1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
Commission file number 0-21223
PROFESSIONALS GROUP, INC.
(Exact name of registrant as specified in its charter)
Michigan 38-3273911
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
2600 Professionals Drive, Okemos, Michigan 48864
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (517) 349-6500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the registrant's common stock, no par value
per share, as of November 13, 1998 was 7,623,869.
2
TABLE OF CONTENTS
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at September 30, 1998 3
(Unaudited) and December 31, 1997
Condensed Consolidated Statements of Income for the Three 4
Months and Nine Months Ended September 30, 1998 and 1997
(Unaudited)
Condensed Consolidated Statements of Cash Flows for the Nine 5
Months Ended September 30, 1998 and 1997 (Unaudited)
Notes to Condensed Consolidated Financial Statements (Unaudited) 6-10
Item 2. Management's Discussion and Analysis of Financial Condition and 11-20
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
PART II. OTHER INFORMATION
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 21-22
Signatures 23
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PROFESSIONALS GROUP, INC. AND SUBSIDIARIES
(Formerly Professionals Insurance Company Management Group)
Condensed Consolidated Balance Sheets
September 30, December 31,
Assets 1998 1997
----------------- ---------------
Investments: (Unaudited) (As Restated)
Fixed maturities available for sale, at fair value
(amortized cost: $653,352,000 and $589,200,000) $682,773,000 $603,423,000
Equity securities available for sale, at fair value
(cost: $5,343,000 and $27,254,000) 4,493,000 28,440,000
Short-term investments, at cost 16,851,000 46,337,000
Real estate, at cost, net of accumulated depreciation 426,000 442,000
----------------- ---------------
Total investments 704,543,000 678,642,000
Cash 3,079,000 2,636,000
Restricted cash 2,105,000 2,070,000
Premiums due from policyholders 33,663,000 37,360,000
Reinsurance balances 76,752,000 75,326,000
Accrued investment income 10,623,000 9,521,000
Deferred federal income taxes 15,647,000 21,448,000
Property and equipment, at cost, net of
accumulated depreciation 8,903,000 9,835,000
Deferred policy acquisition costs 1,481,000 1,376,000
Other assets 22,536,000 9,776,000
----------------- ---------------
Total assets $879,332,000 $847,990,000
================= ===============
Liabilities and Shareholders' Equity
Liabilities:
Loss and loss adjustment expense reserves $529,213,000 $489,207,000
Reserve for extended reporting period claims 26,058,000 25,628,000
Unearned premiums 59,010,000 56,047,000
Long-term debt 20,000,000 22,500,000
Surplus contributions 10,094,000 10,094,000
Accrued expenses and other liabilities 15,799,000 24,634,000
----------------- ---------------
Total liabilities 660,174,000 628,110,000
----------------- ---------------
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;
7,623,869 and 7,593,275 shares issued and
outstanding in 1998 and 1997, respectively 7,624,000 7,593,000
Additional paid-in capital 11,246,000 10,482,000
Retained earnings 181,432,000 191,635,000
Accumulated other comprehensive income,
net of deferred federal income taxes 18,856,000 10,170,000
----------------- ---------------
Total shareholders' equity 219,158,000 219,880,000
----------------- ---------------
Total liabilities and shareholders' equity $879,332,000 $847,990,000
================= ===============
See accompanying notes to the unaudited condensed consolidated financial
statements.
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PROFESSIONALS GROUP, INC. AND SUBSIDIARIES
(Formerly Professionals Insurance Company Management Group)
Condensed Consolidated Statements of Income
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------- ------------
Revenues and other income: (As Restated) (As Restated)
Net premiums written $43,997,000 $44,794,000 $114,021,000 $126,986,000
Increase in unearned premiums, net of
prepaid reinsurance premiums (3,522,000) (7,840,000) (475,000) (32,611,000)
------------ ------------ ------------- -------------
Premiums earned, net 40,475,000 36,954,000 113,546,000 94,375,000
Net investment income 9,765,000 10,031,000 29,172,000 29,799,000
Net realized investment gains 489,000 1,372,000 4,549,000 1,322,000
Reinsurance experience refund - 700,000 3,095,000 2,100,000
Other 1,143,000 470,000 2,628,000 1,207,000
------------ ------------ ------------- -------------
Total revenues and other income 51,872,000 49,527,000 152,990,000 128,803,000
------------ ------------ ------------- -------------
Expenses:
Losses and loss adjustment expenses, net 34,865,000 33,179,000 139,256,000 91,485,000
Increase in reserve for extended reporting
period claims 185,000 318,000 430,000 1,533,000
Policy acquisition and other underwriting expenses 11,735,000 7,551,000 29,337,000 14,015,000
Interest expense 322,000 361,000 1,016,000 730,000
------------ ------------ ------------- -------------
Total expenses 47,107,000 41,409,000 170,039,000 107,763,000
------------ ------------ ------------- -------------
Income (loss) from operations before federal income taxes 4,765,000 8,118,000 (17,049,000) 21,040,000
Federal income taxes 342,000 2,043,000 (6,913,000) 5,513,000
------------ ------------ ------------- -------------
Net income (loss) $4,423,000 $6,075,000 ($10,136,000) $15,527,000
============ ============ ============= =============
Net income (loss) per common share $0.58 $0.80 ($1.33) $2.04
============ ============ ============= =============
Net income (loss) per common share - assuming dilution $0.57 $0.80 ($1.33) $2.04
============ ============ ============= =============
Weighted average shares outstanding 7,623,869 7,593,275 7,603,585 7,593,275
============ ============ ============= =============
Weighted average shares outstanding - assuming dilution 7,748,999 7,596,121 7,649,381 7,594,768
============ ============ ============= =============
See accompanying notes to the unaudited condensed consolidated financial
statements.
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PROFESSIONALS GROUP, INC. AND SUBSIDIARIES
(Formerly Professionals Insurance Company Management Group)
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30,
-------------------------------------------
1998 1997
------------------ -----------------
(As Restated)
Net cash provided by operating activities $12,902,000 $5,461,000
------------------ -----------------
Cash flows from investing activities:
Proceeds from sale or maturity of short-term investments 439,968,000 313,435,000
Purchases of short-term investments (409,990,000) (354,151,000)
Proceeds from maturity of securities available for sale 4,584,000 14,302,000
Proceeds from sale of securities available for sale 171,396,000 176,041,000
Purchases of securities available for sale (215,202,000) (181,593,000)
Purchases of property and equipment (801,000) (791,000)
Payment on liability for purchased book of business (600,000) (747,000)
------------------ -----------------
Net cash used in investing activities (10,645,000) (33,504,000)
------------------ -----------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt - 22,500,000
Repayment of long-term debt (2,500,000) -
Cash paid in lieu of fractional shares (67,000) -
Book overdrafts 753,000 6,513,000
------------------ -----------------
Net cash provided by (used in) financing activities (1,814,000) 29,013,000
------------------ -----------------
Net increase in cash 443,000 970,000
Cash, beginning of period 2,636,000 2,097,000
------------------ -----------------
Cash, end of period $3,079,000 $3,067,000
================== =================
Supplemental disclosure of noncash financing activities:
Issuance of common shares as compensation $795,000 -
================== =================
See accompanying notes to the unaudited condensed consolidated financial
statements.
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PROFESSIONALS GROUP, INC. AND SUBSIDIARIES
(Formerly Professionals Insurance Company Management Group)
Notes to Condensed Consolidated Financial Statements (Unaudited)
(1) Basis of Presentation
Professionals Group, Inc. (formerly Professionals Insurance Company
Management Group) ("Professionals Group," and with its direct and
indirect subsidiaries, the "Company") is a business corporation that
was incorporated under the laws of the State of Michigan on January 31,
1996 and functions as an insurance holding company. Professionals Group
has four direct wholly-owned subsidiaries, three indirect wholly-owned
subsidiaries and one direct eighty percent owned subsidiary. The direct
wholly-owned subsidiaries are ProNational Insurance Company
("ProNational"), PICOM Insurance Agency, Inc. ("PIA"),
Professionals Group Services Corporation ("PGSC") and American
Insurance Management Corporation ("AIMC"). The indirect wholly-owned
entities, all of which are wholly-owned subsidiaries of ProNational,
are PICOM Claims Services Corporation ("PCSC"), ProNational Casualty
Company ("ProNational Casualty") and Physicians Protective Plan, Inc.
("PPP"). The direct eighty percent owned subsidiary is Med Advantage,
Inc. ("Med Advantage").
ProNational is a stock, property and casualty insurer that offers
professional liability insurance to providers of health care services
in Florida, Michigan, Illinois, Indiana, Ohio and Pennsylvania. PIA is
an inactive Michigan insurance agency. PGSC is a Michigan business
corporation that administers certain benefit plans for ProNational
employees. AIMC is an Indiana corporation that serves as the
attorney-in-fact for American Medical Insurance Exchange, an inactive
Indiana interinsurance reciprocal exchange. PCSC provides claims
management services on a fee for service basis. ProNational Casualty is
a stock, property and casualty insurer that is currently not issuing
policies. PPP is a Florida insurance agency. Med Advantage provides
credentialing verification services for medical service providers.
As more fully described in Note 5 to the accompanying financial
statements, on July 1, 1998, Professionals Group consummated its merger
with Physicians Protective Trust Fund, a medical malpractice
self-insurance trust fund located in Coral Gables, Florida ("PPTF").
This transaction has been accounted for as a "pooling of interests"
business combination under generally accepted accounting principles,
whereby Professionals Group has carried forward to its accounts the
assets and liabilities of PPTF at their respective amounts as reported
by PPTF. As a result of such business combination, all prior period
financial information has been restated to reflect the combined
operations of Professionals Group and PPTF.
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PROFESSIONALS GROUP, INC. AND SUBSIDIARIES
(Formerly Professionals Insurance Company Management Group)
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
(1) Basis of Presentation, continued
The accompanying unaudited condensed consolidated financial statements
of the Company have been prepared in conformity with generally accepted
accounting principles and with the instructions for Form 10-Q and Rule
10-01 of Regulation S-X as they apply to interim financial information.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. All significant intercompany transactions have
been eliminated in consolidation.
In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation of
financial position and results of operations have been included. The
operating results for the three month and nine month periods ended
September 30, 1998 are not necessarily indicative of the results to be
expected for the year ending December 31, 1998.
(2) Net Income Per Share
Net income per share is computed by dividing net income by the weighted
average number of shares of common stock and common stock equivalents
(stock options and stock awards) outstanding during each period after
giving effect to stock dividends and treasury shares, calculated on a
daily basis.
(3) Comprehensive Income
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive Income."
This standard establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of SFAS
No. 130 had no impact on the Company's results of operations or
shareholders' equity. SFAS No. 130 requires unrealized gains or losses
on the Company's available-for-sale securities, which prior to adoption
were reported separately in shareholders' equity, to be included in
other comprehensive income. Prior period financial statements have been
reclassified to conform to the requirements of SFAS No. 130.
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PROFESSIONALS GROUP, INC. AND SUBSIDIARIES
(Formerly Professionals Insurance Company Management Group)
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
(3) Comprehensive Income, continued
The components of comprehensive income, net of tax, for the three month
and nine month periods ended September 30, 1998 and 1997 are as
follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ------------------
1998 1997 1998 1997
(In thousands)
Net income (loss) $ 4,423 6,075 (10,136) 15,527
Unrealized holding gains, net of tax 7,745 5,601 8,686 5,122
------- ----- -------- ------
Comprehensive income $12,168 11,676 (1,450) 20,649
======= ====== ======== ======
Accumulated other comprehensive income, net of tax, included in
shareholders' equity at September 30, 1998 and December 31, 1997
consists exclusively of unrealized holding gains, net of tax.
(4) New Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") has issued SFAS No.
131 "Disclosures About Segments of an Enterprise and Related
Information," which is effective for fiscal years beginning after
December 15, 1997. This standard requires that an enterprise report
financial and descriptive information about its reportable operating
segments. Operating segments are components of an enterprise about
which separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Generally, financial
information is required to be reported on the basis that it is used
internally for evaluating segment performance and deciding how to
allocate resources to segments. The Company is not required to report
pursuant to SFAS No. 131 until December 31, 1998 and has not determined
what effects the adoption of SFAS No. 131 will have on its consolidated
footnote disclosures.
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PROFESSIONALS GROUP, INC. AND SUBSIDIARIES
(Formerly Professionals Insurance Company Management Group)
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
(5) Business Combination
On July 1, 1998, Professionals Group consummated its merger with
Physicians Protective Trust Fund, a medical malpractice self-insurance
trust fund located in Coral Gables, Florida ("PPTF"). Pursuant to the
merger agreement, Professionals Group issued 4,087,525 shares of
Professionals Group common stock to the eligible members of PPTF and
paid cash of approximately $67,000 in lieu of fractional shares.
Additionally, 30,594 shares (representing 20% of the 153,000 total
shares to be issued over a period of five years) of Professionals Group
common stock were issued to directors and management of PPTF, as
contemplated by the merger agreement. The transaction has been
accounted for as a "pooling of interests" business combination under
generally accepted accounting principles, whereby Professionals Group
has carried forward to its accounts the assets and liabilities of PPTF
at their respective amounts as reported by PPTF. As a result of such
business combination, all prior period financial information has been
restated to reflect the combined operations of Professionals Group and
PPTF.
Effective June 30, 1998, PPTF took a pretax charge of $27.6
million ($18.2 million after tax) related to loss reserves at June 30,
1998 as follows: $25.6 million increase in loss reserves to reflect
actuarial estimates and the application of Professionals Group's more
conservative reserving practices to PPTF's reserves; and $2.0 million
related to an adverse development stop loss reinsurance agreement. This
reinsurance agreement will provide an additional $14.5 million of
reinsurance cover in excess of the increased PPTF reserves to protect
against future adverse development. Such loss reserve charge has been
reflected in the nine month 1998 financial results of the Company
herein as a result of the "pooling of interests" accounting treatment
of the merger with PPTF.
Additionally, as a result of the consummation of the merger with PPTF,
the Company incurred a one-time third quarter $2.3 million pretax
charge ($1.5 million after tax) related to expenses associated with the
closing of the merger. Such merger expense charge has been reflected in
the three month and nine month 1998 financial results of the Company
herein.
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PROFESSIONALS GROUP, INC. AND SUBSIDIARIES
(Formerly Professionals Insurance Company Management Group)
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
(6) Subsequent Event
On November 2, 1998, Michigan Educational Employees Mutual Insurance
Company ("MEEMIC"), through the newly formed MEEMIC Holdings, Inc.,
filed a registration statement on Form S-1 with the Securities and
Exchange Commission for the purpose of registering shares of its common
stock to be issued in connection with the proposed demutualization of
MEEMIC. Subject to the approval of the policyholders of MEEMIC, MEEMIC
would convert to a stock insurance company and a wholly owned
subsidiary of MEEMIC Holdings, Inc., using a subscription rights method
of demutualization. MEEMIC's plan of demutualization contemplates the
conversion of the $21.5 million Surplus Note of MEEMIC owned by
Professionals Group into shares of MEEMIC Holdings, Inc. and the
purchase by Professionals Group, as the standby purchaser, of any
unexercised subscription rights. After the completion of MEEMIC's plan
of demutualization, Professionals Group expects to own at least 51% of
the stock of MEEMIC Holdings, Inc. The registration statement of MEEMIC
Holdings, Inc. (registration statement no. 333-66671) should be
consulted for a description of the proposed demutualization of MEEMIC
and the expected role of Professionals Group.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis should be read in conjunction
with the condensed consolidated financial statements and the notes thereto
included elsewhere in this report and the Company's Annual Report on Form 10-K
for the year ended December 31, 1997. The following discussion of the financial
condition and results of operations of the Company contains certain
forward-looking statements relating to anticipated future financial conditions
and operating results of the Company and its current business plans. In the
future, the financial condition and operating results of the Company could
differ materially from those discussed herein and its current business plans
could be altered in response to market conditions and other factors beyond the
Company's control. Important factors that could cause or contribute to such
differences or changes include those discussed in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997. (e.g., see the disclosures under
"Item 1. Business - Forward Looking Statements" and under "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations.")
Financial Condition -- September 30, 1998 Compared to December 31, 1997:
On July 1, 1998, Professionals Group consummated its merger with
Physicians Protective Trust Fund, a medical malpractice self-insurance trust
fund located in Coral Gables, Florida ("PPTF"). The transaction has been
accounted for as a "pooling of interests" business combination under generally
accepted accounting principles, whereby Professionals Group has carried forward
to its accounts the assets and liabilities of PPTF at their respective amounts
as reported by PPTF. As a result of such "pooling of interests" business
combination, all prior period financial information has been restated to reflect
the combined operations of Professionals Group and PPTF.
Total assets increased 3.7% to $879.3 million at September 30, 1998,
compared to $848.0 million at December 31, 1997, primarily due to increases in
invested assets and refundable income taxes (included in other assets in the
accompanying condensed consolidated balance sheets), and was offset by a
decrease in deferred federal income taxes. Invested assets increased 3.8% to
$704.5 million, or approximately 80% of the Company's total assets at September
30, 1998. This compares to invested assets of $678.6 million, or approximately
80% of the Company's total assets at December 31, 1997. The increase in invested
assets was primarily due to an increase in unrealized appreciation on the fixed
income portfolio because of a decline in interest rates and positive cash flows
from overall operations. The increase in refundable income taxes was due to the
net loss generated by the Company during the nine months ended September 30,
1998, primarily as a result of the PPTF loss reserve charge (see "Results of
Operations -- Nine Months Ended September 30, 1998 Compared to Nine Months Ended
September 30, 1997.") The decrease in deferred federal income taxes was due
primarily to the increase in net unrealized gains on investments.
The Company's investment portfolio continues to be dominated by fixed
maturity securities at September 30, 1998, 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.
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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 September 30, 1998, the fixed maturity portfolio had a fair value
that was $29.4 million more than the $653.4 million amortized cost of such
portfolio. At December 31, 1997, the fixed maturity portfolio had a fair value
that was $14.2 million higher than the $589.2 million amortized cost of such
portfolio. The increase in such fixed maturity unrealized gains was caused by a
decline in interest rates during 1998. Equity securities decreased to $4.5
million at September 30, 1998, from $28.4 million at December 31, 1997. This
decrease was attributable to the conversion of PPTF's equity securities
portfolio to fixed maturity securities during 1998 to match Professionals
Group's investment philosophy of investing mainly in fixed maturity securities.
Loss and loss adjustment expense reserves represented approximately 80%
and 78% of the Company's consolidated liabilities at September 30, 1998 and
December 31, 1997, respectively. These reserves are determined on the basis of
individual claims and actuarially determined estimates of future losses based on
the Company's past loss experience and projections as to future claims
frequency, severity, inflationary trends and settlement patterns. Estimating
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. It has been the practice of the
Company to establish its loss and loss adjustment expense reserves
conservatively, as it relates to immaturely developed accident years, to
minimize potential uncertainties. The Company's carried reserves have been
established within the range of acceptable values periodically estimated by the
Company's consulting actuary and are recorded based on such actuarial estimates.
The assumptions used in establishing the Company's reserves are regularly
reviewed by management and revised as new data becomes available. Any
adjustments necessary are generally reflected in current operations.
Loss and loss adjustment expense reserves increased 8.2% to $529.2
million at September 30, 1998, from $489.2 million at December 31, 1997. This
increase was primarily attributable to the pretax $25.6 million increase in
PPTF's reserves to reflect actuarial estimates and the application of
Professionals Group's more conservative reserving practices to PPTF's reserves.
PPTF's reserves were also increased by $9.5 million due to an excess limits
verdict on one Florida claim. This case arose from a suit filed against a PPTF
insured in 1994 when PPTF did not have coverage for excess policy limits
verdicts. Although this case is on appeal to the Florida Supreme Court, the full
amount of the excess limits verdict and related costs were posted to reserves
after the Florida Court of Appeals ruled in favor of the plaintiff. Reinsurance
contracts entered into by PPTF after 1995 include certain coverage for losses in
excess of policy limits and the PPTF book of business has been added to
Professionals Group's errors and omissions insurance coverage covering excess
limits exposure. Additionally, there has been a $7.8 million increase in the
reserves assumed from Michigan Educational Employees Mutual Insurance Company
("MEEMIC") to $13.6 million at September 30, 1998, from $5.8 million at December
31, 1997 as the business assumed from MEEMIC continues to increase. These
increases in reserves have been offset somewhat by favorable development of
prior years' reserves related to the Company's professional liability book of
business in the Midwest.
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Shareholders' equity decreased less than 1% to $219.2 million at
September 30, 1998, as compared to $219.9 million at December 31, 1997. The
decrease in shareholders' equity was due to a net loss of $10.1 million,
primarily as a result of a loss reserve charge and a one-time merger
expense charge (see "Results of Operations -- Nine Months Ended September 30,
1998 Compared to Nine Months Ended September 30, 1997.") Such decrease was
offset by accumulated other comprehensive income, consisting of unrealized
holding gains on the investment portfolio of $8.7 million and other increases in
shareholders' equity of $0.7 million during the nine month period ended
September 30, 1998. The Company expects to use retained earnings to increase its
capital base and finance future growth and, therefore, there can be no assurance
as to any future cash dividends by the Company.
Results of Operations -- Three Months Ended September 30, 1998 Compared to Three
Months Ended September 30, 1997:
Total net premiums earned were $40.5 million for the three months ended
September 30, 1998, an increase of 9.5%, compared to net premiums earned of
$37.0 million for the three months ended September 30, 1997. Professional
liability related net premiums earned were $29.7 million for the three months
ended September 30, 1998, an increase of 10.4%, compared to net premiums earned
of $26.9 million for the three months ended September 30, 1997. The increase in
professional liability net premiums earned was primarily due to increased
business in Illinois and Ohio, expansion of business in Pennsylvania and an
increase in the Company's net retention from $250,000 to $500,000, effective
January 1, 1998. The increase in professional liability net premiums earned was
offset somewhat by lower premiums earned in Michigan and Florida resulting from
price-based competition. The earned reinsurance premiums assumed from MEEMIC
were $10.7 million for the three months ended September 30, 1998, an increase of
$0.7 million compared to net premiums earned of $10.0 million for the three
months ended September 30, 1997.
During the three months ended September 30, 1998 and 1997, the Company
continued to balance its need for rate adjustments with a goal of maintaining
market share in very competitive environments in Florida, Michigan, Illinois,
Indiana, Ohio and Pennsylvania. Although the Company 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 net realized investment gains, was
$9.8 million for the three months ended September 30, 1998, a decrease of 2.7%
over net investment income of $10.0 million for the three months ended September
30, 1997. The decrease in net investment income mainly resulted from a reduction
in current yield because of declining interest rates (e.g., as investments
mature, the cash generated is reinvested in lower yielding securities because of
the declining interest rate environment) and because the Florida operations
continued to pay claims
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originally reserved for in 1994 and 1995 when PPTF's net retention was $1.0
million per claim. As a result, the corresponding reduction in loss reserves
combined with lower premium writings in Florida has resulted in a smaller
investment portfolio. The weighted average tax equivalent book yield of the
fixed maturity portfolio was 7.0% and 7.0% as of September 30, 1998 and 1997,
respectively. Net realized investment gains were $0.5 million and $1.4 million
during the three month periods ended September 30, 1998 and 1997, respectively.
Professional liability insurance incurred losses and loss adjustment
expenses (including the increase in reserve for extended reporting period
claims) totaled $27.4 million for the three months ended September 30, 1998, an
increase of 1.4%, compared to $27.0 million for the three months ended September
30, 1997. As a percentage of premiums earned, the professional liability
insurance incurred loss and loss adjustment expense ratio (including the
increase in reserve for extended reporting period claims) decreased to 92.0% for
the three months ended September 30, 1998, compared to 100.2% for the same
period of 1997. The professional liability insurance incurred loss and loss
adjustment expense ratio has decreased due mainly to favorable development of
prior years' loss reserves related to the Company's book of business in the
Midwest.
Incurred losses and loss adjustment expenses related to the personal
automobile and homeowners insurance assumed from MEEMIC (the "personal liability
insurance") totaled $7.7 million for the three months ended September 30, 1998,
an increase of 18.0%, compared to $6.5 million for the three months ended
September 30, 1997. As a percentage of premiums earned, such personal liability
insurance generated an incurred loss and loss adjustment expense ratio of 71.5%
for the three months ended September 30, 1998, compared to 65.1% for the same
period of 1997. The increase in the personal liability insurance incurred loss
and loss adjustment expense ratio was caused by summer storms which occurred in
Michigan during the third quarter of 1998.
Policy acquisition and underwriting expenses were $11.7 million for the
three months ended September 30, 1998, an increase of 55.4% over policy
acquisition and underwriting expenses of $7.6 million for the same period of
1997. As a percentage of premiums earned, the underwriting expense ratio
increased to 29.0% for the three months ended September 30, 1998, from 20.4% for
the same period of 1997. Such expenses for the three months ended September 30,
1998 included a one-time pretax charge of $2.3 million ($1.5 million after tax)
related to expenses associated with the closing of the merger with PPTF. The
remaining increase in underwriting expenses was primarily attributable to $0.8
million of additional compensation expense recognized on stock grants issued to
directors and management of PPTF, as contemplated by the merger agreement.
Interest expense was $322,000 for the three months ended September 30, 1998
compared to $361,000 during the same period in 1997 (See "Liquidity and Capital
Resources").
The Company recorded $342,000 in federal income tax expense for the
three months ended September 30, 1998, compared to $2.0 million during the same
period in 1997. The effective tax rate was 7.2% for the three months ended
September 30, 1998, compared to 25.2% for the three months ended September 30,
1997. The Company's lower effective tax rate for the three months ended
September 30, 1998 was due primarily to increased holdings in tax-exempt
municipal bonds compared to the same period in 1997 and accrual adjustments
attributable to prior periods.
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Net income for the three months ended September 30, 1998 was $4.4
million, or $0.57 per share (assuming dilution) on revenues of $51.9 million.
This compares to net income of $6.1 million, or $0.80 per share (assuming
dilution) on revenues of $49.5 million, for the three months ended September 30,
1997. The decrease in earnings was primarily attributable to the one-time merger
expense charge and was offset by the reduction in income taxes, as described
previously.
Results of Operations -- Nine Months Ended September 30, 1998 Compared to Nine
Months Ended September 30, 1997:
As previously mentioned, on July 1, 1998, Professionals Group
consummated its merger with PPTF. Effective June 30, 1998, PPTF took a
pretax charge of $27.6 million ($18.2 million after tax) related to loss
reserves at June 30, 1998 as follows: $25.6 million increase in loss reserves to
reflect actuarial estimates and the application of Professionals Group's more
conservative reserving practices to PPTF's reserves; and $2.0 million related to
an adverse development stop loss reinsurance agreement. This reinsurance
agreement will provide an additional $14.5 million of reinsurance cover in
excess of the increased PPTF reserves to protect against future adverse
development. Such loss reserve charge has been reflected in the nine month 1998
financial results of the Company herein because of the "pooling of interests"
accounting treatment of the merger.
Additionally, as a result of the consummation of the merger with PPTF,
the Company incurred a one-time pretax charge of $2.3 million ($1.5 million
after tax) related to expenses associated with the closing of the merger. Such
merger expense charge has been reflected in the three month and nine month 1998
financial results of the Company herein.
Total net premiums earned were $113.5 million for the nine months ended
September 30, 1998, an increase of 20.3%, compared to net premiums earned of
$94.4 million for the nine months ended September 30, 1997. Professional
liability related net premiums earned were $81.9 million for the nine months
ended September 30, 1998, a decrease of 2.9%, compared to net premiums earned of
$84.4 million for the nine months ended September 30, 1997. The decrease in
professional liability net premiums earned was primarily attributable to $2.0
million of additional ceded premium related to the adverse development stop loss
reinsurance agreement mentioned previously. Additionally, the decrease in
professional liability net premiums earned was due to lower premiums earned in
Michigan and Florida resulting from price-based competition, which was offset
somewhat by increased business in Illinois and Ohio, expansion of business into
Pennsylvania and an increase in the Company's net retention from $250,000 to
$500,000, effective January 1, 1998. The earned reinsurance premiums assumed
from MEEMIC were $31.6 million for the nine months ended September 30, 1998, an
increase of $21.6 million compared to net premiums earned of $10.0 million for
the nine months ended September 30, 1997 (the MEEMIC reinsurance agreement was
not in force during the first six months of 1997).
During the nine months ended September 30, 1998 and 1997, the Company
continued to balance its need for rate adjustments with a goal of maintaining
market share in very competitive environments in Florida, Michigan, Illinois,
Indiana, Ohio and Pennsylvania. Although the
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Company 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 net realized investment gains, was
$29.2 million for the nine months ended September 30, 1998, a decrease of 2.1%
over net investment income of $29.8 million for the nine months ended September
30, 1997. The decrease in net investment income mainly resulted from a reduction
in current yield because of declining interest rates (e.g., as investments
mature, the cash generated is reinvested in lower yielding securities because of
the declining interest rate environment) and because the Florida operations
continued to pay claims originally reserved for in 1994 and 1995 when PPTF's net
retention was $1.0 million per claim. As a result, the corresponding reduction
in loss reserves combined with lower premium writings in Florida has resulted in
a smaller investment portfolio. The weighted average tax equivalent book yield
of the fixed maturity portfolio was 7.0% and 7.0% as of September 30, 1998 and
1997, respectively. Net realized investment gains were $4.5 million and $1.3
million during the nine month periods ended September 30, 1998 and 1997,
respectively.
Professional liability insurance incurred losses and loss adjustment
expenses (including the increase in reserve for extended reporting period
claims) totaled $117.4 million for the nine months ended September 30, 1998, an
increase of 35.8%, compared to $86.5 million for the nine months ended September
30, 1997. As a percentage of premiums earned, the professional liability
insurance incurred loss and loss adjustment expense ratio (including the
increase in reserve for extended reporting period claims) increased to 143.4%
for the nine months ended September 30, 1998, as compared to 102.5% for the same
period of 1997. The increase was due mainly to the pretax $25.6 million
increase in loss reserves to reflect actuarial estimates and the application of
Professionals Group's more conservative reserving practices to PPTF's reserves,
as mentioned previously. In addition, incurred losses and loss adjustment
expenses for the nine months ended September 30, 1998 included an additional
$9.5 million due to an excess limits verdict on one Florida claim (as mentioned
previously), and was offset by favorable development of prior years' loss
reserves related to the Company's book of business in the Midwest.
Incurred losses and loss adjustment expenses related to the personal
automobile and homeowners insurance assumed from MEEMIC (the "personal liability
insurance") totaled $22.3 million for the nine months ended September 30, 1998,
an increase of 241.4%, compared to $6.5 million for the nine months ended
September 30, 1997 (the MEEMIC reinsurance agreement was not in force during the
first six months of 1997). As a percentage of premiums earned, such personal
liability insurance generated an incurred loss and loss adjustment expense ratio
of 70.4% for the nine months ended September 30, 1998, compared to 65.1% for the
same period of 1997. The increase in the personal liability insurance incurred
loss and loss adjustment expense ratio was caused by summer storms which
occurred in Michigan during the second and third quarters of 1998.
Policy acquisition and underwriting expenses were $29.3 million for the
nine months ended September 30, 1998, an increase of 109.3% over policy
acquisition and underwriting expenses of $14.0 million for the same period of
1997. As a percentage of premiums earned, the underwriting expense ratio
increased to 25.8% for the nine months ended September 30, 1998, from 14.9% for
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the same period of 1997. Such expenses for the nine months ended September 30,
1998 included a one-time third quarter pretax charge of $2.3 million ($1.5
million after tax) related to expenses associated with the closing of the merger
with PPTF and an additional $1.0 million of merger-related expenses incurred
prior to the third quarter of 1998. Underwriting expenses also increased due to
$9.8 million of ceding commission attributable to the MEEMIC reinsurance
agreement compared to $3.0 million for the same period of 1997 (the MEEMIC
reinsurance agreement was not in force during the first six months of 1997).
Underwriting expenses during the nine months ended September 30, 1998 also
included $0.8 million of compensation expense recognized on stock grants issued
to directors and management of PPTF, as contemplated by the merger agreement.
Interest expense related to the Company's bank borrowings of $22.5 million
obtained in April 1997 was $1.0 million for the nine months ended September 30,
1998 compared to $730,000 during the same period in 1997 (See "Liquidity and
Capital Resources").
Primarily as a result of the loss reserve charge and the
one-time merger expense charge, the Company posted a net loss for the nine
months ended September 30, 1998 of $10.1 million, or $1.33 per share (assuming
dilution) on revenues of $153.0 million. This compares to net income of $15.5
million, or $2.04 per share (assuming dilution) on revenues of $128.8 million,
for the nine months ended September 30, 1997.
The Company recorded $6.9 million of federal income tax benefit for the
nine months ended September 30, 1998 due to the pretax loss from operations
(primarily arising from the PPTF loss reserve charge mentioned previously),
compared to $5.5 million of federal income tax expense during the same period in
1997. The effective tax benefit rate for the nine months ended September 30,
1998 was impacted by increased holdings in tax-exempt municipal bonds compared
to the same period in 1997 and accrual adjustments attributable to prior
periods.
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 nine month
periods ended September 30, 1998 or 1997, other than as described in the
following paragraph. As of September 30, 1998,
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no material commitments for capital expenditures existed, and management
believes the Company's present liquidity, together with its expected cash flow
from operations, will be sufficient to fund any future potential commitments for
capital expenditures.
On April 4, 1997, Professionals Group borrowed $22.5 million under a
seven-year unsecured bank term loan, bearing interest at an adjustable rate of
LIBOR plus 62.5 basis points (6.375% at September 30, 1998), 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
principal payment due on April 30, 1998 was paid timely.
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, or had
received waivers of, all required covenants at September 30, 1998.
On July 1, 1998, Professionals Group consummated its merger with
Physicians Protective Trust Fund, a medical malpractice self-insurance trust
fund located in Coral Gables, Florida ("PPTF"). Pursuant to the merger
agreement, Professionals Group issued 4,087,525 shares of Professionals Group
common stock to the eligible members of PPTF and paid cash of approximately
$67,000 in lieu of fractional shares. Additionally, 30,594 shares (representing
20% of the 153,000 total shares to be issued over a period of five years) of
Professionals Group common stock were issued to directors and management of
PPTF, as contemplated by the merger agreement. The transaction has been
accounted for as a "pooling of interests" business combination under generally
accepted accounting principles, whereby Professionals Group has carried forward
to its accounts the assets and liabilities of PPTF at their respective amounts
as reported by PPTF. As a result of such business combination, all prior period
financial information has been restated to reflect the combined operations of
Professionals Group and PPTF.
Effects of New Accounting Pronouncements:
The FASB has issued SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related Information," which is effective for fiscal years
beginning after December 15, 1997. This standard requires that an enterprise
report financial and descriptive information about its reportable operating
segments. Operating segments are components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. Generally, financial information is required to be
reported on the basis that it is used internally for evaluating segment
performance and deciding how to allocate resources to segments. The Company is
not required to report pursuant
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to SFAS No. 131 until December 31, 1998 and has not determined what effects the
adoption of SFAS No. 131 will have on its consolidated footnote disclosures.
Year 2000 Compliance:
The Company utilizes computerized information systems across its entire
operation. The inability of any of the Company's systems to recognize a date
using "00" as the year 2000 could result in information system errors or
failures. Accordingly, the Company has been working to resolve the potential
impact of the year 2000 on the ability of those systems to accurately process
information that may be date-sensitive. Subject to the discussion that follows,
and based on the information thus far available to the Company, the Company
currently believes that the costs expected to be incurred by it in connection
with its efforts to become Year 2000-compliant will not have a material adverse
impact on the Company's operating results or financial position.
The Company has developed and followed a plan to ensure all
modifications and conversions to its primary computerized information systems
are implemented and thoroughly tested on a timely basis. The company estimates
that 90% of such modifications and conversions have been made to date.
Management anticipates that the remaining modifications and conversions will be
completed by June 30, 1999 and that the Company's primary computerized
information systems will be Year 2000-compliant by that date.
Although the Company has established a contingency plan for critical
computerized information systems to mitigate potential delays or other problems
associated with such modifications or conversions deemed necessary by
management, the Company continues to bear some risk related to the Year 2000
issue due to its voluntary interaction with other persons and entities not
affiliated with the Company (e.g., vendors and customers) who must address their
own Year 2000 issues. For this reason, the Company has been monitoring the Year
2000 issues of certain third parties with which it interacts. The Company has
asked such third parties to demonstrate, or give some indication as to, their
ability to become Year 2000-compliant by June 30, 1999. With respect to any
third party who appears unlikely to remedy its Year 2000 issues, the Company
intends to take appropriate steps to mitigate the exposure to the risk posed by
such third party's failure to timely address its Year 2000 issues. However, due
to the uncertainty inherent in both the Year 2000 problem and the efforts of
third parties to timely resolve their own Year 2000 issues, there can be no
assurances that the Company's mitigation efforts will be successful or that the
failure of any third party to timely resolve its Year 2000 issues will not have
a material adverse impact on the Company's operations, operating results or
financial position.
Both internal and external resources will be utilized in the Company's
efforts to become Year 2000-compliant. During 1997, $150,000 of costs were
incurred by the Company in connection with its efforts to become Year
2000-compliant. During the nine months ended September 30, 1998, $150,000 of
costs were incurred by the Company in connection with its efforts to become Year
2000-compliant. Approximately $50,000 of such costs were incurred during the
third quarter of 1998. The total costs of the Company's efforts to become Year
2000-compliant are not expected to exceed $500,000. All of such costs have been,
and will continue to be, expensed as incurred.
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The costs expected to be incurred in connection with the Company's
efforts to become Year 2000-compliant, as well as the date by which the Company
is expected to be Year 2000-compliant, are based on management's best estimates.
Because such estimates were derived utilizing numerous assumptions of future
events (including the availability of certain resources, third party
modifications and other factors), there can be no assurance that these estimates
will be achieved and actual results could differ materially from those plans.
Specific factors that might cause material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes and similar
uncertainties.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
By virtue of General Instruction 1 to Item 305 of Regulation S-K, and
because it is neither a bank or thrift and its market capitalization on January
28, 1997 did not exceed $2.5 billion, the Company is not required at this time
to provide disclosures under this Item 3.
PART II. OTHER INFORMATION
Item 5. Other Information
On November 2, 1998, Michigan Educational Employees Mutual Insurance
Company, through the newly formed MEEMIC Holdings, Inc., filed a registration
statement on Form S-1 with the Securities and Exchange Commission for the
purpose of registering shares of its common stock to be issued in
connection with the proposed demutualization of MEEMIC. Subject to the approval
of the policyholders of MEEMIC, MEEMIC would convert to a stock insurance
company and a wholly owned subsidiary of MEEMIC Holdings, Inc., using a
subscription rights method of demutualization. MEEMIC's plan of demutualization
contemplates the conversion of the $21.5 million Surplus Note of MEEMIC owned by
Professionals Group into shares of MEEMIC Holdings, Inc. and the purchase by
Professionals Group, as the standby purchaser, of any unexercised subscription
rights. After the completion of MEEMIC's plan of demutualization, Professionals
Group expects to own at least 51% of the stock of MEEMIC Holdings, Inc. The
registration statement of MEEMIC Holdings, Inc. (registration statement no.
333-66671) should be consulted for a description of the proposed demutualization
of MEEMIC and the expected role of Professionals Group.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Item 601
Regulation S-K
Exhibit Reference
Number Exhibit Description
----------------- -------------------
(3)(a) Second Amended and Restated Articles of Incorporation of Professionals Group,
Inc. (incorporated by reference to Exhibit 3.1 of the registrant's Current
Report on Form 8-K dated July 1, 1998 (File No. 0-21223)).
(3)(b) By-laws of Professionals Group, Inc. (incorporated by reference to Exhibit
(3)(b)/(4)(b) of the initial filing of the registrant's Registration Statement
on Form S-4 as filed with the Securities and Exchange Commission on April 3,
1996 (registration no. 333-3138)).
(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.*
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* Filed herewith.
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K dated November
2, 1998 disclosing, among other things and under Item 5 (Other
Events), the proposed demutualization of Michigan Educational
Employees Mutual Insurance Company ("MEEMIC") and the
registering of certain shares of common stock of MEEMIC
Holdings, Inc., to be issued in connection with the proposed
demutualization of MEEMIC and the expected role of
Professionals Group, Inc. in such proposed demutualization.
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The Company filed a Current Report on Form 8-K dated July 1,
1998 disclosing (i) under Item 2 (Acquisition or Disposition
of Assets) of Form 8-K the Company's merger with Physicians
Protective Trust Fund, a medical malpractice self-insurance
trust fund, located in Coral Gables, Florida, and (ii) under
Item 5 (Other Events) the submission of various matters to
votes of the stockholders of the Company at its 1998 Annual
Meeting of Stockholders and the results of such votes.
No other reports were filed during the three months ended
September 30, 1998.
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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 GROUP, INC.
DATE: November 13, 1998 /s/ John F. Lang
---------------------------------------------
John F. Lang
Vice President, Treasurer and
Chief Accounting Officer (Principal Financial
Officer and Principal Accounting Officer)
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Index to Exhibits
EX-27 FINANCIAL DATA SCHEDULE