<PAGE>   1

                                 UNITED STATES
                        SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-K


(Mark One)

/X/    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
       SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1996

                                       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
            Okemos, Michigan                           48805-9510
(Address of principal executive offices)               (Zip Code)

Registrant's telephone number, including area code:  (517) 349-6500

Securities registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act:  Common Stock, no
par value per share

Indicate by check mark whether the registrant (1) has filed all reports
required to be 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  / /

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.   /X/

The number of the registrant's shares of common stock, no par value per share,
outstanding as of March 18, 1997 was 3,505,750.

The aggregate market value of voting shares (based on the closing price of
those shares listed on the Nasdaq National Market tier of the Nasdaq Stock
Market) held by non-affiliates of the registrant as of March 18, 1997 was
$81,358,326.

                      DOCUMENTS INCORPORATED BY REFERENCE


Portions of the registrant's Notice of 1997 Annual Meeting of Shareholders and
Proxy Statement dated April 16, 1997 are incorporated by reference in Part III
hereof.


<PAGE>   2

                             TABLE OF CONTENTS


<TABLE>
<CAPTION>
                                                Page No.
<S>                                             <C>
                            PART I
Item 1.  Business...............................  2
          General...............................  2
          Products and Services.................  2
          Marketing.............................  3
          Underwriting..........................  4
          Claims Management.....................  5
          Reserves and Losses...................  6
          Investments...........................  9
          Reinsurance........................... 11
          Competition........................... 13
          Regulation............................ 13
          Subsidiaries.......................... 14
          Employees............................. 15
          Forward-Looking Statements............ 15
          Glossary of Selected Insurance Terms.. 19
Item 2.  Properties............................. 20
Item 3.  Legal Proceedings...................... 21
Item 4.  Submission of Matters to a Vote of
         Security Holders....................... 21
          Executive Officers of Registrant...... 21
 
                          PART II
Item 5.  Market for Registrant's Common Equity
         and Related Stockholder Matters........ 22
Item 6.  Selected Financial Data................ 24
Item 7.  Management's Discussion and Analysis
         of Financial Condition and Results
         of Operations.......................... 26
          Financial Condition................... 26
          Results of Operations................. 28
          Liquidity and Capital Resources....... 34
          Impact of Inflation and
          Changing Prices....................... 37
          Reinsurance........................... 37
          Regulation............................ 39
          Effects of New Accounting
          Pronouncements........................ 40
Item 8.  Financial Statements and
         Supplementary Data..................... 41
Item 9.  Changes in and Disagreements with
         Accountants on Accounting and
         Financial Disclosure................... 73

                              PART III
Item 10. Directors and Executive Officers......  73
Item 11. Executive Compensation................  73
Item 12. Security Ownership of Certain
         Beneficial Owners and Management......  73
Item 13. Certain Relationships and Related
         Transactions..........................  73

                               PART IV
Item 14. Exhibits, Financial Statement
         Schedules, and Reports on Form 8-K....  74
Signatures.....................................  78
</TABLE>

<PAGE>   3

                                    PART I.

Item 1. Business

General:

     Professionals Insurance Company Management Group ("Professionals Group,"
and together with its direct and indirect subsidiaries, the "Company") is a
Michigan business corporation that functions as an insurance holding company.
The Company had consolidated assets of approximately $357.4 million at December
31, 1996.  The Company's principal executive offices are located at 4295 Okemos
Road, Box 2510, Okemos, Michigan 48805-9510, and its telephone number is (517)
349-6500.

Products and Services:

     The principal product currently offered by the Company is professional
liability insurance for providers of health care services in Michigan,
Illinois, Indiana and Ohio.  Professional liability insurance provides
insurance against the legal liability of an insured (and against loss, damage
or expense incidental to a claim of such liability) arising out of bodily
injury, sickness, disease or death sustained by a patient arising from an act
or omission occurring in the furnishing of health care services to a patient.
The Company currently offers its professional liability insurance products in
Michigan, Illinois, Indiana and Ohio to physicians, hospitals, clinics, other
health care institutions, managed care organizations, and dentists.  (The
Company has recently obtained licenses to provide such insurance products in
Iowa and Pennsylvania.)  Substantially all of the Company's premiums in each of
the last three years have been derived from the issuance of professional
liability insurance policies to physicians, dentists and related clinics.

     The Company has the capacity to insure medical professional liability risks
up to $5,000,000 per incident; however, most policies are issued at lower
limits.  In Michigan, the Company generally retains up to $300,000 per risk,
with certain adjustments, and reinsures limits in excess of $300,000.  In
Illinois and Ohio, the Company generally retains up to $250,000 per risk, and
reinsures limits in excess of $250,000.  In Indiana, the Company retains up to
$100,000 per risk, with certain adjustments,  as limits in excess of $100,000
are assigned to a mandatory state fund.  The majority of medical professional
liability policies

                                 -2-

<PAGE>   4

issued by the Company are written on a claims-made form, although approximately
13%, 13% and 22% of the Company's direct medical professional liability
premiums were derived from policies written on an occurrence form during 1996,
1995 and 1994, respectively.

     In 1994, the Company expanded into other professional liability lines by
providing malpractice coverage to lawyers and law firms in the state of
Michigan.  PICOM Insurance Company, a stock insurance company incorporated under
Michigan law in 1980, and a wholly owned subsidiary of Professionals Group
("PICOM") writes primary legal malpractice policies on a claims-made basis and
has capacity to write policy limits of up to $5,000,000 per incident. Direct
written premiums generated from lawyers and law firms was less than two percent
of the Company's total direct written premiums for each of the years ended 1996,
1995 and 1994.  In March 1997, PICOM entered into a non-binding letter of intent
with Michigan Lawyers Mutual Insurance Company, a Michigan-domiciled mutual
insurance company ("MLM"), that contemplates MLM's assuming PICOM's lawyers
professional liability insurance policies in Michigan and PICOM's becoming a
reinsurer of MLM effective June 1, 1997. The letter of intent also contemplates
MLM's providing certain insurance support services to enable PICOM to introduce
its lawyers professional liability product into Illinois, Ohio and Indiana
during 1997.

     The Company is rated B++ by A.M. Best Company, Inc. ("A.M. Best") and BBB+
by Standard & Poor's Corporation ("Standard & Poor's").  See "Glossary of
Selected Insurance Terms" for descriptions of the rating continuums utilized by
A.M. Best and Standard & Poor's.  In developing their respective ratings, A.M.
Best and Standard & Poor's each evaluate a company's financial and operating
performance including a quantitative evaluation of profitability, leverage and
liquidity and a qualitative evaluation of spread of risk, appropriateness of
reinsurance, quality and diversification of assets, adequacy of reserves and
surplus, and management experience.  These ratings are based on factors of
concern to policyholders, agents and intermediaries and are not directed
towards the protection of investors.

Marketing:

     The Company is licensed to write its insurance products in Michigan,
Illinois, Indiana, Iowa, Ohio and Pennsylvania, and currently markets its
products in Michigan, Illinois, Indiana and Ohio.  The Company has branch
offices in Oak Brook, Illinois, Indianapolis, Indiana and Columbus, Ohio, and
intends to expand the

                                  -3-

<PAGE>   5

marketing of its products into Iowa and Pennsylvania in the future.  The
Company has applied for licenses in Kansas, Kentucky, Minnesota, Missouri and
Wisconsin.  There can be no assurances as to whether or when such licenses
will be granted.

     The marketing and sales of the Company's insurance products is carried out
by the Company in cooperation with local independent insurance agencies.  The
Company is primarily responsible for general marketing activities such as
advertising, product information, convention participation and relationships
with various professional associations of which the Company's insureds are
members.  Such independent insurance agencies are primarily responsible for the
sale of the Company's insurance products by pursuing leads generated by the
Company's marketing activities and through agency-generated leads in their
local communities.  For the years ended December 31, 1996, 1995 and 1994, the
Company's top ten agencies accounted for approximately 58%, 57% and 72%,
respectively, of the Company's direct written premiums.  In 1996, 1995 and
1994, one agency individually produced approximately 10% of the Company's
direct written premiums.

     The Company typically enters into written agreements with those
independent insurance agencies offering the Company's insurance products.
These written agreements typically authorize an insurance agency to act as the
Company's agent for the sale and service of specified insurance products in a
specific State.  Such agreements are for a stated duration (typically from one
year to five years) and are terminable only upon prior written notice.  Each
insurance agency executing such an agreement acts as an independent contractor
and is responsible for all expenses incurred by it.  These agreements also (i)
provide for direct billing and collection of all premiums by the Company, (ii)
provide for specific commissions payable to the insurance agency, (iii) provide
for arbitration in the event of disputes, and (iv) prohibit assignment by the
insurance agency without the prior written consent of the Company.

Underwriting:

     All underwriting decisions are made by the Company through its
underwriting staff.  Prospective insureds are required to submit an application
for coverage that, among other things, reviews professional training, area and
scope of practice and claims history.  The Company's underwriting process
involves an evaluation of the application and, in certain situations,
supplemental on-site

                                -4-
<PAGE>   6

risk management evaluations.  Generally speaking, the Company makes an
assessment of the quality and pricing of the risk with particular emphasis on
loss history and practice specialty.

     The Company's insurance policy rates are based upon several factors, the
most important of which are practice specialty and location of practice.
Generally, physicians practicing in surgical specialties, such as neurosurgery,
obstetrics, general surgery, orthopedic surgery and plastic surgery, are
assessed higher premium charges than non-surgeons; and, practices located in
larger metropolitan areas are assessed higher premium charges than those
located in more rural areas.  As of December 31, 1996 and 1995, approximately
63% and 68%, respectively, of the Company's direct medical malpractice
written premium was generated from non-surgical risk groups and 37% and 32%,
respectively, was generated from surgical risk groups.  As of December 31, 1996
and 1995, approximately 51% and 52%, respectively, of such written premiums
were derived from larger metropolitan areas (such as metropolitan Detroit,
Michigan and metropolitan Chicago, Illinois) and 49% and 48%, respectively,
of such written premiums were derived from more rural areas.

Claims Management:

     The Company emphasizes early evaluation and aggressive management of
claims.  Claims are generally reported directly to the Company by the insured
after the insured has received a court summons or a pre-suit notice of claim.
The reported claim is logged in by the Company's claims staff, which then
determines whether the potential loss is covered by an insurance policy issued
by the Company.  If the claim is covered, it is then assigned to a claims
professional for investigation and analysis.  If the claim is in litigation,
the claim is also assigned to one of the Company's selected outside counsel
specializing in the field of professional liability claims.  Approximately 72%
of the Company's claims are litigated and ultimately resolved through
settlement, dismissal or trial.  Approximately 28% of the Company's claims are
resolved outside of the litigation process through settlement or the
abandonment of the claim by the plaintiff.

     The Company's claims staff evaluates and establishes an initial reserve for
each claim within the first 90 days after notification of a claim.  During the
life of a claim, reserves are systematically revised thereafter as new
information about the claim develops.  For litigated claims, the Company's
claims staff works closely with outside counsel to

                                   -5-

<PAGE>   7

develop case strategies and to foster full communications with the insured.
Medical or other professional experts are retained to assist
in the analysis and defense of claims and a claims committee consisting of
certain experienced Company representatives and outside medical specialists
meets regularly to provide medical insights and input for claims involving
complex cases.  The Company's claims staff meets on a weekly basis to review
cases scheduled for trial.  The Company's claims staff frequently attends court
settlement conferences along with outside counsel and monitors cases during
trial.

Reserves and Losses:

     The Company establishes balance sheet reserves based on its estimates of
the future amounts necessary to pay claims and expenses associated with
investigation and settlement of claims.  These estimates include two
components:  case reserves and bulk reserves.  Case reserves are estimates of
future losses and loss adjustment expenses ("losses and LAE") for reported
claims and are established by the Company's claims department.  Bulk reserves,
which include a provision for losses that have occurred but have not been
reported to the Company as well as development on reported claims, are the
difference between (i) the sum of case reserves and paid losses and (ii)
actuarially estimated ultimate incurred losses.  Ultimate incurred losses are
an actuarially determined estimate of total losses and LAE necessary for the
ultimate settlement of all reported claims and incurred but not reported claims,
including amounts already paid.  The assumptions used by the Company in
establishing reserves are reviewed and updated semi-annually based on then
current circumstances.

     As the process of estimating reserves is inherently uncertain and involves
an evaluation of many variables (including social and economic conditions) and
because a significant period of time may elapse between the report of a claim
and the ultimate settlement of that claim, reserve estimates may vary
significantly from the eventual outcome.  The inherent uncertainty of
establishing reserves is relatively greater for companies writing long-tail
casualty insurance, including medical malpractice insurance, due primarily to
the longer-term nature of the resolution of claims.  There can be no assurance
that the ultimate liability will not exceed the amounts reserved for at the
balance sheet date.

     The following table sets forth a reconciliation of beginning and ending
reserves for losses and LAE as shown in the Company's

                                   -6-

<PAGE>   8

consolidated financial statements for the years indicated.  See also Note 9 to
the Company's consolidated financial statements.

<TABLE>
<CAPTION>
                               Years Ended December 31,
                            --------------------------------
                               1996        1995       1994
                            ----------   --------   --------
                                      (in thousands)
<S>                         <C>          <C>        <C>
Balance, beginning of year    $199,605   $188,544   $191,220
Less reinsurance balances
  recoverable                  (14,186)    (3,760)    (4,040)
                            ----------   --------   --------
Net balance, beginning of
  year                         185,419    184,784    187,180
                            ----------   --------   --------
Incurred related to:
  Current year                  65,986     63,027     68,610
  Prior years                  (17,618)   (27,469)   (23,757)
                            ----------   --------   --------
  Total incurred                48,368     35,558     44,853
                            ----------   --------   --------
Effect of change in
  accounting method                 --     12,310         --
Loss and loss adjustment                   
  expense reserves assumed       4,119         --         --
                            ----------   --------   --------
Paid related to:
  Current year                   4,352      3,053      4,433
  Prior years                   32,841     44,180     42,816
                            ----------   --------   --------
   Total paid                   37,193     47,233     47,249
                            ----------   --------   --------
Net balance, end of year       200,713    185,419    184,784
Plus reinsurance balances
  recoverable                   19,206     14,186      3,760
                            ----------   --------   --------
Balance, end of year          $219,919   $199,605   $188,544
                            ==========   ========   ========
</TABLE>

     The following table presents the development of the net liability of
undiscounted reserves for losses and LAE for the calendar years 1987 through
1996.  (Through 1994, the Company's losses and LAE reserves were discounted.
Effective January 1, 1995, this practice was discontinued).  The amounts shown
for each year on the top line of the table present the Company's estimate of its
losses and LAE reserves as originally reported to shareholders.  (The losses and
LAE reserves as originally reported are presented net of reinsurance receivables
relating to unpaid losses through 1991, net of losses and LAE reserve discount
through 1994, and gross of such amounts thereafter).  The net liability-end of
year line represents the undiscounted estimated amount of unpaid losses and LAE
for claims arising in all prior years that were unpaid at the balance sheet
date, including losses that had been incurred but not yet reported, net of
reinsurance ceded.  The portion of the table labeled "cumulative paid as of"
shows the net cumulative payments for losses and LAE made in succeeding years
for losses incurred prior to the balance sheet date. The next portion of the
table shows the re-estimated amount of the previously recorded loss and LAE
reserves based on experience as of the end of each succeeding year, followed by
a line indicating the change from the original estimate to the most current
re-estimate.


                                     -7-
<PAGE>   9

       Analysis of Loss and Loss Adjustment Expense Reserve Development
                                 (in thousands)

<TABLE>
<CAPTION>
                                                         December 31,
                                   ----------------------------------------------------
                                         1987       1988      1989      1990      1991
                                         ----       ----      ----      ----      ---- 
<S>                                  <C>        <C>       <C>       <C>       <C>
Loss & LAE Reserves as
originally reported                   $131,795   $150,745  $162,509  $167,982  $183,603
Less reinsurance recoverable
Add pro forma change to reflect
elimination of discount                 39,138     43,637    41,161    32,781    27,839
                                      --------   --------  --------  --------  --------
Net liability - end of year           $170,933   $194,382  $203,670  $200,763  $211,442
Cumulative paid as of:
 One year later.....................    39,750     44,596    42,611    35,703    43,300
 Two years later....................    83,355     84,376    73,226    69,720    68,512
 Three years later..................   118,865    108,547    99,872    87,375    88,126
 Four years later...................   135,454    126,619   110,475    99,051    99,732
 Five years later...................   148,437    134,396   118,884   107,379   104,815
 Six years later....................   154,114    141,288   125,012   111,347
 Seven years later..................   160,278    146,704   128,772
 Eight years later..................   165,436    150,016
 Nine years later...................   168,474
Re-estimated net liability as of:
End of year.........................   170,933    194,382   203,670   200,763   211,442
One year later......................   195,574    206,473   198,911   192,046   183,353
Two years later.....................   201,781    202,528   191,402   172,650   167,450
Three years later...................   199,484    191,995   173,376   161,494   151,492
Four years later....................   192,060    180,919   165,398   146,942   147,193
Five years later....................   188,621    175,759   155,570   144,384   140,589
Six years later.....................   186,145    169,167   154,533   138,998
Seven years later...................   182,785    170,139   151,591
Eight years later...................   185,280    168,731
Nine years later....................   184,361
Net cumulative
(deficiency) redundancy                (13,428)    25,651    52,079    61,765    70,853

<CAPTION>

                                                         December 31,
                                   ----------------------------------------------------
                                         1992      1993      1994       1995       1996
                                         ----      ----      ----       ----       ---- 
<S>                                 <C>        <C>       <C>        <C>        <C>
Loss & LAE Reserves as
originally reported                   $184,758  $191,220  $188,544   $199,605   $219,919
Less reinsurance recoverable            (2,403)   (4,040)   (3,760)   (14,186)   (19,206)
Add pro forma change to reflect
elimination of discount                 16,568    12,616    12,310          -          -
                                      --------  --------  --------   --------   --------
Net liability - end of year           $198,923  $199,796  $197,094   $185,419   $200,713
Cumulative paid as of:
 One year later                         36,220    42,816    44,180     32,817
 Two years later                        65,570    73,183    70,008
 Three years later                      84,334    88,507
 Four years later                       92,666
 Five years later
 Six years later
 Seven years later
 Eight years later
 Nine years later
Re-estimated net liability as of:
End of year                            198,923   199,796   197,094    185,419    200,713
One year later                         171,318   173,013   169,625    167,778
Two years later                        152,998   158,403   158,756
Three years later                      145,128   149,654
Four years later                       136,749
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Net cumulative
(deficiency) redundancy                 62,174    50,142    38,338     17,641
</TABLE>

     In evaluating the information in the table above, it should be noted that
each column includes the effects of changes in amounts for prior periods.  The
table does not present accident year or policy year development data.
Conditions and trends that have affected the development of liabilities in the
past may not necessarily occur in the future.  Accordingly, it may not be
appropriate to extrapolate future redundancies or deficiencies based on this
table.

                                      -8-

<PAGE>   10

     From 1980 to 1986 all insurance policies written by the Company were
written on an occurrence basis.  Beginning in 1987 the Company has written 
medical malpractice insurance on a claims-made basis and on an occurrence basis.

     The following table presents a reconciliation of reserves of the Company
in accordance with statutory accounting practices ("SAP") with reserves
reflected in the consolidated financial statements prepared in accordance with
generally accepted accounting principles ("GAAP") as of December 31, 1996 and
1995.

               Reconciliation of SAP Reserves with GAAP Reserves
                                 (in thousands)


<TABLE>
<CAPTION>
                                    Years Ended December 31,
                                        1996      1995
                                      --------  --------
<S>                                   <C>        <C>
Loss and LAE reserves - SAP basis     $190,055  $176,026
Add:
Discount............................    10,658     9,393
Provision for reinsurance on unpaid
losses..............................    19,206    14,186
                                      --------  --------
Loss and LAE reserves - GAAP basis    $219,919  $199,605
                                      ========  ========
</TABLE>

     For SAP reporting, loss reserves are discounted at a three percent
discount rate, as permitted by insurance regulatory authorities.  For GAAP
reporting, the Company eliminated discounting of reserves effective January 1,
1995.  Under SAP, loss and LAE reserves are presented net of the provision for
reinsurance, whereas under GAAP, loss and LAE reserves are presented gross of
reinsurance and amounts due from reinsurers are presented as an asset.

Investments:

     The Company invests principally in debt securities such as United States
government obligations, U.S. government agency mortgage-backed securities,
tax-exempt municipal bonds and investment grade corporate bonds.  Investment
policy and the performance of investment managers are reviewed quarterly by or
on behalf of Professionals Group's Board of Directors.  The current investment
policy establishes a target duration and limits fixed income purchases (absent
specific authorization of Professionals Group's Board of Directors) to
securities rated BBB/Baa or better by

                                 -9-

<PAGE>   11

Moody's Investor Services, Inc. ("Moody's"), Standard & Poor's, Duff & Phelps
Inc. or Fitch Investors Service Inc.  The Company's investment manager selects
specific bond issues within these guidelines.  The Company's investment policy
limits holdings in common stocks and preferred stocks, cumulatively, to twenty
percent of the Company's statutory surplus.

     In general, the investment policy of the Company is to maximize after tax
investment yield, subject to constraints on investment quality, maturity and
liquidity.  The Company's investment policy establishes a range for the
appropriate allocation among asset classes.  The precise allocation varies
depending on an evaluation of the economic environment and on the Company's tax
position.  Currently, the Company's investment portfolio consists primarily of
United States government agency, corporate and municipal bonds.  As of December
31, 1996, only one of the rated securities in the Company's fixed income
portfolio was rated below investment grade (carrying value was $807,000).  See
Management's Discussion and Analysis of Financial Condition and Results of
Operations herein for additional discussion.

     As of December 31, 1996 and 1995, all fixed maturity securities were
classified as available-for-sale and carried at estimated fair value.  For
these securities, temporary unrealized gains and losses, net of deferred
federal income taxes, are reported directly through shareholders' equity, and
have no effect on net income.  As of December 31, 1996 and 1995, the estimated
fair value of fixed maturity securities exceeded the aggregate amortized cost
by $298,000 and $2,850,000, respectively, and shareholders' equity was
increased by those amounts, reduced by $101,000 and $963,000, respectively, in
deferred federal income taxes.  The decrease in unrealized gains was due to
slightly higher interest rates at year end 1996 as compared to year end 1995.
See also Notes 4 and 6 to the Company's consolidated financial statements.  The
Company's fixed maturity investment portfolio is sensitive to interest rate
changes.  As of December 31, 1996, a one hundred basis point increase in market
interest rates would decrease the value of this portfolio by approximately
three percent, whereas a one hundred basis point decrease in market interest
rates would increase the value of this portfolio by approximately three
percent.



                                  -10-

<PAGE>   12
Reinsurance:


     Insurance companies purchase reinsurance to limit risk on individual
exposures, protect against catastrophic losses and increase their capacity to
write insurance.  Reinsurance involves an insurance company transferring, or
ceding, all or a portion of its exposure on a given insurance policy to a
reinsurer. The reinsurer assumes the exposure in return for a portion of the
premium received by the insurance company.  Reinsurance does not discharge the
insurer from its obligation to its insureds.  If the reinsurer fails to meet its
obligations, the ceding insurer remains liable to pay the insured.

     The Company cedes a material amount of its business to reinsurers to spread
risk and limit loss per exposure and to protect shareholders' equity from large
or unusual loss activity.  As of December 31, 1996, the Company had both excess
of loss reinsurance (i.e., reinsurance in which the Company has ceded to a
reinsurer, and such reinsurer has assumed, all or a portion of losses associated
with a given policy in excess of a specified retention level up to a
predetermined limit) and "errors and omissions" insurance (i.e., insurance
which protects the Company against losses in excess of policy limits claims).

     The excess of loss reinsurance programs protects the Company above a
retention of $300,000 in Michigan, with certain adjustments, and $250,000 in
Illinois and Ohio, and subject to certain aggregate maximum recoveries. There is
no reinsurance program for business written in Indiana as risks above $100,000
are assigned to a mandatory state fund.  Individual losses are covered by the
excess of loss reinsurance on a per incident basis up to $5 million.  The
"errors and omissions" insurance protects the Company against losses in excess
of policy limits claims up to $10 million, subject to a $500,000 retention for
each claim. See also Note 5 to the Company's consolidated financial statements.

     The following table identifies the Company's most significant reinsurers,
their percentage participation in the Company's aggregate reinsured risk based
upon premiums paid by the Company and their respective A.M. Best ratings as of
December 31, 1996.  No other single reinsurer's percentage participation in 1996
exceeded 3% of total reinsurance premiums:

                                    -11-

<PAGE>   13

<TABLE>
<CAPTION>
                                                         1996 Total
                                              Amounts      Ceded     % of Total
                                  A.M. Best   Due From    Premiums  Ceded Premiums
                                  Rating(1)  Reinsurers   Written      Written
                                  ---------  -----------  -------   --------------
                                             (dollars in thousands)
<S>                               <C>        <C>         <C>        <C>
Underwriters Reinsurance Company.. A+        $ 4,125      $    -            -
TIG Reinsurance................... A           6,110       3,975         42.7%
PMA Reinsurance Company........... A+          2,710       1,777         19.1%
Continental Casualty Company...... A           2,291       1,496         16.1%
Lloyd's of London Syndicates...... Not Rated     709         978         10.5%
Princeton Insurance Company....... A-            591         385          4.1%
Other............................. Not Rated   1,014         696          7.5%
                                             -------      ------        -----
                                             $17,550      $9,307        100.0%
                                             =======      ======        =====
</TABLE>

----------------------

(1)  See "Glossary of Selected Insurance Terms" for a description of the
     rating continuum utilized by A.M. Best.  See also Note 5 to the Company's
     consolidated financial statements.

     The Company, through its reinsurance intermediary, annually reviews the
financial stability of all of its reinsurers.  This review includes a ratings
analysis of each reinsurer participating in a reinsurance contract.  On the
basis of such review, as of December 31, 1996 and 1995, the Company concluded
that there was no material exposure to uncollectible reinsurance balances
payable to the Company by its reinsurers.  The Company has not experienced any
material difficulties in collecting amounts due from reinsurers (reinsurance
recoverables) and believes (i) that its reinsurance is maintained with
financially stable reinsurers and (ii) that any reinsurance security maintained
is adequate to protect its interests.  However, the inability of the Company to
collect on its aggregate reinsurance recoverables, or the inability of the
Company's reinsurers to make payments under the terms of reinsurance treaties
(due to insolvency or otherwise), could have a material adverse effect on the
Company's future results of operations and financial condition.

     It should be noted that the reinsurers to which the Company cedes
reinsurance include certain Lloyd's of London syndicates.  In recent years,
Lloyd's of London has reported substantial aggregate losses which have had
adverse effects on Lloyd's of London in general and on certain syndicates in
particular.  These losses and other adverse developments could affect the
ability of certain Lloyd's of London syndicates to continue to trade and the
ability

                                 -12-

<PAGE>   14

of insureds to continue to place business with particular Lloyd's of
London syndicates.  It is not possible to predict what effects the
circumstances described above may have on Lloyd's of London or on the Company's
contractual relationship with Lloyd's of London syndicates in future years.

     Prior to 1996, the Company assumed no reinsurance from other insurance
companies.  On December 31, 1996, the Company assumed all of the loss and loss
adjustment expense reserves and unearned premiums of American Medical Insurance
Exchange ("AMIE") (see Subsidiaries under Item I herein), which resulted in a
one-time charge to losses and loss adjustment expenses of $613,000.  This
one-time charge resulted primarily from the elimination of AMIE's practice of
discounting its loss and loss adjustment expense reserves.

Competition:

     The Company competes with numerous national insurance companies as well as
various monoline medical malpractice insurers and self-insurance mechanisms.
Many of these competitors have substantially greater financial resources and
higher A.M. Best or Standard & Poor's ratings than does the Company.
Competition may take several forms, including pricing, underwriting, quality of
claims and policyholder services, operating efficiencies and product
differentiation and availability.  Perception of financial strength, as
reflected in the ratings assigned to an insurance company, especially by A.M.
Best, is also a factor in the Company's competitive position.  A highly
competitive environment in the property and casualty insurance market has
developed during the past several years due to increased capacity resulting
from growing capital supporting the industry.  This competitive environment
could result in lower premiums, reduced profitability and loss of market share.
The success of the Company may also be influenced by general economic
conditions in the geographic markets served by it.  No assurance can be given
that favorable economic conditions will exist in such markets.

Regulation:

     The Company is subject to regulation and supervision of its insurance
operations in each of the jurisdictions where it conducts business.
Regulations vary between jurisdictions but, generally, they provide regulatory
authorities with broad supervisory, regulatory and administrative powers over
such matters as licenses,

                                -13-

<PAGE>   15

standards of solvency, premium rates, policy forms, investments, security
deposits, methods of accounting, form and content of financial statements,
reserves for unpaid losses and loss adjustment expenses, reinsurance,
minimum capital and surplus requirements, dividends and other distributions
to shareholders, periodic examinations and annual and other report filings.
These regulations are primarily intended to protect policyholders, not
shareholders.  Over the last several years most states have, and continue
to implement, laws which establish standards for current, as well as
continued, state accreditation.  In addition, the National Association of
Insurance Commissioners ("NAIC") has adopted risk-based capital rules for
property and casualty insurance companies.  Professionals Group's insurance
subsidiaries were adequately capitalized under the NAIC's rules as of December
31, 1996 and 1995.  See Management's Discussion and Analysis of Financial
Condition and Results of Operations--Regulation for further discussion.

     Under the insolvency or guaranty fund laws of most of the states in which
the Company operates, insurers doing business in those states may be assessed
for policyholder losses of insolvent insurance companies.  In addition, from
time to time, states may make special assessments in response to extraordinary
circumstances.  No assurance can be given that there will not be such
assessments in the future.

     Regulation of the insurance industry is undergoing continuous change and
the ultimate effect of such changes cannot be predicted.  Regulations now
affecting the Company may be modified at any time and new regulations affecting
the Company may be enacted.  There is no assurance that such modifications will
not adversely affect the business of the Company.  See Management's Discussion
and Analysis of Financial Condition and Results of Operations--Regulation for
further discussion.

Subsidiaries:

     Professionals Group has four direct wholly-owned subsidiaries and two
indirect wholly-owned subsidiaries.  The direct wholly-owned subsidiaries are:
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").

                                     -14-

<PAGE>   16


     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 and provides
malpractice coverage to lawyers and law firms in Michigan.  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 of Illinois.

Employees:

     The Company had 92 full-time employees and four part-time employees as of
December 31, 1996.  None of these employees are covered by a collective
bargaining agreement.  The Company believes that it enjoys good relations with
its personnel.

Forward-Looking Statements:

     From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, new products and similar matters.  The Private Securities Litigation
Reform Act of 1995 provides a safe harbor for forward-looking statements.  In
order to avail itself of the safe harbor, the Company notes that a variety of
factors could cause its actual results and experience to differ materially from
the anticipated results or other expectations expressed in its forward-looking
statements.  The risks and uncertainties that may affect the operations
performance, development and results of the Company's business include those
discussed elsewhere herein (such as competition and regulation) and the
following:

     Industry Factors.  Virtually all of the Company's insurance premium
revenue is derived from medical malpractice risks.  Many factors influence the
financial results of the medical malpractice insurance business, several of
which are beyond the control of the Company.  The supply of medical malpractice
insurance, or the industry's underwriting capacity, is determined principally
by the industry's level of capitalization, historical underwriting results,
returns on investment and perceived premium rate adequacy.

                                 -15-

<PAGE>   17

Historically, the financial performance of the medical malpractice
insurance industry has tended to fluctuate in cyclical patterns characterized
by periods of greater competition in pricing and underwriting terms and
conditions (a "soft insurance market") followed by periods of capital
shortage and lesser competition (a "hard insurance market").  For several
years, the medical malpractice insurance industry and the Company have
faced a soft insurance market that has generally resulted in lower
premiums and reduced profitability.  In the present soft insurance market
the Company has offered discounts to its published premium rates in order
to retain market share.  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.  Moreover,
there can be no assurances regarding whether or when market conditions will
improve, or the manner in which, or the extent to which, changes in market
conditions may impact the results of operations of the Company.

     Insurance companies rely on the positive performance of their investment
portfolios to offset insurance losses and to enhance profitable results.
Consequently, prevailing economic conditions, particularly changes in market
interest rates, may significantly affect the operations of an insurance company,
such as the Company, that depends on its net investment income.  In addition,
changes in interest rates also can affect the value of an insurance company's
interest-earning assets, which are comprised of fixed and adjustable-rate
investment securities.  Generally, the value of fixed-rate investment securities
fluctuates inversely with changes in interest rates. Changes in interest rates
also can affect the average life of investment securities.  An insurance company
is subject to reinvestment risk to the extent that it is not able to reinvest
prepayments at rates which are comparable to the rates on the maturing
investments.  Changes in market interest rates have resulted in significant
changes in the market value of the Company's portfolio of fixed maturity
investments.  As of December 31, 1996, such portfolio had a modified duration of
approximately four years and a market value that was $298,000 more than the
$286.0 million amortized cost of such portfolio.  A one hundred basis point
increase in market interest rates would decrease the value of this portfolio by
approximately three percent, whereas a one hundred basis point decrease in
market interest rates would increase the value of this portfolio by
approximately three percent.

     The success of the Company may also be influenced by general economic and
legal conditions in the geographic markets served by

                                   -16-

<PAGE>   18

its direct and indirect insurance subsidiaries.  No assurance can be given
that favorable economic and legal conditions will exist in such markets.

     Health Care Industry Consolidation.  The Company derives substantially all
of its premium income from physicians and other individual health care
providers, physician groups, and smaller health care facilities.  The health
care industry is undergoing rapid market driven change and consolidation which
may negatively impact the medical practice and economic independence of
physicians who are the Company's primary customer base.  For example, the
emergence of "managed care" has made it more difficult for physicians to
conduct a traditional fee-for-service practice and has caused some physicians
to leave private practice for employment with medical systems or to join or
contractually affiliate with managed care organizations or practice management
organizations.  Such change and consolidation may result in the elimination of,
or a significant decrease in, the role of the physician in the medical
malpractice insurance purchasing decision.  It could also result in greater
emphasis on the role of professional managers, who may seek to purchase
insurance on a price competitive basis, and who may favor insurance companies
that are larger and more highly rated than the Company.  In addition, such
change and consolidation could reduce medical malpractice premiums available to
the Company as groups of insurance purchasers generally retain more risk by
accepting higher deductibles and self insured retentions or by forming their
own captive insurance mechanisms.

     Underwriting Losses and Reserves.  The Company collects premiums for the
insurance coverage it provides.  Such premiums are based upon certain actuarial
and other assumptions.  Although the Company employs actuarial assumptions that
it believes are reasonable, such assumptions are, by their nature, estimates.
To the extent that the actuarial and other assumptions used by the Company
prove to be incorrect, the Company may incur unanticipated underwriting losses
on the risks that it insures.  Medical malpractice claims and expenses may be
paid over a period of ten years or more, which is longer than most property and
casualty insurance.  Trends in losses may therefore be slow to appear and
accordingly, the Company's reaction in terms of modifying underwriting
practices and changing premium rates may lag underlying loss trends.  In
addition, inflation may increase the Company's ultimate loss costs.

                                      -17-

<PAGE>   19

     The loss and loss adjustment expense reserves established by the Company
are estimates of amounts needed to pay reported and unreported claims and
related loss adjustment expenses.  The estimates are based on assumptions
related to the ultimate cost of settling such claims.  If the Company's reserves
are inadequate, the Company will be required to increase its reserves and thus
reduce its net income or shareholders' equity in the period in which the
deficiency is identified.  Unanticipated underwriting losses or materially
underestimated reserves could have a material adverse effect on the Company.

     Reinsurance.  In order to reduce risk and to increase its underwriting
capacity, the Company obtains reinsurance from unaffiliated reinsurers
(including domestic and foreign companies and Lloyd's of London Syndicates),
although it retains a portion of each risk reinsured.  The Company is subject to
credit risk with respect to its reinsurers because reinsurance does not relieve
the Company of its original liability to its insureds for the risks ceded to
reinsurers.  Although the Company believes that its reinsurance is maintained
with financially stable reinsurers and that any reinsurance security maintained
is adequate to protect its interests, the inability of the Company to collect on
its aggregate reinsurance recoverable, or the inability of the Company's
reinsurers to make payments under the terms of reinsurance treaties (due to
insolvency or otherwise), could have a material adverse effect on the Company's
future results of operations and financial position.

     The amount and cost of reinsurance available to companies specializing in
medical professional liability insurance are subject, in large part, to
prevailing market conditions beyond the control of the Company.  The Company's
ability to provide professional liability insurance at competitive premium rates
and coverage limits on a continuing basis will depend in part upon its ability
to obtain adequate reinsurance in amounts and at rates that will not adversely
affect its competitive position.  Although the Company anticipates that it will
continue to be able to obtain such reinsurance, there can be no assurance that
this will be the case.

     Potential Adverse Consequences of Acquisitions or Business Combinations.
The Company has experienced significant growth in premium volume as a result of
an acquisition of a book business (PICOM-Illinois).  The Company intends to
continue to pursue acquisitions and other business combinations to the extent
suitable candidates and acceptable terms may be identified.  The Company is
unable to

                                   -18-

<PAGE>   20

predict whether or when any prospective acquisition candidate will become
available or the likelihood that any acquisition will be completed.  The
Company competes for acquisition and expansion opportunities with many
entities that have substantially greater resources.  In addition,
acquisitions may involve difficulties in the retention of personnel,
diversion of management's attention, unexpected legal liabilities, and
tax and accounting issues.  There can be no assurance that the Company
will be able to successfully identify suitable acquisition candidates,
complete acquisitions, integrate acquired businesses into its operations,
or expand into new markets.  Once integrated, acquisitions may not achieve
comparable levels of revenues, profitability, or productivity as the
existing business of the Company or otherwise perform as expected.

Glossary of Selected Insurance Terms:

     A.M. Best Rating.  A.M. Best Ratings are divided into "Secure" and
"Vulnerable" rating groups as follows:  Secure Ratings:  A++,A+ (Superior);
A,A- (Excellent); and B++,B+ (Very Good).  Vulnerable Ratings:  B,B-
(Adequate); C++,C+ (Fair); C,C- (Marginal); D (Very Vulnerable); E (Under State
Supervision); and F (In Liquidation).

     Cede.  To transfer to another insurer (the reinsurer) all or part of the
insurance risk underwritten by an insurer.

     Combined Ratio.  The sum of the expense ratio and the loss and LAE ratio.

     Excess of Loss Reinsurance.  A form of reinsurance in which the insurer
cedes to a reinsurer, and such reinsurer assumes, all or a portion of losses in
excess of a specified retention level up to a predetermined limit.

     Expense Ratio.  The ratio of underwriting expenses to net premiums earned.

     Incurred But Not Reported.  The liability for future payments on losses
which have occurred but have not yet been reported.

     Loss Adjustment Expenses (LAE).  The expenses of settling claims,
including legal and other fees.

                                -19-

<PAGE>   21

     Loss and LAE Ratio.  The ratio of incurred losses and loss adjustment
expenses to premiums earned.  Losses include the increase in reserve for
extended reporting period claims.

     Net Premiums Written.  Premiums retained by an insurer after deducting
premiums on business ceded to others.

     Premiums Earned.  The portion of net premiums written applicable to the
expired period of policies.

     Reinsurance.  A procedure whereby an insurer remits or cedes a portion of
the premium to a reinsurer as payment to the reinsurer for assuming a portion
of the risk or liability under the policy.  Reinsurance can be effected by
"treaties" under which all risks of a defined category, amount and type for a
primary insurer are covered, or on a "facultative" basis under which risks are
covered on an individual, contract-by-contract basis.

     Standard & Poor's Ratings.  Standard & Poor's Claims-Paying Ability
Ratings are divided into "Secure Range" and "Vulnerable Range" groupings as
follows.  Secure Range:  AAA (Superior); AA (Excellent); A (Good); and BBB+
(Adequate).  Vulnerable Range:  BB (May be Adequate); B (Vulnerable); CCC
(Extremely Vulnerable); and R (Regulatory Action).

     Statutory Accounting Practices (SAP).  Those practices required by state
law which must be followed by insurers in submitting their financial statements
to state insurance departments.

     Statutory Surplus.  The amount remaining after all liabilities of an
insurance company are subtracted from all of its admitted assets, applying
statutory accounting practices.

Item 2. Properties

     The Company owns its principal executive offices in Okemos, Michigan which
houses the majority of its employees.  The Company also owns, primarily for
investment purposes, an office building in Williamston, Michigan.  The Company
leases office facilities in Oak Brook, Illinois, Indianapolis, Indiana and
Columbus, Ohio.  The Company also leases operating equipment under cancelable
and noncancelable agreements.  As of December 31, 1996, the Company has entered
into $5.5 million of commitments to build a new 53,000

                                   -20-

<PAGE>   22

square foot home office facility in Okemos, Michigan and to purchase new 
furniture and equipment.

Item 3. Legal Proceedings

     There are no material legal proceedings to which Professionals Group or
any of its direct or indirect subsidiaries is a party or to which any of their
property is subject.

Item 4. Submission of Matters to a Vote of Security Holders

     There were no matters submitted to a vote of Professionals Group's
shareholders during the fourth quarter of 1996.

Executive officers of registrant:

     As of March 17, 1997, the executive officers of Professionals Group
consisted of the persons identified below.  Executive officers are elected
annually by, and serve at the pleasure of, Professionals Group's Board of
Directors.


<TABLE>
<CAPTION>
    Name                           Age             Position
    ----                           ---             --------
<S>                           <C>            <C>

W. Peter McCabe, M.D.               57        Chairman

Victor T. Adamo, Esq., CPCU         49        President and Chief Executive Officer

R. Kevin Clinton, FCAS, MAAA        42        Vice President, Treasurer and Chief Financial Officer

Annette E. Flood, Esq., R.N.        38        Secretary
</TABLE>

     W. Peter McCabe, M.D. has been the Chairman of the Board and a director of
Professionals Group since 1996.  Dr. McCabe has been the Chairman of the Board
and a director of PICOM since 1994 and 1980, respectively.  He is board
certified in Plastic Surgery and the current President of the Michigan State
Medical Society.  Dr. McCabe is engaged in private practice and serves on the
medical staff of Saint John Hospital, Detroit, Michigan.  Dr. McCabe is a
graduate of Harvard College and Cornell University Medical School.

     Victor T. Adamo has been the President and Chief Executive Officer and a
director of Professionals Group since 1996.  Mr. Adamo has been the President
of PICOM since 1990 and Chief

                                   -21-

<PAGE>   23

Executive Officer and a director of PICOM since 1987.  Prior to joining
PICOM, Mr. Adamo was in private legal practice from 1975 to 1985 and
represented PICOM in corporate legal matters.  Mr. Adamo is a graduate
of the University of Michigan and New York University School of Law and
is a Chartered Property Casualty Underwriter (CPCU).  Mr. Adamo is the only
Director of Professionals Group who is also an employee of Professionals Group
or any subsidiary of Professionals Group.

     R. Kevin Clinton has been a Vice President and the Treasurer and Chief
Financial Officer of Professionals Group since 1996.  Mr. Clinton has been a
Vice President, Chief Financial Officer and Actuary of PICOM since 1990.  Prior
to becoming an officer of PICOM, Mr. Clinton was PICOM's consulting actuary
from 1986 to 1990.  He formerly served as the Actuary for the Michigan
Insurance Bureau and Michigan Mutual Insurance Company.  Mr. Clinton is a
fellow of the Casualty Actuarial Society and a member of the American Academy
of Actuaries.  Mr. Clinton is a graduate of the University of Michigan where he
received a Bachelors degree in business administration and a Masters degree in
actuarial science.

     Annette E. Flood has been the Secretary of Professionals Group since 1996.
Ms. Flood is Vice President, Corporate Secretary and Legal Counsel of PICOM.
Prior to joining PICOM in 1992, Ms. Flood was employed by Lansing General
Hospital, Lansing, Michigan, from 1986 to 1992, most recently in the capacity
of Vice President, Legal Services and Quality Management.  Prior to joining the
Lansing General Hospital staff, Ms. Flood was in the litigation section of the
law firm of Dykema Gossett, Lansing, Michigan.  Ms. Flood has a Bachelors
degree in nursing from the University of Michigan and a law degree from Wayne
State University Law School.


                                    PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

     Shares of common stock, no par value per share, of Professionals Group
have been traded in the over-the-counter market and listed for quotation on the
Nasdaq National Market tier of the Nasdaq Stock Market under the symbol "PICM"
since September 3, 1996.  Prior to Professionals Group's acquisition of all of
the issued and outstanding shares of PICOM common stock effective August 31,
1996, PICOM common stock was traded in the over-the-

                                     -22-

<PAGE>   24

counter market and was listed for quotation on the Nasdaq National Market
tier of the Nasdaq Stock Market under the symbol "PICM."  Although
transactions in common stock, no par value per share, of Professionals
Group have been, and are expected to continue to be, facilitated by
market-makers, there can be no assurance that an established or liquid trading
market will continue.

     The table below sets forth (i) for the periods prior to September 3, 1996,
the high and low sale prices for PICOM common stock on the Nasdaq National
Market tier of the Nasdaq Stock Market, and (ii) for the periods since
September 3, 1996, the high and low sale prices for the common stock, no par
value per share, of Professionals Group on the Nasdaq National Market tier of
the Nasdaq Stock Market.  In each case the quotations have been adjusted as if
the ten percent stock dividend paid by Professionals Group on December 16, 1996
had occurred prior to such quarters.


<TABLE>
<CAPTION>
                       Common Stock
                       ------------
                       High     Low
                       ----     ---
<S>                  <C>     <C>
1995
----              
First Quarter ......  $10.68  $ 9.09
Second Quarter .....   14.32   10.00
Third Quarter ......   17.05   12.73
Fourth Quarter .....   19.77   16.36

1996
----             
First Quarter ......  $23.41  $18.86
Second Quarter .....   22.95   19.77
Third Quarter ......   22.27   19.55
Fourth Quarter .....   22.00   19.77
</TABLE>


     As of March 18, 1997 there were 2,505 registered holders of shares of
common stock, no par value per share, of Professionals Group.

     The holders of common stock, no par value per share, of Professionals
Group are entitled to receive such dividends as may be declared from time to
time by the Board of Directors of Professionals Group out of funds legally
available therefor.  Professionals Group is not expected to declare cash
dividends on its common stock for the foreseeable future, as it is expected
that earnings of Professionals Group and its subsidiaries will be retained and
used for operations.  Any future dividends will depend upon, among other
things, future financial results and requirements

                                     -23-

<PAGE>   25

and contractual restrictions applicable to Professionals Group or its
subsidiaries.  Professionals Group declared a 10% stock dividend on November
21, 1996 which was paid on December 16, 1996 to shareholders of record
as of December 4, 1996.  No fractional shares of common stock were issued
in payment of the stock dividend.  In lieu of fractional shares, cash of
approximately $26,000 was paid to shareholders.

     The ability of Professionals Group to fund its operations and to pay
dividends on its common stock will be dependent upon its receipt of dividends,
loans or advances from its insurance company subsidiaries (particularly PICOM).
The ability of those subsidiaries to pay dividends is subject to regulatory
restrictions.  Generally, these restrictions limit the amount of dividends such
subsidiaries can pay to their respective parent in any 12-month period to the
greater of statutory net income for the preceding year (excluding realized gains
and losses on sales of investments), or ten percent of policyholders' surplus as
of the end of the preceding year.  As of January 1, 1997, approximately $14.9
million of dividends could be paid by Professionals Group's direct insurance
subsidiaries without prior regulatory approval.  In 1996, Professionals Group's
insurance subsidiaries paid cash dividends aggregating $3.5 million to
Professionals Group.  None of Professionals Group's insurance subsidiaries paid
any cash dividends in either 1995 or 1994.  There can be no assurance as to any
future dividends by Professionals Group or any of its subsidiaries  (see also
Note 11 to the Company's consolidated financial statements).

Item 6. Selected Financial Data

     The following selected financial data are derived from the Company's
consolidated financial statements, except for selected statutory data, which are
presented in accordance with statutory accounting practices.  The data should be
read in conjunction with the consolidated financial statements, related notes
and other financial information included elsewhere in this report. (All such
information is in thousands, except per share data.)

                                   -24-

<PAGE>   26

<TABLE>
<CAPTION>
                                                        Years Ended December 31,
                                               --------------------------------------------
                                                1996     1995     1994      1993     1992
                                               -------  -------   -------  -------  -------
<S>                                            <C>      <C>       <C>      <C>      <C>
Income Statement Data(1):
 Gross premiums written                        $64,771  $67,727   $51,110  $50,514  $49,549
 Net premiums written                           55,464   55,151    48,778   48,177   47,476
 Net premiums earned                            56,687   55,684    48,490   48,192   48,778
 Net investment income                          15,741   14,729    13,379   12,363   14,338
 Total revenues and other income                72,242   70,572    59,867   67,476   70,604
 Losses and loss adjustment expenses(2)(4)      48,368   35,558    44,853   44,585   53,511
 Total expenses                                 60,219   46,230    52,669   52,775   64,787

 Income before cumulative effect of change in
  accounting method                              9,585   16,066     5,154    9,866    3,779
 Cumulative effect of change in accounting
  method(2)                                         --   (8,125)       --       --       --
                                               -------  -------   -------  -------  -------
 Net income                                    $ 9,585  $ 7,941   $ 5,154  $ 9,866  $ 3,779
                                               =======  =======   =======  =======  =======

 Weighted average shares outstanding(3)          3,487    3,432     3,557    3,557    3,555
                                               =======  =======   =======  =======  =======

Earnings per share(3):
 Income before cumulative effect of change in
  accounting method                            $  2.75  $  4.68   $  1.45  $  2.77  $  1.06
 Cumulative effect of change in accounting
 method(2)                                          --    (2.37)       --       --       --
                                               -------  -------   -------  -------  -------
 Net income per common share                   $  2.75  $  2.31   $  1.45  $  2.77  $  1.06
                                               =======  =======   =======  =======  =======

Cash dividends declared per share              $    --  $    --   $    --  $    --  $    --
                                               =======  =======   =======  =======  =======
<CAPTION>

                                                              As of December 31,
                                               ----------------------------------------------------
                                                 1996       1995       1994       1993       1992
                                               --------   --------   --------   --------   --------
<S>                                            <C>        <C>        <C>        <C>        <C>
Balance Sheet Data:
 Total investments                             $300,132   $280,607   $249,979   $253,133   $235,091
 Total assets                                   357,382    330,712    297,926    301,106    284,245
 Loss and loss adjustment expense reserves(2)   219,919    199,605    188,544    191,221    184,758
 Reserve for extended reporting period claims    14,795     14,082     12,738     12,238     11,486
 Unearned premiums                               21,945     23,122     24,557     24,347     24,305
 Shareholders' equity                            87,958     78,411     63,142     64,839     54,974
 Book value per common share(3)                   25.09      22.84      17.75      18.23      15.46
-------------------------------
Selected Statutory Data:
 Loss ratio(4)                                    85.4%      71.5%      93.5%      94.1%     117.3%
 Expense ratio                                    15.9%      17.3%      15.4%      15.8%      16.0%
                                               --------   --------   --------   --------   --------
 Combined ratio                                  101.3%      88.8%     108.9%     109.9%     133.3%
                                               ========   ========   ========   ========   ========

 Statutory surplus                             $ 80,572   $ 67,006   $ 47,149   $ 40,431   $ 27,169
 Net premiums written to statutory surplus         .74x       .82x      1.03x      1.19x      1.75x

Selected GAAP Data:
 GAAP combined ratio(4)                          106.2%      83.0%     108.6%     109.5%     132.8%
                                               ========   ========   ========   ========   ========
 Operating income(5)                           $  9,962   $  7,952   $  6,478   $  7,292   $  4,146
                                               ========   ========   ========   ========   ========
 Operating income per share(3)                 $   2.86   $   2.32   $   1.82   $   2.05   $   1.17
                                               ========   ========   ========   ========   ========
 Net income per share(3)                       $   2.75   $   2.31   $   1.45   $   2.77   $   1.06
                                               ========   ========   ========   ========   ========
</TABLE>

-------------------

                                    -25-

<PAGE>   27

(1)  Effective January 1, 1995, the Company began writing a book of business
     previously written by an Illinois insurance company.
(2)  The Company discounted loss and loss adjustment expense reserves through
     1994.  In 1993 and 1992 the Company changed its loss and loss adjustment
     expense reserve discount rate from 3.75% to 3% and 5.625% to 3.75%,
     respectively.  These reductions in reserve discount rate were treated as
     changes in accounting estimates and resulted in decreases in net income of
     $2.0 million for 1993 and $5.3 million for 1992.  The effects of such
     changes in the reserve discount rate, which were previously presented as
     changes in accounting methods, have been reclassified and presented as
     changes in accounting estimates.  Effective January 1, 1995, the Company
     eliminated its practice of discounting loss and loss adjustment expense
     reserves for GAAP reporting purposes, which was treated as a change in
     accounting method.
(3)  Weighted average shares outstanding are in thousands.  Prior period amounts
     have been restated for the effects of 10% stock dividends on December 16,
     1996 and December 1, 1994 and 1993, respectively.
(4)  In 1995 the Company reduced its estimated liability for loss and loss
     adjustment expense reserves by $12.3 million for redundancies. The ratio
     includes the increase in reserve for extended reporting period claims.
(5)  Operating income excludes the after-tax effect of net realized investment
     gains and losses, cumulative effect changes in accounting methods and the
     after-tax effect of changes in accounting estimates.  For 1995, the
     after-tax effect of the reserve reduction has also been excluded.

Item 7.  Management's Discussion and Analysis of Financial Condition and
         Results of Operations

     The following discussion and analysis should be read in conjunction with
the consolidated financial statements and the notes thereto included elsewhere
in this report.

Financial Condition:

     The Company's total assets were $357.4 million and $330.7 million as of
December 31, 1996 and 1995, respectively.  The increase in total assets as of
December 31, 1996 was primarily the result of strong cash flows from PICOM's
operations due mainly to a decrease in paid losses and loss adjustment expenses
of $10.0 million as compared to 1995.  As of December 31, 1996 and 1995, the
Company had invested assets of $300.1 million and $280.6 million,

                                   -26-

<PAGE>   28

respectively.  As of December 31, 1996 and 1995, invested assets represented
approximately 84% and 85%, respectively, of the Company's total assets at
those dates.

     As of December 31, 1996 and 1995, the Company's investment portfolio was
dominated by fixed maturity securities and primarily consisted of U.S.
government and agency bonds, high-quality corporate bonds, mortgage-backed
securities and tax-exempt U.S. municipal bonds.  As of December 31, 1996 and
1995, these fixed maturity securities aggregated $286.3 million and $260.0
million, respectively.  Approximately $281.3 million, or 98.25% of the fixed
maturity securities held by the Company as of December 31, 1996, were rated
investment grade or better.

     The following table provides a profile of the Company's fixed maturity
portfolio by rating as of December 31, 1996:


<TABLE>
<CAPTION>
                             (Amounts in thousands)
----------------------------------------------------------------------------
                          Fair Value (As Reflected
S&P/Moody's Rating           on Balance Sheet)          Percent of Portfolio
----------------------------------------------------------------------------
<S>                           <C>                       <C>
AAA/Aaa (including U.S.
Governments of $51,049)               $186,567                     65.2%
AA/Aa                                   56,549                     19.8
A/A                                     35,791                     12.5
BBB/Baa                                  2,363                       .8
All other                                5,004                      1.7
   Total                              --------                    -----    
                                      $286,274                    100.0%
                                      ========                    =====  
</TABLE>

     In December 1995, the Company reclassified all of its fixed maturity
securities previously classified as held-to-maturity to available-for-sale, as
permitted by the Special Report, "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities" issued by the
Financial Accounting Standards Board ("FASB").  This one-time reclassification
increased shareholders' equity by $511,000, net of deferred federal income
taxes, as of December 31, 1995.  Accordingly, all fixed maturity securities are
classified as

                                  -27-

<PAGE>   29

available-for-sale and are carried at fair value as of December 31, 1996
and 1995.

     The Company's fixed maturity investment portfolio is sensitive to interest
rate changes.  As of December 31, 1996 and 1995, the fixed maturity portfolio
had unrealized gains of approximately $298,000 and $2.9 million, respectively.
The decrease in unrealized gains was due to slightly higher interest rates at
year end 1996 compared to year end 1995.  As of December 31, 1996, the fixed
maturity portfolio had a weighted average modified duration of approximately
four years.  A one hundred basis point increase in market interest rates would
decrease the value of this portfolio by approximately three percent, whereas a
one hundred basis point decrease in market interest rates would increase the
value of this portfolio by approximately three percent.

     Equity securities as of December 31, 1996 and 1995 consisted primarily of
common stock held in Physicians Insurance Company of Wisconsin, Inc., an
unrelated stock insurance company providing professional liability insurance to
health care providers primarily in Wisconsin.  As of December 31, 1996 and
1995, equity securities had unrealized gains of $62,000 and $33,000,
respectively.


Results of Operations -- Year Ended December 31, 1996 Compared to Year Ended
December 31, 1995:

     For purposes of the following discussion, the Company's 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

                                     -28-

<PAGE>   30

      LawyerCare(sm) - Offers professional liability coverage for lawyers and
      law firms.

      Net premiums written in 1996 were $55.5 million, an increase of 0.6%
over 1995 net premiums written of $55.2 million.  The increase in net premiums
written resulted from a $2.7 million increase in CorpCare(sm) premiums, a $1.1
million increase due to expansion of business into Indiana and Ohio, a $789,000
increase in HealthServices(sm) and HealthPro(sm) premiums and a $973,000
increase in LawyerCare(sm) and other premiums.  These increases were offset by a
decrease in DoctorCare(sm) premiums of $5.3 million that resulted from the
continued consolidation of individual practices into group practices and general
competition in the Michigan and Illinois insurance markets.  Of the net premiums
written in 1996, approximately 90.7% was generated by DoctorCare(sm) and
CorpCare(sm) coverages, 4.3% was generated by HealthServices(sm) and
HealthPro(sm) coverages, 1.6% was generated by LawyerCare(sm) coverage and 3.4%
was generated by other types of coverage.  Of the net premiums written in 1995,
approximately 93.8% was generated by DoctorCare(sm) and CorpCare(sm) coverages,
2.9% was generated by HealthServices(sm) and HealthProsm coverages, 0.9% was
generated by LawyerCare(sm) coverage and 2.4% was generated by other types of
coverage.

     During 1996 and 1995, the Company continued to balance its need for upward
rate adjustments with the 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 years.  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, was
$15.7 million for 1996, an increase of 6.9%, as compared to net investment
income of $14.7 million for 1995 despite a significant shift in the investment
portfolio towards municipal bonds which, due to their tax-exempt status, offer
lower pre-tax yields.  The increase in net investment income was due
principally to increases in invested assets because of positive cash flows from
operations.  The weighted average tax equivalent book yield of the fixed
maturity portfolio was 6.7%

                                  -29-

<PAGE>   31

and 6.5% as of December 31, 1996 and 1995, respectively.  During 1996, the
Company posted net realized investment losses of $473,000, whereas net
realized investment losses in 1995 were negligible.  The 1996 net realized
investment losses resulted from the Company's repositioning of its fixed
maturity portfolio to increase after-tax yield.

     Loss and loss adjustment expense 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.  Management of the Company believes
that the loss and loss adjustment expense reserves are adequate and are at or
above the actuarial best estimate.  At year-end 1994, the Company's loss and
loss adjustment expense reserves were discounted using a three percent interest
rate assumption.  Effective January 1, 1995, the practice of discounting
reserves for financial reporting was eliminated and, accordingly, loss and loss
adjustment expense reserves have been established on an undiscounted basis
thereafter (a more conservative accounting practice used by most publicly-traded
insurance companies).

     Incurred losses and loss adjustment expenses (including the increase in
reserve for extended reporting period claims) for 1996 totaled $49.1 million,
up 33.0%, as compared to incurred losses and loss adjustment expenses of $36.9
million for 1995.  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 86.6% in 1996 compared to 66.3% in 1995.  The 1995
loss and loss adjustment expense ratio was favorably impacted by 22.1
percentage points due to the Company's reduction of its reserves by $12.3
million at year-end 1995 because of favorable development of prior years' loss
reserves, as supported by a detailed actuarial study.

                                    -30-

<PAGE>   32

     Underwriting expenses were $11.1 million in 1996, a 19.4% increase over
underwriting expenses of $9.3 million in 1995.  As a percentage of premiums
earned, the underwriting expense ratio was 19.6% in 1996, up from the
underwriting expense ratio of 16.8% in 1995.  The increase in underwriting
expenses in 1996 relative to 1995 is attributable to non-recurring legal,
accounting and related expenses associated with the formation of the
Professionals Group holding company system, a one-time stock bonus paid to
directors, officers and employees in 1996 and start-up expenses associated with
the Company's expansion of business into Indiana and Ohio.

     The Company recorded $2.4 million in federal income tax expense in 1996 as
compared to $8.3 million in 1995.  The Company's effective federal income tax
rate approximated 20.3% in 1996 compared to 34.0% in 1995.  The decrease in the
effective income tax rate is due to the Company's increased holdings in
tax-exempt municipal bonds as well as an adjustment to the prior years' tax
liability.

     Net income for 1996 was $9.6 million, or $2.75 per share, on revenues of
$72.2 million.  This compares to net income of $7.9 million, or $2.31 per
share, on revenues of $70.6 million in 1995.  The favorable 1996 earnings were
attributable to the factors described above.  Net income for 1995 was reduced
by $8.1 million (net of deferred federal income taxes), or $2.37 per share, as
a result of a cumulative effect change in accounting method associated with the
elimination of the Company's practice of discounting its loss and loss
adjustment expense reserves during 1995.


Results of Operations -- Year Ended December 31, 1995 Compared to Year Ended
December 31, 1994:

     Net premiums written in 1995 were $55.2 million, an increase of 13.1% over
1994 net premiums written of $48.8 million.  Of such increase in net premiums
written, approximately $7.9 million resulted from the purchased book of
physicians and surgeons business written by PICOM-Illinois, which began writing
business effective January 1, 1995.  In addition, 1995 net premiums written
increased due to a $453,000 increase in HealthServices(sm) and HealthPro(sm)
premiums and a $487,000 increase in LawyerCare(sm) premiums.  These increases
were offset by a decrease in DoctorCare(sm) premiums of $2.4 million that
resulted from the

                                 -31-

<PAGE>   33

continued consolidation of individual practices into group practices and
general competition in the Michigan and Illinois insurance markets.  Of the     
net premiums written in 1995, approximately 93.8% was generated by
DoctorCare(sm) and CorpCare(sm) coverages, 2.9% was generated by
HealthServices(sm) and HealthPro(sm) coverages, 0.9% was generated by
LawyerCare(sm) coverage and 2.4% was generated by other types of coverage.  Of
the net premiums written in 1994, approximately 95.0% was generated by
DoctorCare(sm) and CorpCare(sm) coverages, 2.3% was generated by
HealthServices(sm) and HealthPro(sm) coverages, 0.1% was generated by
LawyerCare(sm) coverage and 2.6% was generated by other types of coverage.

     During 1995 and 1994, the Company continued to balance its need for upward
rate adjustments with the goal of maintaining market share in a very
competitive environment in both Michigan and Illinois.  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 years.  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, was
$14.7 million for 1995, up 10.0%, as compared to net investment income of $13.4
million for 1994.  The increase in net investment income was due principally to
increases in invested assets because of positive cash flows from operations.
During 1994, the Company posted net realized investment losses of $2.0 million,
whereas net realized investment losses in 1995 were negligible.

     Incurred losses and loss adjustment expenses (including the increase in
reserve for extended reporting period claims) for 1995 totaled $36.9 million,
down 18.6%, as compared to incurred losses and loss adjustment expenses of
$45.4 million for 1994.  As a percentage of premiums earned, the incurred loss
and loss adjustment expense ratio (including the increase in reserve for
extended reporting period claims) improved to 66.3% in 1995 from 93.5% in 1994.
The 1995 loss and loss adjustment expense ratio was favorably impacted by 22.1
percentage points due to the Company's reduction of its reserves by $12.3
million at year-end 1995 because of favorable development of prior years' loss

                                     -32-

<PAGE>   34

reserves, as supported by a detailed actuarial study.  In addition,
underwriting results for 1995 improved significantly from 1994, when adverse
results arose from a surge in the number of lawsuits filed by the plaintiff bar
in the two week period preceding the April 1, 1994 effective date of Michigan's
tort reform law.

     Underwriting expenses were $9.3 million in 1995, a 27.5% increase over
underwriting expenses of $7.3 million in 1994.  As a percentage of premiums
earned, the underwriting expense ratio was 16.8% in 1995, up from the
underwriting expense ratio of 15.1% in 1994.  The increase in underwriting
expenses in 1995 relative to 1994 is attributable to the Company's purchase in
1995, through PICOM-Illinois, of the right to solicit and write a block of
medical professional liability business in Illinois.  Such acquisition resulted
in an $18 million increase in the Company's direct written premiums (before
reinsurance) in 1995.  The acquisition and operating expenses associated with
PICOM-Illinois, were partially offset by a non-recurring profit commission of
$336,000 arising from the commutation of a reinsurance contract.

     The Company recorded $8.3 million in federal income tax expense in 1995 as
compared to $2.7 million in 1994.  The Company's effective federal income tax
rate approximated 34.0% in both 1995 and 1994.  Regular tax net operating loss
carryforwards of approximately $23.3 million at December 31, 1994 were fully
utilized by the Company during 1995.

     Net income for 1995 was $7.9 million, or $2.31 per share, on revenues of
$70.6 million.  This compares to net income of $5.2 million, or $1.45 per
share, on revenues of $59.9 million in 1994.  The strong 1995 earnings were
primarily attributable to a significant improvement in underwriting results,
including favorable development of prior years' reserves.  Additionally, net
income for 1995 was reduced by $8.1 million (net of deferred federal income
taxes), or $2.37 per share, as a result of a cumulative effect change in
accounting method associated with the elimination of the Company's practice of
discounting its loss and loss adjustment expense reserves during 1995.

                                  -33-

<PAGE>   35

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 years
ended December 31, 1996, 1995 and 1994; however, as of December 31, 1996, the
Company has entered into $5.5 million of commitments to build a new home office
facility in Okemos, Michigan and to purchase new furniture and equipment.  As 
of December 31, 1996, 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 February 1997, the Company entered into an agreement with Michigan
Educational Employees Mutual Insurance Company ("MEEMIC"), a Michigan-domiciled
specialty writer of personal automobile and homeowners coverages for Michigan
teachers and other educational employees.  The agreement contemplates a series
of simultaneous transactions which include the Company's purchase of a $21.0
million surplus certificate from MEEMIC, a quota share reinsurance agreement
whereby PICOM will reinsure a portion of MEEMIC's net retained lines, a
management services agreement between the Company and MEEMIC and the election
of Professionals Group's nominees to MEEMIC's Board of Directors.  These
transactions are subject to regulatory approval by the Michigan

                                      -34-

<PAGE>   36

Commissioner of Insurance and are projected to close by June 30, 1997.

     Professionals Group has obtained a commitment for a seven year, $22.5
million unsecured term loan from a bank, bearing interest at LIBOR plus 75
basis points, and payable monthly.  With the proceeds received from this loan,
Professionals Group's Board of Directors has authorized a $20.0 million capital
contribution to PICOM, which will purchase the surplus certificate from MEEMIC.

     After consummation of the aforedescribed transactions with MEEMIC, the
Company has 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 would be consolidated with
MEEMIC's.  To fund this purchase, MEEMIC will utilize the proceeds of the
surplus certificate, 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 will issue warrants for 275,000 shares of its
common stock to MEIA shareholders.

     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 and approval of MEEMIC's
policyholders.  No specific timetable has been set for this proposed
demutualization and there can be no assurances that MEEMIC will be
demutualized.

     The ability of Professionals Group to fund its operations and to pay
dividends on its common stock will be dependent upon its receipt of dividends,
loans or advances from its insurance company subsidiaries (particularly PICOM).
The ability of those subsidiaries to pay dividends is subject to regulatory
restrictions.  Generally, these restrictions limit the amount of dividends such
subsidiaries can pay to their respective parent in any 12-month period to the
greater of statutory net income for the preceding year (excluding realized
gains and losses on sales of investments), or ten percent of policyholders'
surplus as of the end of the preceding year.  As of January 1, 1997,
approximately $14.9 million of dividends could be paid by Professionals Group's
direct insurance

                                   -35-

<PAGE>   37

subsidiaries without prior regulatory approval.  In 1996, Professionals
Group's insurance subsidiaries paid cash dividends aggregating $3.5 million
to Professionals Group.  None of Professionals Group's insurance
subsidiaries paid any cash dividends in either 1995 or 1994.  There can be no
assurance as to any future dividends by Professionals Group or any of its
subsidiaries (see also Note 11 to the Company's consolidated financial
statements).

     Professionals Group was incorporated in January 1996 for the purpose of
serving as the holding company for PICOM and its subsidiaries.  Effective
August 31, 1996, Professionals Group acquired all of the issued and outstanding
shares of PICOM common stock through the merger of a wholly-owned insurance
company subsidiary of Professionals Group with and into PICOM (the
"Reorganization").  By virtue of the Reorganization, each issued and
outstanding share of PICOM common stock was converted into one share of common
stock, no par value per share, of Professionals Group and PICOM became a
wholly-owned subsidiary of Professionals Group.

     On July 5, 1995, PICOM repurchased 254,823 shares its common stock
(approximately 7.9% of the then issued and outstanding shares of PICOM Common
Stock) owned by Physicians Insurance Company of Ohio at a price of $17 per
share. During 1995, PICOM negotiated a reciprocal stock purchase agreement with
Physicians Insurance Company of Wisconsin, Inc. ("PIC-WIS").  Under the
agreement, PICOM acquired 1,583 shares of PIC-WIS common stock (representing
6.8% of the then outstanding shares of PIC-WIS common stock) for $2.5 million
and PIC-WIS purchased 131,579 shares of PICOM common stock (representing 4.2% of
the then issued and outstanding shares of PICOM common stock) for $2.5 million.
The transaction replaced more than one-half of the equity used to accomplish the
previously reported repurchase of shares of PICOM common stock held by
Physicians Insurance Company of Ohio.

     In May 1996, and in a transaction valued at approximately $1.2 million,
PICOM acquired all of the issued and outstanding shares of American Insurance
Management Corporation, a privately held Indiana corporation that serves as the
attorney-in-fact for American Medical Insurance Exchange, an Indiana
interinsurance reciprocal exchange.  While the acquisition was accounted for as
a purchase, the effect of the acquisition was not material to the Company's
consolidated results of operations  (see also Note 11 to the Company's
consolidated financial statements).

                                     -36-

<PAGE>   38

Impact of Inflation and Changing Prices:

     The consolidated financial statements and related data presented herein
have been prepared in accordance with generally accepted accounting principles
which require the measurement of financial position and operating results in
terms of historical dollars without considering changes in the relative
purchasing power of money over time due to inflation.  The primary assets and
liabilities of the Company are monetary in nature.  As a result, interest rates
have a more significant impact on the Company's performance than the effects of
general levels of inflation.  Interest rates do not necessarily move in the
same direction or magnitude as the cost of paying losses and loss adjustment
expenses.  Moreover, increases in market interest rates, which often occur
during periods of high inflation, reduce the fair value of the Company's fixed
maturity securities.  Conversely, reductions in market interest rates increase
the fair value of fixed maturity securities.

     Inflation increases the costs of settling insurance claims over time.
Because insurance premiums are established before the amount of losses and loss
adjustment expenses, and the extent to which inflation may affect such
expenses, are known, the Company attempts to anticipate the future impact of
inflation when establishing rate levels.  The Company may be limited in raising
its premium levels for competitive and regulatory reasons, in which case the
Company, rather than its insureds, would be required to absorb the effects of
inflation.  Future economic changes which result in prolonged and increasing
levels of inflation could cause increases in the dollar amount of loss and loss
adjustment expense reserves and thereby adversely affect future reserve
development.  To minimize such risk, the Company maintains what management
considers to be strong and adequate reinsurance, conducts regular actuarial
reviews of reserves and maintains adequate asset liquidity.


Reinsurance:

     In the normal course of business, the Company seeks to reduce the loss
that may arise from events that cause unfavorable underwriting results, provide
additional capacity for growth and protect shareholders' equity by reinsuring
certain levels of risk in various areas of exposure with other insurance
enterprises or reinsurers.  At the present time, the Company has both excess of

                                      -37-

<PAGE>   39

loss reinsurance and errors and omissions insurance.  Although reinsurance
agreements contractually obligate the Company's reinsurers to reimburse the
Company for their proportionate share of losses, they do not discharge the
primary liability of the Company.  The Company is contingently liable for the
ceded amount of reserves for unpaid losses and loss adjustment expenses and
unearned premiums in the event the assuming insurance organizations are unable
to meet their contractual obligations.

     For the year ended December 31, 1996, the following table provides certain
information with respect to the Company's reinsurers (see also Note 5 to the
consolidated financial statements for amounts recoverable from the Company's
reinsurers):


<TABLE>
<CAPTION>
                             (Amounts in thousands)
-------------------------------------------------------------------------
                                  Reinsurance Premium
Reinsurer                                Ceded           A.M. Best Rating
-------------------------------------------------------------------------
<S>                                       <C>                <C>
TIG Reinsurance                            $3,975              A
PMA Reinsurance Corporation                 1,777              A+
Continental Casualty Company                1,496              A
Lloyd's of London Syndicates                  978           Not Rated
Princeton Insurance Company                   385              A-
Other                                         696           Not Rated
                                           ------
                                           $9,307
                                           ======
</TABLE>

     The Company continually reviews its reinsurers, considering a number of
factors, the most critical of which is their financial stability.  Based on
these reviews, the Company evaluates its position with its reinsurers with
respect to existing and future reinsurance.  To date, the Company has not
experienced any material difficulty in collecting reinsurance recoverables.  No
assurance can be given, however, regarding the future ability of any of the
Company's reinsurers to meet their future obligations.  Among the insurers to
which the Company cedes reinsurance are certain Lloyd's of London Syndicates.


                                     -38 -

<PAGE>   40
In recent years, Lloyd's has reported substantial losses which have had adverse
effects on Lloyd's in general, and on certain syndicates in particular.  The
substantial losses and other adverse developments could affect the ability of
certain syndicates to continue to operate.  It is not possible to predict what
effects the circumstances described above may have on Lloyd's and the Company's
contractual relationship with Lloyd's Syndicates in future years.


Regulation:

     Certain regulations that affect the Company's insurance subsidiaries are
promulgated by the National Association of Insurance Commissioners ("NAIC"),
which is an association of state insurance commissioners, regulators and
support staff that acts as a coordinating body for the state insurance
regulatory process.  The NAIC has established risk-based-capital ("RBC")
requirements to assist regulators in monitoring the financial strength and
stability of property and casualty insurers.  Under the NAIC requirements,
regulatory compliance is determined by a ratio of an insurance company's
regulatory total adjusted capital, as defined by the NAIC, to its authorized
control level of RBC, as defined by the NAIC.  Companies below specific ratios
are classified within certain levels, each of which requires specific
corrective action.  The levels and ratios are as follows:


<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
                          Ratio of Total Adjusted Capital to Authorized Control
Regulatory Event          Level RBC (Less Than or Equal To)
-------------------------------------------------------------------------------
<S>                       <C>
Company action level                                2

Regulatory action level                            1.5

Authorized control level                            1

Mandatory control level                            0.7
------------------------------------------------------------------------------
</TABLE>

     PICOM and PICOM-Illinois have calculated their ratios of Total Adjusted
Capital to Authorized Control Level RBC and each were in excess of 3:1 at both
December 31, 1996 and 1995.

                                   -39-

<PAGE>   41

     The NAIC has proposed a new Model Investment Law that may affect the
statutory carrying values of certain investments. Additionally, the NAIC has
undertaken a project to codify statutory accounting practices, which may affect
the statutory carrying value of assets and liabilities.  The codification
project is expected to be completed in 1997 and effective in 1999.  It is not
certain, nor is it possible to predict what impact these projects will have on
the Company's insurance subsidiaries, in the event the projects are adopted by
the NAIC.

     The purpose of these regulatory efforts is to improve the solvency of
insurers.  While the impact of these regulatory efforts on the Company's
insurance operations cannot be quantified until enacted, the Company believes
it will be adequately positioned to compete in an environment of more stringent
regulation.


Effects of New Accounting Pronouncements:

     In March 1995, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," which is effective for fiscal years
beginning after December 15, 1995.  SFAS No. 121 requires that long-lived
assets and certain identifiable intangibles to be held and used, or disposed
of, by an entity be reviewed for impairment, and be reported at the lower of
the carrying amount or fair value less costs to sell, if applicable.  The
adoption of SFAS No. 121 did not have a material effect on the Company's
consolidated results of operations or financial condition during 1996.

     In December 1995, the Company reclassified all of its fixed maturity
securities previously classified as held-to-maturity to available-for-sale, as
permitted by the FASB's Special Report, "A Guide to Implementation of Statement
115 on Accounting for Certain Investments in Debt and Equity Securities."  This
one-time reclassification increased shareholders' equity by $511,000, net of
deferred federal income taxes, as of December 31, 1995.  Accordingly, all fixed
maturity securities are classified as available-for-sale and are carried at
fair value as of December 31, 1996 and 1995.

     The FASB has issued SFAS No. 123 "Accounting for Stock-Based
Compensation," which is effective for fiscal years beginning

                                -40-

<PAGE>   42

after December 15, 1995.  SFAS No. 123 prescribes a method of accounting for
stock-based compensation that recognizes compensation cost based on the
fair value of the options at grant date.  In lieu of applying this fair
value based method, a company may elect to disclose only the proforma effects
of such application in the footnotes to its financial statements.  Because
the Company elected the disclosure-only provisions of this standard in 1996,
there was no impact on the Company's consolidated results of operations for
1996.

Item 8. Financial Statements and Supplementary Data

                PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
                                 AND SUBSIDIARY
                          Consolidated Balance Sheets
                           December 31, 1996 and 1995



<TABLE>
<CAPTION>
                            Assets                                           1996     1995
                            ------                                           ----     ----
                                                                   (In thousands, except share data)
<S>                                                                        <C>       <C>
Investments (note 4):
  Available for sale, at fair value:
    Fixed maturities (amortized cost $285,976 and $257,129 in 1996 and
      1995, respectively)                                                  $286,274  259,979
    Equity securities (cost $2,630 and $2,608 in 1996 and 1995,
      respectively)                                                           2,692    2,641
  Short-term investments, at cost, which approximates fair value             10,711   17,512
  Real estate, at cost, net of accumulated depreciation of $69 and $49 in
    1996 and 1995, respectively                                                 455      475
                                                                           --------  -------
        Total investments                                                   300,132  280,607
Cash                                                                          2,023    1,279
Premiums due from policyholders                                               7,268    7,618
Amounts due from reinsurers (note 5)                                         17,550   12,264
Accrued investment income                                                     3,885    3,612
Prepaid reinsurance premiums (note 5)                                           122       76
Deferred federal income taxes (note 6)                                       17,301   18,264
Property and equipment, at cost, net of accumulated depreciation (note 7)     2,459    2,341
Deferred policy acquisition costs (note 8)                                      998    1,092
Other assets (note 15)                                                        5,644    3,559
                                                                           --------  -------
        Total assets                                                       $357,382  330,712
                                                                           ========  =======
<CAPTION>
                  Liabilities and Shareholders' Equity
                  ------------------------------------
<S>                                                                        <C>       <C>
Liabilities:
  Loss and loss adjustment expense reserves (note 9)                       $219,919  199,605
  Reserve for extended reporting period claims                               14,795   14,082
  Unearned premiums                                                          21,945   23,122
  Drafts outstanding                                                          2,540    3,445
  Payable for securities                                                          -    3,205
  Balance due on purchased book of business                                   2,200    2,694
  Accrued expenses and other liabilities                                      8,025    6,148
                                                                           --------  -------
        Total liabilities                                                   269,424  252,301
                                                                           --------  -------
Shareholders' equity (notes 11 and 13):
  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 and
    3,238,959 shares issued and outstanding in 1996 and 1995, respectively,
    including shares in treasury in 1995                                      3,506    3,239
  Additional paid-in capital                                                 14,569    8,417
  Retained earnings                                                          69,645   66,994
  Net unrealized appreciation on investments, net of deferred federal
    income tax expense of $123 and $963 in 1996 and 1995, respectively          238    1,882
                                                                           --------  -------
                                                                             87,958   80,532
  Less cost of common stock in treasury; 123,244 shares in 1995 (note 11)         -   (2,121)
                                                                           --------  -------
        Total shareholders' equity                                           87,958   78,411
                                                                           --------  -------
Commitments and contingencies (notes 5 and 15)
        Total liabilities and shareholders' equity                         $357,382  330,712
                                                                           ========  =======
</TABLE>

See accompanying notes to the consolidated financial statements.

                                      -41-
<PAGE>   43

                PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
                                 AND SUBSIDIARY
                       Consolidated Statements of Income




<TABLE>
<CAPTION>
                                                                     Years Ended December 31,
                                                                   ----------------------------
                                                                   1996        1995        1994
                                                                   ----        ----        ----
                                                             (In thousands, except per share data)
<S>                                                             <C>         <C>         <C>
Revenues and other income:
  Premiums written, including $563 of premiums assumed in 1996  $  64,771      67,727      51,110
  Premiums ceded                                                   (9,307)    (12,576)     (2,332)
                                                                ---------   ---------   ---------
      Net premiums written                                         55,464      55,151      48,778
  Decrease (increase) in unearned premiums, net of prepaid
    reinsurance premiums                                            1,223         533        (288)
                                                                ---------   ---------   ---------
      Premiums earned                                              56,687      55,684      48,490
  Net investment income (note 4)                                   15,741      14,729      13,379
  Net realized investment losses (note 4)                            (473)         (6)     (2,006)
  Other                                                               287         165           4
                                                                ---------   ---------   ---------
      Total revenues and other income                              72,242      70,572      59,867
                                                                ---------   ---------   ---------
Expenses:
  Losses and loss adjustment expenses, net (note 9)                48,368      35,558      44,853
  Increase in reserve for extended reporting period claims            713       1,344         500
  Policy acquisition and other underwriting expenses               11,138       9,328       7,316
                                                                ---------   ---------   ---------
      Total expenses                                               60,219      46,230      52,669
                                                                ---------   ---------   ---------
      Income from operations before equity in earnings of
        affiliate, federal income taxes and cumulative effect of
        change in accounting method                                12,023      24,342       7,198
Equity in earnings of affiliate                                         -           -         612
                                                                ---------   ---------   ---------
      Income before federal income taxes and cumulative
        effect of change in accounting method                      12,023      24,342       7,810
Federal income taxes (note 6)                                      (2,438)     (8,276)     (2,656)
                                                                ---------   ---------   ---------
      Income before cumulative effect of change in
        accounting method                                           9,585      16,066       5,154

Cumulative effect of change in accounting method - elimination
  of loss and loss adjustment expense reserve discount, net of
  deferred federal income tax benefit of $4,185 (note 9)                -      (8,125)          -
                                                                ---------   ---------   ---------
      Net income (note 13)                                      $   9,585       7,941       5,154
                                                                =========   =========   =========
Net income per common share:
  Income before cumulative effect of change in
    accounting method                                           $    2.75        4.68        1.45
  Cumulative effect of change in accounting method                      -       (2.37)          -
                                                                ---------   ---------   ---------
      Net income per common share                               $    2.75        2.31        1.45
                                                                =========   =========   =========
Pro forma amounts, assuming the elimination of loss and loss
    adjustment expense reserve discounting is applied
    retroactively:
  Net income                                                    $       -      16,066       5,356
                                                                =========   =========   =========
  Net income per common share                                   $       -        4.68        1.51
                                                                =========   =========   =========
Weighted average shares outstanding (note 11)                   3,486,723   3,432,339   3,556,563
                                                                =========   =========   =========
</TABLE>



See accompanying notes to the consolidated financial statements.


                                      -42-
<PAGE>   44

                PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
                                 AND SUBSIDIARY
                Consolidated Statements of Shareholders' Equity
                  Years ended December 31, 1996, 1995 and 1994


<TABLE>
<CAPTION>


                                                                                                               
                                                                                                                
                                                                                                                 
                                                                                                                  
                                                 Common Stock                                              
                                       ------------------------------                                         
                                              Shares                                                                       
                                       --------------------             Additional                                          
                                                      In                 Paid-in     Retained                                    
                                       Issued      Treasury    Amount    Capital     Earnings                                
                                       ------      --------    ------   ----------   --------                                  
                                                  (In  thousands, except share data)

<S>                                   <C>          <C>         <C>       <C>         <C>                                     
Balances, December 31, 1993           2,945,536           -    $2,946     4,220       58,170                                    
Net income                                    -           -         -         -        5,154                                     
Issuance of 10% stock dividend          293,423           -       293     3,961       (4,271)                                  
Net depreciation on debt and
  equity securities                           -           -         -         -            -                                      
                                      ---------    --------    ------    ------       ------                                    
Balances, December 31, 1994           3,238,959           -     3,239     8,181       59,053                                    
Net income                                    -           -         -         -        7,941                                    
Purchase of treasury shares,
  at cost (note 11)                           -     254,823         -         -            -                                    
Sale of treasury shares (note 4)              -    (131,579)        -       236            -                                     
Net appreciation on debt securities
  transferred from held-to-maturity
  classification (note 4)                     -           -         -         -            -                                    
Net appreciation on debt and
  equity securities                           -           -         -         -            -                                     
                                      ---------    --------    ------    ------       ------                                     
Balances, December 31, 1995           3,238,959     123,244     3,239     8,417       66,994                                      

Net income                                    -           -         -         -        9,585                                    
Issuance of common stock (note 1)             1           -         -         -            -                                   
Issuance of treasury shares as
  stock bonus (note 11)                       -     (28,430)        -       207            -                                    
Issuance of treasury shares in
  purchase of subsidiary (note 11)            -     (44,000)        -       178            -                                    
Retirement and cancellation of
  treasury shares (note 11)             (50,814)    (50,814)      (51)     (823)           -                                    
Issuance of 10% stock dividend          317,604           -       318     6,590       (6,934)                                   
Net depreciation on debt and
  equity securities                           -           -         -         -            -                                   
                                      ---------    --------    ------    ------       ------                                    
Balances, December 31, 1996           3,505,750          --    $3,506    14,569       69,645                                    
                                      =========    ========    ======    ======       ======                                     
<CAPTION>


                                      Net Unrealized
                                       Appreciation
                                      (Depreciation)
                                     on Investments,
                                         Net of
                                        Deferred
                                        Federal        Cost of              Total
                                         Income        Common               Share
                                          Tax          Stock in            holders'
                                         Effect        Treasury             Equity
                                         ------        --------             ------
                                            (In  thousands, except share data)

<S>                                   <C>               <C>              <C>
Balances, December 31, 1993               (497)              -              64,839
Net income                                   -               -               5,154
Issuance of 10% stock dividend               -               -                 (17)
Net depreciation on debt and
  equity securities                     (6,834)              -              (6,834)
                                       -------          ------             -------
Balances, December 31, 1994             (7,331)              -              63,142
Net income                                   -               -               7,941
Purchase of treasury shares,
  at cost (note 11)                          -          (4,385)             (4,385)
Sale of treasury shares (note 4)             -           2,264               2,500
Net appreciation on debt securities
  transferred from held-to-maturity
  classification (note 4)                  511               -                 511
Net appreciation on debt and
  equity securities                      8,702               -               8,702
                                       -------          ------             -------
Balances, December 31, 1995              1,882          (2,121)             78,411

Net income                                   -               -               9,585
Issuance of common stock (note 1)            -               -                   -
Issuance of treasury shares as
  stock bonus (note 11)                      -             490                 697
Issuance of treasury shares in
  purchase of subsidiary (note 11)           -             757                 935
Retirement and cancellation of
  treasury shares (note 11)                  -             874                   -
Issuance of 10% stock dividend               -               -                 (26)
Net depreciation on debt and
  equity securities                     (1,644)              -              (1,644)
                                       -------          ------             -------
Balances, December 31, 1996                238               -              87,958
                                       =======          ======             =======
</TABLE>


See accompanying notes to the consolidated financial statements.

                                      -43-
<PAGE>   45

                PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
                                 AND SUBSIDIARY
                     Consolidated Statements of Cash Flows



<TABLE>
<CAPTION>
                                                                          Years Ended December 31,
                                                                         ---------------------------
                                                                         1996        1995       1994
                                                                         ----        ----       ----
                                                                                (In thousands)
<S>                                                                    <C>         <C>        <C>
Cash flows from operating activities:
  Net income                                                           $  9,585      7,941      5,154
  Adjustments to reconcile net income to net cash provided by 
  operating activities:
    Depreciation and amortization                                         2,423      1,056      2,257
    Undistributed equity in earnings of affiliate                             -          -       (612)
    Realized losses on investments                                          473          6      2,006
    Deferred federal income taxes                                         1,834      5,250      2,306
    Stock bonus                                                             697          -          -
    Changes in assets and liabilities:
     Premiums due from policyholders                                        350        558        185
     Amounts due from reinsurers                                         (5,286)    (8,809)       346
     Accrued investment income                                             (273)      (615)      (443)
     Prepaid reinsurance premiums                                           (46)       902         77
     Deferred policy acquisition costs                                       94         20        (84)
     Other assets                                                        (1,137)      (331)         -
     Loss and loss adjustment expense reserves                           20,314     11,061     (2,677)
     Reserve for extended reporting period claims                           713      1,344        500
     Unearned premiums                                                   (1,177)    (1,435)       210
     Drafts outstanding                                                    (905)       (18)       388
     Accrued expenses and other liabilities                               1,877        667        104
                                                                      ---------   --------   --------
      Net cash provided by operating activities                          29,536     17,597      9,717
                                                                      ---------   --------   --------
Cash flows from investing activities:
  Proceeds from sale or maturity of short-term investments              293,643    658,437    239,905
  Purchases of short-term investments                                  (286,325)  (634,287)  (231,308)
  Proceeds from maturity of securities available for sale                 2,000     43,847      9,265
  Proceeds from sale of securities available for sale                    97,188    115,684     70,518
  Purchases of securities available for sale                           (130,506)  (216,175)   (88,189)
  Proceeds from maturity of securities held to maturity                       -     27,686     29,180
  Proceeds from sale of securities held to maturity                           -        758      1,455
  Purchases of securities held to maturity                                    -    (12,861)   (40,852)
  Payable for securities                                                 (3,205)     3,205          -
  Purchases of property and equipment                                      (667)      (774)      (224)
  Payment on liability for purchased book of business                      (894)      (893)         -
                                                                      ---------   --------   --------
      Net cash used in investing activities                             (28,766)   (15,373)   (10,250)
                                                                      ---------   --------   --------
Cash flows from financing activities:
  Purchase of treasury shares                                                 -     (4,385)         -
  Sale of treasury shares                                                     -      2,500          -
  Cash paid in lieu of fractional shares                                    (26)         -        (17)
                                                                      ---------   --------   --------
      Net cash used in financing activities                                 (26)    (1,885)       (17)
                                                                      ---------   --------   --------
Net increase (decrease) in cash                                             744        339       (550)

Cash, beginning of year                                                   1,279        940      1,490
                                                                      ---------   --------   --------
Cash, end of year                                                      $  2,023      1,279        940
                                                                      =========   ========   ========
Supplemental disclosure of cash flow information - federal income
 taxes paid (recovered)                                                $  1,593       (159)       350
                                                                      =========   ========   ========
Supplemental schedule of noncash investing and financing activities:
  Purchase of book of business (note 15):
    Intangible assets acquired                                         $   (400)    (3,587)         -
    Amount due                                                              400      3,587          -
  Issuance of treasury shares as stock bonus (note 11)                      697          -          -
  Issuance of treasury shares for acquired company (note 11)                935          -          -
</TABLE>


See accompanying notes to the consolidated financial statements.

                                      -44-
<PAGE>   46

                PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
                                 AND SUBSIDIARY
                   Notes to Consolidated Financial Statements
                        December 31, 1996, 1995 and 1994



(1) Description of Business

    General

    Professionals Insurance Company Management Group (Professionals Group) is
    an insurance holding company incorporated under Michigan law on January 31,
    1996.  Professionals Group owns all of the issued and outstanding common
    stock of PICOM Insurance Company (PICOM), a stock insurance company
    incorporated under Michigan law.  Professionals Group and PICOM are
    collectively referred to as "the Company."

    Effective August 31, 1996, and pursuant to a Reorganization Agreement dated
    May 13, 1996 (the Reorganization Agreement), and an Agreement and Plan of
    Merger dated May 13, 1996 (Plan of Merger), among Professionals Group,
    PICOM Interim Insurance Company, a stock insurance company incorporated
    under Michigan law and a wholly owned subsidiary of Professionals Group
    (INSCO) and PICOM, Professionals Group acquired all of the outstanding
    capital stock of PICOM through the merger of INSCO with and into PICOM (the
    Merger).  As a result of the Merger: (1) INSCO was merged into PICOM and
    INSCO ceased to exist; (2) PICOM, as the surviving corporation, became a
    wholly owned subsidiary of Professionals Group; (3) each issued and
    outstanding share of common stock of PICOM (representing 3,188,145 shares)
    was converted into one share of common stock of Professionals Group, and
    (4) all of the issued and outstanding shares of INSCO held by Professionals
    Group were converted into shares of common stock of PICOM.

    Prior to the Reorganization Agreement and the Plan of Merger, PICOM loaned
    $1,500,000 to Professionals Group for the purpose of enabling Professionals
    Group to form and capitalize INSCO in accordance with the Michigan
    Insurance Code.  Professionals Group invested the entire $1,500,000 in
    INSCO in exchange for all of the issued and outstanding shares of capital
    stock of INSCO.  The loan from PICOM to Professionals Group had a stated
    interest rate and maturity date and was secured by a pledge of all of the
    issued and outstanding shares of INSCO.  Subsequent to the Merger, PICOM
    declared and paid cash dividends totaling $3,530,334 to Professionals
    Group.  Professionals Group then used $1,530,334 of the cash dividend to
    repay PICOM the outstanding balance plus accrued interest on the loan.

    The Merger has been accounted for in a manner similar to a pooling of
    interests, whereby Professionals Group has carried forward to its accounts
    the assets and liabilities of PICOM at their respective amounts as reported
    by PICOM.

    PICOM is a Michigan-domiciled property and casualty insurance company
    providing professional liability insurance for physicians, surgeons,
    dentists, hospitals, other health care providers and lawyers and law firms
    in Michigan, Ohio and Indiana.  PICOM is also licensed in Illinois, Iowa
    and Pennsylvania.  PICOM, through a wholly owned insurance subsidiary also
    writes business in Illinois (see note 2).


                                      -45-
<PAGE>   47


                PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
                                 AND SUBSIDIARY
             Notes to Consolidated Financial Statements, Continued



(1) Description of Business, Continued

    Following is a description of the most significant risks facing
    property/casualty insurers and how the Company mitigates those risks:

    Legal/Regulatory Risk is the risk that the legal or regulatory environment
    in which an insurer operates will change and create additional costs or
    expenses not anticipated by the insurer in pricing its products.  That is,
    regulatory initiatives designed to reduce insurer profits or new legal
    theories may create costs for the insurer beyond those recorded in the
    financial statements.  The Company mitigates this risk through underwriting
    and loss adjusting practices which identify and minimize the adverse impact
    of this risk.

    Credit Risk is the risk that issuers of securities owned by the Company
    will default or other parties, including reinsurers, which owe the Company
    money will not pay.  Also, the Company writes a significant amount of
    business under which policyholders reimburse the Company for policy
    deductibles.  The Company minimizes this risk by adhering to a conservative
    investment strategy, by maintaining sound reinsurance and credit and
    collection policies and by providing for any amounts deemed uncollectible.

    Interest Rate Risk is the risk that interest rates will change and cause a
    decrease in the value of an insurer's investments.  The Company mitigates
    this risk by attempting to match the maturity schedule of its assets with
    the expected payout of its liabilities.  To the extent that liabilities
    come due more quickly than assets mature, an insurer would have to sell
    assets prior to maturity and recognize a gain or loss.  At December 31,
    1996, the estimated market value of the Company's bond portfolio was
    greater than its amortized cost.

    In preparing the consolidated financial statements, management is required
    to make estimates and assumptions that affect the reported amounts of
    assets and liabilities as of the dates of the balance sheets and revenues
    and expenses for the periods then ended.  Actual results may differ from
    those estimates.

    The most significant estimates that are susceptible to significant change
    in the near term relate to the determination of the loss and loss
    adjustment expense reserves and the reserve for extended reporting period
    claims.  Although considerable variability is inherent in these estimates,
    management believes that the reserves are adequate.  The estimates are
    reviewed regularly and adjusted as necessary.  Such adjustments are
    generally reflected in current operations.  Other material estimates that
    are susceptible to significant change in the near term relate to the
    recoverability of deferred federal income tax assets.

(2) Principles of Consolidation

    The accompanying consolidated financial statements include the accounts of
    Professionals Group, its wholly owned subsidiary, PICOM and the following
    wholly owned subsidiaries of PICOM:

    PICOM Insurance Company of Illinois (PICOM-Illinois) - an
    Illinois-domiciled property and casualty insurance company providing
    professional liability insurance for physicians and surgeons in the State
    of Illinois.  PICOM-Illinois was formed in December 1994 to write the book
    of business purchased effective January 1, 1995 (see note 15).

    PICOM Claims Services Corporation - a provider of claims processing
    services to a nonaffiliated professional liability company.

                                      -46-
<PAGE>   48


                PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
                                 AND SUBSIDIARY
             Notes to Consolidated Financial Statements, Continued



(2) Principles of Consolidation, Continued

    PICOM Financial Services Corporation - an inactive financial services
    company.

    PICOM Insurance Agency, Inc. - an inactive insurance agency.

    American Insurance Management Corporation - an Indiana Corporation that
    serves as the attorney-in-fact for American Medical Insurance Exchange, an
    Indiana interinsurance reciprocal exchange.

    All significant intercompany transactions and balances have been eliminated
    in consolidation.

(3) Summary of Significant Accounting Policies

    (a)  Basis of Presentation

         The consolidated financial statements have been prepared in accordance
         with generally accepted accounting principles (GAAP), which vary in
         certain respects from statutory accounting practices followed in
         reporting to insurance regulatory authorities (see note 13 for the
         effects of such differences).

    (b)  Investments

         Investment securities are classified upon acquisition into one of
         three categories:  trading, available-for-sale or held-to-maturity.
         Trading securities are bought and held principally for the purpose of
         selling them in the near term.  Held-to-maturity securities are those
         securities the Company has the positive intent and ability to hold
         until maturity.  At December 31, 1996 and 1995, all of the Company's
         securities are classified as available-for-sale and are those
         securities that would be available to be sold in response to the
         Company's liquidity needs, changes in market interest rates and
         asset-liability management strategies, among others.

         Available-for-sale securities are recorded at fair value, whereas
         held-to-maturity securities are recorded at amortized cost.
         Unrealized gains and losses, net of the related income tax effect, on
         available-for-sale securities are excluded from income and reported as
         a separate component of shareholders' equity.  Transfers of securities
         between categories are recorded at fair value at the date of transfer.
         Unrealized gains and losses associated with transfers of securities
         from held-to-maturity to available-for-sale are recorded as a separate
         component of shareholders' equity.

         A decline in the fair value of an available-for-sale or
         held-to-maturity security below cost that is deemed other than
         temporary results in a charge to income, resulting in the
         establishment of a new cost basis for the security.  All declines in
         fair values of the Company's investment securities in 1996, 1995 or
         1994 were deemed to be temporary.


                                      -47-
<PAGE>   49


                PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
                                 AND SUBSIDIARY
             Notes to Consolidated Financial Statements, Continued



(3) Summary of Significant Accounting Policies, Continued

    (b)  Investments, Continued

         Investments in preferred stock and common stock of nonaffiliates are
         stated at fair value.  Fair values are based on quoted market prices
         or dealer quotes.  If a quoted market price is not available, fair
         value is estimated using quoted market prices for similar securities.

         Short-term investments, which consist principally of commercial paper,
         money market funds and U.S. government securities, are stated at cost,
         which approximates fair value.

         Premiums and discounts are amortized or accreted, respectively, over
         the life of the related debt security as an adjustment to yield using
         the yield-to-maturity method.  Dividends and interest income are
         recognized when earned.  Realized gains and losses are included in
         earnings and are derived using the specific-identification method for
         determining the cost of securities sold.

    (c)  Revenue Recognition

         Insurance premium income is recognized on a monthly pro rata basis
         over the respective terms of the policies in-force and unearned
         premiums represent the portion of premiums written which is applicable
         to the unexpired terms of the policies in-force.

         Reinsurance arrangements are prospective contracts for which prepaid
         reinsurance premiums are amortized ratably over the related policy
         terms based on the estimated ultimate amounts to be paid.

    (d)  Loss and Loss Adjustment Expense Reserves

         Loss and loss adjustment expense reserves represent the accumulation
         of individual case estimates for reported losses and loss adjustment
         expenses, bulk adjustments to case estimates and actuarial estimates
         for incurred but not reported losses and loss adjustment expenses,
         based upon the Company's actual experience, assumptions and
         projections as to claims frequency, severity, inflationary trends and
         settlement payments.  The reserve for loss and loss adjustment
         expenses is intended to cover the ultimate net cost of all losses and
         loss adjustment expenses incurred but unsettled through the balance
         sheet date.  The reserve is stated gross of reinsurance ceded.

         Through December 31, 1994, the Company discounted loss and loss
         adjustment expense reserves to present value.  Effective January 1,
         1995, the Company eliminated its practice of discounting, a change in
         method of accounting (see note 9).


                                      -48-
<PAGE>   50


                PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
                                 AND SUBSIDIARY
             Notes to Consolidated Financial Statements, Continued



(3) Summary of Significant Accounting Policies, Continued

    (e)  Reserve for Extended Reporting Period Claims

         The reserve for extended reporting period claims coverage is recorded
         during the term of the original claims-made policy, utilizing the
         pure-premium approach, in amounts adequate to pay for estimated future
         claims reported subsequent to current policyholders' death, disability
         or retirement.  Changes in this reserve are charged or credited to
         income.

    (f)  Property and Equipment and Depreciation

         Property and equipment are recorded at cost, net of accumulated
         depreciation.  Depreciation is computed on the straight-line method
         over periods ranging from 4 to 25 years.  Maintenance, repairs and
         minor renewals are charged to expense as incurred.

         The cost and related accumulated depreciation of assets sold are
         removed from the related accounts and the resulting gain or loss is
         reflected in income.

    (g)  Deferred Policy Acquisition Costs

         Policy acquisition costs, specifically commissions, are deferred,
         subject to ultimate recoverability from future income, including
         investment income and amortized to expense over the period in which 
         the related premiums are earned.

    (h)  Federal Income Taxes

         Deferred federal income tax assets and liabilities are recognized for
         the expected future tax consequences attributable to differences
         between the financial statement carrying amount of existing assets and
         liabilities and their respective tax bases.  Deferred tax assets and
         liabilities are measured using enacted tax rates expected to apply to
         taxable income in the years in which these temporary differences are
         expected to be recovered or settled.  The effect on deferred tax
         assets and liabilities of a change in tax rates is recognized in
         income in the period that includes the enactment date.

    (i)  Intangible Assets

         Intangible assets are comprised of goodwill, which represents the
         excess of cost over the fair value of assets acquired, and the cost of
         a purchased book of business (see note 15), both of which are being
         amortized on a straight-line basis over ten years.  The carrying value
         of intangible assets is periodically reviewed by the Company based on
         the expected future undiscounted operating cash flows of the related
         entity.  Based upon its most recent analysis, the Company believes
         that no material impairment of intangible assets exists at December
         31, 1996.


                                      -49-
<PAGE>   51


                PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
                                 AND SUBSIDIARY
             Notes to Consolidated Financial Statements, Continued



(3) Summary of Significant Accounting Policies, Continued

    (j)  Stock-Based Compensation

         As more fully described in note 12, the Company records compensation
         expense for stock options only if the market price of the Company's
         stock, on the date of grant, exceeds the amount an individual must pay
         to acquire the stock.

    (k)  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 year after giving
         effect to stock dividends and treasury shares.

(4) Investments

    In November 1995, the Financial Accounting Standards Board issued a "Guide
    to Implementation of Statement 115 on Accounting for Certain Investments in
    Debt and Equity Securities."  This guide allowed companies to reassess the
    appropriateness of the classification of securities as of the date of the
    implementation guide, but no later than December 31, 1995.  As a result,
    the Company made a one-time transfer of approximately $77,893,000 in
    investment securities previously classified as held-to-maturity to the
    available-for-sale classification.  The effect of such reclassification
    increased shareholders' equity by $511,000, net of deferred federal income
    taxes.

    A summary of amortized cost, gross unrealized gains and losses and
    estimated fair value of investments in securities as of December 31, 1996
    and 1995, follows:


<TABLE>
<CAPTION>
                                                                1996
                                                -------------------------------------
                                                           Gross Unrealized Estimated
                                                Amortized  ----------------    Fair
                                                   Cost    Gains   Losses     Value
                                                ---------  ----- ---------- ---------
                                                             (In thousands)
<S>                                              <C>       <C>    <C>       <C>
Fixed maturities available for sale:
  U.S. Treasury securities and obligations of
    U.S. government corporations and agencies    $ 52,065    342    394      52,013
  Debt securities issued by states of the United
    States and political subdivisions of the
    states                                         95,433    581    258      95,756
  Debt securities issued by foreign governments       690    150      -         840
  Corporate debt securities                        46,356    345    375      46,326
  Mortgage-backed securities:
    Government                                     68,752    466    788      68,430
    Other                                          15,684    168     41      15,811
  Redeemable preferred stocks                       6,996    104      2       7,098
                                                 --------  -----  -----     -------
                                                 $285,976  2,156  1,858     286,274
                                                 ========  =====  =====     =======
Equity securities available for sale -
  common stocks                                  $  2,630     67      5       2,692
                                                 ========  =====  =====     =======
</TABLE>


                                      -50-
<PAGE>   52


                PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
                                 AND SUBSIDIARY
             Notes to Consolidated Financial Statements, Continued



(4)  Investments, Continued


<TABLE>
<CAPTION>

                                                                   1995
                                                ------------------------------------------

                                                                 Gross Unrealized  Estimated
                                                Amortized        ----------------    Fair
                                                   Cost          Gains   Losses     Value
                                                ---------        ----- ----------  ---------
                                                             (In thousands)
<S>                                                <C>       <C>          <C>     <C>
Fixed maturities available for sale:
  U.S. Treasury securities and obligations of 
    U.S. government corporations and agencies      $ 85,716      1,499       35      87,180
  Debt securities issued by states of the United
    States and political subdivisions of the
    states                                           50,348        489        5      50,832
  Debt securities issued by foreign governments         606         88        -         694
  Corporate debt securities                          35,567        831       61      36,337
  Mortgage-backed securities:
    Government                                       67,610        236      481      67,365
    Other                                            17,282        318       29      17,571
                                                   --------      -----      ---     -------
                                                   $257,129      3,461      611     259,979
                                                   ========      =====      ===     =======
Equity securities available for sale - common
  stocks                                           $  2,608         66       33       2,641
                                                   ========      =====       ===    =======
</TABLE>

    The amortized cost and estimated fair value of fixed maturities at December
    31, 1996, by contractual maturity, are shown below.  Expected maturities on
    certain corporate and mortgage-backed securities may differ from
    contractual maturities because borrowers may have the right to call or
    prepay obligations with or without call or prepayment penalties.


<TABLE>
<CAPTION>
                                                 Estimated
                                       Amortized    Fair
                                          Cost     Value
                                       ---------  -------
                                         (In thousands)
<S>                                     <C>       <C>
Due in one year or less                 $  4,590    4,608
Due after one year through five years     83,947   83,824
Due after five years through ten years    96,372   96,635
Due after ten years                        9,635    9,868
                                        --------  -------
                                         194,544  194,935
Mortgage-backed securities:
  Government                              68,752   68,430
  Other                                   15,684   15,811
Redeemable preferred stocks                6,996    7,098
                                        --------  -------
                                        $285,976  286,274
                                        ========  =======
</TABLE>


                                      -51-
<PAGE>   53


                PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
                                 AND SUBSIDIARY
             Notes to Consolidated Financial Statements, Continued



(4) Investments, Continued

    Proceeds and related gross realized gains and gross realized losses on
    sales of fixed maturities follow:


<TABLE>
<CAPTION>
                              Years Ended December 31,
                              -----------------------
                               1996     1995      1994
                               ----     ----      ----
                                   (In thousands)
<S>                          <C>       <C>       <C>
Proceeds                     $97,127   116,441   71,637
                             =======   =======   ======
Gross realized gains         $   319     1,672      887
Gross realized losses           (807)   (1,345)  (3,024)
                             -------   -------   ------
 Net realized gains (losses) $  (488)      327   (2,137)
                             =======   =======   ======
</TABLE>

    A summary of the sources of net investment income follows:

<TABLE>
                              Years Ended December 31,
                              ----------------------
                              1996     1995     1994
                              ----     ----     ----
                                   (In thousands)
<S>                          <C>      <C>     <C>
Fixed maturities             $15,548  11,920  12,863
Equity securities                 32       2       2
Short-term investments and
  cash and cash equivalents      860   3,176   1,232
Real estate                       87      70      59
Other investment assets          143     477     490
                             -------  ------  ------
  Total investment income     16,670  15,645  14,646
Less investment expenses         929     916   1,267
                             -------  ------  ------
 Net investment income       $15,741  14,729  13,379
                             =======  ======  ======
</TABLE>

    Realized gains (losses) and increases (decreases) in net unrealized gains
    (losses) follow:

<TABLE>
                                             Years Ended December 31,
                                             -----------------------
                                             1996     1995      1994
                                             ----     ----      ----
                                                 (In thousands)
<S>                                        <C>       <C>      <C>
Net realized losses:
  Fixed maturities                         $  (488)     327    (2,137)
  Equity securities                             15     (333)      131
                                           -------   ------   -------
    Net realized losses                    $  (473)      (6)   (2,006)
                                           =======   ======   =======
Change in net unrealized gains (losses):
  Fixed maturities                         $(2,552)  19,356   (15,506)
  Equity securities                             29       22       (82)
                                           -------   ------   -------
    Total change in net unrealized gains
      (losses)                             $(2,523)  19,378   (15,588)
                                           =======   ======   =======
</TABLE>


                                      -52-
<PAGE>   54


                PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
                                 AND SUBSIDIARY
             Notes to Consolidated Financial Statements, Continued



(4) Investments, Continued

    During 1994, the Company sold all its Federal National Mortgage Association
    interest-only strip bonds, having an aggregate amortized cost of
    $1,146,255, from its held-to-maturity portfolio for $1,455,032, resulting
    in a net gain of $308,777.  The sale of these securities resulted from
    management's decision to eliminate the interest rate risk associated with
    these investments, and accordingly, management does not intend to invest in
    this type of security prospectively.  Because these investment securities
    were unique in the Company's investment portfolio, management's intent to
    hold other debt securities until maturity was not affected by these sales.

    During 1995, the Company tendered a fixed maturity security having an
    amortized cost of $747,146 from its held-to-maturity portfolio for
    $757,862, resulting in a gain of $10,716.  This security was tendered
    because the future creditworthiness of the issuer was not determinable.

    On December 28, 1995, under a reciprocal stock purchase agreement with
    Physicians Insurance Company of Wisconsin, Inc. (PIC-Wis), the Company
    acquired 1,583 shares of PIC-Wis' common stock (representing 6.77 % of
    PIC-Wis' outstanding stock) for $2,500,000, and PIC-Wis acquired 131,579
    shares of the Company's common stock (representing 4.2 % of the Company's
    outstanding stock) for $2,500,000.

    At December 31, 1996, U.S. Treasury notes and certificates of deposit with
    a carrying value of $3,407,000 were on deposit with regulatory authorities,
    as required by law.

(5) Reinsurance

    In the normal course of business, the Company seeks to reduce the loss that
    may arise from events that cause unfavorable underwriting results by
    reinsuring certain levels of risk in various areas of exposure with other
    insurance enterprises or reinsurers.  Amounts receivable from reinsurers
    are estimated in a manner consistent with the claim liability associated
    with the reinsured policy.  Although reinsurance agreements contractually
    obligate the Company's reinsurers to reimburse the Company for their
    proportionate share of losses, they do not discharge the primary liability
    of the Company.  The Company remains liable for the ceded amount of
    reserves for unpaid losses and loss adjustment expenses and unearned
    premiums in the event the assuming insurance organizations are unable to
    meet their contractual obligations.

    The Company has various excess of loss and quota share reinsurance
    agreements.  As of December 31, 1996, PICOM's and PICOM-Illinois' maximum
    current net retention, subject to certain adjustments of risk on any single
    coverage per claim after reinsurance, follows:


<TABLE>
<CAPTION>
                                                        Net
                                                     Retention
                                                     ---------
                 <S>                                  <C>
                 PICOM Insurance Company              $300,000
                 PICOM Insurance Company of Illinois   250,000
</TABLE>


                                      -53-
<PAGE>   55


                PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
                                 AND SUBSIDIARY
             Notes to Consolidated Financial Statements, Continued



(5) Reinsurance, Continued

    The Company continually reviews its reinsurers, considering a number of
    factors, the most critical of which is their financial stability.  Based on
    these reviews, the Company evaluates its position with reinsurers with
    respect to existing and future reinsurance.

    At December 31, 1996, amounts due from and premiums prepaid to reinsurers
    follow:



<TABLE>
<CAPTION>
                                              Amounts    Prepaid
                                             Due From  Reinsurance
                                            Reinsurers   Premiums
                                            ---------- -----------
                                               (In thousands)
<S>                                         <C>        <C>

Underwriters Reinsurance Company              $4,125         -
TIG Reinsurance                                6,110        37
PMA Reinsurance Corporation                    2,710         3
Continental Casualty Company                   2,291         9
Lloyd's of London Syndicates                     709        27
Princeton Insurance Company                      591         4
Other                                          1,014        42
                                             -------       ---
                                             $17,550       122
                                             =======       ===
</TABLE>

Amounts due from reinsurers consisted of amounts related to:

<TABLE>
<CAPTION>
                                                 December 31,
                                             -------------------
                                               1996       1995
                                             --------   --------
                                                (In thousands)
<S>                                         <C>         <C>
Paid losses and loss adjustment expenses     $    41         48
Unpaid losses and loss adjustment expenses    19,206     14,186
Premiums ceded payable                        (2,059)    (2,074)
Other                                            362        104
                                             -------     ------
                                             $17,550     12,264
                                             =======     ======
</TABLE>

Premiums earned and losses and loss adjustment expenses are net of the
following reinsurance ceded amounts:

<TABLE>
<CAPTION>
                                    Years Ended December 31,
                                    ------------------------
                                      1996    1995    1994
                                      ----    ----    ----
                                        (In thousands)
<S>                                  <C>     <C>     <C>
Premiums earned                      $9,261  13,478  2,409

Losses and loss adjustment expenses   6,356  11,475  1,910
</TABLE>

The increases in ceded premiums and ceded losses and loss adjustment expenses,
beginning in 1995, result from PICOM-Illinois' reinsurance program.

                                      -54-
<PAGE>   56


                PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
                                 AND SUBSIDIARY
             Notes to Consolidated Financial Statements, Continued



(5) Reinsurance, Continued

    On December 31, 1996, the Company assumed all of the loss and loss
    adjustment expense reserves and unearned premiums of American Medical
    Insurance Exchange (AMIE), which resulted in a one-time charge to losses
    and loss adjustment expenses of $613,000.  This one-time charge resulted
    primarily from the elimination of AMIE's practice of discounting its loss
    and loss adjustment expense reserves.

(6) Federal Income Taxes

    The Company files a consolidated federal income tax return which includes
    PICOM and all of PICOM's subsidiaries.  Income tax expense is computed
    under the liability method, whereby deferred income taxes reflect the
    estimated future tax effects of temporary differences between the carrying
    value of assets and liabilities for financial reporting purposes and those
    for income tax purposes.  A valuation allowance is then required to be
    established to reduce a deferred tax asset if it is "more likely than not"
    that the related tax benefits will not be realized.

    The provision for federal income taxes consists of the following:
<TABLE>
<CAPTION>

                      Years Ended December 31,
                      ------------------------
                        1996    1995    1994
                        ----    ----    ----
                           (In thousands)
<S>                   <C>     <C>      <C>
Current                $  604  (1,159)    350
Deferred                1,834   9,435   2,306
                       ------  ------   -----

                       $2,438   8,276   2,656
                       ======  ======   =====
</TABLE>

The significant components of federal income tax expense (benefit) are
as follows:


<TABLE>
<CAPTION>
                        Years Ended December 31,
                        ------------------------
                         1996     1995     1994
                         ----     ----     ----
                             (In thousands)
<S>                    <C>      <C>      <C>
Continuing operations  $2,438    8,276    2,656
Accounting changes          -   (4,185)       -
Shareholders' equity     (840)   4,740   (3,525)
                       ------   ------   ------
                       $1,598    8,831     (869)
                       ======   ======   ======
</TABLE>

                                      -55-
<PAGE>   57


                PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
                                 AND SUBSIDIARY
             Notes to Consolidated Financial Statements, Continued



(6) Federal Income Taxes, Continued

    Actual federal income taxes vary from amounts computed by applying the
    current federal income tax rate of 34% to income or loss before federal
    income taxes.  For the years ended December 31, 1996, 1995 and 1994, the
    reasons for these differences, and the tax effects thereof, are as follows:


<TABLE>
<CAPTION>
                                            1996     1995    1994
                                            ----     ----    ----
                                                (In thousands)
<S>                                       <C>       <C>     <C>
Expected tax expense                      $ 4,088   8,276   2,656
Dividends received deduction                  (11)      -       -
Tax-exempt interest                        (1,000)    (65)      -
Adjustment to prior years' tax liability     (913)      -       -
Other, net                                    274      65       -
                                          -------   -----   -----
Actual tax expense                        $ 2,438   8,276   2,656
                                          =======   =====   =====
</TABLE>

The tax effects of temporary differences that give rise to deferred federal
income tax assets and deferred federal income tax liabilities follow:



<TABLE>
<CAPTION>
                                                           December 31,
                                                           ------------
                                                           1996    1995
                                                           ----    ----
                                                          (In thousands)
<S>                                                      <C>      <C>
Deferred federal income tax assets arising from:
  Loss and loss adjustment expense reserves              $14,704  16,655
  Unearned premium reserves                                1,484   1,567
  Alternative minimum tax credits                          1,656   1,840
  Other, net                                                 194      72
                                                         -------  ------
    Total deferred federal income tax assets              18,038  20,134
                                                         -------  ------
Deferred federal income tax liabilities arising from:
  Deferred policy acquisition costs                          339     371
  Unrealized gains on investments                            123     963
  Other                                                      275     536
                                                         -------  ------
      Total deferred federal income tax liabilities          737   1,870
                                                         -------  ------
      Net deferred federal income taxes                  $17,301  18,264
                                                         =======  ======
</TABLE>

In assessing the realizability of deferred federal income tax assets,
management considers whether it is more likely than not that some portion
of the deferred federal income tax assets will not be realized.  Because of
the carryforward provisions of the Internal Revenue Code, the expectation
that temporary differences will reverse during periods in which taxable
income is generated, and the fact that the Company has not incurred an
operating loss for either financial or federal income tax reporting
purposes since 1987, management believes it is more likely than not that
the Company will fully realize the net deferred federal income tax assets.
Accordingly, no valuation allowance has been established.

                                      -56-
<PAGE>   58


                PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
                                 AND SUBSIDIARY
             Notes to Consolidated Financial Statements, Continued



(7) Property and Equipment

    At December 31, 1996 and 1995, property and equipment consisted of the
    following:


<TABLE>
<CAPTION>
                                                 1996      1995
                                                 ----      ----
                                                 (In thousands)
<S>                                            <C>       <C>
Real estate                                    $ 1,998    1,813
Data processing equipment, including software    2,008    1,780
Furniture, fixtures and equipment                1,210    1,051
                                               -------   ------
                                                 5,216    4,644
Accumulated depreciation                        (2,757)  (2,303)
                                               -------   ------
  Total property and equipment                 $ 2,459    2,341
                                               =======   ======
</TABLE>


(8) Deferred Policy Acquisition Costs

    Changes in deferred policy acquisition costs are summarized as follows:


<TABLE>
<CAPTION>
                                        Years Ended December 31,
                                        -----------------------
                                        1996     1995      1994
                                        ----     ----      ----
                                             (In thousands)
<S>                                   <C>       <C>      <C>
Net asset balance, beginning of year  $ 1,092    1,112    1,028
                                      -------   ------   ------
Amounts deferred:
    Commissions to agents               2,873    3,181    2,257
    Ceding commission income           (1,229)  (1,543)     (59)
                                      -------   ------   ------
           Net amounts deferred         1,644    1,638    2,198
                                      -------   ------   ------
Net amortization                       (1,738)  (1,658)  (2,114)
                                      -------   ------   ------
Net asset balance, end of year        $   998    1,092    1,112
                                      =======   ======   ======
</TABLE>

(9) Loss and Loss Adjustment Expense Reserves

    Prior to 1995, loss and loss adjustment expense reserves were discounted to
    reflect anticipated investment income.  Discounts were based on historical
    payment patterns and assumed an interest rate at or below the Company's
    investment yield, which was the same rate used for statutory reporting
    purposes.

    Effective January 1, 1995, the Company eliminated its practice of
    discounting loss and loss adjustment expense reserves for GAAP reporting
    purposes, a change in method of accounting.  The Company believes it is
    preferable not to discount reserves because it is more conservative and is
    practiced by most publicly held insurers.  This change in method of
    accounting resulted in a one-time cumulative charge of $8,125,000, net of
    deferred federal income taxes, as of January 1, 1995.


                                      -57-
<PAGE>   59


                PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
                                 AND SUBSIDIARY
             Notes to Consolidated Financial Statements, Continued



(9) Loss and Loss Adjustment Expense Reserves, Continued

    Activity in loss and loss adjustment expense reserves is summarized as
    follows:


<TABLE>
<CAPTION>
                                                      Years Ended December 31,
                                                     --------------------------
                                                     1996       1995       1994
                                                     ----       ----       ----
                                                          (In thousands)
<S>                                                <C>        <C>       <C>
Balance, beginning of year                         $199,605   188,544   191,220
Less reinsurance balances recoverable               (14,186)   (3,760)   (4,040)
                                                   --------   -------   -------
Net balance, beginning of year                      185,419   184,784   187,180
                                                   --------   -------   -------
Incurred related to:
  Current year                                       65,986    63,027    68,610
  Prior years                                       (17,618)  (27,469)  (23,757)
                                                   --------   -------   -------
      Total incurred                                 48,368    35,558    44,853
                                                   --------   -------   -------
Effect of change in accounting method                     -    12,310         -
Loss and loss adjustment expense reserves
  assumed (see note 5)                                4,119         -         -
                                                   --------   -------   -------
Paid related to:
  Current year                                        4,352     3,053     4,433
  Prior years                                        32,841    44,180    42,816
                                                   --------   -------   -------
      Total paid                                     37,193    47,233    47,249
                                                   --------   -------   -------
Net balance, end of year                            200,713   185,419   184,784
Plus reinsurance balances recoverable                19,206    14,186     3,760
                                                   --------   -------   -------
Balance, end of year                               $219,919   199,605   188,544
                                                   ========   =======   =======
</TABLE>

The Company establishes conservative reserves for the most recent accident
years and adjusts the reserves as new information becomes available.  This
conservative reserving practice has resulted in favorable development in
estimates of prior years' reserves.

Had the elimination of discounting been retroactively applied, total
incurred losses would have been $44,547,000 in 1994.


                                      -58-
<PAGE>   60


                PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
                                 AND SUBSIDIARY
             Notes to Consolidated Financial Statements, Continued

(10) Employee Benefit Plans

     The Company currently maintains two defined contribution employee benefit
     plans--a 401(k) plan and a money purchase plan--which cover substantially
     all employees meeting certain eligibility requirements.

     With respect to the 401(k) plan, the Company annually contributes 5% of an
     employee's salary and matches employee contributions up to 5% of an
     employee's salary.  During 1996, 1995 and 1994, the Company's expense under
     the 401(k) plan was $295,000, $261,000 and $298,000, respectively.

     With respect to the money purchase plan, the Company annually contributes
     3% of an employee's salary up to a prescribed maximum, plus 5% of the
     excess of an employee's salary over the prescribed maximum.  During 1996,
     1995 and 1994, the Company's expense under the money purchase plan was
     $112,000, $114,000 and $118,000, respectively.

     The Company has a stock purchase plan through which employees and directors
     of the Company and its wholly owned subsidiaries may purchase the Company's
     common stock by means of payroll deduction.  Pursuant to this plan, the
     Company may elect to match participant purchases, which it is currently
     matching at the rate of $1.25 (of which $1.00 is used to purchase the
     Company's common stock and $0.25 is applied to income taxes) for each $1.00
     of participant purchases up to a maximum participant purchase of $6,000 per
     year.  In 1996, 1995 and 1994, the Company incurred expenses of $215,000,
     $82,000 and $64,000, respectively, under this plan.

(11) Shareholders' Equity

     Approximately $317,200,000 of consolidated assets represents assets of the
     Company's insurance operations that may not be transferable to the Company
     in the form of dividends, loans or advances without prior regulatory
     approval.  Specifically, the Michigan and Illinois Insurance Codes limit
     the amount of dividends that PICOM or PICOM-Illinois can pay to their
     respective parent in any 12-month period to the greater of statutory net
     income for the preceding year, excluding realized gains (losses) on sales
     of investments, or 10% of policyholders' surplus as of the preceding
     year-end.  As of January 1, 1997, approximately $14,899,000 and $601,000
     could be paid without prior regulatory approval by PICOM and
     PICOM-Illinois, respectively.  In 1996, PICOM paid $3,530,334 in dividends
     and PICOM-Illinois paid no dividends.  In 1995 and 1994, neither PICOM nor
     PICOM-Illinois paid any dividends.

     On February 28, 1996, the Company awarded 28,430 shares of common stock
     held in treasury to directors, officers and employees of the Company as a
     one-time stock bonus.  Compensation expense for this stock bonus
     approximated $697,000, which was charged to policy acquisition and other
     underwriting expenses.

     On May 1, 1996, in a transaction approximating $1,244,000, the Company paid
     $309,000 and issued 44,000 shares of common stock held in treasury (valued
     at $935,000) in exchange for all of the issued and outstanding shares of
     American Insurance Management Corporation.  The acquisition was accounted
     for as a purchase.  The effect of the acquisition was not material to the
     Company's consolidated results of operations.


                                      -59-
<PAGE>   61


                PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
                                 AND SUBSIDIARY
             Notes to Consolidated Financial Statements, Continued




(11)  Shareholders' Equity, Continued

      As a result of the merger on August 31, 1996 (see note 1), the remaining
      50,814 shares of the Company's common stock held in treasury were
      canceled and retired at cost.

      Effective July 5, 1995, the Company purchased 254,823 shares of its
      common stock (approximately 7.9% of its then-issued and outstanding
      shares) from Physicians Insurance Company of Ohio for $4,331,991 ($17 per
      share), plus $53,000 for advisory and finder fees.  These shares, net of
      131,579 shares sold in December 1995 (see note 4), were held as treasury
      stock available for resale at December 31, 1995.

      On November 21, 1996 and September 22, 1994, the Company declared 10%
      stock dividends, issued on December 16, 1996 and December 1, 1994,
      respectively, to shareholders of record as of December 4, 1996 and
      October 28, 1994, respectively.  All per-share information in the
      accompanying consolidated financial statements has been adjusted to give
      retroactive effect to these stock dividends.

(12)  Stock Options and Awards

      The Company has established the 1996 Long-Term Stock Incentive Plan
      (the "Incentive Plan") under which, subject to adjustment, 300,000 shares
      of the Company's common stock are available to grant incentive and
      non-qualified stock options, stock appreciation rights (SARs), restricted
      stock, restricted stock units, performance awards, dividend equivalents
      and other stock-based awards to employees of, including any officer or
      officer-director, or consultants to the Company and its subsidiaries. 
      All terms and conditions of any grants under the Incentive Plan are at
      the discretion of the Compensation Committee of the Company's Board of
      Directors.  As of December 31, 1996, no grants have been made under the
      Incentive Plan.

      The Company has also established the 1996 Non-Employee Directors Stock
      Option Plan (the "Directors Plan") under which, subject to adjustment,
      non-qualified options for 50,000 shares of the Company's common stock may
      be granted to non-employee directors (maximum of 5,000 shares to one
      individual) of the Company.  Options are granted at or above the market
      price of the Company's common stock on the date of grant.  Options become
      exercisable one year from the date of grant and expire seven years from
      the date of grant.  No charges to operations are recorded with respect to
      authorization, grant or exercise of options.  Proceeds received upon
      exercise are credited to shareholders' equity.  As of December 31, 1996,
      stock options totaling 4,500 shares of the Company's common stock had
      been granted under the Directors Plan at an exercise price of $21.63.  No
      options were exercised or canceled during 1996.

                                      -60-
<PAGE>   62


                PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
                                 AND SUBSIDIARY
             Notes to Consolidated Financial Statements, Continued



(12) Stock Options and Awards, Continued

    Information regarding the Directors Plan for 1996 follows:


<TABLE>
<CAPTION>
                                     Options Outstanding           Options Exercisable
                              ---------------------------------- ----------------------
                                                     Weighted
                                       Weighted       Average      Number     Weighted
                                        Average      Remaining   Exercisable  Average
                                       Exercise     Contractual  At December  Exercise
                               Shares    Price          Life      31, 1996     Price
                               ------  --------     -----------  -----------  --------
<S>                          <C>       <C>           <C>         <C>         <C>

Options outstanding,
  beginning of year                -    $   -           -            -        $  -
Options granted                 4,500    21.63          -            -           -
                              -------   ------
Options outstanding,
  end of year                   4,500   $21.63        7 years        -        $  -
                              =======   ======                    ======       =====
Range of exercise prices
  for options outstanding,
  end of year                 $ 21.63
                              =======
Options available for
  grant, end of year           45,500
                              =======
Weighted average fair value
  of options granted during
  the year                    $ 10.35
                              =======
</TABLE>



    The Financial Accounting Standards Board has issued Statement of Financial
    Accounting Standards ("SFAS") No. 123 "Accounting for Stock-Based
    Compensation," which is effective for fiscal years beginning after December
    15, 1995.  This standard prescribes a method of accounting for stock-based
    compensation that recognizes compensation cost based on the fair value of
    options at grant date.  In lieu of applying this fair value based method, a
    company may elect to disclose only the proforma effects of such application
    in the footnotes to its financial statements.

    The Company has elected the disclosure-only provisions of SFAS No. 123.
    Accordingly,  had compensation cost for the Directors Plan been based on
    the fair value of options at grant date, the Company's 1996 net income (in
    thousands) and net income per common share would have been reduced to the
    proforma amounts below:


<TABLE>
<S>                                <C>
Net income:
    As reported                    $9,585
    Proforma                        9,548

Net income per common share:
    As reported                     $2.75
    Proforma                         2.74
</TABLE>





                                      -61-
<PAGE>   63


                PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
                                 AND SUBSIDIARY
             Notes to Consolidated Financial Statements, Continued



(12) Stock Options and Awards, Continued

     The fair value of options at date of grant was estimated using the
     Black-Scholes option pricing model with the following weighted average
     assumptions used for grants in 1996:  dividend yield of 0%; expected
     volatility of 30.4%; risk free interest rate of 6.75%; and expected lives
     of 7 years.  The proforma effect on net income for 1996 is not
     representative of the proforma effect on net income for future years
     because additional stock option awards could be made in future years.

(13) Statutory Insurance Accounting Practices

     PICOM and PICOM-Illinois are required to file financial statements prepared
     in accordance with statutory insurance accounting practices (SAP)
     prescribed or permitted by Michigan and Illinois with their respective
     domiciliary states.  The only material statutory accounting method utilized
     by PICOM that is permitted rather than prescribed is PICOM's discounting of
     its loss and loss adjustment expense reserves through December 31, 1994 and
     discounting of loss reserves only thereafter.  The impact of such permitted
     practice is to increase the statutory policyholders' surplus of PICOM by
     $10,658,000 and $9,393,000 at December 31, 1996 and 1995, respectively.
     PICOM-Illinois does not utilize any permitted accounting practices.

     Accounting practices used to prepare statutory-basis financial statements
     differ in some respects from GAAP.  A reconciliation of statutory capital
     and surplus at December 31, 1996 and 1995, and statutory net income for the
     years ended December 31, 1996, 1995 and 1994, of PICOM and PICOM-Illinois,
     as applicable (as filed with their respective insurance regulatory
     authorities), to the amounts shown in the accompanying consolidated
     financial statements follows:


<TABLE>
<CAPTION>
                                                                December 31,
                                                                -------------
                                                                1996     1995
                                                                ----     ----
                                                                (In thousands)
<S>                                                           <C>        <C>
Statutory capital and surplus                                 $ 80,572   67,006
Net unrealized appreciation on securities available for sale       293    2,832
Deferred policy acquisition costs capitalized for GAAP             998    1,092
Deferred federal income taxes recorded for GAAP                 17,301   18,264
Assets non-admitted for SAP                                        813      640
Loss and loss adjustment expense reserve discount              (10,658)  (9,393)
Liabilities for GAAP in excess of SAP                           (2,700)  (2,700)
Liabilities required for SAP in excess of those required
  for GAAP                                                         524      572
Intercompany dividends eliminated for GAAP                       2,000        -
Net loss attributable to Professionals Group                    (1,287)       -
Other                                                              102       98
                                                              --------   ------
Total shareholders' equity per accompanying consolidated
  balance sheets                                              $ 87,958   78,411
                                                              ========   ======
</TABLE>

                                      -62-
<PAGE>   64


                PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
                                 AND SUBSIDIARY
             Notes to Consolidated Financial Statements, Continued



(13) Statutory Insurance Accounting Practices, Continued


<TABLE>
<CAPTION>
                                                       Years Ended December 31,
                                                       ------------------------
                                                        1996     1995     1994
                                                        ----     ----     ----
                                                            (In thousands)
<S>                                                   <C>       <C>      <C>
Statutory net income                                  $14,238   22,201    6,537
Deferred federal income tax expense recorded for
  GAAP                                                 (1,834)  (9,435)  (2,306)
Change in loss and loss adjustment expense reserve
  discount                                             (1,265)   1,925        -
Change in liabilities for GAAP in excess of SAP             -    1,000        -
Cumulative effect of change in accounting method            -   (8,125)       -
Other                                                    (245)     371      926
                                                      -------   ------   ------
Combined net income of insurance companies based on
  GAAP                                                 10,894    7,937    5,157
Net income (loss) attributable to non-insurance
  subsidiaries                                            (22)       4       (3)
Net loss attributable to Professionals Group           (1,287)       -        -
                                                      -------   ------   ------
Net income per accompanying consolidated statements
  of income                                           $ 9,585    7,941    5,154
                                                      =======   ======   ======
</TABLE>

      Certain regulations that affect PICOM, PICOM-Illinois and the insurance
      industry are promulgated by the National Association of Insurance
      Commissioners (NAIC), which is an association of state insurance
      commissioners, regulators and support staff that acts as a coordinating
      body for the state insurance regulatory process.  The NAIC has established
      risk-based capital (RBC) requirements to assist regulators in monitoring
      the financial strength and stability of property and casualty insurers.
      Under the NAIC requirements, each insurer must maintain its total capital
      and surplus above a calculated minimum threshold or take corrective
      measures to achieve that threshold.  PICOM and PICOM-Illinois have
      calculated their RBC levels based on these requirements and have
      determined that they passed the RBC test and have capital and surplus in
      excess of the minimum threshold.

(14)  Concentrations and Credit Risk

      The Company writes approximately 80% of its premiums through approximately
      55 independent agents and approximately 20% of its premiums directly.  In
      1996, 1995 and 1994, respectively, one agent individually produced
      approximately 10% of the Company's direct premiums written.  In 1996, 1995
      and 1994, nine agents, in aggregate, produced approximately 55%, 54%, and
      68%, respectively, of the Company's direct premiums written.


                                      -63-
<PAGE>   65


                PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
                                 AND SUBSIDIARY
             Notes to Consolidated Financial Statements, Continued



(14) Concentrations and Credit Risk, Continued

     All premiums are directly billed to policyholders and premiums due are
     secured by the related unearned premiums.  When insureds fail to pay their
     premiums, coverage is canceled.  The Company generally requires 
     policyholders to remit a minimum of 40% of the premium at policy
     origination date. Subsequent scheduled payments are monitored to prevent
     the Company from providing coverage beyond the date for which payment has
     been received. In the opinion of management, the amounts carried on the
     accompanying consolidated balance sheets are collectible.

(15) Commitments

     Effective January 1, 1995, PICOM purchased the right to solicit and write
     medical professional liability insurance in Illinois that was formerly
     written by another Illinois insurance company.  The purchase price, which
     is a percentage of annualized gross premiums written through 1999, will be
     a minimum of $3,452,954, plus $134,000 attributable to a non-compete
     covenant.  The aggregate minimum purchase price of $3,586,954, net of
     accumulated amortization approximating $717,400 and $358,700, was recorded
     as an intangible asset at December 31, 1996 and 1995, respectively.  To the
     extent the ultimate purchase price exceeds the minimum, such excess will be
     capitalized.  During 1996, it was determined that the actual purchase price
     is expected to exceed the minimum.  As a result, an additional $400,000 was
     capitalized in 1996.

     As of December 31, 1996, the Company has entered into $5.5 million of
     commitments to build a new home office facility and to purchase new
     furniture and equipment.  No other material commitments for capital
     expenditures exist.

(16) Quarterly Financial Data (Unaudited)

     The unaudited operating results by quarter for 1996 and 1995, are
     summarized below:


<TABLE>
<CAPTION>
                      Total        Income                Net
                     Revenues      Before             Income Per
                     and Other     Income      Net      Common
                      Income       Taxes      Income    Share
                     ---------     ------     ------  ----------
                       (In thousands, except per-share data)
<S>                 <C>            <C>        <C>     <C>
1996:
  First Quarter       $18,275       3,166      2,328     .68
  Second Quarter       17,649       2,761      2,158     .62
  Third Quarter        17,925       3,251      2,396     .68
  Fourth Quarter       18,393       2,845      2,703     .77
                      -------      ------      -----     ===
              Year    $72,242      12,023      9,585
                      =======      ======      =====
</TABLE>


                                      -64-
<PAGE>   66


                PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
                                 AND SUBSIDIARY
             Notes to Consolidated Financial Statements, Continued



(16) Quarterly Financial Data (Unaudited), Continued

<TABLE>
<CAPTION>
                                  Income Before    Pretax
                       Total    Income Taxes and  Effect of                 Net
                    Revenues   Cumulative Effect  Change in              Income Per
                    and Other    of Change in     Accounting    Net       Common
                     Income    Accounting Method    Method     Income     Share
                    --------   -----------------  ----------   ------   ----------
                              (In thousands, except per-share data)
<S>                 <C>        <C>                <C>          <C>      <C>
1995:
  First quarter     $ 17,019        1,255          (12,310)     (7,295)    (2.05)
  Second quarter      17,294        3,593                -       2,371       .67
  Third quarter       18,110        3,861                -       2,548       .77
  Fourth quarter      18,149       15,633                -      10,317      3.12
                    --------       ------          -------      ------     =====
               Year $ 70,572       24,342          (12,310)      7,941
                    ========       ======          =======      ======
</TABLE>

     Net income per common share amounts for the first three quarters of 1996
     and all four quarters of 1995 have been restated from those originally
     reported to reflect the 10% stock dividend declared in 1996 (see note 11).

     The sum of quarterly net income per share data for 1995 does not equal the
     annual amount due to changes in the weighted average number of common
     shares outstanding during the respective periods.

(17) Fair Value of Financial Instruments

     SFAS No. 107, Disclosures About Fair Value of Financial Instruments,
     requires disclosures of fair-value information about financial instruments,
     whether or not recognized in the balance sheet, for which it is practicable
     to estimate the value.  In situations where quoted market prices are not
     available, fair values are to be based on estimates using present value or
     other valuation techniques.  SFAS No. 107 excludes certain financial
     instruments and all nonfinancial instruments from its disclosure
     requirements.

     Under SFAS No. 107, the Company's investment securities, cash, short-term
     investments, drafts outstanding and balance due on purchased book of
     business constitute financial instruments.  The carrying amounts of all
     financial instruments--other than investment securities, which are
     presented in note 4--approximated their fair values at December 31, 1996
     and 1995.

                                      -65-
<PAGE>   67

                PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
                                 AND SUBSIDIARY
             Notes to Consolidated Financial Statements, Continued



(18) Subsequent Events

     In February 1997, the Company entered into an agreement with Michigan
     Educational Employees Mutual Insurance Company (MEEMIC), a
     Michigan-domiciled mutual insurance company, which contemplates a series of
     simultaneous transactions that include the purchase of a $21 million
     surplus certificate from MEEMIC, a quota share reinsurance agreement
     whereby PICOM will reinsure a portion of MEEMIC's net retained lines, a
     management services agreement between the Company and MEEMIC and the
     election of Professionals Group's nominees to MEEMIC's Board of Directors.
     These transactions, subject to regulatory approval by the Michigan
     Commissioner of Insurance, are projected to close by June 30, 1997.

     Professionals Group has obtained a commitment for a seven year, $22.5
     million unsecured term loan from a bank, bearing interest at LIBOR plus 75
     basis points and payable monthly.  With the proceeds received from this
     loan, Professionals Group's Board of Directors has authorized a $20 million
     capital contribution to PICOM, which will purchase the surplus certificate
     from MEEMIC.

     After consummation of the aforedescribed transactions with MEEMIC, the
     Company has 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's insurance products.  Upon
     its purchase, MEIA's marketing and sales functions would be consolidated
     with MEEMIC's.  To fund this purchase, MEEMIC will utilize the proceeds of
     the surplus certificate, plus a $20 million promissory note to be issued by
     a MEEMIC subsidiary which will be guaranteed by the Company. Additionally,
     Professionals Group will issue warrants for 275,000 shares of its common
     stock to MEIA shareholders.

     At a future date, the Company and MEEMIC expect to pursue demutualization
     of MEEMIC.  Such demutualization would be subject to regulatory approval by
     the Michigan Commissioner of Insurance and approval of MEEMIC's
     policyholders.  No specific timetable has been set for this proposed
     demutalization.



                                      -66-
<PAGE>   68
                          Independent Auditors' Report


The Board of Directors and Shareholders
Professionals Insurance Company Management Group:

We have audited the accompanying consolidated balance sheets of Professionals
Insurance Company Management Group (formerly PICOM Insurance Company) and
subsidiary as of December 31, 1996 and 1995, and the related consolidated
statements of income, shareholders' equity and cash flows for the years then
ended.  In connection with our audits of the consolidated financial
statements, we also have audited the financial statement schedule as of and for
the period ended December 31, 1996.  These consolidated financial statements
and financial statement schedule are the responsibility of the Company's
management.  Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform our audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.  An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.  We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Professionals
Insurance Company Management Group and subsidiary as of December 31, 1996 and
1995, and the results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.  Also
in our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.

As discussed in notes 3 and 9 to the consolidated financial statements, the
Company changed its method of accounting for loss and loss adjustment expense
reserves to eliminate discounting of such reserves in 1995.



KPMG Peat Marwick LLP


East Lansing, Michigan
February 26, 1997


                                       67



<PAGE>   69
REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and Shareholders of
Professionals Insurance Company Management Group and Subsidiary


We have audited the accompanying consolidated statements of income,
shareholders' equity and cash flows of Professionals Insurance Company
Management Group and Subsidiary (formerly, PICOM Insurance Company and
Subsidiaries) for the year ended December 31, 1994.  These financial statements
are the responsibility of the Company's management.  Our responsibility is to
express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.  An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.  We believe that our audit provides a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects the consolidated results of its operations and its cash
flows of Professionals Insurance Company Management Group and Subsidiary as of
December 31, 1994 and for the year ended December 31, 1994 in conformity with
generally accepted accounting principles.
        


                                                Coopers & Lybrand L.L.P.


Columbus, Ohio
February 17, 1995




                                     -68-
<PAGE>   70

SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT

PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP (PARENT COMPANY)

CONDENSED BALANCE SHEET


<TABLE>
<CAPTION>
December 31, 1996
(In thousands)

<S>                                                       <C>
Assets

Investment in subsidiary                                  $87,271
Short-term investments, at cost, which
   approximates fair value                                  2,030
Cash                                                         -
                                                          -------
   Total assets                                           $89,300
                                                          =======

Liabilities and Shareholders' Equity

Liabilities - accrued expenses and other liabilities       $1,343
                                                          -------
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                                              3,506
Additional paid-in capital                                 14,569
Retained earnings                                          69,645
Net unrealized appreciation on investments,
   net of deferred taxes                                      238
                                                          -------
   Total shareholders' equity                              87,958
                                                          -------
   Total liabilities and shareholders' equity             $89,300
                                                          =======
</TABLE>

These condensed financial statements should be read in conjunction with
the accompanying consolidated financial statements and notes thereto of
Professionals Insurance Company Management Group and subsidiary.

See accompanying notes to the condensed financial information of registrant.

                                     -69-
<PAGE>   71

SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT, CONTINUED

PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP (PARENT COMPANY)

CONDENSED STATEMENT OF INCOME

<TABLE>
<CAPTION>
Period Ended December 31, 1996
(In thousands)

<S>                                                            <C>
Revenues

Dividend income from subsidiary                                $3,530
Investment income                                                  30
                                                               ------
   Total revenues                                               3,560
                                                               ------
Expenses

Operating and administrative                                    1,317
Interest expense                                                   30
                                                               ------
   Total expenses                                               1,347
                                                               ------
   Income before federal income taxes and
     equity in undistributed income of subsidiary               2,213

Federal income taxes                                                0
                                                               ------
   Income before equity in undistributed income
     of subsidiary                                              2,213

Equity in undistributed income of subsidiary                    4,823
                                                               ------
   Net income                                                  $7,036
                                                               ======
</TABLE>

These condensed financial statements should be read in conjunction with
the accompanying consolidated financial statements and notes thereto of
Professionals Insurance Company Management Group and subsidiary.

See accompanying notes to the condensed financial information of registrant.


                                      -70-
<PAGE>   72

SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT, CONTINUED

PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP (PARENT COMPANY)

CONDENSED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
Period Ended December 31, 1996
(In thousands)

<S>                                                                <C>
Cash flows from operating activities

   Net income                                                      $7,036
   Adjustments to reconcile net income to net cash
     provided by operating activities:
     Equity in undistributed income of subsidiary                  (4,823)
     Increase in accrued expenses and other
       liabilities                                                  1,343
                                                                   ------
       Net cash provided by operating activities                    3,556
                                                                   ------
Cash flows from investing activities

   Proceeds from sale or maturity of short-term
     investments                                                    6,048
   Purchases of short-term investments                             (8,078)
   Capital contribution to consolidated
     subsidiary                                                    (1,500)
                                                                   ------
       Net cash used in investing activities                       (3,530)
                                                                   ------
Cash flows from financing activities

   Cash paid in lieu of fractional shares                             (26)
   Proceeds from issuance of note payable                           1,500
   Payments on note payable                                        (1,500)
                                                                   ------
     Net cash used in financing activities                            (26)
                                                                   ------
Net change in cash                                                   -

Cash, beginning of year                                              -
                                                                   ------
Cash, end of year                                                  $ -
                                                                   ======
</TABLE>

These condensed financial statements should be read in conjunction with
the accompanying consolidated financial statements and notes thereto of
Professionals Insurance Company Management Group and subsidiary.

See accompanying notes to the condensed financial information of registrant.

                                     -71-
<PAGE>   73

SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT, CONTINUED

PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP (PARENT COMPANY)

NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT

Period Ended December 31, 1996


(1)   Description of Business

      Professionals Insurance Company Management Group (Professionals Group) is
      an insurance holding company incorporated under Michigan law on January
      31, 1996.  Accordingly, condensed financial information for Professionals
      Group is only being presented from the period January 31, 1996 (date of
      inception) through December 31, 1996.  Professionals Group owns all of
      the issued and outstanding common stock of PICOM Insurance Company, a
      stock insurance company incorporated under Michigan law.


(2)   Federal Income Taxes

      Under terms of Professionals Group's tax sharing agreement with its
      direct and indirect subsidiaries, income tax provisions for the
      individual companies are computed on a separate company basis.

                                     -72-
<PAGE>   74
Item 9.   Changes in and Disagreements with Accountants on Accounting and 
          Financial Disclosure

     At a meeting of the Board of Directors of PICOM Insurance Company held on
September 21, 1995 and after recommendation by the Audit Committee of the Board
of Directors of PICOM, the accounting firm of KPMG Peat Marwick LLP was engaged
by PICOM to perform future independent audits of PICOM commencing with calendar
year 1995.  KPMG Peat Marwick LLP thereby replaced Coopers & Lybrand LLP as
PICOM's independent auditors.  The change in accountants resulted from PICOM's
putting its audit work out to bid and did not reflect any dissatisfaction or
disagreement with Coopers & Lybrand LLP. Coopers & Lybrand LLP participated in 
the bidding process. In a letter dated October 3, 1995, Coopers Lybrand LLP
confirmed that the change in certifying accountants did not result from
disagreement on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope of procedure. During their two most
recent fiscal years neither Professionals Group nor PICOM engaged any
independent accountants other than KPMG Peat Marwick LLP and Coopers & Lybrand
LLP to audit the financial statements of Professionals Group, PICOM or any
significant subsidiary of Professionals Group or PICOM.

                                    PART III

Item 10.  Directors and Executive Officers

     The information called for by this item with respect to the directors of
Professionals Group is reported under the caption "Proposal I-- Election of
Directors" of the Professionals Insurance Company Management Group Notice of
1997 Annual Meeting of Shareholders and Proxy Statement dated April 16, 1997,
which pages and information are herein incorporated by reference.

     Information regarding the executive officers of Professionals Group is
reported in Part I on this Annual Report on Form 10-K pursuant to General
Instruction G to Form 10-K.

     Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Annual Report on Form 10-K or any amendment to
this Annual Report on Form 10-K.

Item 11. Executive Compensation

     The information called for by this item is reported under the captions
"Management Remuneration" and "Employment Severance Compensation Plans" of
the Professionals Insurance Company Management Group Notice of 1997 Annual
Meeting of Shareholders and Proxy Statement dated April 16, 1997, which pages
and information are herein incorporated by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

     The information called for by this item is reported under the caption
"Voting Securities and Principal Holders" of the Professionals Insurance Company
Management Group Notice of 1997 Annual Meeting of Shareholders and Proxy
Statement dated April 16, 1997, which pages and information are herein
incorporated by reference.

Item 13. Certain Relationships and Related Transactions

     The information called for by this item is reported under the captions 
"Compensation Committee Interlocks and Inside Participation" and "Directors
Compensation and Benefits" of the Professionals Insurance Company Management
Group Notice of 1997 Annual Meeting of Shareholders and Proxy Statement dated
April 16, 1997, which pages and information are herein incorporated by
reference.


                                     -73-
<PAGE>   75
                                    PART IV


Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

Exhibits:


<TABLE>
<CAPTION>
    Item 601
 Regulation S-K
Exhibit Reference
     Number        Exhibit Description
-----------------  -------------------
<S>                <C>
  (3)(a)/(4)(a)    First Amended and Restated Articles of Incorporation of
                   Professionals Insurance Company Management Group and all
                   amendments thereto (incorporated by reference to Exhibit
                   (3)(a)/(4)(a) 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)).

  (3)(b)/(4)(b)    By-laws of Professionals Insurance Company Management Group
                   (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)).

     (4)(c)        Specimen certificate for Professionals Insurance Company
                   Management Group's common stock (incorporated by reference
                   to Exhibit 4(c) of the Quarterly Report on Form 10-Q for the
                   quarterly period ended September 30, 1996 as filed with the
                   Securities and Exchange Commission on November 12, 1996
                   (file no. 0-21223)).
</TABLE>

                                     -74-
<PAGE>   76

<TABLE>
<CAPTION>
    Item 601
  Regulation S-K
Exhibit Reference
     Number        Exhibit Description
-----------------  -------------------
<S>                <C>
     (4)(d)        Specimen stock option issued under the Professionals
                   Insurance Company Management Group 1996 Non-Employee
                   Directors Stock Option Plan (incorporated by reference to
                   Exhibit 4(d) of the Quarterly Report on Form 10-Q for the
                   quarterly period ended September 30, 1996 filed with the
                   Securities and Exchange Commission on November 12, 1996
                   (file no. 0-21223)).

     (10)(a)       Professionals Insurance Company Management Group 1996 Long
                   Term Incentive Plan (incorporated by reference to Exhibit
                   10(c) of Amendment No. 1 to the registrant's Registration
                   Statement on Form S-4 as filed with the Securities and
                   Exchange Commission on June 11, 1996 (registration no.
                   333-3138)).

     (10)(b)       Professionals Insurance Company Management Group 1996
                   Non-Employee Directors Stock Option Plan (incorporated by
                   reference to Exhibit 10(d) of Amendment No. 1 to the
                   registrant's Registration Statement on Form S-4 as filed
                   with the Securities and Exchange Commission on June 11, 1996
                   (registration no. 333-3138)).

     (10)(c)       Professionals Insurance Company Management Group Stock
                   Purchase Plan (incorporated by reference to Exhibit 10(e) 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)).

     (10)(d)       PICOM Insurance Company Employees' Savings and Retirement
                   Plan.*

     (10)(e)       PICOM Insurance Company Pension Plan.*
</TABLE>

                                     -75-
<PAGE>   77

<TABLE>
<CAPTION>
    Item 601
  Regulation S-K
Exhibit Reference
      Number       Exhibit Description
-----------------  -------------------

<S>               <C>
      (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.

      (16)         Letter of Coopers & Lybrand, L.L.P., independent certified
                   public accountants, regarding change in accountants
                   (incorporated by reference to Exhibit 16 of Amendment No. 1
                   to the registrant's Registration Statement on Form S-4 as
                   filed with the Securities and Exchange Commission on June 11,
                   1996 (registration no. 333-3138)).                         

      (21)         List of subsidiaries of registrant.*

      (24)         Powers of attorney.*

      (27)         Financial Data Schedule of registrant.*
</TABLE>
-----------------
* Filed herewith.

Management contracts and compensatory plans or arrangements:

     The management contracts and compensatory plans or arrangements required
to be filed as exhibits and included in such list of exhibits are as follows:

      Exhibit (10)(a) Professionals Insurance Company Management Group 1996
      Long-Term Incentive Plan.

      Exhibit (10)(b) Professionals Insurance Company Management Group 1996
      Non-Employee Directors Stock Option Plan.

      Exhibit (10)(c) Professionals Insurance Company Management Group Stock
      Purchase Plan.

      Exhibit (10)(d) PICOM Insurance Company Employees' Savings and Retirement
      Plan.

      Exhibit (10)(e) PICOM Insurance Company Pension Plan.

                                      -76-
<PAGE>   78


      Index to Financial Statements and Financial Statement Schedules:


<TABLE>
<CAPTION>
                                                                          10-K
                                                                         Report
                                                                         page(s)
                                                                         -------
<S>                                                                      <C>
Financial Statements:

Consolidated balance sheets as of December 31, 1996 and 1995............. 41

Consolidated statements of income for each of the years ended December
31, 1996, 1995 and 1994.................................................. 42

Consolidated statements of shareholders' equity for each of the years
ended December 31, 1996, 1995 and 1994................................... 43

Consolidated statements of cash flows for each of the years ended
December 31, 1996, 1995 and 1994......................................... 44

Notes to consolidated financial statements............................... 45

Reports of independent auditors.......................................... 67

Financial Statement Schedules:

 II. Condensed financial information of registrant....................... 69
</TABLE>

-----------------
All other schedules for which provision is made in Regulation S-X either (i)
are not required under the related instructions or are inapplicable and,
therefore, have been omitted, or (ii) the information required is included in
the consolidated financial statements or the notes thereto that are a part
hereof.

Reports on Form 8-K:

     None.

                                      -77-
<PAGE>   79

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) 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:  March 26, 1997               By: /s/ Victor T. Adamo
                                            ----------------------------
                                             Victor T. Adamo
                                             President and
                                             Chief Executive Officer

                                      -78-

<PAGE>   80

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.


     Signature                      Title               Date
     ---------                      -----               ----           

                        President and Chief
/s/ Victor T. Adamo     Executive Officer
----------------------  (Principal Executive      March 26, 1997
Victor T. Adamo         Officer)

/s/ R. Kevin Clinton    Vice President,
----------------------  Treasurer and Chief       March 26, 1997
R. Kevin Clinton        Financial Officer
                        (Principal Financial
                        Officer)
  Jerry D. Campbell*
----------------------  Director                  March 26, 1997
Jerry D. Campbell

  John F. Dodge, Jr.*
----------------------  Director                  March 26, 1997
John F. Dodge, Jr.

  H. Harvey Gass*
----------------------  Director                  March 26, 1997
H. Harvey Gass

  W. Peter McCabe*
----------------------  Director                  March 26, 1997
W. Peter McCabe

  John F. McCaffrey*
----------------------  Director                  March 26, 1997
John F. McCaffrey

  Isaac J. Powell*
----------------------  Director                  March 26, 1997
Isaac J. Powell

  Ann F. Putallaz*
----------------------  Director                  March 26, 1997
Ann F. Putallaz

  Donald S. Young*
----------------------  Director                  March 26, 1997
Donald S. Young

  William H. Woodhams*
----------------------  Director                  March 26, 1997
William H. Woodhams


*By: /s/ Victor T. Adamo
     -------------------
     Victor T. Adamo, as attorney-in-fact for the persons indicated


                                      -79-
<PAGE>   81
                                Exhibit Index
                                -------------

<TABLE>
<CAPTION>
Exhibit No.        Description
-----------        -----------
<S>                <C>
  (3)(a)/(4)(a)    First Amended and Restated Articles of Incorporation of
                   Professionals Insurance Company Management Group and all
                   amendments thereto (incorporated by reference to Exhibit
                   (3)(a)/(4)(a) 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)).

  (3)(b)/(4)(b)    By-laws of Professionals Insurance Company Management Group
                   (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)).

     (4)(c)        Specimen certificate for Professionals Insurance Company
                   Management Group's common stock (incorporated by reference
                   to Exhibit 4(c) of the Quarterly Report on Form 10-Q for the
                   quarterly period ended September 30, 1996 as filed with the
                   Securities and Exchange Commission on November 12, 1996
                   (file no. 0-21223)).

     (4)(d)        Specimen stock option issued under the Professionals
                   Insurance Company Management Group 1996 Non-Employee
                   Directors Stock Option Plan (incorporated by reference to
                   Exhibit 4(d) of the Quarterly Report on Form 10-Q for the
                   quarterly period ended September 30, 1996 filed with the
                   Securities and Exchange Commission on November 12, 1996
                   (file no. 0-21223)).

     (10)(a)       Professionals Insurance Company Management Group 1996 Long
                   Term Incentive Plan (incorporated by reference to Exhibit
                   10(c) of Amendment No. 1 to the registrant's Registration
                   Statement on Form S-4 as filed with the Securities and
                   Exchange Commission on June 11, 1996 (registration no.
                   333-3138)).

     (10)(b)       Professionals Insurance Company Management Group 1996
                   Non-Employee Directors Stock Option Plan (incorporated by
                   reference to Exhibit 10(d) of Amendment No. 1 to the
                   registrant's Registration Statement on Form S-4 as filed
                   with the Securities and Exchange Commission on June 11, 1996
                   (registration no. 333-3138)).

     (10)(c)       Professionals Insurance Company Management Group Stock
                   Purchase Plan (incorporated by reference to Exhibit 10(e) 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)).

     (10)(d)       PICOM Insurance Company Employees' Savings and Retirement
                   Plan.*

     (10)(e)       PICOM Insurance Company Pension Plan.* 

     (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.

     (16)          Letter of Coopers & Lybrand, L.L.P., independent certified
                   public accountants, regarding change in accountants
                   (incorporated by reference to Exhibit 16 of Amendment No. 1
                   to the registrant's Registration Statement on Form S-4 as
                   filed with the Securities and Exchange Commission on June 11,
                   1996 (registration no. 333-3138)).

     (21)          List of subsidiaries of registrant.*

     (24)          Powers of attorney.*

     (27)          Financial Data Schedule of registrant.*
</TABLE>

-----------------
* Filed herewith.