1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
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 INSURANCE COMPANY MANAGEMENT GROUP
(Exact name of registrant as specified in its charter)
Michigan 38-3273911
(State of Incorporation) (I.R.S. Employer Identification No.)
4295 Okemos Road, Box 2510 48805-9510
Okemos, Michigan (Zip Code)
(Address of principal executive offices)
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 of the registrant's common stock, no par value per share,
outstanding as of August 12, 1997 was 3,505,750.
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TABLE OF CONTENTS
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
at June 30, 1997 (Unaudited) and
December 31, 1996 3
Condensed Consolidated Statements of
Income for the Three Months and Six
Months Ended June 30, 1997 and 1996 (Unaudited) 4
Condensed Consolidated Statements of
Cash Flows for the Six Months Ended
June 30, 1997 and 1996 (Unaudited) 5
Notes to Condensed Consolidated
Financial Statements (Unaudited) 6-7
Item 2. Management's Discussion and
Analysis of Financial Condition and
Results of Operations 8-15
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 15-16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
June 30, December 31,
Assets 1997 1996
------------ ------------
Investments: (Unaudited)
Fixed maturities available for sale, at fair value
(amortized cost: $310,822,000 and $285,976,000) $311,151,000 $286,274,000
Equity securities available for sale, at fair value
(cost: $2,646,000 and $2,630,000) 2,751,000 2,692,000
Short-term investments, at cost 9,752,000 10,711,000
Real estate, at cost, net of accumulated depreciation 445,000 455,000
------------ ------------
Total investments 324,099,000 300,132,000
Cash 3,405,000 2,023,000
Premiums due from policyholders 10,542,000 7,268,000
Amounts due from reinsurers 18,966,000 17,550,000
Accrued investment income 4,100,000 3,885,000
Deferred federal income taxes 16,242,000 17,301,000
Property and equipment, at cost, net of
accumulated depreciation 2,310,000 2,459,000
Deferred policy acquisition costs 1,072,000 998,000
Other assets 10,500,000 5,766,000
------------ ------------
Total assets $391,236,000 $357,382,000
============ ============
Liabilities and Shareholders' Equity
Liabilities:
Loss and loss adjustment expense reserves $226,728,000 $219,919,000
Reserve for extended reporting period claims 14,995,000 14,795,000
Unearned premiums 21,768,000 21,945,000
Long-term debt 22,500,000 -
Accrued expenses and other liabilities 11,936,000 12,765,000
------------ ------------
Total liabilities 297,927,000 269,424,000
------------ ------------
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;
3,505,750 shares issued and outstanding in 1997 and 1996 3,506,000 3,506,000
Additional paid-in capital 14,569,000 14,569,000
Retained earnings 74,943,000 69,645,000
Net unrealized appreciation on investments,
net of deferred federal income taxes 291,000 238,000
------------ ------------
Total shareholders' equity 93,309,000 87,958,000
------------ ------------
Total liabilities and shareholders' equity $391,236,000 $357,382,000
============ ============
See accompanying notes to the unaudited condensed consolidated financial
statements.
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PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ----------------------------
1997 1996 1997 1996
----------- ----------- ----------- ----------
Revenues and other income:
Net premiums written $10,581,000 $11,944,000 $24,957,000 $28,392,000
Decrease in unearned premiums, net of
prepaid reinsurance premiums 2,508,000 2,143,000 523,000 32,000
----------- ----------- ----------- -----------
Premiums earned, net 13,089,000 14,087,000 25,480,000 28,424,000
Net investment income 4,710,000 3,836,000 8,882,000 7,705,000
Net realized investment losses (34,000) (362,000) (70,000) (376,000)
Other 285,000 88,000 339,000 171,000
----------- ----------- ----------- -----------
Total revenues and other income 18,050,000 17,649,000 34,631,000 35,924,000
----------- ----------- ----------- -----------
Expenses:
Losses and loss adjustment expenses, net 11,249,000 12,066,000 21,633,000 24,481,000
Increase in reserve for extended reporting
period claims 100,000 - 200,000 100,000
Policy acquisition and other underwriting expenses 2,650,000 2,822,000 5,285,000 5,416,000
Interest expense 370,000 - 370,000 -
----------- ----------- ----------- -----------
Total expenses 14,369,000 14,888,000 27,488,000 29,997,000
----------- ----------- ----------- -----------
Income from operations before federal income taxes 3,681,000 2,761,000 7,143,000 5,927,000
Federal income taxes (1,004,000) (603,000) (1,845,000) (1,441,000)
----------- ----------- ----------- -----------
Net income $2,677,000 $2,158,000 $5,298,000 $4,486,000
=========== =========== =========== ===========
Net income per common share $0.76 $0.62 $1.51 $1.29
=========== =========== =========== ===========
Weighted average shares outstanding 3,506,755 3,491,244 3,506,567 3,467,436
=========== =========== =========== ===========
See accompanying notes to the unaudited condensed consolidated
financial statements.
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PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended June 30,
-----------------------------------
1997 1996
------------ ------------
Net cash provided by operating activities $4,228,000 $5,461,000
------------ ------------
Cash flows from investing activities:
Proceeds from sale or maturity of short-term investments 154,268,000 151,258,000
Purchases of short-term investments (153,148,000) (151,079,000)
Proceeds from maturity of securities available for sale 370,000 1,500,000
Proceeds from sale of securities available for sale 29,975,000 75,361,000
Purchases of securities available for sale (55,938,000) (80,822,000)
Payable for securities - (1,192,000)
Purchases of property and equipment (126,000) (180,000)
Payment on liability for purchased book of business (747,000) (894,000)
------------ ------------
Net cash used in investing activities (25,346,000) (6,048,000)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 22,500,000 -
------------ ------------
Net cash provided by financing activities 22,500,000 -
------------ ------------
Net increase (decrease) in cash 1,382,000 (587,000)
Cash, beginning of period 2,023,000 1,279,000
------------ ------------
Cash, end of period $3,405,000 $692,000
============ ============
Supplemental disclosure of non-cash investing
and financing activities:
Issuance of treasury shares as stock bonus $- $697,000
============ ============
Issuance of treasury shares for acquired company $- $935,000
============ ============
See accompanying notes to the unaudited condensed consolidated financial
statements.
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PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
(1) Basis of Presentation
Professionals Insurance Company Management Group ("Professionals Group,"
and with its direct and indirect subsidiaries, the "Company") is a
business corporation incorporated under the laws of the State of Michigan
that functions as an insurance holding company. Professionals Group has
four direct wholly-owned subsidiaries and two indirect wholly-owned
subsidiaries. The direct wholly-owned subsidiaries are PICOM Insurance
Company ("PICOM"), PICOM Insurance Agency, Inc. ("PIA"), PICOM Financial
Services Corporation ("PFSC") and American Insurance Management
Corporation ("AIMC"). The indirect wholly-owned entities, all of which
are wholly-owned subsidiaries of PICOM, are PICOM Claims Services
Corporation ("PCSC") and PICOM Insurance Company of Illinois
("PICOM-Illinois").
PICOM is a stock, property and casualty insurer incorporated under the
laws of the State of Michigan in 1980. PICOM offers professional
liability insurance to providers of health care services in Michigan,
Indiana and Ohio. PIA is an inactive Michigan insurance agency
incorporated under the laws of the State of Michigan on March 31, 1981.
PFSC is an inactive business corporation incorporated under the laws of
the State of Michigan on May 29, 1986. AIMC is an Indiana corporation
that serves as the attorney-in-fact for American Medical Insurance
Exchange, an Indiana interinsurance reciprocal exchange. 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.
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 Illinois.
The accompanying unaudited condensed consolidated financial statements of
the Company have been prepared in conformity with generally accepted
accounting principles and with the instructions for Form 10-Q and Rule
10-01 of Regulation S-X as they apply to interim financial information.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. All significant intercompany transactions have been
eliminated in consolidation.
In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation of
financial position and results of operations have been included. The
operating results for the three month and six month periods ended June 30,
1997 are not necessarily indicative of the results to be expected for the
year ending December 31, 1997.
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PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
(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) outstanding during each period after giving effect to
stock dividends and treasury shares, calculated on a daily basis.
(3) Long-Term Debt
On April 4, 1997, Professionals Group obtained $22.5 million in proceeds
from a seven-year unsecured bank term loan, bearing interest at an
adjustable rate of LIBOR plus 75 basis points (6.71% at June 30, 1997),
and payable quarterly (the "Credit Agreement"). Principal payments are due
on April 30, as follows: 1998 - $2,500,000; 1999 - $2,500,000; 2000 -
$3,000,000; 2001 - $3,000,000; 2002 - $3,500,000; 2003 - $3,500,000; and
2004 - $4,500,000.
The Credit Agreement contains a covenant which prohibits the payment of
cash dividends on Professionals Group's common stock (except for cash paid
in lieu of fractional shares related to stock dividends declared).
Additional covenants also require the Company to, among other things,
maintain total consolidated shareholders' equity of at least $80.0 million
plus 50% of the preceding fiscal year's consolidated net income, maintain
a ratio of debt to equity of not more than 0.5:1 and maintain a fixed
charges coverage ratio and an interest coverage ratio (as defined by the
Credit Agreement) of not less than 1.5:1 and 2.5:1, respectively. The
Company was in compliance with all required covenants at June 30, 1997.
(4) New Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS No.
128") which is effective for financial statements issued for both interim
and annual periods ending after December 15, 1997. Earlier application is
not permitted. This standard replaces the presentation of primary
earnings per share with a presentation of basic earnings per share and
also requires dual presentation of basic and diluted earnings per share
for all entities with complex capital structures. Because early adoption
of SFAS No. 128 is not permitted, there is no impact on the Company's
earnings per share amounts for the interim periods presented herein.
However, upon adoption in the fourth quarter of 1997, all prior interim
and annual period earnings per share data presented will be restated to
conform with the provisions of SFAS No. 128. The Company does not expect
the impact of the adoption of SFAS No. 128 to be material to previously
reported earnings per share amounts.
The FASB has also issued SFAS No. 130 "Reporting Comprehensive Income,"
which is effective for fiscal years beginning after December 15, 1997.
This standard requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section
of a statement of financial position.
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion and analysis should be read in conjunction with
the condensed consolidated financial statements and the notes thereto included
elsewhere in this report and the Company's Annual Report to Shareholders for
the year ended December 31, 1996.
Financial Condition -- June 30, 1997 Compared to December 31, 1996:
Total assets increased to $391.2 million at June 30, 1997, as compared to
$357.4 million at December 31, 1996, primarily due to an increase in invested
assets. The increase in invested assets was primarily due to proceeds received
from the Company's bank term loan which was used to purchase a $21.5 million
surplus note issued by another insurance company (see "Liquidity and Capital
Resources" herein for further discussion) as well as positive cash flows from
operations.
Invested assets were $324.1 million, or approximately 83% of the Company's
total assets at June 30, 1997. This compares to invested assets of $300.1
million, or approximately 84% of the Company's total assets at December 31,
1996. The Company's investment portfolio continues to be dominated by fixed
maturity securities at June 30, 1997, and primarily consists of U.S. government
and agency bonds, high-quality corporate bonds, mortgage-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 June 30,
1997, the fixed maturity portfolio had a fair value that was $329,000 higher
than the $310.8 million amortized cost of such portfolio. At December 31,
1996, the fixed maturity portfolio had a fair value that was $298,000 higher
than the $286.0 million amortized cost of such portfolio.
Loss and loss adjustment expense reserves represented approximately 76%
and 82% of the Company's consolidated liabilities at June 30, 1997 and December
31, 1996, respectively. The decrease in this ratio was due to the Company's
issuance of long-term debt during the second quarter of 1997 (see further
discussion below). 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 professional
liability reserves is a complex process which is heavily dependent on judgment
and involves many uncertainties. As a result, reserve estimates may vary
significantly from the eventual outcome. The assumptions used in establishing
the Company's reserves are reviewed and updated regularly as new data becomes
available. Any adjustments necessary are generally reflected in current
operations. The loss and loss adjustment expense reserves are determined by
the Company's actuary, who is an officer of the Company and a Fellow of the
Casualty Actuarial Society, as well as by an independent actuarial consulting
firm. Management of the Company believes that the loss and loss adjustment
expense reserves are adequate and are at or above the actuarial best estimate.
The loss and loss adjustment expense reserves have been established on an
undiscounted basis.
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9
Loss and loss adjustment expense reserves increased 3.1% to $226.7 million
at June 30, 1997, from $219.9 million at December 31, 1996. This increase was
primarily attributable to an increase in the number of outstanding claims at
June 30, 1997 as compared to December 31, 1996.
On April 4, 1997, Professionals Group obtained $22.5 million in proceeds
from a seven-year unsecured bank term loan. See Liquidity and Capital
Resources herein for further discussion of this transaction.
Shareholders' equity was $93.3 million at June 30, 1997 versus $88.0
million at December 31, 1996. The increase in shareholders' equity was due to
net income of $5.3 million during the six month period ended June 30, 1997 as
well as $53,000 of net unrealized appreciation on investments, net of deferred
federal income taxes. The Company expects to use retained earnings to increase
its capital base and finance future growth and will defer consideration of cash
dividends for the foreseeable future.
Results of Operations -- Three Months Ended June 30, 1997 Compared to Three
Months Ended June 30, 1996:
For purposes of the following discussion, the Company's liability
coverages (and the related Service Marks) are defined as follows:
CorpCare(SM) - Offers professional liability coverage for group practices;
DoctorCare(SM) - Offers professional liability coverage for individual
physicians, surgeons and dentists;
HealthPro(SM) - Offers professional liability coverage for other health
care specialists such as nurses, psychologists and optometrists;
HealthServices(SM) - Offers professional liability coverage for health
care organizations such as hospitals, clinics, hospices and surgery
centers; and
LawyerCare(SM) - Offers professional liability coverage for lawyers and
law firms.
Net premiums written were $10.6 million for the three months ended June
30, 1997, a decrease of 11.4%, as compared to net premiums written of $11.9
million for the three months ended June 30, 1996. DoctorCare(SM) premiums
decreased by $1.3 million due primarily to the continued consolidation of
individual practices into group practices and price-based competition in the
Michigan and Illinois insurance markets. Additionally, a $343,000 increase in
CorpCare(SM) premiums and an $86,000 increase in HealthServices(SM)
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and HealthPro(SM) premiums were offset by a $487,000 decrease in LawyerCare(SM)
and other premiums. The decrease in LawyerCare(SM) premiums was due to the
ceding of all LawyerCare(SM) policies in-force as of June 1, 1997 to Michigan
Lawyers Mutual Insurance Company ("MLM"). However, the Company anticipates that
future quarterly gross written premiums will be favorably impacted due to
reinsurance assumed from MLM and Michigan Educational Employees Mutual
Insurance Company ("MEEMIC") starting in the third quarter of 1997. Of the net
premiums written in the second quarter of 1997, approximately 89.8% was
generated by DoctorCare(SM) and CorpCare(SM) coverages, 8.8% was generated by
HealthServices(SM) and HealthPro(SM) coverages, negative 2.6% was generated by
LawyerCare(SM) coverage (due to the ceding of all LawyerCare(SM) business as
previously mentioned) and 4.0% was generated by other types of coverage. Of
the net premiums written in the second quarter of 1996, approximately 87.6% was
generated by DoctorCare(SM) and CorpCare(SM) coverages, 7.1% was generated by
HealthServices(SM) and HealthPro(SM) coverages, 1.6% was generated by
LawyerCare(SM) coverage and 3.7% was generated by other types of coverage.
During the three months ended June 30, 1997 and 1996, the Company continued
to balance its desire for upward rate adjustments with its goal of maintaining
market share in very competitive environments in Michigan, Illinois, Indiana and
Ohio. As a result, the Company offered discounts to its published premium rates
to retain market share and experienced margin or price reductions as a result of
competitive market conditions in those periods. Although the Company has
maintained profitability and is endeavoring to offset lower premiums charged
through more selective underwriting practices, there can be no assurance that
these practices will be successful in the long run.
Net investment income, excluding realized capital gains and losses, totaled
$4.7 million for the three months ended June 30, 1997 as compared to net
investment income of $3.8 million for the three months ended June 30, 1996, an
increase of 22.8%. The increase in net investment income mainly resulted from
a substantial increase in average invested assets primarily due to proceeds
received from the Company's bank term loan which were used to purchase a $21.5
million surplus note from MEEMIC (see "Liquidity and Capital Resources" herein
for further discussion) as well as continued positive cash flows from
operations. The weighted average tax equivalent book yield of the fixed
maturity portfolio was 6.8% and 6.6% as of June 30, 1997 and 1996,
respectively. Net realized investment losses were negligible during the three
month period ended June 30, 1997 as compared to a net realized investment loss
of $362,000 during the same period of 1996. The second quarter 1996 net
realized investment loss was taken to reposition the fixed maturity portfolio
to increase after-tax yield.
Incurred losses and loss adjustment expenses (including the increase in
reserve for extended reporting period claims) decreased to $11.3 million for the
three months ended June 30, 1997 from $12.1 million for the three months ended
June 30, 1996. As a percentage of premiums earned, the incurred loss and loss
adjustment expense ratio (including the increase in reserve for extended
reporting period claims) was 86.7% for the three months ended June 30, 1997, up
from 85.7% for the same period of 1996. The increase in the three month
incurred loss and loss adjustment expense ratio was due primarily to an increase
in the reserve for extended reporting period claims.
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Policy acquisition and underwriting expenses decreased to $2.7 million for
the three months ended June 30, 1997 from $2.8 million for the three months
ended June 30, 1996. As a percentage of premiums earned, the underwriting
expense ratio was 20.2% for the three months ended June 30, 1997, up slightly
from an underwriting expense ratio of 20.0% for the same period of 1996. The
small increase was mainly attributable to the reduction in premiums written
mentioned previously.
The Company recorded $370,000 of interest expense for the three months
ended June 30, 1997 because of the issuance of $22.5 million of long-term debt
in April, 1997 (see "Liquidity and Capital Resources" herein for further
discussion).
The Company recorded $1.0 million in federal income tax expense for the
three months ended June 30, 1997, compared to $603,000 during the same period
in 1996. The effective tax rate was 27.3% for the three months ended June 30,
1997 versus 21.8% for the three months ended June 30, 1996. The higher
effective tax rate for the three months ended June 30, 1997 was due primarily
to an adjustment to prior years' tax liabilities recorded during the second
quarter of 1996.
Net income for the three months ended June 30, 1997 was $2.7 million, or
$0.76 per share on revenues of $18.1 million, as compared to net income of $2.2
million, or $0.62 per share on revenues of $17.6 million, for the three months
ended June 30, 1996. The improvement in earnings is primarily attributable to
improved net investment income and a decrease in net realized investment losses
as described previously.
Results of Operations -- Six Months Ended June 30, 1997 Compared to Six Months
Ended June 30, 1996:
Net premiums written were $25.0 million for the six months ended June 30,
1997, a decrease of 12.1%, as compared to net premiums written of $28.4 million
for the six months ended June 30, 1996. DoctorCare(SM) premiums decreased by
$3.3 million due primarily to the continued consolidation of individual
practices into group practices and price-based competition in the Michigan and
Illinois insurance markets. Additionally, the decrease in net premiums written
resulted from a $4,000 decrease in CorpCare(SM) premiums, a $28,000 decrease in
HealthServices(SM) and HealthPro(SM) premiums and a $90,000 decrease in
LawyerCare(SM) and other premiums. The decrease in LawyerCare(SM) premiums was
due to the ceding of all LawyerCare(SM) policies in-force as of June 1, 1997 to
MLM. However, the Company anticipates that future quarterly gross written
premiums will be favorably impacted due to reinsurance assumed from MLM and
MEEMIC starting in the third quarter of 1997. Of the net premiums written in
1997, approximately 90.3% was generated by DoctorCare(SM) and CorpCare(SM)
coverages, 6.3% was generated by HealthServices(SM) and HealthPro(SM)
coverages, negative 0.4% was generated by LawyerCare(SM) coverage (due to the
ceding of all LawyerCare(SM) business as previously mentioned) and 3.8% was
generated by other types of coverage. Of the net premiums written in 1996,
approximately 91.1% was generated by DoctorCare(SM) and CorpCare(SM) coverages,
5.6% was generated by HealthServices(SM) and HealthPro(SM) coverages, 1.0% was
generated by LawyerCare(SM) coverage and 2.3% was generated by other types of
coverage.
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During the six months ended June 30, 1997 and 1996, the Company continued
to balance its desire for upward rate adjustments with its goal of maintaining
market share in very competitive environments in Michigan, Illinois, Indiana
and Ohio. As a result, the Company offered discounts to its published premium
rates to retain market share and experienced margin or price reductions as a
result of competitive market conditions in those periods. Although the Company
has maintained profitability and is endeavoring to offset lower premiums
charged through more selective underwriting practices, there can be no assurance
that these practices will be successful in the long run.
Net investment income, excluding realized capital gains and losses,
totaled $8.9 million for the six months ended June 30, 1997 as compared to net
investment income of $7.7 million for the six months ended June 30, 1996, an
increase of 15.3%. The increase in net investment income mainly resulted from
a substantial increase in average invested assets primarily due to proceeds
received from the Company's bank term loan which were used to purchase a
$21.5 million surplus note from MEEMIC (see "Liquidity and Capital Resources"
herein for further discussion) as well as continued positive cash flows from
operations. The weighted average tax equivalent book yield of the fixed
maturity portfolio was 6.8% and 6.6% as of June 30, 1997 and 1996,
respectively. Net realized investment losses were $70,000 during the six month
period ended June 30, 1997 as compared to a net investment loss of $376,000
during the same period of 1996. The 1996 net realized investment loss was
taken to reposition the fixed maturity portfolio to increase after-tax yield.
Incurred losses and loss adjustment expenses (including the increase in
reserve for extended reporting period claims) decreased to $21.8 million for
the six months ended June 30, 1997 from $24.6 million for the six months ended
June 30, 1996. As a percentage of premiums earned, the incurred loss and loss
adjustment expense ratio (including the increase in reserve for extended
reporting period claims) was 85.7% for the six months ended June 30, 1997, down
from 86.5% for the same period of 1996. The decrease in six month incurred
losses and loss adjustment expenses was due primarily to favorable development
of prior years' loss reserves and slightly lower claims frequency.
Policy acquisition and underwriting expenses decreased to $5.3 million for
the six months ended June 30, 1997 from $5.4 million for the six months ended
June 30, 1996. As a percentage of premiums earned, the underwriting expense
ratio was 20.7% for the six months ended June 30, 1997, up from an underwriting
expense ratio of 19.1% for the same period of 1996. The increase was mainly
attributable to the reduction in premiums written mentioned previously.
The Company recorded $370,000 of interest expense for the six months ended
June 30, 1997 because of the issuance of $22.5 million of long-term debt in
April, 1997 (see "Liquidity and Capital Resources" herein for further
discussion).
The Company recorded $1.8 million in federal income tax expense for the six
months ended June 30, 1997, compared to $1.4 million during the same period in
1996. The effective tax rate was 25.8% for the six months ended June 30, 1997
versus 24.3% for the six months ended June 30, 1996. The higher effective tax
rate for the six months ended June 30, 1997 was due primarily to an adjustment
to prior years' tax liabilities recorded during the six months ended June 30,
1996.
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Net income for the six months ended June 30, 1997 was $5.3 million, or
$1.51 per share on revenues of $34.6 million, as compared to net income of $4.5
million, or $1.29 per share on revenues of $35.9 million, for the six months
ended June 30, 1996. The improvement in earnings is primarily attributable to
improved net investment income, a decrease in net realized investment losses
and a lower incurred loss and loss adjustment expense ratio, as described
previously.
Liquidity and Capital Resources:
Liquidity describes the ability to generate sufficient cash flows to meet
the cash requirements of continuing operations. Liquidity, in the context of
insurance operations, is typically determined by two distinct operations:
underwriting and investing. Net cash flows from underwriting operations are
used to build an investment portfolio, which in turn produces future cash from
investment income. The Company continuously monitors available cash and
short-term investment balances in relation to projected cash needs to maintain
adequate balances for current payments while maximizing cash available for
longer term investment opportunities.
The payment of losses, loss adjustment expenses and operating expenses in
the ordinary course of business represents the Company's principal need for
liquid funds. Payments for losses and loss adjustment expenses are distributed
fairly evenly throughout the year. Payments for reinsurance are made within
thirty days subsequent to the end of each quarter, with adjustments made after
each reinsurance year. Historically, cash used to pay for these items has been
provided by operations. The Company did not borrow any funds in the six month
periods ended June 30, 1997 or 1996 for capital expenditures; however, as of
June 30, 1997, the Company has entered into $6.7 million of commitments to
build a new home office facility in Okemos, Michigan and to purchase new
furniture and equipment. As of June 30, 1997, no other 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 these commitments for capital expenditures.
In June, 1997, PICOM ceded all of its LawyerCare(SM) policies in-force to
Michigan Lawyers Mutual Insurance Company ("MLM") and will reinsure 35% of MLM's
net premiums starting June 1, 1997. This reinsurance is projected to increase
PICOM's gross written premiums to approximately $2.0 million on an annualized
basis.
In April, 1997, the Company completed an agreement with Michigan
Educational Employees Mutual Insurance Company ("MEEMIC"), a Michigan-domiciled
specialty writer of personal automobile and homeowners coverages for teachers
and other members of the educational community in Michigan. Pursuant to the
agreement and based on the approvals of the Michigan Commissioner of Insurance:
(i) PICOM purchased a twelve-year, $21.5 million surplus note from MEEMIC,
bearing interest at 8.5% per annum (the "Surplus Note"); (ii) effective July 1,
1997,
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PICOM will reinsure approximately 40% of MEEMIC's net premiums (this is
projected to increase PICOM's gross written premiums by approximately $35.0
million on an annualized basis); (iii) Professionals Group will provide MEEMIC
with information systems services and certain consulting services pursuant to a
ten-year management services agreement; and (iv) nominees of Professionals
Group have been elected to all positions on the Board of Directors of MEEMIC.
Concurrent with the above transaction, Professionals Group obtained $22.5
million in proceeds from a seven-year unsecured bank term loan, bearing
interest at an adjustable rate of LIBOR plus 75 basis points (6.71% at June 30,
1997), and payable quarterly (the "Credit Agreement"). Principal payments are
due on April 30, as follows: 1998 - $2,500,000; 1999 - $2,500,000; 2000 -
$3,000,000; 2001 - $3,000,000; 2002 - $3,500,000; 2003 - $3,500,000; and 2004 -
$4,500,000. Professionals Group used $20.0 million of the proceeds received
from this loan to make a capital contribution to PICOM, which in turn,
purchased the Surplus Note from MEEMIC.
The Credit Agreement contains a covenant which prohibits the payment of
cash dividends on Professionals Group's common stock (except for cash paid in
lieu of fractional shares related to stock dividends declared). Additional
covenants also require the Company to, among other things, maintain total
consolidated shareholders' equity of at least $80.0 million plus 50% of the
preceding fiscal year's consolidated net income, maintain a ratio of debt to
equity of not more than 0.5:1 and maintain a fixed charges coverage ratio and an
interest coverage ratio (as defined by the Credit Agreement) of not less than
1.5:1 and 2.5:1, respectively. The Company was in compliance with all required
covenants at June 30, 1997.
The Company has also agreed to assist MEEMIC in acquiring the net assets
of Michigan Educators Insurance Agency, Inc. ("MEIA"). MEIA is an insurance
agency that has the exclusive right to distribute MEEMIC insurance products.
Upon its purchase, MEIA's marketing and sales functions shall be consolidated
with MEEMIC's. To fund this purchase, it is proposed that MEEMIC shall utilize
the proceeds of the Surplus Note, plus a $20.0 million promissory note to be
issued by a subsidiary of MEEMIC, which will be guaranteed by Professionals
Group. Additionally, Professionals Group would issue warrants for 275,000
shares of its common stock to MEIA shareholders. MEEMIC's acquisition of MEIA
is subject to regulatory approval by the Michigan Commissioner of Insurance.
At a future date, Professionals Group and MEEMIC expect to pursue
demutualization of MEEMIC. Such demutualization would be subject to regulatory
approval by the Michigan Commissioner of Insurance, approval by MEEMIC's
policyholders and approval by Professionals Group's shareholders. No specific
timetable has been set for this proposed demutualization and there can be no
assurances that MEEMIC will be demutualized.
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Effects of New Accounting Pronouncements:
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS No. 128")
which is effective for financial statements issued for both interim and annual
periods ending after December 15, 1997. Earlier application is not permitted.
This standard replaces the presentation of primary earnings per share with a
presentation of basic earnings per share and also requires dual presentation of
basic and diluted earnings per share for all entities with complex capital
structures. Because early adoption of SFAS No. 128 is not permitted, there is
no impact on the Company's earnings per share amounts for the interim periods
presented herein. However, upon adoption in the fourth quarter of 1997, all
prior interim and annual period earnings per share data presented will be
restated to conform with the provisions of SFAS No. 128. The Company does not
expect the impact of the adoption of SFAS No. 128 to be material to previously
reported earnings per share amounts.
The FASB has also issued SFAS No. 130 "Reporting Comprehensive Income,"
which is effective for fiscal years beginning after December 15, 1997. This
standard requires that an enterprise (a) classify items of other comprehensive
income by their nature in a financial statement and (b) display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of a statement of financial
position.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Shareholders was held on June 4, 1997. At
the meeting, the following directors were elected, by the votes listed:
Incumbent director Victor T. Adamo, Esq., CPCU, was reelected for a term
of three years expiring at the 2000 Annual Meeting. Mr. Adamo was elected with
2,437,270 shares voting for and 8,225 shares withheld. Incumbent director John
F. McCaffrey was reelected for a term of three years expiring at the 2000 Annual
Meeting. Mr. McCaffrey was elected with 2,437,270 shares voting for and 8,225
shares withheld. Incumbent director Isaac J. Powell, M.D., was reelected for a
term of three years expiring at the 2000 Annual Meeting. Dr. Powell was elected
with 2,437,270 shares voting for and 8,225 shares withheld. In addition,
incumbent directors Jerry D. Campbell, John F. Dodge, Jr., Esq., H. Harvey Gass,
M.D., W. Peter McCabe, M.D., Ann F. Putallaz, Ph.D., Donald S. Young, Esq. and
William H. Woodhams, M.D. continued in office.
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At such Annual meeting of Shareholders, the appointment of KPMG Peat
Marwick LLP as independent auditors for the year ending December 31, 1997
was ratified, with 2,415,107 shares voting for, 6,144 shares voting against and
24,244 shares abstaining. In addition, a non-binding shareholder proposal
regarding the classification of the Board of Directors was defeated, with
483,872 shares voting for, 1,404,035 shares voting against and 64,728 shares
abstaining. Additionally, 492,860 shares did not cast a vote on this proposal.
The above matters are more fully described in the Company's proxy statement
dated April 16, 1997.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Item 601
Regulation S-K
Exhibit Reference
Number Exhibit Description
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(11) No statement re: computation of per
share earnings is required to be filed
because the computations can be
clearly determined from the materials
contained herein.
(27) Financial Data Schedule of registrant.*
* Filed herewith.
(b) Reports on Form 8-K.
None.
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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 thereunto duly authorized.
PROFESSIONALS INSURANCE COMPANY
MANAGEMENT GROUP
DATE: August 13, 1997 /s/ R. Kevin Clinton
----------------------------
R. Kevin Clinton
Vice President, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
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INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
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11 No statement re: computation of per share earnings is
required to be filed because the computations can be
clearly determined from the materials contained herein.
27 Financial Data Schedule of registrant.