, shareholders' equity, and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of PICOM Insurance
Company and subsidiaries as of December 31, 1995, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
As discussed in notes 1 and 7 to the consolidated financial statements, the
Company changed its method of accounting for loss and loss adjustment expense
reserves by eliminating discounting of such reserves in 1995.
KPMG Peat Marwick LLP
East Lansing, Michigan
February 20, 1996
FS-1
9
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
PICOM Insurance Company and Subsidiaries
We have audited the accompanying consolidated balance sheet of PICOM Insurance
Company and Subsidiaries as of December 31, 1994, and the related consolidated
statements of income, shareholders' equity and cash flows for the years December
31, 1994 and 1993. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of PICOM Insurance
Company and Subsidiaries as of December 31, 1994, and the consolidated results
of its operations and its cash flows for the years ended December 31, 1994 and
1993 in conformity with generally accepted accounting principles.
As described in Note 1 to the consolidated financial statements, the
Company changed its method of accounting for certain investments in 1993. As
described in Note 7 to the consolidated financial statements, the Company
changed the discount rate used in recording loss and loss adjustment expense
reserves in 1993. The effect of changing the discount rate, which was
previously presented as a change in accounting principle, has been reclassified
and presented as a change in estimate.
COOPERS & LYBRAND L.L.P.
Columbus, Ohio
February 17, 1995
FS-2
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PICOM INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
-------------------
Assets 1995 1994
------ ---- ----
(In thousands, except share data)
Investments (note 2):
Fixed maturities:
Available for sale, at market value (amortized cost: $257,129 and $125,554) $259,979 114,433
Held to maturity, at amortized cost (market value of $87,259) - 92,644
Equity securities available for sale, at market value (cost: $2,608 and $152) 2,641 163
Equity security, at equity value - 1,901
Short-term investments, at cost 17,512 40,347
Real estate, at cost, net of accumulated depreciation of $49 and $29 in 1995 and
1994, respectively 475 491
-------- -------
Total investments 280,607 249,979
Cash 1,279 940
Premiums due from policyholders 7,618 8,176
Amounts due from reinsurers (note 3) 12,264 3,455
Accrued investment income 3,612 2,997
Prepaid reinsurance premiums (note 3) 76 978
Deferred federal income taxes (note 4) 18,264 28,257
Property and equipment, net of accumulated depreciation and amortization (note 5) 2,341 2,032
Deferred policy acquisition costs (note 6) 1,092 1,112
Other assets (note 12) 3,559 -
-------- -------
Total assets $330,712 297,926
======== =======
Liabilities and Shareholders' Equity
------------------------------------
Liabilities:
Loss and loss adjustment expense reserves (note 7) $199,605 188,544
Reserve for extended reporting period claims 14,082 12,738
Unearned premiums 23,122 24,557
Drafts outstanding 3,445 3,463
Payable for securities 3,205 -
Balance due on purchased book of business (note 12) 2,694 -
Accrued expenses and other liabilities 6,148 5,482
-------- -------
Total liabilities 252,301 234,784
-------- -------
Shareholders' equity (notes 9 and 10):
Common stock, $1 par value; 10,000,000 shares authorized; 3,238,959 shares
issued and outstanding, including shares in treasury 3,239 3,239
Additional paid-in capital 8,417 8,181
Retained earnings 66,994 59,053
Net unrealized appreciation (depreciation) on investments, net of deferred
federal income tax expense (benefit) of $963 and ($3,777) in 1995 and 1994,
respectively 1,882 (7,331)
-------- ------
80,532 63,142
Less cost of common stock in treasury; 123,244 shares in 1995 (note 2) (2,121) -
-------- -------
Total shareholders' equity 78,411 63,142
-------- -------
Commitments and contingencies (notes 3 and 12)
Total liabilities and shareholders' equity $330,712 297,926
======== =======
See accompanying notes to the consolidated financial statements.
FS-3
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PICOM INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Income
Years Ended December 31,
---------------------------------------------------
1995 1994 1993
------------- ------------- -------------
(In thousands, except per-share data)
Revenues and other income:
Premiums written $ 67,727 51,110 50,514
Premiums ceded (12,576) (2,332) (2,337)
------------ ------------ ------------
Net premiums written 55,151 48,778 48,177
Decrease (increase) in unearned premiums, net of prepaid
reinsurance premiums 533 (288) 15
------------ ------------ ------------
Premiums earned 55,684 48,490 48,192
Investment income, net of expenses (note 2) 14,729 13,379 12,363
Net realized investment gains (losses) (note 2) (6) (2,006) 6,916
Other 165 4 5
------------ ------------ ------------
Total revenues and other income 70,572 59,867 67,476
------------ ------------ ------------
Expenses:
Losses and loss adjustment expenses, net (note 7) 35,558 44,853 44,585
Increase in reserve for extended reporting period claims 1,344 500 752
Policy acquisition and other underwriting expenses 9,328 7,316 7,438
------------ ------------ ------------
Total expenses 46,230 52,669 52,775
------------ ------------ ------------
Income from operations before equity in earnings
of affiliate, federal income taxes, and cumulative
effect of change in accounting method 24,342 7,198 14,701
Equity in earnings of affiliate - 612 145
------------ ------------ ------------
Income before federal income taxes and cumulative
effect of change in accounting method 24,342 7,810 14,846
Federal income taxes (note 4) (8,276) (2,656) (4,980)
------------ ------------ ------------
Income before cumulative effect of change in
accounting method 16,066 5,154 9,866
Cumulative effect of change in accounting method (note 7):
Elimination of loss and loss adjustment expense reserve
discount, net of deferred federal income tax benefit of $4,185 (8,125) - -
------------ ------------ ------------
Net income (note 10) $ 7,941 5,154 9,866
============ ============ ============
Net income per common share:
Income before cumulative effect of change in accounting method $ 5.16 1.59 3.05
Cumulative effect of change in accounting method (2.61) - -
------------ ------------ ------------
Net income per common share $ 2.55 1.59 3.05
============ ============ ============
Pro forma amounts, assuming the elimination of loss and loss
adjustment expense reserve discounting is applied retroactively:
Net income $ 16,066 5,356 12,475
============ ============ ============
Net income per common share $ 5.16 1.65 3.85
============ ============ ============
Weighted average shares outstanding (note 9) 3,114,735 3,238,959 3,238,959
============ ============ ============
See accompanying notes to the consolidated financial statements.
FS-4
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PICOM INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1995, 1994, and 1993
Net Unrealized
Appreciation
Common Stock (Depreciation)
------------------------------------ on Investments, Cost of
Shares Additional Net of Deferred Common Total
-------------------------- Paid-in Retained Federal Income Stock in Shareholders'
Issued In Treasury Amount Capital Earnings Tax Effect Treasury Equity
------ ----------- ------ ------- -------- --------------- -------- -------------
(In thousands, except share data)
Balances, December
31, 1992 2,678,701 - $2,679 818 51,987 (510) - 54,974
Net income - - - - 9,866 - - 9,866
Issuance of 10%
stock dividend 266,835 - 267 3,402 (3,683) - - (14)
Net appreciation on
debt and equity
securities - - - - - 13 - 13
--------- -------- ------ ----- ------ ------ ------ ------
Balances, December
31, 1993 2,945,536 - 2,946 4,220 58,170 (497) - 64,839
Net income - - - - 5,154 - - 5,154
Issuance of 10%
stock dividend 293,423 - 293 3,961 (4,271) - - (17)
Net depreciation on
debt and equity
securities - - - - - (6,834) - (6,834)
--------- -------- ------ ----- ------ ------ ------ ------
Balances, December
31, 1994 3,238,959 - 3,239 8,181 59,053 (7,331) - 63,142
Net income - - - - 7,941 - - 7,941
Purchase of
treasury shares, at
cost (note 9) - 254,823 - - - - (4,385) (4,385)
Sale of treasury
shares (note 2) - (131,579) - 236 - - 2,264 2,500
Net appreciation on
debt securities
transferred from
held-to-maturity
classification
(note 2) - - - - - 511 - 511
Net appreciation on
debt and equity
securities - - - - - 8,702 - 8,702
--------- -------- ------ ----- ------ ------ ------ ------
Balances,
December 31, 1995
3,238,959 123,344 $3,239 8,417 66,994 1,882 (2,121) 78,411
========= ======== ====== ===== ====== ====== ====== ======
See accompanying notes to the consolidated financial statements.
FS-5
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PICOM INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31,
-----------------------------------------
1995 1994 1993
---- ---- ----
(In thousands)
Cash flows from operating activities:
Net income $ 7,941 5,154 9,866
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,056 2,256 1,670
Undistributed equity in earnings of affiliate - (612) (145)
Realized (gains) losses on investments 6 2,006 (6,916)
Proceeds from sale or maturity of trading securities - - 461,625
Purchases of trading securities - - (417,565)
Deferred federal income taxes 5,250 2,306 4,505
Changes in assets and liabilities:
Premiums due from policyholders 558 185 (198)
Amounts due from reinsurers (8,809) 346 (1,841)
Accrued investment income (615) (443) (150)
Prepaid reinsurance premiums 902 77 (57)
Deferred policy acquisition costs 20 (84) (122)
Other assets (331) - -
Loss and loss adjustment expense reserves 11,061 (2,677) 6,463
Reserve for extended reporting period claims 1,344 500 752
Unearned premiums (1,435) 210 42
Drafts outstanding (18) 388 (387)
Accrued expenses and other liabilities 667 104 74
-------- -------- --------
Net cash provided by operating activities 17,597 9,716 57,616
-------- -------- --------
Cash flows from investing activities:
Proceeds from sale or maturity of short-term investments 658,437 239,905 349,449
Purchases of short-term investments (634,287) (231,308) (357,549)
Proceeds from maturity of securities available for sale 43,847 9,265 -
Proceeds from sale of securities available for sale 115,684 70,518 -
Purchases of securities available for sale (216,175) (88,189) -
Proceeds from maturity of securities held to maturity 27,686 29,180 19,011
Proceeds from sale of securities held to maturity 758 1,455 -
Purchases of securities held to maturity (12,861) (40,852) (67,014)
Payable for securities 3,205 - -
Purchases of property and equipment (774) (224) (926)
Payment on liability for purchased book of business (893) - -
-------- -------- --------
Net cash used in investing activities (15,373) (10,250) (57,029)
-------- -------- --------
Cash flows from financing activities:
Purchase of treasury shares (4,385) - -
Sale of treasury shares 2,500 - -
Cash paid in lieu of fractional shares - (16) (14)
-------- -------- --------
Net cash used in financing activities (1,885) (16) (14)
-------- -------- --------
Net increase (decrease) in cash 339 (550) 573
Cash, beginning of year 940 1,490 917
-------- -------- --------
Cash, end of year $ 1,279 940 1,490
======== ======== ========
Supplemental disclosure of cash flow information -
federal income taxes paid (recovered) $ (159) 350 385
Supplemental schedule of noncash investing activities -
purchase of book of business (note 12):
Intangible assets acquired $ (3,587) - -
Amount due 3,587 - -
See accompanying notes to the consolidated financial statements.
FS-6
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PICOM INSURANCE COMPANY AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 1995, 1994, and 1993
(1) Organization and Significant Accounting Policies
(a) General
PICOM Insurance Company (the Company), formerly Physicians Insurance
Company of Michigan, is a Michigan-domiciled property and casualty
insurance company providing professional liability insurance for
physicians, surgeons, dentists, hospitals, other health care
providers, and lawyers and law firms in the State of Michigan. In
addition to Michigan, the Company is also licensed in Illinois,
Indiana, and Ohio.
The term "PICOM" as used herein refers to all entities within the
consolidated group.
Following is a description of the more significant risks facing
property/casualty insurers and how PICOM mitigates those risks:
Legal/Regulatory Risk is the risk that the legal or regulatory
environment in which an insurer operates will change and create
additional loss costs or expenses not anticipated by the insurer in
pricing its products. That is, regulatory initiatives designed to
reduce insurer profits, or new legal theories, may create costs for
the insurer beyond those recorded in the financial statements. PICOM
mitigates this risk through underwriting and loss adjusting practices
which identify and minimize the adverse impact of this risk.
Credit Risk is the risk that issuers of securities owned by PICOM
will default, or other parties, including reinsurers which owe PICOM
money, will not pay. Also, PICOM writes a significant amount of
business under which policyholders reimburse PICOM for policy
deductibles. PICOM minimizes this risk by adhering to a conservative
investment strategy, by maintaining sound reinsurance and credit and
collection policies, and by providing for any amounts deemed
uncollectible.
Interest Rate Risk is the risk that interest rates will change and
cause a decrease in the value of an insurer's investments. PICOM
mitigates this risk by attempting to match the maturity schedule of
its assets with the expected payout of its liabilities. To the
extent that liabilities come due more quickly than assets mature, an
insurer would have to sell assets prior to maturity and recognize a
gain or loss. At December 31, 1995, the estimated market value of
PICOM's bond portfolio was greater than its amortized costs.
(b) Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and the following subsidiaries:
PICOM Insurance Company of Illinois (PICOM-Illinois), a wholly owned
subsidiary of the Company, is an Illinois-domiciled property and
casualty insurance company providing professional liability insurance
for physicians and surgeons in the State of Illinois. PICOM-Illinois
was formed in December 1994 to write the book of business purchased
effective January 1, 1995 (see note 12).
PICOM Claims Services Corporation (Claims Services), a wholly owned
subsidiary of the Company, provides claims processing services to a
nonaffiliated professional liability company.
FS-7
15
PICOM INSURANCE COMPANY AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, Continued
(1) Organization and Significant Accounting Policies, Continued
(b) Principles of Consolidation, Continued
PICOM Financial Services Corporation, a wholly owned subsidiary of the
Company, is an inactive financial services company.
PICOM Insurance Agency, a wholly owned subsidiary of the Company, is
an inactive insurance agency.
All significant intercompany transactions and balances have been
eliminated in consolidation.
(c) Basis of Presentation
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles (GAAP), which vary in
certain respects from statutory accounting followed in reporting to
insurance regulatory authorities (see note 10 for effects of such
differences). In preparing the consolidated financial statements,
management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the dates of the
balance sheets, and revenues and expenses for the periods then ended.
Actual results may differ from those estimates. Material estimates
that are susceptible to significant change in the near term relate to
the determination of the loss and loss adjustment expense reserves and
the recoverability of deferred federal income tax assets.
(d) Investments
Effective December 31, 1993, PICOM adopted Statement of Financial
Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Under the provisions of
SFAS No. 115, investment securities are classified upon acquisition
into one of three categories: trading, available-for-sale, or
held-to-maturity. The adoption of SFAS No. 115 had no impact on
earnings for the year ended December 31, 1993.
Trading securities are bought and held principally for the purpose of
selling them in the near term. PICOM held no trading securities in
either 1995 or 1994. Held-to-maturity securities are those securities
PICOM has the positive intent and ability to hold until maturity. All
other securities are classified as available-for-sale and are those
securities that would be available to be sold in response to PICOM's
liquidity needs, changes in market interest rates, and asset-liability
management strategies, among others.
Trading and available-for-sale securities are recorded at market
value. Held-to-maturity securities are recorded at amortized cost,
adjusted for the amortization or accretion of premiums or discounts,
respectively. Unrealized gains and losses on trading securities are
recognized in income, whereas unrealized gains and losses, net of the
related income tax effect, on available-for-sale securities are
excluded from income and reported as a separate component of
shareholders' equity. Transfers of securities between categories are
recorded at fair value at the date of transfer. Unrealized gains and
losses associated with transfers of securities from held-to-maturity
to available-for-sale are recorded as a separate component of
shareholders' equity.
FS-8
16
PICOM INSURANCE COMPANY AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, Continued
(1) Organization and Significant Accounting Policies, Continued
(d) Investments, Continued
A decline in the market value of an available-for-sale or
held-to-maturity security below cost that is deemed other than
temporary results in a charge to income, resulting in the
establishment of a new cost basis for the security. All declines in
market values of PICOM's investment securities in 1995, 1994, or 1993
were deemed to be temporary.
Investments in common stock of nonaffiliates are stated at market
value. Market values are based on quoted market prices or dealer
quotes. If a quoted market price is not available, market value is
estimated using quoted market prices for similar securities.
The investment in common stock of Physicians Insurance Company of
Indiana (PICI), an affiliate which was sold in 1995 (see note 2), was
accounted for on the equity method, whereby PICOM's equity in the
earnings of PICI was credited directly to income.
Short-term investments, which consist principally of commercial
paper, money market funds, and U.S. government securities, are stated
at cost, which approximates fair value.
Premiums and discounts are amortized or accreted, respectively, over
the life of the related debt security as an adjustment to yield using
the yield-to-maturity method. Dividends and interest income are
recognized when earned. Realized gains and losses are included in
earnings and are derived using the specific-identification method for
determining the cost of securities sold.
(e) Revenue Recognition
Insurance premium income is recognized on a monthly pro rata basis
over the respective terms of the policies, and unearned premiums
represent the portion of premiums written which is applicable to the
unexpired terms of the policies.
Reinsurance arrangements are prospective contracts for which prepaid
reinsurance premiums are amortized ratably over the related policy
terms based on the estimated ultimate amounts to be paid.
(f) Loss and Loss Adjustment Expense Reserves
Loss and loss adjustment expense reserves represent the accumulation
of individual case estimates for reported losses and loss adjustment
expenses, bulk adjustments to losses and loss adjustment expenses,
based upon PICOM's actual experience, assumptions, and projections as
to claims frequency, severity, inflationary trends, and settlement
payments. The reserve for loss and loss adjustment expenses is
intended to cover the ultimate net cost of all losses and loss
adjustment expenses incurred but unsettled through the balance sheet
date. The reserve is stated gross of reinsurance ceded. The
assumptions used in making such reserve estimates are continually
reviewed and updated, and the ultimate liability may be more or less
than the current estimate. The effects of changes in the estimated
reserve are included in the results of operations in the period in
which the estimate is revised.
FS-9
17
PICOM INSURANCE COMPANY AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, Continued
(1) Organization and Significant Accounting Policies, Continued
(f) Loss and Loss Adjustment Expense Reserves, Continued
Through December 31, 1994, the Company discounted loss and loss
adjustment expense reserves to present value. Effective January 1,
1995, the Company eliminated discounting, a change in method of
accounting (see note 7).
(g) Reserve for Extended Reporting Period Claims
The reserve for extended reporting period claims coverage is recorded
during the term of the original claims-made policy, utilizing the
pure-premium approach, in amounts adequate to pay for estimated
future claims reported subsequent to current policyholders' death,
disability, or retirement. Changes in this reserve are charged or
credited to income.
(h) Property and Equipment
Property and equipment are recorded at cost, net of accumulated
depreciation. Depreciation is computed on the straight-line method
over periods ranging from 4 to 25 years, the estimated useful lives
of the respective assets. Maintenance, repairs, and minor renewals
are charged to expense as incurred.
The cost and related accumulated depreciation of assets sold are
removed from the related accounts, and the resulting gains or losses
are reflected in income.
(i) Deferred Policy Acquisition Costs
Policy acquisition costs, specifically commissions, are deferred,
subject to ultimate recoverability from future income, including
investment income, and amortized to expense over the period in which
related premiums are earned.
(j) Federal Income Taxes
Deferred federal income tax assets and liabilities are recognized for
the expected future tax consequences attributable to differences
between the financial statement carrying amount of existing assets
and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which these temporary
differences are expected to be recovered or settled, and the effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(k) Intangible Assets
The cost of the purchased book of business is being amortized on a
straight-line basis over ten years.
(l) Net Income Per Share
Net income per share is computed by dividing net income by the
weighted average number of shares outstanding during each year after
giving effect to stock dividends and treasury shares.
FS-10
18
PICOM INSURANCE COMPANY AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, Continued
(1) Organization and Significant Accounting Policies, Continued
(m) Accounting Standards Not Yet Adopted
In March 1995, the Financial Accounting Standards Board (FASB) issued
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets To Be Disposed Of, which is effective for fiscal
years beginning after December 15, 1995. SFAS No. 121 requires that
long-lived assets and certain identifiable intangibles to be held and
used, or disposed of, by an entity be reviewed for impairment, and be
reported at the lower of the carrying amount or fair value less cost
to sell, if applicable. The adoption of SFAS No. 121 is not expected
to have a material effect on PICOM's operating results or financial
condition.
(n) Financial Statement Presentation
Certain amounts in the consolidated financial statements for prior
years have been reclassified to conform with the current year's
presentation.
(2) Investments
In November 1995, the FASB issued a Guide to Implementation of Statement
115 on Accounting for Certain Investment in Debt and Equity Securities.
This guide allowed companies to reassess the appropriateness of the
classification of securities as of the date of the implementation guide,
but no later than December 31, 1995. As a result, PICOM made a one-time
transfer of approximately $77,893,000 in investment securities previously
classified as held-to-maturity to the available-for-sale classification.
The effect of such reclassification increased shareholders' equity by
$511,000, net of deferred federal income taxes.
A summary of amortized cost, gross unrealized gains and losses, and
estimated market value of investments in securities as of December 31, 1995
and 1994, follows:
1995
-------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Market Value
--------- ---------- ---------- ------------
(In thousands)
Fixed maturities available for sale:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies $136,064 1,988 40 138,012
Debt securities issued by foreign governments 606 88 - 694
Corporate securities 35,567 831 61 36,337
Mortgage-backed securities:
Government 67,610 236 481 67,365
Other 17,282 318 29 17,571
-------- ----- --- -------
$257,129 3,461 611 259,979
======== ===== === =======
Equity securities available for sale $ 2,608 66 33 2,641
======== ===== === =======
FS-11
19
PICOM INSURANCE COMPANY AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, Continued
(2) Investments, Continued
1994
---------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Market Value
--------- ---------- ---------- ------------
(In thousands)
Fixed maturities available for sale:
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 68,191 - 7,224 60,967
Debt securities issued by foreign governments 8,461 - 1,226 7,235
Corporate securities 14,523 5 934 13,594
Mortgage-backed securities:
Government 27,928 1 1,548 26,381
Other 6,451 - 195 6,256
-------- --- ------- -------
$125,554 6 11,127 114,433
======== === ======= =======
Equity securities available for sale $ 152 26 15 163
======== === ====== =======
Fixed maturities held to maturity:
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 14,924 - 482 14,442
Corporate securities 11,346 26 1,128 10,244
Mortgage-backed securities:
Government 42,163 1 2,710 39,454
Other 24,211 33 1,125 23,119
-------- --- ------ -------
$ 92,644 60 5,445 87,259
======== === ====== =======
The amortized cost and estimated market value of fixed maturities at
December 31, 1995, by contractual maturity, are shown below. Actual
maturities, or estimated average life on certain corporate and
mortgage-backed securities, may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties.
Amortized Approximate
Cost Market Value
--------- ------------
(In thousands)
Due in one year or less $ 2,852 2,850
Due after one year through five years 82,771 83,752
Due after five years through ten years 95,599 97,112
Due after ten years, primarily U.S. government and
mortgage-backed securities 75,907 76,265
-------- -------
$257,129 259,979
======== =======
At December 31, 1995, 99 percent of the fixed maturity portfolio was rated
"A" or above by Moody's Investors Services, Inc., or Standard and Poor's
Corporation.
FS-12
20
PICOM INSURANCE COMPANY AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, Continued
(2) Investments, Continued
Proceeds and related gross realized gains and gross realized losses on
sales of fixed maturities follow:
Years Ended December 31,
-------------------------
1995 1994 1993
---- ---- ----
(In thousands)
Proceeds $116,441 71,637 450,574
======= ====== =======
Gross realized gains $ 1,672 887 7,976
Gross realized losses (1,345) (3,024) (1,060)
------- ------- -------
Net realized gains (losses) $ 327 (2,137) 6,916
======= ======= =======
A summary of the sources of investment income follows:
Years Ended December 31,
---------------------------
1995 1994 1993
---- ---- ----
(In thousands)
Fixed maturities $ 11,920 12,863 11,792
Equity securities 2 2 2
Short-term investments, and cash and cash equivalents 3,176 1,232 1,512
Real estate 70 59 26
Other investment assets 477 490 -
------- ------ ------
Total investment income 15,645 14,646 13,332
Less investment expenses 916 1,267 969
------- ------ ------
Net investment income $14,729 13,379 12,363
======= ====== ======
FS-13
21
PICOM INSURANCE COMPANY AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, Continued
(2) Investments, Continued
Realized gains (losses) and increases (decreases) in net unrealized gains
(losses) follow:
Years Ended December 31,
------------------------
1995 1994 1993
---- ---- ----
(In thousands)
Net realized gains (losses):
Fixed maturities $ 327 (2,137) 6,916
Equity securities (333) 131 -
------- ------- -----
Net realized gains (losses) $ (6) (2,006) 6,916
======= ======= =====
Change in net unrealized gains (losses):
Fixed maturities $19,356 (15,506) (188)
Equity securities 22 (82) 56
------- ------- -----
Total change in net unrealized
gains (losses) $19,378 (15,588) (132)
======= ======= =====
During 1994, PICOM sold all its Federal National Mortgage Association
(FNMA) interest-only strip bonds, having an aggregate amortized cost of
$1,146,255, from its held-to-maturity portfolio for $1,455,032, resulting
in a net gain of $308,777. The sale of these securities resulted from
management's decision to eliminate the interest rate risk associated with
these investments, and accordingly, management does not intend to invest in
this type of security prospectively. Because these investment securities
were unique in PICOM's investment portfolio, management's intent to hold
other debt securities until maturity was not affected by these sales.
During 1995, PICOM tendered a fixed maturity security having an amortized
cost of $747,146 from its held-to-maturity portfolio for $757,862,
resulting in a gain of $10,716. This security was tendered because the
future creditworthiness of the issuer was not determinable.
Investment in common stock of affiliate represented PICOM's 32 percent
ownership of PICI, which had a financial statement value of $1,900,882 at
December 31, 1994. In 1995, PICOM sold this investment for $1,557,207,
resulting in a realized loss of $343,675.
On December 28, 1995, under a reciprocal stock purchase agreement with
Physicians Insurance Company of Wisconsin, Inc. (PIC-Wis), the Company
acquired 1,583 shares of PIC-Wis' common stock (representing 6.77 percent
of PIC-Wis' outstanding stock) for $2,500,000, and PIC-Wis acquired 131,579
shares of the Company's common stock (representing 4.2 percent of the
Company's outstanding stock) for $2,500,000.
At December 31, 1995, U.S. Treasury notes and certificates of deposit with
a carrying value of $3,558,000 were on deposit with regulatory authorities,
as required by law.
FS-14
22
PICOM INSURANCE COMPANY AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, Continued
(3) Reinsurance
In the normal course of business, PICOM seeks to reduce the loss that may
arise from events that cause unfavorable underwriting results by reinsuring
certain levels of risk in various areas of exposure with other insurance
enterprises or reinsurers. Amounts receivable from reinsurers are
estimated in a manner consistent with the claim liability associated with
the reinsured policy. Although reinsurance agreements contractually
obligate PICOM's reinsurers to reimburse PICOM for their proportionate
share of losses, they do not discharge the primary liability of PICOM.
PICOM is contingently liable for the ceded amount of reserves for unpaid
losses and loss adjustment expenses and unearned premiums in the event the
assuming insurance organizations are unable to meet their contractual
obligations.
PICOM has various excess of loss and quota share reinsurance agreements.
As of December 31, 1995, the Company and PICOM-Illinois' maximum current
net retention, subject to certain adjustments of risk on any single
coverage per claim after reinsurance, follows:
Net
Retention
---------
PICOM Insurance Company $300,000
PICOM Insurance Company of Illinois 250,000
PICOM continually reviews its reinsurers, considering a number of factors,
the most critical of which is their financial stability. Based on these
reviews, PICOM evaluates its position with reinsurers with respect to
existing and future reinsurance.
At December 31, 1995, amounts due from and premiums prepaid to reinsurers
follow:
Amounts Prepaid
A.M. Best Due from Reinsurance
Rating Reinsurers Premiums
--------- ---------- -----------
(In thousands)
Underwriters Reinsurance Company A $4,125 -
TIG Reinsurance A 2,909 7
PMA Reinsurance Corporation A+ 1,091 -
Continental Casualty Company A 1,001 -
Skandia American A- 1,165 -
Lloyds of London Not Rated 746 48
Princeton Insurance Company A- 269 5
Other Not Rated 958 16
------- --
$12,264 76
======= ==
Of the above, approximately $615,000 is collateralized by irrevocable
letters of credit at December 31, 1995.
FS-15
23
PICOM INSURANCE COMPANY AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, Continued
(3) Reinsurance, Continued
Amounts due from reinsurers consisted of amounts related to:
December 31,
---------------------
1995 1994
---- ----
(In thousands)
Paid losses and loss adjustment expenses $ 48 212
Unpaid losses and loss adjustment expenses 14,186 3,760
Premiums ceded payable (2,074) (600)
Other 104 83
------- ------
$12,264 3,455
======= ======
Ceded premiums earned and reinsurance recoveries on losses and loss
adjustment expenses follow:
Years Ended December 31,
------------------------
1995 1994 1993
---- ---- ----
(In thousands)
Ceded premiums earned $13,478 2,409 2,280
Reinsurance recoveries on losses and loss adjustment
expenses 11,475 1,910 2,717
Ceded premiums earned and reinsurance recoveries increased in 1995 because
of PICOM-Illinois' reinsurance program.
(4) Federal Income Taxes
PICOM files a consolidated federal income tax return which includes all
subsidiaries. Income tax expense is computed under the liability method,
whereby deferred income taxes reflect the estimated future tax effects of
temporary differences between the carrying value of assets and liabilities
for financial reporting purposes and those for income tax purposes. A
valuation allowance is then required to be established to reduce a deferred
tax asset if it is "more likely than not" that the related tax benefits
will not be realized.
The provision for federal income taxes consists of the following:
Years Ended December 31,
------------------------
1995 1994 1993
---- ---- ----
(In thousands)
Current $(1,159) 350 475
Deferred 9,435 2,306 4,505
------- ----- -----
$ 8,276 2,656 4,980
======= ===== =====
FS-16
24
PICOM INSURANCE COMPANY AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, Continued
(4) Federal Income Taxes, Continued
The significant components of federal income tax expense (benefit) are as
follows:
Years Ended December 31,
------------------------
1995 1994 1993
---- ---- ----
(In thousands)
Continuing operations $ 8,276 2,656 4,980
Accounting changes (4,185) - -
Shareholders' equity 4,740 (3,525) 10
------- ------ ------
$ 8,831 (869) 4,990
======= ====== ======
Federal income taxes differed from the "expected" tax expense (computed by
applying the federal corporate tax rate to income before federal income
taxes and cumulative effect of changes in accounting methods) as follows:
Years Ended December 31,
------------------------
1995 1994 1993
---- ---- ----
(In thousands)
Computed ("expected") tax expense $8,520 2,734 5,196
Tax-exempt investment income (65) - -
Foreign capital gains (58) - -
Other, net (121) (78) (216)
------ ----- -----
Actual tax expense $8,276 2,656 4,980
====== ===== =====
FS-17
25
PICOM INSURANCE COMPANY AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, Continued
(4) Federal Income Taxes, Continued
The tax effects of temporary differences that give rise to deferred federal
income tax assets and deferred federal income tax liabilities follow:
December 31,
------------
1995 1994
---- ----
(In thousands)
Deferred federal income tax assets arising from:
Net operating loss carryforwards $ - 7,919
Loss and loss adjustment expense reserves 16,655 13,057
Unearned premium reserves 1,567 2,470
Alternative minimum tax credits 1,840 1,534
Unrealized losses on investments - 3,777
Other, net 72 49
------- ------
Total deferred federal income tax assets 20,134 28,806
------- ------
Deferred federal income tax liabilities:
Deferred acquisition costs 371 378
Unrealized gains on investments 963 -
Other 536 171
------- ------
Total deferred federal income tax liabilities 1,870 549
------- ------
Net deferred federal income taxes $18,264 28,257
======= ======
In assessing the realizability of deferred federal income tax assets,
management considers whether it is more likely than not that some portion
of the deferred federal income tax assets will not be realized. Because of
the carryforward provisions of the Internal Revenue Code, the expectation
that temporary differences will reverse during periods in which taxable
income is generated, and the fact that PICOM has not incurred an operating
loss for either financial or federal income tax reporting purposes since
1987, management believes it is more likely than not that PICOM will fully
realize the net deferred federal income tax assets. Accordingly, no
valuation allowance has been established.
FS-18
26
PICOM INSURANCE COMPANY AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, Continued
(5) Property and Equipment
At December 31, 1995 and 1994, property and equipment consisted of the
following:
1995 1994
---- ----
(In thousands)
Real estate $ 1,813 1,800
Data processing equipment, including software 1,780 1,787
Furniture, fixtures, and equipment 1,051 967
------- ------
4,644 4,554
Accumulated depreciation (2,303) (2,522)
------- ------
$ 2,341 2,032
======= ======
Total depreciation expense was $419,737 in 1995, $492,146 in 1994, and
$485,401 in 1993.
(6) Deferred Policy Acquisition Costs
Changes in deferred policy acquisition costs are summarized as follows:
Years Ended December 31,
1995 1994 1993
---- ---- ----
(In thousands)
Net asset balance, beginning of period $ 1,112 1,028 906
------- ------ ------
Amounts deferred:
Commissions to agents 3,181 2,257 2,171
Ceding commission income (1,161) (59) (105)
------- ------ ------
Net deferred 2,020 2,198 2,066
------- ------ ------
Net amortization (2,040) (2,114) (1,944)
------- ------ ------
Net asset balance, end of period $ 1,092 1,112 1,028
======= ====== ======
(7) Loss and Loss Adjustment Expense Reserves
In 1994 and 1993, loss and loss adjustment expense reserves were discounted
to reflect anticipated investment income. Discounts were based on
historical payment patterns and same rate used for statutory reporting
purposes.
FS-19
27
PICOM INSURANCE COMPANY AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, Continued
(7) Loss and Loss Adjustment Expense Reserves, Continued
Discounted loss and loss adjustment expense reserves as of December 31,
1994 (in thousands), follow:
Loss and loss adjustment expense reserves $200,854
Present value of future investment income (12,310)
--------
Discounted loss and loss adjustment expense reserves $188,544
========
The losses and loss adjustment expenses incurred for the years ended
December 31, 1994 and 1993, follow:
1994 1993
------ ------
(In thousands)
Losses and loss adjustment expenses incurred $44,547 40,632
Change in present value of future investment income 306 3,953
------- ------
Discounted losses and loss adjustment expenses incurred, net $44,853 44,585
======= ======
Prior to 1995, loss and loss adjustment expense reserves had been adjusted
("discounted") to reflect anticipated investment income. The method of
discounting was based upon historical payment patterns and assumes an
interest rate at the same rate used for statutory reporting purposes. In
1993, the Company reduced its discount rate assumption from 3.75% to 3.00%
for all accident years. The effect of this reduction in discount rate was
previously presented as a change in accounting principle (cumulative
effect of $2,006,000). The effect of this reduction in discount rate has
been reclassified and presented as a change in estimate resulting in an
increase in losses and loss adjustment expenses of $3,039,000 and a
decrease in federal income taxes of $1,033,000.
Effective January 1, 1995, the Company eliminated discounting of loss and
loss adjustment expense reserves for GAAP reporting purposes, a change in
method of accounting. PICOM believes it is preferable not to discount
reserves, because it is more conservative and is practiced by most publicly
held insurers. This change in method of accounting resulted in a one-time
cumulative charge of $8,125,000, net of deferred federal income taxes, as
of January 1, 1995 (see note 10).
FS-20
28
PICOM INSURANCE COMPANY AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, Continued
(7) Loss and Loss Adjustment Expense Reserves, Continued
Activity in loss and loss adjustment expense reserves is summarized as
follows:
Years Ended December 31,
1995 1994 1993
---- ---- ----
(In thousands)
Balance, beginning of year $188,544 191,220 184,757
Less reinsurance balances recoverable (3,760) (4,040) (2,403)
-------- ------- -------
Net balance, beginning of year 184,784 187,180 182,354
-------- ------- -------
Incurred related to:
Current year 63,027 68,610 68,237
Prior years (27,469) (23,757) (23,652)
-------- ------- -------
Total incurred 35,558 44,853 44,585
-------- ------- -------
Effect of changes in accounting methods 12,310 - --
-------- ------- -------
Paid related to:
Current year 3,053 4,433 3,539
Prior years 44,180 42,816 36,220
-------- ------- -------
Total paid 47,233 47,249 39,759
-------- ------- -------
Net balance, end of year 185,419 184,784 187,180
Plus reinsurance balances recoverable 14,186 3,760 4,040
-------- ------- -------
Balance, end of year $199,605 188,544 191,220
======== ======= =======
PICOM establishes conservative reserves for the most recent accident years
and adjusts the reserves as new information becomes available. This
conservative reserving practice has resulted in favorable development in
estimates of prior years' reserves.
Had the elimination of discounting been retroactively applied to 1992,
total incurred losses would have been $44,547,000 and $43,671,000 in 1994
and 1993, respectively.
(8) Employee Benefit Plans
PICOM currently maintains two defined contribution employee benefit
plans--a 401(k) plan and a money purchase plan--which cover substantially
all employees meeting certain eligibility requirements.
With respect to the 401(k) plan, PICOM annually contributes 5 percent of an
employee's salary and matches employee contributions up to 5 percent of an
employee's salary. During 1995, 1994, and 1993, PICOM's expense under the
401(k) plan was $261,000, $298,000, and $286,000, respectively.
FS-21
29
PICOM INSURANCE COMPANY AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, Continued
(8) Employee Benefit Plans, Continued
With respect to the money purchase plan, PICOM annually contributes 3
percent of an employee's salary up to a prescribed maximum, plus 5 percent
of the excess of an employee's salary over the prescribed maximum. During
1995, 1994, and 1993, PICOM's expense under the money purchase plan was
$114,000, $118,000, and $110,000, respectively.
PICOM has a stock purchase plan through which employees and directors of
PICOM and its wholly owned subsidiaries may purchase PICOM common stock by
means of payroll deduction. Pursuant to this plan, PICOM may elect to
match participant purchases, which it is currently matching at the rate of
$1.25 (of which $1.00 is used to purchase PICOM common stock and $0.25 is
applied to income taxes) for each $1.00 of participant purchases up to a
maximum participant purchase of $6,000 per year. In 1995, 1994, and 1993,
PICOM incurred expenses of $82,000, $64,000, and $42,000, respectively,
under this plan.
(9) Shareholders' Equity
Without prior regulatory approval, the Michigan and Illinois Insurance
Codes limit the amount of dividends that the Company can pay to its
shareholders or that PICOM-Illinois can pay to its parent in any 12-month
period to the greater of statutory net income for the preceding year,
excluding realized gains (losses) on sales of investments, or 10 percent of
policyholders' surplus as of the preceding year-end. As of January 1,
1996, approximately $23,694,000 and $598,000 could be paid without prior
regulatory approval by the Company and PICOM-Illinois, respectively. In
1995, neither the Company nor PICOM-Illinois paid any dividends.
Effective July 5, 1995, PICOM purchased 254,823 shares of its common stock
(approximately 7.9 percent of its then-issued and outstanding shares) from
Physicians Insurance Company of Ohio for $4,331,991 ($17 per share), plus
$53,000 for advisory and finder fees. These shares, net of 131,579 shares
sold in December 1995 (see note 2), are held as treasury stock available
for resale.
On September 22, 1994, and September 15, 1993, the Company declared a 10
percent stock dividend, issued on December 1, 1994 and 1993, respectively,
to shareholders of record as of October 28, 1994, and November 1, 1993,
respectively. All per-share information in the accompanying consolidated
financial statements has been adjusted to give retroactive effect to these
stock dividends.
(10)Statutory Insurance Accounting Principles
The Company and PICOM-Illinois are required to file financial statements
prepared in accordance with statutory insurance accounting principles
("SAP") prescribed or permitted by Michigan and Illinois with their
respective domiciliary states. The only material statutory accounting
method utilized by the Company that is permitted rather than prescribed is
the Company's discounting of its loss and loss adjustment expense reserves.
The impact of such permitted practice is to increase statutory
policyholders' surplus of the Company by $9,393,000 and $12,310,000 at
December 31, 1995 and 1994, respectively.
Both the Company and PICOM-Illinois are required by the Michigan Insurance
Bureau (MIB) and the Insurance Department of the State of Illinois,
respectively, to maintain capital and surplus of $1,500,000.
FS-22
30
PICOM INSURANCE COMPANY AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, Continued
(10)Statutory Insurance Accounting Principles, Continued
Accounting principles used to prepare statutory-basis financial statements
differ in some respects from GAAP. A reconciliation of statutory
policyholders' surplus at December 31, 1995 and 1994, and statutory net
income for the years ended December 31, 1995, 1994, and 1993, of the
Company and PICOM-Illinois, as applicable (as filed with their respective
insurance regulatory authorities), to the amounts shown in the accompanying
consolidated financial statements follows:
December 31,
--------------
1995 1994
---- ----
(In thousands)
Statutory policyholders' surplus $67,006 47,149
Net unrealized appreciation (depreciation) on securities
available for sale 2,832 (11,127)
Deferred policy acquisition costs capitalized for GAAP 1,092 1,112
Deferred federal income taxes recorded for GAAP 18,264 28,257
Assets non-admitted for SAP 640 560
Loss and loss adjustment expense reserve discount (9,393) -
Liabilities for GAAP in excess of SAP (2,700) (3,700)
Liabilities required for SAP in excess of those required
for GAAP 572 651
Other 98 240
------- -------
Total shareholders' equity per accompanying consolidated
balance sheets $78,411 63,142
======= =======
Years Ended December 31,
------------------------
1995 1994 1993
---- ---- ----
(In thousands)
Statutory net income $22,201 6,537 13,458
Deferred federal income tax expense recorded for
GAAP (9,435) (2,306) (4,505)
Change in loss and loss adjustment expense reserve
discount 1,925 - -
Change in liabilities for GAAP in excess of SAP 1,000 - -
Cumulative effect of changes in accounting methods (8,125) - -
Other 371 926 916
------- ------ ------
Combined net income of insurance companies based on
GAAP 7,937 5,157 9,869
Net income (loss) attributable to non-insurance
subsidiaries 4 (3) (3)
------- ------ ------
Net income per accompanying consolidated statements
of income $ 7,941 5,154 9,866
======= ====== ======
FS-23
31
PICOM INSURANCE COMPANY AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, Continued
(10) Statutory Insurance Accounting Principles, Continued
Certain regulations that affect PICOM and the insurance industry are
promulgated by the National Association of Insurance Commissioners (NAIC).
The NAIC is an association of state insurance commissioners, regulators,
and support staff that acts as a coordinating body for the state insurance
regulatory process. In 1994, the NAIC established risk-based capital
("RBC") requirements to assist regulators in monitoring the financial
strength and stability of property and casualty insurers. Under the NAIC
requirements, each insurer must maintain its total capital and surplus
above a calculated threshold or take corrective measures to achieve the
threshold. The Company and PICOM-Illinois have calculated their RBC levels
based on these requirements and have determined that they passed the RBC
test and have capital and surplus in excess of the threshold.
(11) Concentrations and Credit Risk
The Company writes approximately 90 percent of its premiums through
approximately 30 independent agents and approximately 10 percent of its
premiums directly. In 1995, 1994, and 1993, 3 agents individually produced
between 10 and 15 percent of the Company's premiums written. In 1995,
1994, and 1993, 6 agents, in aggregate, produced approximately 57, 57, and
58 percent, respectively, of the Company's premiums written.
PICOM-Illinois writes approximately 47 percent of its premiums through 23
independent agents and approximately 53 percent directly. In 1995, 1 agent
produced 19.4 percent of PICOM-Illinois' premiums written.
All premiums are directly billed to policyholders, and premiums due are
secured by the related unearned premiums. When insureds fail to pay their
premiums, coverage is canceled. PICOM requires policyholders to remit a
minimum of 40 percent of the premium at policy origination date.
Subsequent scheduled payments are monitored to prevent PICOM from providing
coverage beyond the date for which payment has been received. In the
opinion of management, the net amounts carried on the accompanying
consolidated balance sheets are collectible.
(12) Commitments
PICOM is engaged in various legal actions incident to the nature of its
insurance business. Management is of the opinion that none of the
litigation will have a material effect on PICOM's results of operations as
well as its financial position.
Effective January 1, 1995, PICOM purchased the right to solicit and write
medical professional liability insurance in Illinois that was formerly
written by another Illinois insurance company. The purchase price, which
is a percentage of annualized gross premiums written through 1999, will be
a minimum of $3,452,954, plus $134,000 attributable to a non-compete
covenant. The aggregate minimum purchase price of
$3,586,954, net of amortization approximating $358,700, is recorded as an
intangible asset at December 31, 1995. To the extent the purchase price
exceeds the minimum, such excess will be capitalized.
FS-24
32
PICOM INSURANCE COMPANY AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, Continued
(13) Quarterly Financial Data (Unaudited)
The unaudited operating results by quarter for 1995, 1994, and 1993 are
summarized below:
Income Before
Income Taxes and Pretax
Total Cumulative Effect Effect of Net
Revenues and Other of Change in Change in Net Income Per
Income Accounting Method Accounting Income Common Share
------------------ -------------------- ---------- ------ --------------
(In thousands, except per-share data)
1995:
1st $17,020 1,255 (12,310) (7,295) (2.25)
2nd 17,292 3,593 - 2,371 .73
3rd 18,110 3,861 - 2,548 .85
4th 18,150 15,633 - 10,317 3.45
------- ------ ------- ------
Year $70,572 24,342 (12,310) 7,941
======= ====== ======= ======
1994:
1st $14,843 2,241 - 1,479 .46
2nd 14,271 97 - 64 .02
3rd 15,474 2,847 - 1,879 .58
4th 15,279 2,625 - 1,732 .53
------- ------ ------- ------
Year $59,867 7,810 - 5,154
======= ====== ======= ======
1993:
1st $15,808 1,643 - 1,084 .34
2nd 17,005 2,018 - 1,332 .41
3rd 19,977 4,070 - 2,686 .83
4th 14,686 7,115 - 4,764 1.47
------- ------ ------- ------
Year $67,476 14,846 - 9,866
======= ====== ======= ======
Results for the first three quarters of 1995 have been restated from those
originally reported because the Company changed its method of accounting
for loss and loss adjustment expense reserves by eliminating discounting
of such reserves effective January 1, 1995.
Results for the first three quarters of 1993 have been reclassified from
those originally reported because the Company changed its loss and loss
adjustment expense reserve discount rate from 3.75% to 3%.
Net income was negatively impacted during the second quarter of 1994 due to
an increase in claims filed just prior to the effective date of Michigan's
tort reform laws.
FS-25
33
PICOM INSURANCE COMPANY AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, Continued
(14) Fair Value of Financial Instruments
SFAS No. 107, Disclosures About Fair Value of Financial Instruments,
requires disclosures of fair-value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable
to estimate the value. In situations where quoted market prices are not
available, fair values are to be based on estimates using present value or
other valuation techniques. SFAS No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure
requirements.
Under SFAS No. 107, PICOM's investment securities, cash, short-term
investments, drafts outstanding, and balance due on purchased book of
business constitute financial instruments. The carrying amounts of all
financial instruments--other than investment securities, which are
presented in note 2--approximated their fair values at December 31, 1995
and 1994.
FS-26
34
PICOM INSURANCE COMPANY AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except share data)
June 30, December 31,
Assets 1996 1995
------ --------- ------------
(Unaudited)
Investments:
Fixed maturities - available for sale, at market value (amortized cost: $259,421 and
$257,129) $255,942 259,979
Equity securities available for sale, at market value (cost: $2,623 and $2,608) 3,030 2,641
Short-term investments, at cost 17,577 17,512
Real estate, at cost, net of accumulated depreciation 465 475
-------- --------
Total investments 277,014 280,607
Cash 692 1,279
Premiums due from policyholders 9,304 7,618
Amounts due from reinsurers 15,496 12,264
Accrued investment income 3,495 3,612
Prepaid reinsurance premiums 645 76
Deferred federal income taxes 20,428 18,264
Property and equipment, net of accumulated depreciation and amortization 2,290 2,341
Deferred policy acquisition costs 1,087 1,092
Other assets 5,692 3,559
-------- --------
Total assets $336,143 $330,712
======== ========
Liabilities and Shareholders' Equity
------------------------------------
Liabilities:
Loss and loss adjustment expense reserves $206,811 $199,605
Reserve for extended reporting period claims 14,182 14,082
Unearned premiums 23,136 23,122
Drafts outstanding 1,237 3,445
Payable for securities 2,013 3,205
Balance due on purchased book of business 1,800 2,694
Accrued expenses and other liabilities 6,845 6,148
-------- --------
Total liabilities 256,024 252,301
-------- --------
Shareholders' equity:
Common stock, $1 par value; 10,000,000 shares authorized; 3,238,959 shares
issued and outstanding, including shares in treasury 3,239 3,239
Additional paid-in capital 8,802 8,417
Retained earnings 71,480 66,994
Net unrealized appreciation (depreciation) on investments, net of deferred
federal income tax expense (benefit) of ($905) and $963 in 1996 and 1995,
respectively (2,528) 1,882
-------- --------
80,993 80,532
Less cost of common stock in treasury (50,814 and 123,244 shares) (874) (2,121)
-------- --------
Total shareholders' equity 80,119 78,411
-------- --------
Total liabilities and shareholders' equity $336,143 330,712
======== ========
See accompanying notes to the unaudited condensed consolidated financial
statements.
FS-27
35
PICOM INSURANCE COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(In thousands, except per-share data)
Six Months Ended June 30,
1996 1995
---- ----
(Unaudited)
Revenues and other income:
Premiums written $ 33,184 33,418
Premiums ceded 4,792 5,834
---------- ---------
Net premiums written 28,392 27,584
Decrease in unearned premiums, net of prepaid reinsurance premiums 32 99
---------- ---------
Premiums earned, net 28,424 27,683
Investment income, net of expenses 7,705 6,718
Net realized investment losses (376) (89)
Other 171 -
---------- ---------
Total revenues and other income 35,924 34,312
---------- ---------
Expenses:
Losses and loss adjustment expenses, net 24,481 24,516
Increase in reserve for extended reporting period claims 100 781
Policy acquisition and other underwriting expenses (note 3) 5,416 4,167
---------- ---------
Total expenses 29,997 29,464
---------- ---------
Income from operations before federal income taxes and cumulative
effect of change in accounting method 5,927 4,848
Federal income taxes (1,441) (1,647)
---------- ---------
Income before cumulative effect of change in accounting method 4,486 3,201
Cumulative effect of change in accounting method - elimination of
loss and loss adjustment expense reserve discount, net of
deferred federal income tax benefit of $4,185 - (8,125)
---------- ---------
Net income (loss) $ 4,486 (4,924)
========== =========
Net income (loss) per common share:
Income before cumulative effect of change in accounting method $ 1.42 0.99
Cumulative effect of change in accounting method - (2.51)
---------- ---------
Net income (loss) per common share $ 1.42 (1.52)
========= =========
Weighted average shares outstanding 3,149,832 3,238,959
========= =========
See accompanying notes to the unaudited condensed consolidated financial
statements.
FS-28
36
PICOM INSURANCE COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Shareholders' Equity
Six months ended June 30, 1996 and 1995
Net Unrealized
Appreciation
Common Stock (Depreciation)
------------------------------------ on Investments, Cost of
Shares Additional Net of Deferred Common Total
-------------------------- Paid-in Retained Federal Income Stock in Shareholders'
Issued In Treasury Amount Capital Earnings Tax Effect Treasury Equity
------ ----------- ------ ------- -------- --------------- -------- -------------
(In thousands, except share data)
Balances, December
31, 1994 3,238,959 - $3,239 8,181 59,053 (7,331) - 63,142
Net loss (unaudited) - - - - (4,924) - - (4,924)
Net appreciation on
debt and equity
securities
(unaudited) - - - - - 6,578 - 6,578
--------- ------- ------ ----- ------ ------ ------ ------
Balances, June 30,
1995 (unaudited) 3,238,959 - $3,239 8,181 54,129 (753) - 64,796
========= ======= ====== ===== ====== ====== ====== ======
Balances, December
31, 1995 3,238,959 123,244 $3,239 8,417 66,994 1,882 (2,121) 78,411
Net income (unaudited) - - - - 4,486 - - 4,486
Issuance of treasury
shares (note 3)
(unaudited) - (72,430) - 385 - - 1,247 1,632
Net depreciation on
debt and equity
securities
(unaudited) - - - - - (4,410) - (4,410)
--------- ------- ------ ----- ------ ------ ------ ------
Balances, June 30,
1996 (unaudited) 3,238,959 50,814 $3,239 8,802 71,480 (2,528) (874) 80,119
========= ======= ====== ===== ====== ====== ====== ======
See accompanying notes to the unaudited condensed consolidated financial
statements.
FS-29
37
PICOM INSURANCE COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
Six Months Ended June 30,
----------------------------
1996 1995
---- ----
(Unaudited)
Cash flows from operating activities:
Net income (loss) $ 4,486 (4,924)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization 1,091 1,713
Realized losses on investments 376 89
Deferred federal income taxes (296) (2,527)
Stock bonus award 697 -
Changes in assets and liabilities:
Premiums due from policyholders (1,686) (3,304)
Amounts due from reinsurers (3,232) (7,525)
Accrued investment income 117 287
Prepaid reinsurance premiums (569) 958
Deferred policy acquisition costs 5 (75)
Other assets (1,337) (1,347)
Loss and loss adjustment expense reserves 7,206 20,024
Reserve for extended reporting period claims 100 781
Unearned premiums 14 (1,057)
Drafts outstanding (2,208) (164)
Accrued expenses and other liabilities 697 5,232
-------- -------
Net cash provided by operating activities 5,461 8,161
-------- -------
Cash flows from investing activities:
Proceeds from sale or maturity of short-term investments 151,258 267,352
Purchases of short-term investments (151,079) (285,408)
Proceeds from maturity of securities available for sale 1,500 3,600
Proceeds from sale of securities available for sale 75,361 95,638
Purchases of securities available for sale (80,822) (78,892)
Purchases of securities held to maturity - (9,206)
Payable for securities (1,192) -
Purchases of property and equipment (180) (149)
Payment on liability for purchased book of business (894) (894)
-------- -------
Net cash used in investing activities (6,048) (7,959)
-------- -------
Net increase (decrease) in cash (587) 202
Cash, beginning of period 1,279 940
-------- -------
Cash, end of period $ 692 1,142
======== =======
Supplemental disclosure of cash flow information - federal income taxes paid $ 1,846 -
Supplemental schedule of noncash investing activities:
Purchase of book of business:
Intangible assets acquired $ - (3,587)
Amount due - 3,587
Issuance of treasury shares through stock bonus award 697 -
Issuance of treasury shares for acquired company 935 -
See accompanying notes to the unaudited condensed consolidated financial
statements.
FS-30
38
PICOM INSURANCE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Six Months Ended June 30, 1996 and 1995, (Unaudited)
and December 31, 1995
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
PICOM Insurance Company and subsidiaries ("the Company") have been prepared
in accordance with generally accepted accounting principles and pursuant to
the rules and regulations of the Securities and Exchange Commission for
interim financial information. In management's opinion, all adjustments,
consisting of normal recurring adjustments, which are necessary for a fair
presentation of financial position and results of operations have been
made. It is recommended that these condensed consolidated financial
statements be read in conjunction with the consolidated financial
statements and notes related thereto included elsewhere herein.
(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 outstanding during the period,
calculated on a daily basis.
(3) Shareholders' Equity
On February 28, 1996, the Company awarded 28,430 shares of common stock
held in treasury to 78 directors, officers, and employees of the Company as
a one-time stock bonus award. Compensation expense for this stock bonus
award approximated $697,000, which was charged to policy acquisition and
other underwriting expenses.
On May 1, 1996, in a transaction aggregating $1,243,000,the Company paid
$308,000 and issued 44,000 shares of common stock held in treasury (valued
at $935,000) in exchange for all of the issued and outstanding shares of
American Insurance Management Corporation, a privately held Indiana
corporation that serves as the attorney-in-fact for American Medical
Insurance Exchange, an Indiana interinsurance reciprocal exchange.
FS-31
39
EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
27 Financial Data Schedule of PICOM Insurance
Company