<PAGE>   1

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                                 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, 1999

                                       OR

      [ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
            SECURITIES EXCHANGE ACT OF 1934

      FOR THE TRANSITION PERIOD FROM           TO

                         COMMISSION FILE NUMBER 0-21223

                           PROFESSIONALS GROUP, INC.
             (Exact name of registrant as specified in its charter)

<TABLE>
<S>                                             <C>
                  MICHIGAN                                       38-3273911
        (State or other jurisdiction                          (I.R.S. Employer
      of incorporation or organization)                      Identification No.)

          2600 PROFESSIONALS DRIVE
              OKEMOS, MICHIGAN                                      48864
  (Address of principal executive offices)                       (Zip Code)
</TABLE>

       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 filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes [X]  No [ ]

     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 aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant on March 1, 2000 was $166,708,523 (based on the
closing price on such date, as reported on The Nasdaq Stock Market(R)).

     The number of the registrant's shares of common stock, no par value per
share, outstanding as of March 1, 2000 was 8,924,909.

                      DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the registrant's Notice of Annual Meeting of Stockholders and
Proxy Statement for its 2000 Annual Meeting of Stockholders are incorporated by
reference in Part III hereof.
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<PAGE>   2

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                         PAGE NO.
                                                                         --------
<S>       <C>                                                            <C>
                                     PART I
Item 1.   Business....................................................          3
          General.....................................................          3
          Products and Services.......................................          3
          Marketing...................................................          4
          Underwriting................................................          4
          Claims Management...........................................          5
          Reserves and Losses.........................................          5
          Investments.................................................          8
          Reinsurance.................................................          8
          Competition.................................................          9
          Regulation..................................................         10
          Subsidiaries................................................         12
          Employees...................................................         13
          Forward-Looking Statements..................................         13
          Glossary of Selected Insurance Terms........................         13
Item 2.   Properties..................................................         14
Item 3.   Legal Proceedings...........................................         14
Item 4.   Submission of Matters to a Vote of Security Holders.........         15
          Executive Officers of Registrant............................         15

                                     PART II
Item 5.   Market for Registrant's Common Equity and Related
            Stockholder Matters.......................................         17
Item 6.   Selected Financial Data.....................................         19
Item 7.   Management's Discussion and Analysis of Financial Condition
            and Results of Operations.................................         20
          Financial Condition.........................................         21
          Results of Operations.......................................         22
          Liquidity and Capital Resources.............................         26
          Effects of Inflation........................................         27
          Effects of New Accounting Pronouncements....................         27
          Year 2000 Compliance........................................         28
Item 7A.  Quantitative and Qualitative Disclosures about Market
            Risk......................................................         28
Item 8.   Financial Statements and Supplementary Data.................         30
Item 9.   Changes in and Disagreements with Accountants on Accounting
            and Financial Disclosure..................................         60

                                    PART III
Item 10.  Directors and Executive Officers of the Registrant..........         60
Item 11.  Executive Compensation......................................         60
Item 12.  Security Ownership of Certain Beneficial Owners and
            Management................................................         61
Item 13.  Certain Relationships and Related Transactions..............         61

                                     PART IV
Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form
            8-K.......................................................         61

Signatures............................................................         65
</TABLE>

                                        2
<PAGE>   3

                                     PART I

ITEM 1. BUSINESS

GENERAL

     Professionals Group, Inc. ("Professionals Group," and together with its
subsidiaries, the "Company") is a Michigan business corporation and insurance
holding company that was incorporated under the laws of the State of Michigan on
January 31, 1996. The Company had consolidated assets of $1,072.1 million and
$889.2 million at December 31, 1999 and 1998, respectively. Professionals
Group's principal executive offices are located at 2600 Professionals Drive,
Okemos, Michigan 48864, and its telephone number is (517) 349-6500.

     On July 1, 1999, Michigan Educational Employees Mutual Insurance Company
completed its conversion to a stock insurance company and changed its name to
MEEMIC Insurance Company ("MEEMIC"). As a result of the conversion, MEEMIC
became a wholly owned subsidiary of MEEMIC Holdings, Inc. ("MEEMIC Holdings"), a
publicly traded Michigan business corporation (Nasdaq: MEMH). As part of
MEEMIC's conversion, Professionals Group acquired 77% of the outstanding common
stock of MEEMIC Holdings. This acquisition was accounted for as a purchase
business combination. Beginning July 1, 1999, the financial results of MEEMIC
Holdings have been consolidated into the financial results of the Company.

     On July 1, 1998, Professionals Group consummated its merger with Physicians
Protective Trust Fund, a medical malpractice self-insurance trust fund located
in Coral Gables, Florida ("PPTF"). Pursuant to the merger agreement,
Professionals Group issued 4,087,525 shares of Professionals Group common stock
to the eligible members of PPTF. The transaction has been accounted for as a
"pooling of interests" business combination under generally accepted accounting
principles, whereby Professionals Group has carried forward to its accounts the
assets and liabilities of PPTF at their respective amounts as reported by PPTF.
All prior period financial information was restated to reflect the combined
operations of Professionals Group and PPTF.

     The Company is organized and operates principally in the property and
casualty insurance industry and has three reportable segments -- professional
liability lines property and casualty insurance, personal lines property and
casualty insurance and investment operations. Segment information, for which
results are regularly reviewed by Company management in making decisions about
resources to be allocated to the segments and assess their performance, has been
disclosed in Note 18 to the Company's consolidated financial statements (see
"Item 8. Financial Statements and Supplementary Data").

PRODUCTS AND SERVICES

     The Company offers medical professional liability insurance to physicians,
surgeons, dentists, hospitals and other health care providers through its wholly
owned subsidiary ProNational Insurance Company, a stock insurance company
incorporated under Michigan law in 1980 ("ProNational"). Medical professional
liability insurance provides insurance against the legal liability of an insured
(and against loss, damage or expense incident 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. ProNational, which is licensed to provide such insurance
in 20 states, operates primarily in Florida, Michigan, Illinois, Indiana,
Kentucky, Ohio and Pennsylvania. ProNational has applied for licenses in 2
additional states. ProNational Casualty Company, a stock insurance company
incorporated under the laws of Illinois in 1994 and a wholly owned subsidiary of
ProNational ("ProNational Casualty"), is licensed to provide such insurance in
Illinois.

     The Company offers private passenger automobile and homeowners insurance
primarily to educational employees and their immediate families through its
majority owned subsidiary, MEEMIC, a stock insurance company incorporated under
Michigan law in 1949. MEEMIC is licensed to provide such insurance in Michigan
and has applied for licenses in 3 additional states.

                                        3
<PAGE>   4

     ProNational, ProNational Casualty and MEEMIC are all rated A- (Excellent)
by A.M. Best Company, Inc. ("A.M. Best"). ProNational is rated A- (Strong) 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 an insurer'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 shareholders.

MARKETING

     ProNational currently markets its insurance products primarily in Florida,
Michigan, Illinois, Indiana, Kentucky, Ohio and Pennsylvania. ProNational's
insurance products are marketed and sold in cooperation with local independent
insurance agencies and by direct employees of ProNational. ProNational is
primarily responsible for general marketing activities such as advertising,
product information, convention participation and relationships with various
professional associations of which ProNational's insureds are members. The
independent insurance agencies are primarily responsible for the sale of
ProNational's insurance products by pursuing leads generated by ProNational's
marketing activities and through agency-generated leads in their local
communities. During 1999, approximately 56% of ProNational's direct written
premiums were produced through independent insurance agencies (the top ten
agencies accounted for approximately 31% of total direct written premiums) and
44% were produced directly.

     ProNational has also entered into endorsement and marketing agreements with
local medical associations and other provider-supported organizations that
provide rate credits and certain services for insureds of the programs. These
endorsement and marketing agreements allow ProNational to make presentations and
provide access to the medical association's respective publications for
advertisements.

     ProNational provides risk management services designed to heighten its
insureds awareness of situations giving rise to potential loss exposures, to
educate its insureds on ways to improve their medical procedures and to assist
its insureds in implementing risk modification measures. ProNational presents
and participates in periodic seminars with medical groups at which pertinent
subjects are presented.

     MEEMIC markets its insurance products through sales representatives
associated with its wholly owned agency, which is the exclusive distributor of
MEEMIC's insurance products. Most of the sales representatives belong to the
educational community and are engaged in peer selling.

     MEEMIC's agency conducts regular meetings with its sales representatives,
establishes benchmarks and goals, conducts technical training and sponsors
continuing education programs. The agency representatives provide information to
MEEMIC about the marketplace and needs of its insureds, which is used to develop
new products and new product features. The agency recruits and trains new sales
representatives to work in underserviced areas of Michigan. During 1999, one
sales representative accounted for over 5% of MEEMIC's direct written premiums
and the top ten representatives accounted for approximately 35% of MEEMIC's
direct written premiums.

UNDERWRITING

     All underwriting decisions for medical professional liability products are
made by ProNational through its underwriting staff. ProNational's independent
agencies do have binding authority. Each prospective insured is required to
submit an application for coverage that, among other things, reviews the
professional training, area and scope of practice and claims history of the
prospective insured. Through its underwriting process, which involves an
evaluation of the application and, in certain situations, may include
supplemental on-site risk management evaluations, ProNational assesses the
quality and pricing of the risk, emphasizing loss history, practice specialty
and location. ProNational's insurance policy premiums are based upon several
factors, the most important of which are loss history, practice specialty and
location of practice.

                                        4
<PAGE>   5

     The majority of medical professional liability policies issued by
ProNational are "claims-made" policies, although approximately 16% of
ProNational's direct medical professional liability premiums were derived from
"occurrence" policies during 1999. See "Glossary of Selected Insurance Terms"
for claims-made and occurrence definitions.

     MEEMIC's agency representatives have the authority to bind coverage for a
thirty day period. MEEMIC's underwriting staff accepts applications for
insurance based on established underwriting guidelines. Underwriting supervisors
regularly audit the work of individual underwriters to ensure adherence to these
guidelines.

CLAIMS MANAGEMENT

     ProNational's claims department is responsible for the supervision of
claims investigation, the establishment of case reserves, cost control, case
management, development of the defense strategy and the coordination and control
of attorneys engaged by ProNational. Medical and/or other professional experts
are retained to assist in the analysis and defense of claims. A claims committee
comprised of experienced company representatives and outside medical specialists
meets regularly to provide medical insights and input for certain complex cases.
ProNational has seven claims offices in order to provide localized and timely
attention to claims.

     ProNational's claims department has settlement authority for claims filed
against its insureds. ProNational emphasizes early evaluation and aggressive
management of claims. ProNational believes that it has developed relationships
with attorneys who have significant experience in the defense of professional
liability claims and who are able to defend claims in an aggressive, cost
efficient manner.

     MEEMIC's claims department is responsible for the timely investigation,
evaluation and settlement of claims, controlling claims expense and maintaining
adequate reserves. MEEMIC's claims operation is centralized in Auburn Hills,
Michigan, however; several multi-line resident adjusters are located in cities
throughout Michigan. MEEMIC has also established a network of automobile glass
and body shops that provide damage appraisals and repairs according to
established company guidelines. Independent adjusters are used when claim volume
rises. Audits of liability claim files are conducted regularly by claims
department managers. Less than 1% of all claims result in litigation. The
majority of litigation is handled by MEEMIC's in-house legal counsel and
monitored by the claims department.

RESERVES AND LOSSES

     The Company establishes reserves based on its estimates of the future
amounts necessary to pay claims and expenses associated with investigation and
settlement of claims. These estimates consist of 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) an actuarially determined estimate of the
total losses and LAE necessary for the ultimate settlement of all reported
claims and incurred but not reported claims, including amounts already paid.

     Loss and LAE reserves are determined on the basis of individual claims and
actuarially determined estimates of future losses based on the Company's past
loss experience, available industry data and projections as to future claims
frequency, severity, inflationary trends and settlement patterns. Estimating
reserves, especially professional liability reserves and in states where the
Company does not have significant past loss experience, 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 regularly reviewed
and updated by management as new data becomes available. Any adjustments
necessary are generally reflected in current operations.

                                        5
<PAGE>   6

     The following table reconciles beginning and ending reserves for losses and
LAE as shown in the Company's consolidated financial statements for the years
indicated. See also Note 8 to the Company's consolidated financial statements.

<TABLE>
<CAPTION>
                                                                 YEARS ENDED DECEMBER 31,
                                                              -------------------------------
                                                                1999        1998       1997
                                                                ----        ----       ----
                                                                      (IN THOUSANDS)
<S>                                                           <C>         <C>        <C>
Balance, beginning of year..................................  $ 540,583   $489,207   $501,512
Less reinsurance balances recoverable.......................   (108,036)   (80,431)   (73,855)
                                                              ---------   --------   --------
Net balance, beginning of year..............................    432,547    408,776    427,657
                                                              ---------   --------   --------
Incurred related to:
  Current year..............................................    181,944    161,417    155,595
  Prior years...............................................    (22,184)     9,623    (31,361)
                                                              ---------   --------   --------
          Total incurred....................................    159,760    171,040    124,234
                                                              ---------   --------   --------
Loss and LAE reserves acquired..............................     39,836         --         --
                                                              ---------   --------   --------
Paid related to:
  Current year..............................................     47,191     26,157     19,679
  Prior years...............................................    120,693    121,112    123,436
                                                              ---------   --------   --------
          Total paid........................................    167,884    147,269    143,115
                                                              ---------   --------   --------
Net balance, end of year....................................    464,259    432,547    408,776
Plus reinsurance balances recoverable.......................    167,722    108,036     80,431
                                                              ---------   --------   --------
Balance, end of year........................................  $ 631,981   $540,583   $489,207
                                                              =========   ========   ========
</TABLE>

                                        6
<PAGE>   7

     The following table presents the development of the net liability of
undiscounted reserves for losses and LAE for the calendar years 1990 through
1999. (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 stockholders. (The losses and
LAE reserves as originally reported are presented net of reinsurance
recoverables 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.

        ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE RESERVE DEVELOPMENT
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                        DECEMBER 31,
                              ------------------------------------------------------------------------------------------------
                                1990       1991       1992       1993       1994       1995       1996       1997       1998
                                ----       ----       ----       ----       ----       ----       ----       ----       ----
<S>                           <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>
Loss & LAE Reserves as
 originally reported........  $315,972   $336,907   $401,548   $427,254   $465,571   $501,690   $501,512   $489,207   $540,583
Less reinsurance
 recoverable................        --         --     45,227     50,016     49,865     53,264     73,855     80,431    108,036
Add pro forma change to
 reflect elimination of
 discount...................    32,781     27,839     16,568     12,616     12,310         --         --         --         --
                              --------   --------   --------   --------   --------   --------   --------   --------   --------
Net liability -- end of
 year.......................  $348,753   $364,746   $372,889   $389,854   $428,016   $448,426   $427,657   $408,776   $432,547
Cumulative paid as of:
One year later..............    75,671     93,668     95,487    105,882    124,644    133,082    123,436    121,112    116,187
Two years later.............   145,751    161,794    167,510    187,443    219,466    223,053    211,797    207,355
Three years later...........   188,545    206,119    215,932    239,956    263,515    281,534    269,935
Four years later............   212,083    231,551    244,286    258,242    297,344    318,720
Five years later............   226,977    246,433    254,020    280,113    318,762
Six years later.............   235,345    251,918    260,777    293,743
Seven years later...........   238,096    255,597    269,268
Eight years later...........   240,185    263,460
Nine years later............   244,860
Re-estimated net liability
 as of:
End of year.................   348,753    364,746    372,889    389,854    428,016    448,426    427,657    408,776    432,547
One year later..............   331,263    335,227    344,978    368,231    409,022    434,810    396,296    418,399    415,463
Two years later.............   306,969    317,643    327,746    358,275    395,053    400,149    404,898    402,124
Three years later...........   292,899    300,333    322,781    344,771    374,180    414,957    394,175
Four years later............   273,572    300,030    311,978    327,943    374,167    406,675
Five years later............   274,770    293,631    303,057    331,814    374,576
Six years later.............   268,343    287,939    298,185    332,469
Seven years later...........   261,611    285,053    299,341
Eight years later...........   263,834    287,175
Nine years later............   264,948
Net cumulative redundancy...    83,805     77,571     73,548     57,385     53,440     41,751     33,482      6,652     17,084

<CAPTION>
                                 DECEMBER 31,
                              ------------------
                               1999*      1999
                               -----      ----
<S>                           <C>       <C>
Loss & LAE Reserves as
 originally reported........  $94,634   $631,981
Less reinsurance
 recoverable................   54,798    167,722
Add pro forma change to
 reflect elimination of
 discount...................       --         --
                              -------   --------
Net liability -- end of
 year.......................  $39,836   $464,259
Cumulative paid as of:
One year later..............    4,506
Two years later.............
Three years later...........
Four years later............
Five years later............
Six years later.............
Seven years later...........
Eight years later...........
Nine years later............
Re-estimated net liability
 as of:
End of year.................   34,736    464,259
One year later..............
Two years later.............
Three years later...........
Four years later............
Five years later............
Six years later.............
Seven years later...........
Eight years later...........
Nine years later............
Net cumulative redundancy...    5,100
</TABLE>

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

* Represents MEEMIC reserves acquired on July 1, 1999 and subsequent development
  thereon, through December 31, 1999. This balance combined with balances
  reflected in the 1998 column determine development recorded for the Company on
  a consolidated basis.

     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.
                                        7
<PAGE>   8

     As shown in the reserve development table, positive reserve development
exists for each of the years 1990 through 1998. Such positive reserve
development is mainly attributable to (i) the Company's historical practice of
establishing its loss and loss adjustment expense reserves conservatively, as it
relates to immaturely developed accident years, to minimize potential
uncertainties, and (ii) lower than expected claims costs associated in part with
tort reform legislation enacted in Michigan between 1986 and 1994. Such tort
reform legislation shortened the statute of limitations, introduced a statute of
repose with a six year limitation for adults, modified expert witness rules to
require more qualified expert witnesses and capped non-economic damages. The
1997 year has a lower positive reserve development compared to other years which
was mainly attributable to a loss reserve charge recorded by the Company in 1998
to reflect actuarial estimates and the application of the Company's reserving
practices to the Florida book of business acquired from PPTF in 1998.

     The following table reconciles loss and LAE 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, 1999 and 1998.

               RECONCILIATION OF SAP RESERVES WITH GAAP RESERVES
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              -------------------
                                                                1999       1998
                                                                ----       ----
<S>                                                           <C>        <C>
Loss and LAE reserves -- SAP basis..........................  $464,259   $432,547
Provision for reinsurance on unpaid losses..................   167,722    108,036
                                                              --------   --------
  Loss and LAE reserves -- GAAP basis.......................  $631,981   $540,583
                                                              ========   ========
</TABLE>

     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. The
Company does not discount reserves for GAAP or SAP reporting.

INVESTMENTS

     The Company invests principally in fixed maturity securities, all of which
are classified as available for sale. Investment management services are
provided to the Company by independent third party investment managers. Such
services include reviewing and recommending investment policies and implementing
and executing investment strategies and are currently provided for a fee based
on the market value of the investment portfolio managed by the respective
managers. The general investment policies of the Company are intended to
accommodate its need for liquidity and current income. The primary objective is
to achieve a high level of after-tax income, while minimizing risk. The Company
has invested a substantial portion of its fixed maturity portfolio in municipal
bonds, which the Company believes generate a greater after-tax return than
investments in taxable fixed income securities of comparable risk, duration and
other investment characteristics. The fixed maturity portfolio had an average
Standard & Poor's credit quality rating of AA (Excellent) and there were no
securities in default at December 31, 1999. See also Note 5 to the Company's
consolidated financial statements.

REINSURANCE

     In accordance with industry practice, the Company purchases reinsurance to
limit risk on individual exposures, protect against catastrophic losses,
stabilize underwriting results and increase its capacity to write insurance.
Reinsurance involves the 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 Company.
Reinsurance does not discharge the Company from its obligation to its insureds.
If the reinsurer fails to meet its obligations, the Company remains liable to
pay the insured.

                                        8
<PAGE>   9

     ProNational has various reinsurance agreements. Generally, ProNational's
risk retention level has been dependent upon numerous factors including limits
of liability coverage sold in a particular state, level of experience within a
state and ProNational's analysis of the potential underwriting results within
each state. Accordingly, ProNational's retention has varied between $250,000 and
$1.0 million. Currently, ProNational retains $500,000 in most states.
ProNational also has reinsurance agreements that provide defined coverages for
claims exceeding policy limits or extra contractual obligations. ProNational
also has various stop loss reinsurance agreements, primarily to protect against
potential future adverse development.

     MEEMIC has reinsured its risks in excess of $150,000 per loss. MEEMIC has
also purchased catastrophe reinsurance for automobile physical damage and
homeowners property damage in four layers up to $13.5 million in excess of
$500,000, with each layer subject to a retention of 5%. Every insurer (including
MEEMIC) engaged in writing personal protection insurance coverage in Michigan is
required to be a member of the Michigan Catastrophic Claims Association
("MCCA"), an unincorporated nonprofit association created by Michigan law. The
MCCA covers all personal injury losses incurred by MEEMIC and all other member
companies in excess of $250,000. Although the MCCA acts in the same manner as a
reinsurer, it is not an insurance company and is not rated by A.M. Best.

     ProNational and MEEMIC place their reinsurance agreements and treaties with
a number of individual companies and syndicates to avoid significant
concentrations of credit risk. PMA Reinsurance Corporation and General
Reinsurance Corporation are ProNational's largest reinsurers, with 36% and 28%,
respectively, of ProNational's total ceded premiums in 1999. American Re is
MEEMIC's largest reinsurer (excluding ProNational), with 7% of MEEMIC's total
ceded premiums in 1999. All reinsurers exceeding 5% of ProNational's and
MEEMIC's respective total ceded premiums in 1999 are rated A- (Excellent) or
higher by A.M. Best. ProNational and MEEMIC rely on their reinsurance
intermediary to assist in the analysis of credit quality of its reinsurers.
ProNational and MEEMIC have not experienced any material difficulties in
collecting amounts due from reinsurers and both believe (i) that reinsurance is
maintained with financially stable reinsurers and (ii) that any reinsurance
security maintained is adequate to protect their interests. See also Note 6 to
the Company's consolidated financial statements.

     From July 1, 1997 through June 30, 1999, ProNational assumed, on a
quota-share basis, 40% of the net personal lines insurance business from MEEMIC.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations." In accordance with MEEMIC's conversion into a stock
company, this quota share reinsurance agreement was cancelled on June 30, 1999.

COMPETITION

     The Company competes with numerous insurance companies and various
self-insurance mechanisms. Many of these competitors are substantially larger
and have considerably greater financial resources than does the Company.
Additionally, several of these competitors have A.M. Best ratings that are
higher than the Company's insurance subsidiaries of A- (Excellent).

     Competition, particularly in the medical malpractice insurance industry,
may take several forms including pricing, service quality, breadth and
flexibility of coverages, method of sale, and insurance carrier financial
stability and ratings. The Company competes through name recognition and
reputation by emphasizing a high level of customer service to insureds, and,
especially in its Midwest markets, by using local insurance agencies to sell and
distribute its medical professional liability insurance products. The Company
has attempted to balance its need for rate adjustments with the goal of
maintaining market share in a very competitive insurance market. Although the
Company is endeavoring to offset lower premiums charged through selective
underwriting practices, there can be no assurance that these practices will be
successful in the long term.

     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.

                                        9
<PAGE>   10

REGULATION

     General. Insurance holding companies and insurance companies are
extensively regulated. Such regulation has had a significant effect on the
operations of insurance holding companies and insurance companies in the past
and is expected to have significant effects in the future. Periodically,
legislation is considered and adopted which has resulted in, or that could
result in, further regulation or deregulation of insurance holding companies and
insurance companies. No assurance can be given as to whether any additional
legislation will be adopted or as to the effect such legislation would have on
the business of the Company.

     Insurance companies are subject to regulation by government agencies in the
states in which they are licensed. ProNational is domiciled in Michigan and is
licensed as a property and casualty insurer in 20 states. ProNational Casualty
is domiciled and licensed as a property and casualty insurer in Illinois. MEEMIC
is domiciled in Michigan and licensed as a property and casualty insurer in
Michigan. The nature and extent of such regulation varies from jurisdiction to
jurisdiction, but typically involves prior approval of the acquisition of
control of an insurance company or of any company controlling an insurance
company, regulation of certain transactions entered into by an insurance company
with any of its affiliates, approval of premium rates, forms and policies used
for many lines of insurance, standards of solvency and minimum amounts of
capital and surplus which must be maintained, establishment of reserves required
to be maintained for unearned premium, losses and loss adjustment expenses or
for other purposes, limitations on types and amounts of investments,
restrictions on the size of risks which may be insured by a single entity,
licensing of insurers and agents, deposits of securities for the benefit of
policyholders, and the filing of periodic reports with respect to financial
condition and other matters. In addition, state regulatory examiners perform
periodic examinations of insurance companies, including market conduct
examinations. Such regulation is generally intended for the protection of
policyholders rather than shareholders. In addition, individual state insurance
departments may prevent premium rates for some classes of insureds from
reflecting the level of risk assumed by the insurer for those classes. Such
developments may adversely affect the profitability of various lines of
insurance.

     Professionals Group is subject to regulation as an insurance holding
company because of its ownership of ProNational and MEEMIC and is required to
file information relating to its capital structure, ownership, and financial
condition and general business operations of its insurance subsidiaries. As an
insurance holding company, Professionals Group is also subject to special
reporting and prior approval requirements with respect to transactions among its
affiliates.

     Insurance companies are affected by a variety of state and Federal
legislative and regulatory measures and judicial decisions. 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.

     Change or Acquisition of Control. ProNational and MEEMIC are Michigan
stock, property and casualty insurance companies organized under the Michigan
Insurance Code of 1956, as amended (the "Michigan Insurance Code"). ProNational
Casualty is an Illinois stock, property and casualty insurance company organized
under the Illinois Insurance Code. The Michigan Insurance Code and the Illinois
Insurance Code provide that the acquisition or change of "control" of a domestic
insurer or of any person that controls a domestic insurer cannot be consummated
without the prior approval of the relevant insurance regulatory authority. A
person seeking to acquire control, directly or indirectly, of a domestic insurer
or of any person controlling a domestic insurer must generally file with the
relevant insurance regulatory authority an application for change of control
(commonly known as a "Form A") containing certain information required by
statute and published regulations and provide a copy of such Form A to the
domestic insurer. In both Michigan and Illinois, control is generally presumed
to exist if any person, directly or indirectly, owns, controls, holds the power
to vote or holds proxies representing 10% or more of the voting securities of
any other person.

     In addition, many state insurance regulatory laws contain provisions that
require pre-notification to state agencies of a change in control of a
non-domestic admitted insurer in that state. While such pre-notification
                                       10
<PAGE>   11

statutes do not authorize the state agency to disapprove the change of control,
such statutes do authorize issuance of a cease and desist order with respect to
the non-domestic admitted insurer if certain conditions exist such as undue
market concentration.

     Insolvency Funds; Mandatory Pools. Most states require admitted property
and casualty insurers to become members of insolvency or guaranty funds or
associations which generally protect policyholders against the insolvency of
such insurers. Members of the fund or association must contribute to the payment
of certain claims made against insolvent insurers. The Company makes accruals
for its portion of assessments when notified of assessments by a fund or
association.

     Insurance companies are also required to participate in various mandatory
insurance facilities or in funding mandatory pools, which are generally designed
to provide insurance coverage for consumers who are unable to obtain insurance
in the voluntary insurance market. Pools are typically found in insurance lines
such as workers' compensation, homeowners and personal automobile insurance.
These pools typically require all companies writing applicable lines of
insurance in the state for which the pool has been established to fund
deficiencies experienced by the pool based upon each company's relative premium
writings in that state, with any excess funding typically distributed to the
participating companies on the same basis. The Company makes accruals for its
portion of assessments when notified of assessments by a pool.

     Restrictions on Dividends. The Michigan Insurance Code and the Illinois
Insurance Code regulate the distribution of dividends and other payments to a
holding company by its insurance subsidiaries. Under each of the Michigan
Insurance Code and the Illinois Insurance Code, an insurer may pay dividends or
distribute cash or other property so long as such dividends or distributions,
together with all other dividends or distributions made within the preceding
year, do not exceed the greater of (i) 10% of the insurer's policyholders'
surplus as of December 31 of the preceding year or (ii) the net income, not
including realized capital gains, for the twelve-month period ending December 31
of the preceding year, with larger dividends payable only upon prior regulatory
approval. Such restrictions or any additional subsequently imposed restrictions
may in the future affect Professionals Group's ability to fund its operations,
pay principal and interest on its debt, pay its expenses and pay any cash
dividends to its stockholders. Future dividends from Professionals Group's
subsidiaries may also be limited by business considerations.

     Risk-Based Capital. The National Association of Insurance Commissioners
(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 insurer's regulatory total adjusted capital, as
defined by the NAIC, to its authorized control level of RBC, as defined by the
NAIC. Insurers 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 LEVEL RBC
LEVEL                                                   (LESS THAN OR EQUAL TO)
-----                                               -------------------------------
<S>                                                 <C>
Company action level..............................                2.0
Regulatory action level...........................                1.5
Authorized control level..........................                1.0
Mandatory control level...........................                0.7
</TABLE>

     ProNational, ProNational Casualty and MEEMIC have calculated their ratios
of total adjusted capital to authorized control level RBC and each were in
excess of 5:1 at December 31, 1999.

     NAIC-IRIS Ratios. The NAIC's Insurance Regulatory Information System was
developed by a committee of state insurance regulators and is primarily intended
to assist state insurance departments in executing their statutory mandates to
oversee the financial condition of insurers operating in their respective
states. IRIS identifies 11 industry ratios and specifies "usual values" for each
ratio. Departure from the usual values on four or more ratios generally leads to
inquiries from individual state insurance commissioners, of which none have been
received.

     In 1999, ProNational Casualty did not have any ratios which varied from the
"usual value" range.
                                       11
<PAGE>   12

     In 1999, ProNational had one ratio which varied from the "usual value"
range -- two year overall operating ratio. ProNational's two year overall
operating ratio was outside the acceptable range due to a $25.6 million loss
reserve charge (See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations") and ProNational's elimination of its
practice of discounting loss reserves for SAP reporting during 1998.

     In 1999, MEEMIC had two ratios which varied from the "usual value" range.
The two items, which had "unusual values", were change in net writings and
change in surplus. Change in net writings was outside the acceptable range as a
result of the quota share agreement with ProNational being cancelled on July 1,
1999, which allowed MEEMIC to retain a greater portion of its own business. The
change in surplus was outside the acceptable range as a result of the proceeds
from MEEMIC's initial public offering on July 1, 1999.

     Effect of Federal Legislation. Although the Federal government does not
directly regulate the business of insurance, Federal initiatives often affect
the insurance business in a variety of ways. Current and proposed Federal
measures which may significantly affect the insurance business include Federal
government participation in health care reform, product liability claims,
environmental regulation, pension regulation (ERISA), the taxation of insurers
and reinsurers, minimum levels of liability insurance and safety regulations.

     Tort Reform. On a state level, several states, including Michigan, have
adopted tort reforms designed to moderate the risk of practice to health care
providers. Although such legislation is being subjected to numerous
constitutional challenges, it generally has a positive impact by reducing
malpractice losses. Such legislation also tends to result in increased
competition because it causes the particular state to be more attractive to
other insurance companies seeking to expand their markets. The Company has seen
an increase in competition in its markets due, in part, to the passage of tort
reform.

     On the Federal level, attempts to reform the delivery of medical care have
contained provisions that could, if adopted, have a material impact on the
Company and its insurance products. An example of such a change is the concept
of "enterprise liability" that was contained in President Clinton's health care
proposal. Under the enterprise liability concept, doctors would not bear
individual liability for malpractice events with such liability being borne by
the hospital or other enterprise in which the doctor practices. If enterprise
liability or a similar concept were adopted, insurers such as ProNational could
be at a competitive disadvantage because their business is concentrated in
individual physician risks and larger, more established, companies already
provide medical malpractice insurance for the enterprise risks.

     NAIC -- Codification. The NAIC has codified statutory accounting practices
(the "Codification") that provide for state insurance commissioner discretion in
the determination of appropriate statutory accounting for insurers. The NAIC has
established an effective date of January 1, 2001 for the Codification. Actual
implementation of the Codification will be determined by an insurer's state of
domicile.

     Many issues remain to be resolved during the implementation phase; however,
its completion will likely change the definitions of what comprised prescribed
versus permitted statutory accounting practices, and may result in changes to
the accounting policies that insurance enterprises use to prepare their
statutory financial statements. Currently, permitted statutory accounting
practices encompass all accounting practices not so prescribed and differ from
state to state, may differ from company to company within a state and may change
in the future. Management has not determined the effects, if any, that
Codification may have on its insurance subsidiaries.

SUBSIDIARIES

     Professionals Group has seven wholly owned subsidiaries and two majority
owned subsidiaries. The wholly owned subsidiaries are: ProNational, ProNational
Insurance Agency, Inc., Professionals Group Services Corporation, American
Insurance Management Corporation, PICOM Claims Services Corporation, ProNational
Casualty and Physicians Protective Plan, Inc. The majority owned subsidiaries
are MedAdvantage, Inc. and MEEMIC Holdings.

                                       12
<PAGE>   13

EMPLOYEES

     The Company, primarily through ProNational and MEEMIC, had 380 employees as
of December 31, 1999. 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

     We make forward-looking statements in this Annual Report on Form 10-K and
may make such statements in future filings with the SEC. We may also make
forward-looking statements in our press releases or other public or stockholder
communications. Our forward-looking statements, which are subject to risks and
uncertainties, include information about our expectations and possible or
assumed future results of our operations. When we use any of the words
"believes," "expects," "anticipates," "estimates" or similar expressions, we are
making forward-looking statements.

     We claim the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995 for all of our
forward-looking statements. While we believe that our forward-looking statements
are reasonable, you should not place undue reliance on any such forward-looking
statements, which speak only as of the date made. You should understand that a
number of factors, all of which are difficult to predict and many of which are
beyond our control, could affect our future results and performance and any
other expectations expressed in our forward-looking statements. This could cause
our actual results, performance and experience to differ materially from those
expressed in our forward-looking statements. Factors that might cause such a
difference include the following:

     - significantly increased industry competition that causes lower premiums
       and reduced profitability;

     - inflation and changes in the interest rate environment that increase our
       loss costs, or reduce the fair value of our financial instruments, or
       otherwise adversely impact our operations;

     - underwriting losses on the risks we insure are greater than we expect;

     - general economic conditions, either nationally or in our market areas,
       that are worse than expected;

     - adverse changes in the securities markets;

     - legislative or regulatory changes that adversely affect our business;

     - restrictions on our ability to enter new markets successfully and
       capitalize on growth opportunities; and

     - technological changes that are more difficult or expensive than we
       expect.

     We do not undertake, and we specifically disclaim, any obligation to update
any forward-looking statements to reflect the occurrence of unanticipated events
or circumstances after the date of such statements.

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.

     Claims-made policy. An insurance policy covering only those claims which
are reported during the policy period.

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

                                       13
<PAGE>   14

     Earned premium. The prorated portion of an insurance premium which is no
longer considered prepaid as a result of the elapsed time the insurance policy
has been in force. For example, after six months, $12,000 of a prepaid $24,000
annual premium is considered earned premium.

     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 (IBNR). 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.

     Loss and LAE ratio. The ratio of incurred losses and loss adjustment
expenses to premiums earned. Losses include increases in reserves for extended
reporting period claims.

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

     Occurrence Policy. An insurance policy covering losses occurring during the
policy period, without regard to when the claim is reported to the insurer.

     Quota Share Reinsurance. A form of reinsurance in which the insurer cedes
and the reinsurer assumes an agreed-upon percentage of risks. Also known as
proportional reinsurance.

     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.

     Reserves. Liability established by an insurer to reflect the estimated cost
of claim payments and loss adjustment expenses that the insurer will ultimately
be required to pay with respect to the insurance it has underwritten.

     Standard & Poor's ratings. Standard & Poor's Insurer Financial Strength
Ratings are divided into "Secure Range" and "Vulnerable Range" groupings as
follows. Secure Range: AAA (Extremely Strong); AA (Very Strong); A (Strong); and
BBB (Good). Vulnerable Range: BB (Marginal); B (Weak); CCC (Very Weak); CC
(Extremely Weak); and R (Regulatory Supervision).

     Statutory Accounting Practices (SAP). Those principles 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

     Professionals Group owns its principal executive offices in Okemos,
Michigan. Professionals Group also owns, primarily for investment purposes, an
office building in Williamston, Michigan. MEEMIC leases its principal executive
offices in Auburn Hills, Michigan. MEEMIC also owns, primarily for investment
purposes, an 11.5 acre vacant parcel of land in Auburn Hills, Michigan. The
Company leases office facilities in various locations and also leases computer
and operating equipment under cancelable and noncancelable agreements.

ITEM 3. LEGAL PROCEEDINGS

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

                                       14
<PAGE>   15

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No matters were submitted to a vote of Professionals Group's stockholders
during the fourth quarter of 1999.

EXECUTIVE OFFICERS OF REGISTRANT

     As of March 10, 2000, 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>
William H. Woodhams, M.D................       62    Chairman
Victor T. Adamo, Esq., CPCU.............       52    President and Chief Executive Officer
R. Kevin Clinton, FCAS, MAAA............       45    Vice President
Annette E. Flood, Esq., R.N. ...........       40    Vice President and Secretary
John F. Lang, CPA.......................       35    Vice President, Treasurer and Chief
                                                     Financial Officer
Joseph O. Marker, FCAS, MAAA............       51    Chief Actuary
William P. Sabados......................       50    Chief Information Officer
</TABLE>

     William H. Woodhams, M.D. has been a director of Professionals Group since
1996 and its Chairman since 1999. Dr. Woodhams was a director of ProNational
Insurance Company from 1980 to July 1, 1998. Dr. Woodhams is board certified in
Family Practice and has been in private practice in Kalamazoo, Michigan since
1964. Dr. Woodhams serves as an Assistant Clinical Professor in the Department
of Family Practice at Michigan State University, College of Human Medicine. Dr.
Woodhams is also a member of the Michigan Board of Medicine Committee of
Licensure and Discipline. Dr. Woodhams served as a member of the Board of
Directors of Physicians Insurance Company of Indiana from 1982 to 1994. Dr.
Woodhams is a graduate of the The University of Michigan School of Medicine.

     Victor T. Adamo, Esq., has been the President and Chief Executive Officer
and a director of Professionals Group since 1996. Mr. Adamo has been a director
of ProNational since 1990, and was its Chief Executive Officer from 1987 to 1998
and from 1999 to present. Mr. Adamo has been a director and the Chairman of
MEEMIC since May 1997. Mr. Adamo has been a director and the Chairman of MEEMIC
Holdings since its formation in October 1998. Prior to joining ProNational, Mr.
Adamo was in private legal practice from 1975 to 1985 and represented
ProNational 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 and Mr. R. Kevin Clinton are the
only current directors of Professionals Group who are also employees of
Professionals Group or a subsidiary of Professionals Group.

     R. Kevin Clinton, FCAS, MAAA, has been the President and Chief Executive
Officer and a director of MEEMIC since May 1997. Mr. Clinton has been the
President and Chief Executive Officer and a director of MEEMIC Holdings since
its formation in October 1998. Mr. Clinton was the Chief Financial Officer of
Professionals Group from 1996 to March 2000 and has been a director of
Professionals Group since September 1997. Mr. Clinton served as Vice President,
Treasurer and Actuary of ProNational from 1990 through June 1997. Prior to
becoming an officer of ProNational, Mr. Clinton was ProNational's consulting
actuary from 1986 to 1990. He formerly served as the Actuary for the Michigan
Insurance Bureau and in the actuarial department of 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 B.A. degree in business
administration and an M.A. in actuarial science. Mr. Clinton and Mr. Victor T.
Adamo are the only current directors of Professionals Group who are also
employees of Professionals Group or a subsidiary of Professionals Group.

                                       15
<PAGE>   16

     Annette E. Flood, Esq., R.N., has been a Vice President and Secretary of
Professionals Group since 1996. Ms. Flood is a director and Senior Vice
President, Corporate Secretary and Legal Counsel of ProNational. Ms. Flood has
been a director of MEEMIC since May 1997. Ms. Flood has been a director of
MEEMIC Holdings since its formation in October 1998. Prior to joining
ProNational 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 PLLC, Lansing, Michigan. Ms. Flood has a B.A. degree in
nursing from The University of Michigan and a law degree from Wayne State
University Law School.

     John F. Lang, has been a Vice President, Treasurer and Chief Accounting
Officer of Professionals Group since July 1998. Mr. Lang has been the Chief
Financial Officer of Professionals Group since March 2000. Mr. Lang has been a
director and Senior Vice President of ProNational since May 1999. Mr. Lang
served as Treasurer of ProNational from August 1996 through June 1998 and as
Chief Financial Officer of ProNational from July 1997 through June 1998. Prior
to joining ProNational in 1996, Mr. Lang was a senior manager on the audit staff
of Coopers & Lybrand LLP where he was employed since 1986. Mr. Lang is a CPA and
has a B.S.B.A. degree in accounting from Central Michigan University.

     Joseph O. Marker, FCAS, MAAA, has been the Chief Actuary of Professionals
Group since March 1999. Mr. Marker is also a director and Senior Vice President
and Chief Actuary of ProNational. Prior to joining Professionals Group, Mr.
Marker served in an actuarial capacity for Allmerica Financial Corporation in
Howell, Michigan from 1986 through 1999, most recently as Vice President,
Actuarial. Prior to 1986, Mr. Marker was an actuary for Westfield Companies and
St. Paul Companies. Mr. Marker is a Fellow of the Casualty Actuarial Society and
a member of the American Academy of Actuaries. Mr. Marker is a graduate of The
University of Michigan where he received a Bachelors degree in mathematics and a
Masters degree from the University of Minnesota in Mathematics.

     William P. Sabados, has been the Chief Information Officer of Professionals
Group since July 1998. Mr. Sabados is also a director and Chief Information
Officer of ProNational. Mr. Sabados has been a Vice President and Chief
Information Officer of MEEMIC since February 1997. From 1987 to 1997, Mr.
Sabados was Vice President of Information Systems for the Investor Insurance
Group. Prior to that, Mr. Sabados served as Director of Membership/Billing for
Blue Cross/Blue Shield North East Ohio in Cleveland, Ohio since 1984. Mr.
Sabados is a graduate of David M. Meyers College.

                                       16
<PAGE>   17

                                    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 on The Nasdaq Stock Market(R) under the symbol "PICM" since
September 3, 1996. Prior to Professionals Group's formation, the stock traded
under the name of PICOM Insurance Company on The Nasdaq Stock Market(R), which
also used the symbol "PICM."

     The table below sets forth the high and low sale prices for the common
stock, no par value per share, of Professionals Group on The Nasdaq Stock
Market(R). In each case the quotations have been adjusted as if the ten percent
stock dividend paid by Professionals Group on December 13, 1999 had occurred
prior to such quarters. 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.

<TABLE>
<CAPTION>
                                                               COMMON STOCK
                                                              ---------------
                                                               HIGH     LOW
                                                               ----     ---
<S>                                                           <C>      <C>
1999
First Quarter...............................................  $28.86   $22.96
Second Quarter..............................................   32.27    21.36
Third Quarter...............................................   31.82    21.59
Fourth Quarter..............................................   27.00    20.00
1998
First Quarter...............................................  $36.78   $32.03
Second Quarter..............................................   35.12    27.48
Third Quarter...............................................   31.41    19.94
Fourth Quarter..............................................   32.05    20.66
</TABLE>

     As of March 1, 2000 there were 4,261 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 or to repurchase Professionals Group's common stock in open market
transactions. Any future dividends will depend upon, among other things, future
financial results and requirements and contractual restrictions applicable to
Professionals Group or its subsidiaries, including a covenant related to
Professionals Group's bank term loan which prohibits the payment of cash
dividends on Professionals Group's common stock (except for cash paid in lieu of
fractional shares related to stock dividends declared). Professionals Group
declared a 10% stock dividend on November 15, 1999 which was paid on December
13, 1999 to stockholders of record as of November 29, 1999. No fractional shares
of common stock were issued in payment of the stock dividend. In lieu of
fractional shares, an immaterial amount of cash was paid to stockholders.

     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
ProNational). The ability of those subsidiaries to pay dividends is subject to
regulatory restrictions that generally 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. (See "Item 1.
Business -- Regulation -- Restrictions on Dividends.") As of January 1, 2000,
approximately $23.0 million of dividends could be paid by Professionals Group's
direct insurance subsidiaries without prior

                                       17
<PAGE>   18

regulatory approval. In 1999, 1998 and 1997, Professionals Group's insurance
subsidiaries paid cash dividends aggregating $12.0 million, $12.3 million and
$4.7 million, respectively, to Professionals Group. 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).

                                       18
<PAGE>   19

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.)

<TABLE>
<CAPTION>
                                                        YEARS ENDED DECEMBER 31,
                                          ----------------------------------------------------
                                            1999       1998       1997       1996       1995
                                            ----       ----       ----       ----       ----
<S>                                       <C>        <C>        <C>        <C>        <C>
Income Statement Data(1):
  Gross premiums written................  $225,123   $162,529   $181,170   $154,739   $171,413
  Net premiums written..................   199,351    143,922    163,014    124,183    155,658
  Net premiums earned...................   195,169    153,449    132,026    125,406    156,191
  Net investment income.................    41,142     38,443     39,521     39,051     37,779
  Total revenues and other income.......   243,571    203,669    181,542    170,106    199,352
  Losses and loss adjustment
     expenses(2)(4).....................   159,760    171,040    124,234    124,761    156,154
          Total expenses................   208,549    213,032    151,273    144,043    173,774
  Income (loss) before cumulative effect
     of change in accounting method and
     extraordinary item.................    25,791     (3,231)    22,428     18,961     18,902
  Cumulative effect of change in
     accounting method(2)...............        --         --         --         --     (8,125)
  Extraordinary item....................     1,397         --         --         --         --
                                          --------   --------   --------   --------   --------
          Net income (loss).............  $ 27,188   $ (3,231)  $ 22,428   $ 18,961   $ 10,777
                                          ========   ========   ========   ========   ========
  Weighted average shares outstanding --
     basic(3)...........................     9,145      9,189      9,174      9,155      9,101
                                          ========   ========   ========   ========   ========
  Weighted average shares outstanding --
     assuming dilution(3)...............     9,253      9,189      9,176      9,155      9,101
                                          ========   ========   ========   ========   ========
Earnings per share -- basic(3):
  Income (loss) before cumulative effect
     of change in accounting method and
     extraordinary item.................  $   2.82   $  (0.35)  $   2.44   $   2.07   $   2.07
  Cumulative effect of change in
     accounting method(2)...............        --         --         --         --      (0.89)
  Extraordinary item....................      0.15         --         --         --         --
                                          --------   --------   --------   --------   --------
          Net income (loss) per common
            share -- basic..............  $   2.97   $  (0.35)  $   2.44   $   2.07   $   1.18
                                          ========   ========   ========   ========   ========
Earnings per share -- assuming
  dilution(3):
  Income (loss) before cumulative effect
     of change in accounting method and
     extraordinary item.................  $   2.75   $  (0.35)  $   2.44   $   2.07   $   2.07
  Cumulative effect of change in
     accounting method(2)...............        --         --         --         --      (0.89)
  Extraordinary item....................      0.15         --         --         --         --
                                          --------   --------   --------   --------   --------
          Net income (loss) per common
            share -- assuming
            dilution....................  $   2.90   $  (0.35)  $   2.44   $   2.07   $   1.18
                                          ========   ========   ========   ========   ========
Cash dividends declared per share.......  $     --   $     --   $     --   $     --   $     --
                                          ========   ========   ========   ========   ========
</TABLE>

                                       19
<PAGE>   20

<TABLE>
<CAPTION>
                                                          AS OF DECEMBER 31,
                                      ----------------------------------------------------------
                                         1999         1998        1997        1996        1995
                                         ----         ----        ----        ----        ----
<S>                                   <C>           <C>         <C>         <C>         <C>
Balance Sheet Data:
  Total investments.................  $  758,268    $691,033    $678,642    $644,992    $664,656
  Total assets......................   1,072,089     889,211     847,990     774,904     768,828
  Loss and loss adjustment expense
     reserves.......................     631,981     540,583     489,207     501,512     501,690
  Reserve for extended reporting
     period claims..................      27,674      26,674      25,628      23,420      22,017
  Unearned premiums.................      87,305      48,201      56,047      21,945      23,122
  Long-term debt....................      17,500      20,000      22,500          --          --
  Stockholders' equity..............     216,816     222,097     219,880     190,157     180,327
  Book value per common share(3)....       24.10       24.13       23.97       20.73       19.81
</TABLE>

<TABLE>
<CAPTION>
                                                      YEARS ENDED DECEMBER 31,
                                      --------------------------------------------------------
                                        1999        1998        1997        1996        1995
                                        ----        ----        ----        ----        ----
<S>                                   <C>         <C>         <C>         <C>         <C>
Selected Statutory Data:
  Loss ratio(4).....................      89.7%      119.1%       95.8%       99.9%      101.8%
  Expense ratio(1)..................      21.7%       24.6%       14.6%       12.0%        9.9%
                                      --------    --------    --------    --------    --------
  Combined ratio....................     111.4%      143.7%      110.4%      111.9%      111.7%
                                      ========    ========    ========    ========    ========
  Statutory surplus.................  $229,657    $193,894    $221,487    $185,648    $159,376
  Net premiums written to statutory
     surplus........................       .60x        .74x        .74x        .67x        .98x
Selected GAAP Data:
  GAAP combined ratio(4)............     104.6%      136.5%      113.2%      114.9%      111.3%
                                      ========    ========    ========    ========    ========
</TABLE>

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

(1) From July 1, 1997 through June 30, 1999, the Company assumed 40% of the net
    premiums of MEEMIC. The business assumed from MEEMIC has increased the
    expense ratio because of the higher ceding commission associated with this
    personal lines business. On July 1, 1999, MEEMIC Holdings was consolidated
    into Professionals Group's financial statements as a result of Professionals
    Group obtaining majority ownership (see also Note 4 to the Company's
    consolidated financial statements).

(2) The Company discounted loss and loss adjustment expense reserves through
    1994. 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 13,
    1999, December 23, 1998 and December 16, 1996, respectively.

(4) In 1998 the Company increased its estimated liability for loss and loss
    adjustment expense reserves by $25.6 million to reflect actuarial estimates
    and the application of the Company's reserving practices to its Florida book
    of business. The ratio includes the increase in reserve for extended
    reporting period claims.

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. The following discussion contains certain forward-looking
statements relating to anticipated future financial conditions and operating
results of the Company and its current business plans. In the future, the
financial condition and operating results of the Company could differ materially
from those discussed herein and its current business plans could be altered in
response to market conditions and other factors beyond the Company's control.
Important factors that could cause or contribute to such differences or changes
include those discussed elsewhere in this report (e.g., see the disclosures
under "Item 1. Business -- Forward Looking Statements").

                                       20
<PAGE>   21

OVERVIEW

     Professionals Group is organized and operates principally in the property
and casualty insurance industry and has two insurance product segments. The
professional liability segment provides insurance coverage and services to
health care providers through Professionals Group's wholly owned subsidiary,
ProNational Insurance Company. The personal lines segment provides personal auto
and homeowners coverages primarily to teachers and other educational employees
through Professionals Group's majority owned subsidiary, MEEMIC Holdings, Inc.
and its wholly owned subsidiary, MEEMIC Insurance Company.

     On July 1, 1999, MEEMIC Holdings was consolidated into Professionals
Group's financial statements as a result of Professionals Group obtaining
majority ownership (see also Note 4 to the Company's consolidated financial
statements.) The transaction was accounted for as a purchase business
combination.

     On July 1, 1998, Professionals Group consummated its merger with Physicians
Protective Trust Fund, a medical malpractice self-insurance trust fund located
in Coral Gables, Florida ("PPTF"). The transaction was accounted for as a
"pooling of interests" business combination under generally accepted accounting
principles, whereby Professionals Group has carried forward to its accounts the
assets and liabilities of PPTF at their respective amounts as reported by PPTF.
All prior period financial information was restated to reflect the combined
operations of Professionals Group and PPTF (see also Note 4 to the Company's
consolidated financial statements.)

FINANCIAL CONDITION

     The Company's total assets increased $182.9 million, or 20.6%, to $1,072.1
million at December 31, 1999, compared to $889.2 million at December 31, 1998.
The increase in total assets was due primarily to the acquisition of MEEMIC
Holdings which added $249.1 million. The significant components of the increase
in total assets related to invested assets, reinsurance balances and deferred
federal income taxes, as further discussed below. Reinsurance balances increased
$61.4 million, or 57.6%, to $168.1 million at December 31, 1999, from $106.7
million at December 31, 1998 due primarily to the acquisition of MEEMIC
Holdings, which added $51.3 million. The remainder of the increase in
reinsurance balances was due to an increase of medical malpractice business sold
at higher limits, resulting in greater reinsurance participation, therefore the
reinsurance recoverables have continued to increase.

     As of December 31, 1999 and 1998, the Company had invested assets of $758.3
million and $691.0 million, respectively. This 9.7% increase in invested assets
was primarily due to the acquisition of MEEMIC Holdings, which added $159.7
million. Offsetting this increase was a reduction in the fair value of the fixed
maturity portfolio, as further discussed below. Invested assets represented
approximately 71% and 78% of the Company's total assets as of December 31, 1999
and 1998, respectively.

     As of December 31, 1999 and 1998, 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, redeemable preferred stocks, and tax-exempt U.S. municipal bonds. As
of December 31, 1999 and 1998, these fixed maturity securities aggregated $731.0
million and $669.1 million, respectively. Approximately 59% of the fixed
maturity portfolio was rated AAA by Standard & Poor's at December 31, 1999. The
fixed maturity portfolio had an average Standard & Poor's credit quality rating
of AA (Excellent) and there were no securities in default at December 31, 1999.

     All fixed maturity securities are classified as available-for-sale and are
carried at fair value as of December 31, 1999 and 1998. As a result, the
Company's fixed maturity investment portfolio is sensitive to interest rate
changes. As of December 31, 1999, the fixed maturity portfolio had net
unrealized losses of $19.5 million. As of December 31, 1998, the fixed maturity
portfolio had net unrealized gains of $22.3 million. This change was due
primarily to higher interest rates at year-end 1999 compared to year-end 1998.
As of December 31, 1999, the fixed maturity portfolio had a weighted average
modified duration of approximately 4.9 years. A one hundred basis point increase
in market interest rates would decrease the value of this portfolio by
approximately 4.9 percent, whereas a one hundred basis point decrease in market
interest rates would increase the value of this portfolio by approximately 4.9
percent.

                                       21
<PAGE>   22

     As of December 31, 1999 and 1998, equity securities totaled $4.9 million
and $3.9 million, respectively, and primarily consisted of high-quality U.S.
corporate common stocks. As of December 31, 1999 and 1998, equity securities had
net unrealized gains (losses) of $1.1 million and ($0.1) million, respectively.

     Deferred federal income taxes increased $29.7 million, or 121.1%, to $54.2
million at December 31, 1999, from $24.5 million at December 31, 1998. This
increase was primarily attributable to the acquisition of MEEMIC Holdings, which
added $17.8 million and from unrealized losses in the investment portfolio.

     Loss and loss adjustment expense reserves represented approximately 74% and
81% of the Company's consolidated liabilities at December 31, 1999 and 1998,
respectively. The decrease in this percentage was due to the acquisition of
MEEMIC Holdings, which has a smaller percentage of reserves to total liabilities
when compared to professional liability reserves, therefore the percentage of
reserves to total liabilities has decreased. These reserves are determined on
the basis of individual claims and actuarially determined estimates of future
losses based on the Company's past loss experience and projections as to future
claims frequency, severity, inflationary trends and settlement patterns.
Estimating reserves, and especially professional liability reserves, is a
complex process that is heavily dependent on judgment and involves many
uncertainties. As a result, reserve estimates may vary significantly from the
eventual outcome. It has been the practice of the Company to establish its loss
and loss adjustment expense reserves within the range of acceptable values
periodically estimated by the Company's consulting actuary. The Company's
carried reserves are recorded based on such actuarial estimates. The assumptions
used in establishing the Company's reserves are regularly reviewed by management
and revised as new data becomes available. Any adjustments necessary are
generally reflected in current operations.

     Loss and loss adjustment expense reserves increased $91.4 million, or
16.9%, to $632.0 million at December 31, 1999, from $540.6 million at December
31, 1998. This increase was primarily attributable to the acquisition of MEEMIC
Holdings, which added $96.0 million.

     The unearned premium reserve increased $39.1 million, or 81.1%, to $87.3
million at December 31, 1999, from $48.2 million at December 31, 1998. This
increase was due mainly to the acquisition of MEEMIC Holdings, which added $34.1
million. The remainder of the increase was due to an increase in the
professional liability business written in 1999 compared to 1998.

     The $18.6 million excess of assets acquired over cost and the minority
interest of $23.8 million at December 31, 1999 were related to the acquisition
of MEEMIC Holdings (see also Note 4 to the Company's consolidated financial
statements.)

     Shareholders' equity decreased $5.3 million, or 2.4%, to $216.8 million at
December 31, 1999, from $222.1 million at December 31, 1998. The decrease in
shareholders' equity was due to a decrease in accumulated other comprehensive
income, consisting of unrealized losses on the investment portfolio of $26.8
million and other decreases in shareholders' equity of $5.7 million (primarily
related to the Company's stock repurchase program -- see "Liquidity and Capital
Resources"), which was offset by net income of $27.2 million during 1999 (see
"Results of Operations -- Year Ended December 31, 1999 Compared to Year Ended
December 31, 1998.") The Company expects to use retained earnings to increase
its capital base and finance future growth and, therefore, there can be no
assurance as to any future cash dividends by the Company.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998

PROFESSIONAL LIABILITY INSURANCE OPERATIONS SEGMENT

     Professional liability net premiums written were $116.6 million for the
year ended December 31, 1999, an increase of $15.4 million, or 15.2%, compared
to net premiums written of $101.2 million for the year ended December 31, 1998.
This increase was due to increased premium writings in the Company's existing
markets of Florida, Illinois, Indiana, Michigan and Pennsylvania as well as
business written in new states such as Kentucky and New Jersey. The most
significant increase was in Florida because of eighteen month policies issued in
1997 as part of a plan to stagger Florida renewals more evenly throughout the
year. The issuance of eighteen month policies in 1997 resulted in a one-time
decrease in premiums written in 1998 because these
                                       22
<PAGE>   23

policies were not renewed until 1999. These increases were offset somewhat by
continued price-based competition.

     Professional liability net premiums earned were $113.4 million for 1999, an
increase of $2.7 million, or 2.4%, compared to net premiums earned of $110.7
million for 1998. The increase in professional liability net premiums earned was
due primarily to increased business in the Company's Midwest markets.

     During 1999 and 1998, the Company endeavored to balance its need for rate
adjustments with the goal of maintaining market share in a very competitive
professional liability environment. Although the Company endeavored to offset
lower premiums charged through selective underwriting practices, there can be no
assurance that these practices will be successful in the long run.

     Reinsurance experience refunds were $3.1 million in 1998. Through 1995,
reinsurance agreements on the Florida business included profit sharing
provisions whereby premiums were refunded to the Company after an established
period of time if premiums paid exceeded actual losses incurred plus an
allowance for expenses. Interest income also accrued on excess premiums paid. In
prior years, the amount of profit recognized in income was based on ultimate
loss projections established by the Company's independent actuary. Reinsurance
profits were paid to the Company when losses developed favorably. During 1998,
reinsurance contracts covering claims prior to 1991 were commuted. Therefore,
any deferred reinsurance profits from these contracts were recognized in 1998.
Reinsurance experience refunds subsequent to 1998 are not expected to be
material.

     Professional liability insurance incurred losses and loss adjustment
expenses (including the increase in reserve for extended reporting period
claims) totaled $109.1 million in 1999, a decrease of $35.0 million, or 24.3%,
compared to $144.1 million in 1998. The decrease was primarily due to unusually
high loss costs during 1998, including a $25.6 million increase to loss reserves
to reflect actuarial estimates and the application of the Company's reserving
practices to the Florida book of business as well as a $9.5 million excess
limits verdict on one Florida claim. As a percentage of premiums earned, the
professional liability insurance incurred loss and loss adjustment expense ratio
(including the increase in reserve for extended reporting period claims, but
excluding the reserve charges) improved to 96.2% in 1999, compared to 96.7% in
1998. The decrease in the professional liability loss and loss adjustment
expense ratio was mainly attributable to reinsurance benefits derived from a
stop loss reinsurance contract entered into for the 1999 accident year and
favorable development of prior years' loss reserves related to the Company's
book of business in the Midwest.

     Professional liability policy acquisition and underwriting expenses were
$24.4 million in both 1999 and 1998. As a percentage of premiums earned, the
underwriting expense ratio improved to 21.6% during 1999, from 22.1% during
1998. Underwriting expenses for 1999 included $2.0 million of severance expenses
associated with the resignation of three executives that joined Professionals
Group from PPTF. Underwriting expenses for 1998 included $3.3 million of
expenses associated with the closing of the PPTF merger.

PERSONAL LINES INSURANCE OPERATIONS SEGMENT

     Personal lines net premiums written were $82.8 million for the year ended
December 31, 1999, an increase of $40.1 million, or 93.8%, compared to net
premiums written of $42.7 million for the year ended December 31, 1998 (pursuant
to the then existing quota share reinsurance relationship with MEEMIC). Personal
lines net premiums earned were $81.8 million for 1999, an increase of $39.1
million, or 91.5%, compared to net premiums earned of $42.7 million for 1998
(pursuant to the then existing quota share reinsurance relationship with
MEEMIC). The increase in both net premiums written and net premiums earned was
due to the acquisition of MEEMIC Holdings.

     Personal lines insurance incurred losses and loss adjustment expenses
totaled $51.7 million for 1999, an increase of $23.7 million, or 84.6%, compared
to $28.0 million for 1998 (pursuant to the then existing quota share reinsurance
relationship with MEEMIC). The increase in incurred losses and loss adjustment
expenses was due to the acquisition of MEEMIC Holdings. As a percentage of
premiums earned, the personal lines insurance incurred loss and loss adjustment
expense ratio decreased to 63.2% in 1999, compared to 65.6% in 1998. The
personal lines insurance loss and loss adjustment expense ratio benefited from
favorable weather conditions in both 1999 and 1998.

                                       23
<PAGE>   24

     Personal lines policy acquisition and underwriting expenses were $18.9
million during 1999, an increase of $5.9 million, or 45.5%, compared to $13.0
million during 1998 (pursuant to the then existing quota share reinsurance
relationship with MEEMIC). The increase in the personal lines policy acquisition
and underwriting expenses was due to the acquisition of MEEMIC Holdings.

GENERAL INSURANCE OPERATIONS

     Net investment income, excluding net realized investment gains, was $41.1
million for 1999, an increase of $2.7 million, or 7.0%, compared to net
investment income of $38.4 million for 1998. The increase reflects the addition
of MEEMIC's investment portfolio as of July 1, 1999. The weighted average tax
equivalent book yield of the fixed maturity portfolio was 7.0% and 6.9% as of
December 31, 1999 and 1998, respectively. Net realized investment gains were
$2.7 million and $4.8 million during 1999 and 1998, respectively. The
significant amount of investment gains recorded in 1998 was attributable to the
sale of a majority of the Company's common stock portfolio due to the Company's
desire to maximize after-tax investment yield. Interest expense was $1.1 million
and $1.3 million during 1999 and 1998, respectively. See "Liquidity and Capital
Resources."

     The Company recorded $6.7 million in federal income tax expense during
1999, compared to a $6.1 million tax benefit during 1998 due to the pretax loss
generated from the reserve charges. The Company's effective federal income tax
rate was 19.1% during 1999, compared to a tax benefit rate of (65.5%) in 1998.
The Company's relatively low effective tax rate for 1999 was due primarily to an
increase in the percentage of tax-exempt municipal bonds.

     Net income for 1999 was $27.2 million, or $2.90 per diluted share, on
revenues of $243.6 million. This compares to a net loss of $3.2 million, or a
loss of $0.35 per diluted share, on revenues of $203.7 million for 1998. The
improvement in earnings was primarily attributable to the improvement in the
loss and loss adjustment expense ratio, as described previously. Two significant
items also impacted net income during 1999. These items resulted from MEEMIC's
conversion to a stock insurance company. The first item was a one-time gain on
early extinguishment of debt, which increased net income by $1.4 million. The
second item reflects the 23% of MEEMIC Holdings not owned by Professionals
Group. This minority interest reduced net income by $2.6 million.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997:

PROFESSIONAL LIABILITY INSURANCE OPERATIONS SEGMENT

     Professional liability net premiums written were $101.2 million for the
year ended December 31, 1998, a decrease of $41.7 million, or 29.2%, compared to
net premiums written of $142.9 million for the year ended December 31, 1997.
This decrease was mainly due to the Florida policies issued in the last half of
1997 that had a term of eighteen months to convert policy renewal dates from a
common renewal date of January 1st. Prior to 1997 all Florida policies were
issued on a calendar year basis with all policies renewing January 1st of each
year. The issuance of eighteen month policies in 1997 resulted in a one time
increase in premiums written (and premiums due from policyholders) for 1997. An
offsetting decrease in premiums written was expected in 1998 because these
policies were not renewed until 1999.

     Professional liability net premiums earned were $110.7 million for 1998, a
decrease of $1.2 million, or 1.0%, compared to net premiums earned of $111.9
million for 1997. The decrease in professional liability net premiums earned was
due primarily to lower premiums earned in Michigan and Florida resulting from
price-based competition. This decrease in professional liability net premiums
earned was offset somewhat by increased business in Illinois and Ohio, expansion
of business into Pennsylvania and an increase in the Company's net retention
from $250,000 to $500,000, effective January 1, 1998.

     During 1998 and 1997, the Company endeavored to balance its need for rate
adjustments with the goal of maintaining market share in a very competitive
professional liability environment. Although the Company endeavored to offset
lower premiums charged through selective underwriting practices, there can be no
assurance that these practices will be successful in the long run.
                                       24
<PAGE>   25

     Reinsurance experience refunds were $3.1 million and $4.2 million in 1998
and 1997, respectively. Through 1995, reinsurance agreements on the Florida
business included profit sharing provisions whereby premiums were refunded to
the Company after an established period of time if they exceeded actual losses
incurred plus an allowance for expenses. Interest income also accrued on excess
premiums paid. In prior years, the amount of profit recognized in income was
based on ultimate loss projections established by the Company's independent
actuary. Reinsurance profits were paid to the Company when losses developed
favorably. During 1998, reinsurance contracts covering claims prior to 1991 were
commuted. Therefore, any deferred reinsurance profits from these contracts were
recognized in 1998.

     Professional liability insurance incurred losses and loss adjustment
expenses (including the increase in reserve for extended reporting period
claims) totaled $144.1 million in 1998, an increase of $30.7 million, or 27.1%,
compared to $113.4 million in 1997. The increase was primarily due to unusually
high loss costs during 1998, including a $25.6 million increase to loss reserves
to reflect actuarial estimates and the application of the Company's reserving
practices to the Florida book of business as well as a $9.5 million excess
limits verdict on one Florida claim. As a percentage of premiums earned, the
professional liability insurance incurred loss and loss adjustment expense ratio
(including the increase in reserve for extended reporting period claims, but
excluding the reserve charges) improved to 96.7% in 1998, compared to 101.3% in
1997. The decrease in the professional liability loss and loss adjustment
expense ratio was mainly attributable to favorable development of prior years'
loss reserves related to the Company's book of business in the Midwest.

     Professional liability policy acquisition and underwriting expenses were
$24.4 million in 1998, an increase of $8.0 million, or 48.7%, compared to policy
acquisition and underwriting expenses of $16.4 million in 1997. As a percentage
of premiums earned, the underwriting expense ratio increased to 22.1% during
1998, from 14.7% during 1997. Underwriting expenses for 1998 included $3.3
million of expenses associated with the closing of the PPTF merger. Underwriting
expenses during 1998 also included $1.2 million of additional compensation
expense recognized on stock grants issued to directors and management of PPTF,
as contemplated by the merger agreement. In addition, 1997 expenses included a
one-time premium tax refund which reduced 1997 underwriting expenses by $2.6
million.

PERSONAL LINES INSURANCE OPERATIONS SEGMENT

     Personal lines net premiums assumed (written and earned) from MEEMIC were
$42.7 million in 1998, an increase of $22.6 million, or 112.2%, compared to net
premiums assumed (written and earned) of $20.1 million in 1997 (the quota share
reinsurance relationship with MEEMIC was not in force during the first six
months of 1997.)

     Personal lines insurance incurred losses and loss adjustment expenses
totaled $28.0 million for 1998, an increase of $14.9 million, or 114.1%,
compared to $13.1 million for 1997 (the quota share reinsurance relationship
with MEEMIC was not in force during the first six months of 1997). As a
percentage of premiums earned, the personal lines insurance incurred loss and
loss adjustment expense ratio was 65.6% and 65.0% in 1998 and 1997,
respectively. The personal lines insurance loss and loss adjustment expense
ratio benefited from favorable weather conditions in both 1998 and 1997.

     Personal lines policy acquisition and underwriting expenses were $13.0
million during 1998, an increase of $6.4 million, or 97.6%, compared to $6.6
million during 1997 (the quota share reinsurance relationship with MEEMIC was
not in force during the first six months of 1997).

GENERAL INSURANCE OPERATIONS

     Net investment income, excluding net realized investment gains, was $38.4
million for 1998, a decrease of $1.1 million, or 2.7%, compared to net
investment income of $39.5 million for 1997. The decrease in net investment
income mainly resulted from a reduction in current yield because of declining
interest rates (e.g., as investments mature, the cash generated is reinvested in
lower yielding securities because of the declining interest rate environment).
The weighted average tax equivalent book yield of the fixed maturity portfolio
was 6.9% and 7.1% as of December 31, 1998 and 1997, respectively. Net realized
investment gains were

                                       25
<PAGE>   26

$4.8 million and $3.9 million during 1998 and 1997, respectively. Interest
expense was $1.3 million and $1.1 million during 1998 and 1997, respectively.
See "Liquidity and Capital Resources."

     The Company recorded a $6.1 million tax benefit during 1998, due to the
pretax loss generated from the reserve charges, compared to $7.8 million in
federal income tax expense in 1997. The Company's effective federal income tax
(benefit) rate was (65.5%) in 1998 compared to 25.9% in 1997. The large amount
of tax exempt income in relation to the small pretax loss has caused the
unusually high effective tax (benefit) rate in 1998.

     The net loss for 1998 was $3.2 million, or a loss of $0.35 per diluted
share, on revenues of $203.7 million. This compares to net income of $22.4
million, or $2.44 per diluted share, on revenues of $181.5 million in 1997.

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 generally 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. In 1997, the Company used a portion of its cash
flow from operations to fund its purchase of a new home office facility,
including furniture and equipment, for $7.1 million. As of December 31, 1999, no
material commitments for capital expenditures existed, and management believes
the Company's present liquidity, together with its expected cash flow from
operations, will be sufficient to fund its commitments for capital expenditures.

     The Company did not borrow any funds in 1999, 1998 or 1997, other than as
described below. On April 4, 1997, Professionals Group borrowed $22.5 million
under a seven-year unsecured bank term loan, bearing interest at an adjustable
rate of LIBOR plus 62.5 basis points (6.55% at December 31, 1999), and payable
quarterly (the "Credit Agreement"). As of December 31, 1999, the outstanding
principal balance was $17.5 million. The remaining principal payments are due on
April 30, as follows: 2000 -- $3.0 million; 2001 -- $3.0 million; 2002 -- $3.5
million; 2003 -- $3.5 million; and 2004 -- $4.5 million. The Company paid the
$2.5 million principal amount due on April 30, 1999. Professionals Group used
$20.0 million of the proceeds of this loan to make a capital contribution to
ProNational, which in turn, used the proceeds to purchase a $21.5 million
promissory note from MEEMIC.

     The Credit Agreement contains a covenant which prohibits the payment of
cash dividends on Professionals Group's common stock (except for cash paid in
lieu of fractional shares related to stock dividends declared). Additional
covenants also require the Company to, among other things, maintain total
consolidated stockholders' equity of at least $80.0 million plus 50% of the
preceding fiscal year's consolidated net income, maintain a ratio of debt to
equity of not more than 0.5:1 and maintain a fixed charges coverage ratio and an
interest coverage ratio (as defined in the Credit Agreement) of not less than
1.5:1 and 2.5:1, respectively. The Company was in compliance with, or has
received waivers of, all required covenants as of December 31, 1999.

     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
ProNational). 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

                                       26
<PAGE>   27

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, 2000, approximately $23.0 million of dividends
could be paid by Professionals Group's direct insurance subsidiaries without
prior regulatory approval. In 1999, 1998 and 1997, Professionals Group's
insurance subsidiaries paid cash dividends aggregating $12.0 million, $12.3
million and $4.7 million, respectively, to Professionals Group. 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).

     On April 14, 1999, Professionals Group's Board of Directors authorized
management to repurchase up to 400,000 shares of the Company's common stock. On
December 11, 1999, the Board of Directors approved an increase in the number of
shares available to be repurchased to 440,000 shares. This increase was approved
to reflect the additional shares outstanding due to the 10% stock dividend
declared on November 15, 1999. The Board also extended the stock repurchase
program from April 28, 2000 to September 30, 2000. The Company repurchased
239,648 shares under this plan at a total cost of $6.5 million during 1999.

     On July 1, 1999, MEEMIC completed its conversion to a stock insurance
company. As a result of the conversion, MEEMIC became a wholly owned subsidiary
of MEEMIC Holdings, Inc., a publicly traded Michigan business corporation
(Nasdaq: MEMH). As part of MEEMIC's conversion, the Company acquired 5,065,517
shares, or 77%, of the outstanding common stock of MEEMIC Holdings, at a cost of
$50.6 million. Of these shares, 2,302,209 shares were acquired upon the
conversion of a $21.5 million promissory note (plus accrued interest of $1.5
million) previously issued by MEEMIC to ProNational. The remaining 2,763,308
shares were purchased by ProNational for cash of $27.6 million. The excess of
net assets acquired over cost was $19.6 million. This acquisition was accounted
for as a purchase business combination. Beginning with the third quarter of
1999, the financial results of MEEMIC Holdings have been consolidated into the
financial results of the Company (see also Note 4 to the Company's consolidated
financial statements).

     On July 1, 1998, Professionals Group consummated its merger with Physicians
Protective Trust Fund, a medical malpractice self-insurance trust fund located
in Coral Gables, Florida ("PPTF"). Pursuant to the merger agreement,
Professionals Group issued 4,087,525 shares of Professionals Group common stock
to the eligible members of PPTF and paid cash of approximately $67,000 in lieu
of fractional shares. Additionally, 30,594 shares (representing 20% of the
153,000 total shares to be issued over a period of five years) of Professionals
Group common stock were issued to directors and management of PPTF, as
contemplated by the merger agreement (see also Note 4 to the Company's
consolidated financial statements.)

EFFECTS OF INFLATION

     The primary effects of inflation on the Company are considered in
estimating reserves for unpaid losses and loss adjustment expenses and in the
premium rate-making process. The actual effects of inflation on the Company's
results of operations cannot be accurately known until claims are ultimately
settled. However, based on actual results to date, the Company believes that
loss and loss adjustment expense reserves and the Company's rate-making process
make adequate provision for the effects of inflation.

EFFECTS OF NEW ACCOUNTING PRONOUNCEMENTS

     The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative
Instruments and Hedging Activities", which is effective for fiscal quarters of
all fiscal years beginning after June 15, 2000 (as amended by SFAS No. 137).
SFAS No. 133 requires that all derivative instruments be recorded on the balance
sheet at fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction, and if it is, the type
of hedge transaction. As the Company currently does not use derivative
instruments, we anticipate that the adoption of SFAS No. 133 will not affect the
results of operations or financial position of the Company.

                                       27
<PAGE>   28

YEAR 2000 COMPLIANCE

     The Company has completed an assessment of its computerized information
systems across its entire operation and has determined that all significant
systems are Year 2000 compliant. To date, ProNational has incurred approximately
$0.5 million in connection with its efforts to become Year 2000 compliant. All
of such costs have been expensed as incurred. In 1999, MEEMIC has incurred
approximately $1.0 million ($3.0 million in total) for the purchase of new
computerized information and communication systems. Neither ProNational or
MEEMIC anticipates incurring additional costs related to the Year 2000. The
Company has received written assurances from the third party vendors of such
equipment and software, that such items are Year 2000 compliant. The Company has
also conducted Year 2000 investigation and testing with its major third party
vendors' software and hardware and determined that all significant hardware and
software is Year 2000 compliant. While the Company believes that Year 2000
compliance issues have been reasonably addressed, both internally and
externally, no assurances can be given that all entities with whom the Company
does business will be Year 2000 compliant. The foregoing disclosure contains
information regarding Year 2000 readiness which constitutes a "Year 2000
Readiness Disclosure" as defined in the Year 2000 Readiness Disclosure Act.

     While the Company has experienced no Year 2000 related problems during the
transition to the Year 2000, it is maintaining its contingency plans in the
event that any problems arise going forward.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

GENERAL

     The Company invests in fixed maturity, equity and short-term securities.
The Company's investment strategy recognizes the need to maintain capital
adequate to support its insurance operations. The Company evaluates the
risk/reward trade-off of investment opportunities, measuring their effects on
yield, stability, diversity, overall quality and liquidity of the investment
portfolio.

     As of December 31, 1999, the majority of the Company's investment portfolio
was invested in fixed maturity securities and short-term investments. The fixed
maturity securities primarily consisted of U.S. government and agency bonds,
high-quality corporate bonds, mortgage-backed securities, redeemable preferred
stocks and tax-exempt U.S. municipal bonds (see also "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Financial Condition").

QUALITATIVE INFORMATION ABOUT MARKET RISK

     Investments in the Company's portfolio have varying degrees of risk. The
primary market risk exposure to the fixed maturity portfolio is interest rate
risk, which is limited somewhat by managing ProNational's duration to a defined
range of 3.5 to 5.5 years and limiting MEEMIC's duration to a maximum of 300% of
the duration of MEEMIC's liabilities. The distribution of maturities and sector
concentrations are monitored on a regular basis. Equity securities (common
stocks), which generally have greater risk and volatility of market value are
not significant to the Company's overall investment portfolio, therefore,
exposure to equity price risk is not significant. However, market values of
equity securities are monitored regularly.

     The Company regularly examines the quality distribution of its investment
portfolio for evidence of impairment. In such cases, changes in market value are
evaluated to determine the extent to which such changes are attributable to: (i)
interest rates, (ii) market-related factors other than interest rates and (iii)
financial conditions, business prospects and other fundamental factors specific
to the issuer. Declines attributable to issuer fundamentals are reviewed in
further detail. Available evidence is considered to estimate the realizable
value of the investment. When a security in the Company's investment portfolio
has a decline in market value which is other than temporary, the Company is
required by GAAP to reduce the carrying value of such security to its net
realizable value. All declines in market values of the Company's investment
securities at December 31, 1999 were deemed to be temporary.

     The Company currently has no market risk exposure to foreign currency
exchange rate risk or commodity price risk.

                                       28
<PAGE>   29

QUANTITATIVE INFORMATION ABOUT MARKET RISK

     Financial instruments subject to interest rate risk as of December 31, 1999
and 1998 were as follows:

<TABLE>
<CAPTION>
                                                      MARKET VALUE
                                  ----------------------------------------------------
                                  -200 BPS   -100 BPS              +100 BPS   +200 BPS
                                   CHANGE     CHANGE     ACTUAL     CHANGE     CHANGE
                                  --------   --------    ------    --------   --------
                                                     (IN THOUSANDS)
<S>                               <C>        <C>        <C>        <C>        <C>
Total portfolio value at
  December 31, 1999.............  $797,240   $774,165   $750,669   $727,237   $704,158
                                  ========   ========   ========   ========   ========
Total portfolio value at
  December 31, 1998.............  $758,816   $723,566   $686,711   $653,273   $618,280
                                  ========   ========   ========   ========   ========
</TABLE>

     The Company does not invest in fixed maturity securities for trading
purposes. Exposure to risk is represented in terms of changes in fair value due
to selected hypothetical movements in market rates. Bonds and preferred stocks
are individually priced to yield to the worst case scenario. Securities issued
by states of the United States and political subdivisions of the states are
assumed to hold their prepayment patterns. Mortgage-backed and asset-backed
securities are priced assuming deal specific prepayment scenarios, considering
the deal structure, prepayment penalties, yield maintenance agreements and the
underlying collateral. All of the preferred stocks have mechanisms that are
expected to provide an opportunity to liquidate at par.

     Financial instruments subject to equity market risk as of December 31, 1999
and 1998 were as follows:

<TABLE>
<CAPTION>
                                                                     HYPOTHETICAL MARKET
                                                           ACTUAL          CHANGES
                                                           MARKET    --------------------
                                                           VALUE       +10%        -10%
                                                           ------      ----        ----
                                                                   (IN THOUSANDS)
<S>                                                        <C>       <C>         <C>
Common stocks at December 31, 1999.......................  $4,899     $5,389      $4,409
                                                           ======     ======      ======
Common stocks at December 31, 1998.......................  $3,901     $4,291      $3,511
                                                           ======     ======      ======
</TABLE>

     The table above summarizes the Company's equity price risk as of December
31, 1999 and 1998 and shows the effects of a hypothetical 10% increase and 10%
decrease in the market prices as of December 31, 1999 and 1998. The selected
hypothetical change does not reflect what could be considered the best or worst
case scenarios.

     The Company generally does not invest in equity securities for trading
purposes. As of December 31, 1999 and 1998, equity securities represented less
than 1% of the Company's total assets. The carrying values of publicly traded
investments subject to equity price risk are based on quoted market prices as of
the balance sheet date. Market prices are subject to fluctuation and,
consequently, the amount realized in the subsequent sale of the investment may
significantly differ from the reported market value. Fluctuation in the market
price of a security may result from perceived changes in the underlying economic
characteristics of the investee, the relative prices of alternative investments
and general market conditions. Furthermore, amounts realized in the sale of a
particular security may be affected by the relative quantity of the security
being sold. The carrying values of privately held investments are subject to
equity price risk which are based on the forgoing market price considerations
and also on the underlying value of the issuer and other buyer's perceptions of
such value, as well as lack of liquidity considerations.

                                       29
<PAGE>   30

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                   PROFESSIONALS GROUP, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1999 AND 1998

<TABLE>
<CAPTION>
                                                                 1999         1998
                                                                 ----         ----
                                                              (IN THOUSANDS, EXCEPT
                                                                   SHARE DATA)
<S>                                                           <C>           <C>
ASSETS
Investments:
  Available for sale, at fair value:
     Fixed maturities (amortized cost $750,548 and $646,864
      in 1999 and 1998, respectively).......................  $  731,036    $669,118
     Equity securities (cost $3,846 and $4,035 in 1999 and
      1998, respectively)...................................       4,899       3,901
  Short-term investments, at cost, which approximates fair
     value..................................................      19,633      17,593
  Real estate, at cost, net of accumulated depreciation of
     $132 and $111 in 1999 and 1998, respectively...........       2,700         421
                                                              ----------    --------
          Total investments.................................     758,268     691,033
Cash........................................................      13,797         379
Restricted cash.............................................       2,070       2,070
Premiums due from policyholders.............................      34,951      27,580
Reinsurance balances........................................     168,100     106,692
Accrued investment income...................................      10,087      10,743
Deferred Federal income taxes...............................      54,161      24,501
Property and equipment, at cost, net of accumulated
  depreciation of $5,888 and $4,617 in 1999 and 1998,
  respectively..............................................      10,779       9,117
Prepaid reinsurance premiums................................       6,667       4,917
Other assets................................................      13,209      12,179
                                                              ----------    --------
          Total assets......................................  $1,072,089    $889,211
                                                              ==========    ========

            LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
  Loss and loss adjustment expense reserves.................  $  631,981    $540,583
  Reserve for extended reporting period claims..............      27,674      26,674
  Unearned premiums.........................................      87,305      48,201
  Long-term debt............................................      17,500      20,000
  Excess of net assets acquired over cost...................      18,609          --
  Accrued expenses and other liabilities....................      48,400      31,656
  Minority interest.........................................      23,804          --
                                                              ----------    --------
          Total liabilities.................................     855,273     667,114
                                                              ----------    --------
Shareholders' equity:
  Preferred stock, no par value; 5,000,000 shares
     authorized; no shares issued and outstanding...........          --          --
  Common stock, no par value; 25,000,000 shares authorized;
     8,997,709 and 8,383,924 shares issued and outstanding
     in 1999 and 1998, respectively.........................       8,998       8,384
  Additional paid-in capital................................      47,033      33,982
  Retained earnings.........................................     172,968     165,132
  Accumulated other comprehensive income, net of deferred
     Federal income taxes...................................     (12,183)     14,599
                                                              ----------    --------
          Total shareholders' equity........................     216,816     222,097
                                                              ----------    --------
          Total liabilities and shareholders' equity........  $1,072,089    $889,211
                                                              ==========    ========
</TABLE>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.

                                       30
<PAGE>   31

                   PROFESSIONALS GROUP, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

<TABLE>
<CAPTION>
                                                                1999        1998        1997
                                                                ----        ----        ----
                                                              (IN THOUSANDS, EXCEPT SHARE DATA)
<S>                                                           <C>         <C>         <C>
Revenues and other income:
  Premiums written, including $25,364, $47,781 and $21,871
     of premiums assumed in 1999, 1998 and 1997,
     respectively...........................................  $225,123    $162,529    $181,170
  Premiums ceded............................................   (25,772)    (18,607)    (18,156)
                                                              --------    --------    --------
          Net premiums written..............................   199,351     143,922     163,014
  Decrease (increase) in unearned premiums, net of prepaid
     reinsurance premiums...................................    (4,182)      9,527     (30,988)
                                                              --------    --------    --------
          Premiums earned, net..............................   195,169     153,449     132,026
  Net investment income.....................................    41,142      38,443      39,521
  Net realized investment gains.............................     2,704       4,810       3,913
  Reinsurance experience refunds............................        --       3,071       4,236
  Other.....................................................     4,556       3,896       1,846
                                                              --------    --------    --------
          Total revenues and other income...................   243,571     203,669     181,542
                                                              --------    --------    --------
Expenses:
  Losses and loss adjustment expenses, net..................   159,760     171,040     124,234
  Increase in reserve for extended reporting period
     claims.................................................     1,000       1,046       2,208
  Policy acquisition and other underwriting expenses........    43,343      37,424      23,009
  Amortization expense, net.................................       142         992         724
  Interest expense..........................................     1,098       1,313       1,098
  Other.....................................................     3,206       1,217          --
                                                              --------    --------    --------
          Total expenses....................................   208,549     213,032     151,273
                                                              --------    --------    --------
Income (loss) from operations before Federal income taxes
  (benefit), minority interest and extraordinary item.......    35,022      (9,363)     30,269
Federal income taxes (benefit)..............................     6,672      (6,132)      7,841
                                                              --------    --------    --------
Income (loss) before minority interest and extraordinary
  item......................................................    28,350      (3,231)     22,428
Minority interest...........................................    (2,559)         --          --
                                                              --------    --------    --------
Income (loss) before extraordinary item.....................    25,791      (3,231)     22,428
Extraordinary item -- gain on early extinguishment of debt,
  net of taxes of $720......................................     1,397          --          --
                                                              --------    --------    --------
          Net income (loss).................................  $ 27,188    $ (3,231)   $ 22,428
                                                              ========    ========    ========
Net income (loss) per common share -- basic:
  Income (loss) before extraordinary item...................  $   2.82    $  (0.35)   $   2.44
  Income from extraordinary item............................      0.15          --          --
                                                              --------    --------    --------
          Net income (loss) per common share -- basic.......  $   2.97    $  (0.35)   $   2.44
                                                              ========    ========    ========
Net income (loss) per common share -- assuming dilution:
  Income (loss) before extraordinary item...................  $   2.75    $  (0.35)   $   2.44
  Income from extraordinary item............................      0.15          --          --
                                                              --------    --------    --------
          Net income (loss) per common share -- assuming
            dilution........................................  $   2.90    $  (0.35)   $   2.44
                                                              ========    ========    ========
</TABLE>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.

                                       31
<PAGE>   32

                   PROFESSIONALS GROUP, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

<TABLE>
<CAPTION>
                                                                1999      1998      1997
                                                                ----      ----      ----
                                                                     (IN THOUSANDS)
<S>                                                           <C>        <C>       <C>
Net income (loss)...........................................  $ 27,188   $(3,231)  $22,428
                                                              --------   -------   -------
Other comprehensive income (loss):
  Unrealized holding gains (losses) on securities arising
     during the period (net of income taxes (benefit) of
     ($12,878), $3,917 and $5,089 in 1999, 1998 and 1997,
     respectively)..........................................   (24,997)    7,604     9,878
  Less reclassification adjustment for realized gains
     included in net income (loss) (net of income taxes of
     $919, $1,635 and $1,330 in 1999, 1998 and 1997,
     respectively)..........................................    (1,785)   (3,175)   (2,583)
                                                              --------   -------   -------
          Other comprehensive income (loss).................   (26,782)    4,429     7,295
                                                              --------   -------   -------
          Comprehensive income..............................  $    406   $ 1,198   $29,723
                                                              ========   =======   =======
</TABLE>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.

                                       32
<PAGE>   33

                   PROFESSIONALS GROUP, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

<TABLE>
<CAPTION>
                                                                                ACCUMULATED
                                                                                   OTHER
                                                                               COMPREHENSIVE
                                     COMMON STOCK                               INCOME, NET
                                  ------------------   ADDITIONAL               OF DEFERRED        TOTAL
                                   SHARES               PAID-IN     RETAINED      FEDERAL      SHAREHOLDERS'
                                   ISSUED     AMOUNT    CAPITAL     EARNINGS   INCOME TAXES       EQUITY
                                   ------     ------   ----------   --------   -------------   -------------
                                                      (IN THOUSANDS, EXCEPT SHARE DATA)
<S>                               <C>         <C>      <C>          <C>        <C>             <C>
Balances, December 31, 1996.....  7,593,275   $7,593    $10,482     $169,207     $  2,875        $190,157
Net income......................         --       --         --       22,428           --          22,428
Net appreciation on debt and
  equity securities.............         --       --         --           --        7,295           7,295
                                  ---------   ------    -------     --------     --------        --------
Balances, December 31, 1997.....  7,593,275    7,593     10,482      191,635       10,170         219,880
Net loss........................         --       --         --       (3,231)          --          (3,231)
Issuance of common stock........     30,594       31      1,126           --           --           1,157
Issuance of 10% stock
  dividend......................    760,055      760     22,374      (23,272)          --            (138)
Net appreciation on debt and
  equity securities.............         --       --         --           --        4,429           4,429
                                  ---------   ------    -------     --------     --------        --------
Balances, December 31, 1998.....  8,383,924    8,384     33,982      165,132       14,599         222,097
Net income......................         --       --         --       27,188           --          27,188
Issuance of common stock........     33,473       34        851           --           --             885
Issuance of 10% stock
  dividend......................    820,688      821     18,465      (19,326)          --             (40)
Common stock repurchased........   (239,648)    (240)    (6,266)          --           --          (6,506)
Dissenter's rights paid.........       (728)      (1)         1          (26)          --             (26)
Net depreciation on debt and
  equity securities.............         --       --         --           --      (26,782)        (26,782)
                                  ---------   ------    -------     --------     --------        --------
Balances, December 31, 1999.....  8,997,709   $8,998    $47,033     $172,968     $(12,183)       $216,816
                                  =========   ======    =======     ========     ========        ========
</TABLE>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.

                                       33
<PAGE>   34

                   PROFESSIONALS GROUP, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

<TABLE>
<CAPTION>
                                                                1999         1998         1997
                                                                ----         ----         ----
                                                                        (IN THOUSANDS)

<S>                                                           <C>          <C>          <C>
Cash flows from operating activities:
  Net income (loss).........................................  $  27,188    $  (3,231)   $  22,428
  Adjustments to reconcile net income (loss) to net cash
    provided by (used in) operating activities:
    Depreciation and amortization...........................      2,409        4,311        3,470
    Realized gains on investments...........................     (2,704)      (4,810)      (3,913)
    Deferred Federal income taxes...........................      2,166       (5,335)       2,353
    Extraordinary gain on early extinguishment of debt......     (2,117)          --           --
    Common stock issued as compensation.....................        885        1,157           --
    Minority interest.......................................      2,070           --           --
    Changes in assets and liabilities:
      Restricted cash.......................................         --           --          (66)
      Premiums due from policyholders.......................     (2,504)       9,780      (29,696)
      Reinsurance balances..................................         59      (31,366)      (4,916)
      Accrued investment income.............................        778       (1,222)         333
      Prepaid reinsurance premiums..........................     (1,750)      (1,681)      (3,114)
      Deferred policy acquisition costs.....................     (1,922)        (124)        (378)
      Other assets..........................................        919       (4,818)      (1,318)
      Loss and loss adjustment expense reserves.............     (3,236)      51,376      (12,305)
      Reserve for extended reporting period claims..........      1,000        1,046        2,208
      Unearned premiums.....................................      5,931       (7,846)      34,102
      Accrued expenses and other liabilities................     (6,479)      (7,730)      (2,388)
                                                              ---------    ---------    ---------
        Net cash provided by (used in) operating
          activities........................................     22,693         (493)       6,800
                                                              ---------    ---------    ---------
Cash flows from investing activities:
  Proceeds from sale or maturity of short-term
    investments.............................................    954,874      602,999      581,257
  Purchases of short-term investments.......................   (953,740)    (573,550)    (613,658)
  Proceeds from maturity of securities available for sale...     10,638       12,440       10,836
  Proceeds from sale of securities available for sale.......    272,807      201,311      269,399
  Purchases of securities available for sale................   (285,706)    (240,420)    (268,070)
  Cash acquired in excess of cash paid related to MEEMIC
    acquisition.............................................     20,338           --           --
  Purchases of real estate, property and equipment..........     (5,743)      (1,306)      (7,771)
  Payment on liability for purchased book of business.......       (637)        (600)        (754)
                                                              ---------    ---------    ---------
        Net cash provided by (used in) investing
          activities........................................     12,831          874      (28,761)
                                                              ---------    ---------    ---------
Cash flows from financing activities:
  Proceeds from issuance of long-term debt..................         --           --       22,500
  Repayment of long-term debt...............................     (2,500)      (2,500)          --
  Repayment of payable related to an acquisition............    (13,034)          --           --
  Cash paid for dissenter's rights..........................        (26)          --           --
  Common stock repurchased..................................     (6,506)          --           --
  Cash paid in lieu of fractional shares....................        (40)        (138)          --
                                                              ---------    ---------    ---------
        Net cash provided by (used in) financing
          activities........................................    (22,106)      (2,638)      22,500
                                                              ---------    ---------    ---------
        Net increase (decrease) in cash.....................     13,418       (2,257)         539
Cash, beginning of year.....................................        379        2,636        2,097
                                                              ---------    ---------    ---------
Cash, end of year...........................................  $  13,797    $     379    $   2,636
                                                              =========    =========    =========
Supplemental disclosure of cash flow information:
  Federal income taxes paid.................................  $   6,869    $   4,701    $   4,259
  Interest paid.............................................      1,098        1,384          730
Supplemental schedule of noncash investing and financing
  activities:
  Exchange of assets for ownership interest in MEEMIC.......  $  23,022    $      --    $      --
  Issuance of common stock as compensation..................        885        1,157           --
  Liability incurred in acquisition of subsidiary...........         --          313           --
                                                              =========    =========    =========
</TABLE>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.

                                       34
<PAGE>   35

                   PROFESSIONALS GROUP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

(1) FORMATION OF COMPANY AND DESCRIPTION OF BUSINESS

     Professionals Group, Inc. (Professionals Group) is an insurance holding
company incorporated under Michigan law on January 31, 1996. Professionals Group
owns all of the issued and outstanding common stock of ProNational Insurance
Company (ProNational), a Michigan-domiciled property and casualty insurance
company which primarily provides professional liability insurance coverages and
services to health care providers. ProNational owns 100% of ProNational Casualty
Company (ProNational Casualty), an inactive Illinois-domiciled property and
casualty insurance company. ProNational also owns 77% of MEEMIC Holdings, Inc.
(MEEMIC Holdings) which provides personal auto and homeowners coverages to
teachers and other educational employees through MEEMIC Insurance Company
(MEEMIC), a Michigan-domiciled property and casualty insurance company.
Professionals Group and subsidiaries are collectively referred to as "the
Company."

(2) PRINCIPLES OF CONSOLIDATION

     The consolidated financial statements include the accounts of Professionals
Group and its wholly-owned subsidiaries, as well as entities over which it has
voting control, including MEEMIC Holdings, a publicly traded company in which
Professionals Group has a 77% ownership interest. All significant intercompany
transactions and balances have been eliminated in consolidation.

(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  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 (SAP) followed in reporting to insurance
regulatory authorities (see note 13 for the effects of such differences).

  Investments

     At December 31, 1999 and 1998, all of the Company's securities are
classified as available for sale which 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. Unrealized gains
and losses, net of the related income tax effect, on available for sale
securities are excluded from income and recorded as other comprehensive income.

     A decline in the fair value of an available for sale 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 1999, 1998 or 1997 were deemed
to be temporary.

     Investments in preferred stock and common stock of nonaffiliates are stated
at fair value. Fair values for all investments 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

                                       35
<PAGE>   36
                   PROFESSIONALS GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

     Real estate, which primarily consists of vacant land available for sale, is
stated at cost.

  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.

     Through 1995, reinsurance agreements on the Company's Florida business
included profit sharing provisions whereby premiums were refunded to the Company
after an established period of time if they exceeded actual losses incurred plus
an allowance for expenses. Interest income also accrued on excess premiums paid.
In prior years, the amount of profit recognized in income was based on ultimate
loss projections established by the Company's independent actuary. Reinsurance
profits were recognized by the Company when losses developed favorably. During
1998, the 1991 and prior reinsurance contracts were commuted and deferred
reinsurance profits thereon were recognized.

  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. Additionally, the Company provides
for loss and loss adjustment expense reserves on assumed business based on
information received from the ceding companies. 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.

  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 believed to be adequate to pay for estimated future claims
reported subsequent to a current policyholder's death, disability or retirement.
Changes in this reserve are charged or credited to income.

  Property and equipment and depreciation

     Property and equipment, consisting of real estate, data processing
equipment and furniture and fixtures, 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.

                                       36
<PAGE>   37
                   PROFESSIONALS GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  Deferred policy acquisition costs

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

  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.

  Intangible assets

     Intangible assets are comprised mainly of goodwill, which represents the
excess of cost over the fair value of assets acquired, and the cost of a
purchased book of business. Intangible assets 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 item. Based upon its most recent analysis,
the Company believes that no material impairment of intangible assets exists at
December 31, 1999.

  Stock-based compensation

     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.

  Net income per share

     Net income per share is computed by dividing net income by the weighted
average number of shares of common stock and common stock equivalents (stock
options and stock grants) outstanding during each year after giving effect to
stock dividends and treasury shares.

                                       37
<PAGE>   38
                   PROFESSIONALS GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     A reconciliation of the numerators and denominators of the "income (loss)
per share -- basic" and "income (loss) per share -- assuming dilution" is
presented below:

<TABLE>
<CAPTION>
                                                     INCOME         SHARES       PER-SHARE
                                                   (NUMERATOR)   (DENOMINATOR)    AMOUNT
                                                   -----------   -------------   ---------
<S>                                                <C>           <C>             <C>
FOR THE YEAR ENDED DECEMBER 31, 1999
  Income per share -- basic......................  $27,188,000     9,144,597      $ 2.97
                                                                                  ======
  Effect of dilutive securities -- stock options
     and stock grants............................           --       108,439
  Effect of MEEMIC Holdings stock options on
     minority interest...........................     (353,000)           --
                                                   -----------     ---------
  Income per share -- assuming dilution..........  $26,835,000     9,253,036      $ 2.90
                                                   ===========     =========      ======
FOR THE YEAR ENDED DECEMBER 31, 1998
  Loss per share -- basic........................  $(3,231,000)    9,189,441      $(0.35)
                                                                                  ======
  Effect of dilutive securities -- stock options
     and stock grants............................           --            --
                                                   -----------     ---------
  Loss per share -- assuming dilution............  $(3,231,000)    9,189,441      $(0.35)
                                                   ===========     =========      ======
FOR THE YEAR ENDED DECEMBER 31, 1997
  Income per share -- basic......................  $22,428,000     9,174,018      $ 2.44
                                                                                  ======
  Effect of dilutive securities -- stock
     options.....................................           --         2,011
                                                   -----------     ---------
  Income per share -- assuming dilution..........  $22,428,000     9,176,029      $ 2.44
                                                   ===========     =========      ======
</TABLE>

     The diluted share base for the year ended December 31, 1998 excludes
incremental shares of 72,172 related to stock options and stock grants. These
shares are excluded due to their antidilutive effect as a result of the
Company's net loss during 1998.

  Other comprehensive income

     Other comprehensive income consists solely of unrealized gains or losses on
the Company's available for sale securities.

  Restricted cash

     Restricted cash is an amount required to be deposited in escrow for the
appeal process of a specific case being litigated and decided upon in
arbitration.

  Use of estimates

     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.

                                       38
<PAGE>   39
                   PROFESSIONALS GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  Reclassifications

     Certain prior year amounts have been reclassified in order to conform with
the current year presentation format.

(4) BUSINESS COMBINATIONS

     On July 1, 1999, Michigan Educational Employees Mutual Insurance Company
completed its conversion to a stock insurance company and changed its name to
MEEMIC Insurance Company (MEEMIC). As a result of the conversion, MEEMIC became
a wholly owned subsidiary of MEEMIC Holdings, Inc. (MEEMIC Holdings), a publicly
traded Michigan business corporation. As part of MEEMIC's conversion, the
Company acquired 5,065,517 shares, or 77%, of the outstanding common stock of
MEEMIC Holdings, at a cost of $50.6 million. Of these shares, 2,302,209 shares
were acquired upon the conversion of a $21.5 million promissory note (plus
accrued interest of $1.5 million) previously issued by MEEMIC to ProNational.
The remaining 2,763,308 shares were purchased by ProNational for cash of $27.6
million. This acquisition was accounted for as a purchase business combination.
The excess of net assets acquired over cost was $19.6 million, and is being
amortized on the straight-line method over 10 years. As contemplated in MEEMIC's
conversion plan, MEEMIC accelerated the payment of certain debt. This early
extinguishment of debt resulted in an extraordinary gain of $1,397,000, net of
federal income taxes of $720,000 in 1999. Beginning July 1, 1999, the financial
results of MEEMIC Holdings have been consolidated into the financial results of
the Company. The following unaudited pro forma information presents a summary of
the consolidated results of operations of the Company for the years ended
December 31, 1999 and 1998, as if this acquisition had occurred on January 1,
1998 (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                                1999       1998
                                                                ----       ----
<S>                                                           <C>        <C>
Total revenues..............................................  $279,571   $273,895
Income before extraordinary item............................    28,820      6,981
Net income..................................................    30,344      6,678
Diluted income per common share before extraordinary item...      3.11       0.75
Diluted net income per common share.........................      3.28       0.72
</TABLE>

     These unaudited pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
which would have actually resulted had this acquisition occurred on January 1,
1998, or of future results of operations of the Company.

     On July 1, 1998, Professionals Group consummated its merger with Physicians
Protective Trust Fund, a medical malpractice self-insurance trust fund located
in Coral Gables, Florida (PPTF). Pursuant to the merger agreement, Professionals
Group issued 4,087,525 shares of Professionals Group common stock to the
eligible members of PPTF and paid cash of approximately $67,000 in lieu of
fractional shares. Additionally, 30,594 shares (representing 20% of the 153,000
total shares to be issued over a period of five years) of Professionals Group
common stock were issued to directors and management of PPTF, as contemplated by
the merger agreement. The transaction has been accounted for as a "pooling of
interests" business combination under generally accepted accounting principles,
whereby Professionals Group has carried forward to its accounts the assets and
liabilities of PPTF at their respective amounts as reported by PPTF. All prior
period financial information was restated to reflect the combined operations of
Professionals Group and PPTF.

                                       39
<PAGE>   40
                   PROFESSIONALS GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(5) INVESTMENTS

     A summary of amortized cost, gross unrealized gains and losses and
estimated fair value of investments in securities available for sale as of
December 31, 1999 and 1998 follows:

<TABLE>
<CAPTION>
                                                            GROSS UNREALIZED   ESTIMATED
                                                AMORTIZED   ----------------     FAIR
                                                  COST      GAINS    LOSSES      VALUE
                                                ---------   -----    ------    ---------
                                                             (IN THOUSANDS)
<S>                                             <C>         <C>      <C>       <C>
AT DECEMBER 31, 1999:
Fixed maturities:
  U.S. Treasury securities and obligations of
     U.S. Government corporations and
       agencies...............................  $ 41,520    $  103   $ 1,388   $ 40,235
  Debt securities issued by states of the
     United States and political subdivisions
     of the states............................   358,686     2,087     9,563    351,210
  Debt securities issued by foreign
     governments..............................     3,728        --       100      3,628
  Corporate debt securities...................   115,019        86     3,491    111,614
  Mortgage-backed securities:
     Government...............................   149,721        80     5,104    144,697
     Other....................................    57,475        16     2,290     55,201
  Redeemable preferred stocks.................    24,399       183       131     24,451
                                                --------    ------   -------   --------
                                                $750,548    $2,555   $22,067   $731,036
                                                ========    ======   =======   ========
Equity securities.............................  $  3,846    $1,071   $    18   $  4,899
                                                ========    ======   =======   ========
</TABLE>

<TABLE>
<CAPTION>
                                                             GROSS UNREALIZED   ESTIMATED
                                                 AMORTIZED   ----------------     FAIR
                                                   COST       GAINS    LOSSES     VALUE
                                                 ---------    -----    ------   ---------
                                                              (IN THOUSANDS)
<S>                                              <C>         <C>       <C>      <C>
AT DECEMBER 31, 1998:
Fixed maturities:
  U.S. Treasury securities and obligations of
     U.S. Government corporations and
       agencies................................  $ 73,529    $ 3,705    $ --    $ 77,234
  Debt securities issued by states of the
     United States and political subdivisions
     of the states.............................   288,172     11,468     298     299,342
  Debt securities issued by foreign
     governments...............................     3,734        540      --       4,274
  Corporate debt securities....................   128,423      5,175      79     133,519
  Mortgage-backed securities:
     Government................................    98,422      1,245      90      99,577
     Other.....................................    38,779        342     405      38,716
  Redeemable preferred stocks..................    15,805        651      --      16,456
                                                 --------    -------    ----    --------
                                                 $646,864    $23,126    $872    $669,118
                                                 ========    =======    ====    ========
Equity securities..............................  $  4,035    $   147    $281    $  3,901
                                                 ========    =======    ====    ========
</TABLE>

                                       40
<PAGE>   41
                   PROFESSIONALS GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The amortized cost and estimated fair value of fixed maturities at December
31, 1999, 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>
                                                              AMORTIZED   ESTIMATED
                                                                COST      FAIR VALUE
                                                              ---------   ----------
                                                                  (IN THOUSANDS)
<S>                                                           <C>         <C>
Due in one year or less.....................................  $ 16,399     $ 16,387
Due after one year through five years.......................   132,638      132,420
Due after five years through ten years......................   203,674      198,738
Due after ten years.........................................   166,242      159,142
                                                              --------     --------
                                                               518,953      506,687
Mortgage-backed securities:
  Government................................................   149,721      144,697
  Other.....................................................    57,475       55,201
Redeemable preferred stocks.................................    24,399       24,451
                                                              --------     --------
                                                              $750,548     $731,036
                                                              ========     ========
</TABLE>

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

<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                                       ------------------------------
                                                         1999       1998       1997
                                                         ----       ----       ----
                                                               (IN THOUSANDS)
<S>                                                    <C>        <C>        <C>
Proceeds.............................................  $283,445   $213,751   $277,610
                                                       ========   ========   ========
Gross realized gains.................................  $  4,192   $  5,906   $  5,400
Gross realized losses................................    (1,488)    (1,096)    (1,487)
                                                       --------   --------   --------
  Net realized gains.................................  $  2,704   $  4,810   $  3,913
                                                       ========   ========   ========
</TABLE>

     A summary of the sources of net investment income follows:

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                                          ---------------------------
                                                           1999      1998      1997
                                                           ----      ----      ----
                                                                (IN THOUSANDS)
<S>                                                       <C>       <C>       <C>
Fixed maturities........................................  $38,903   $38,584   $38,662
Equity securities.......................................      937       151       203
Short-term investments, cash and cash equivalents.......    2,605     1,308     1,969
Real estate.............................................       51       298       147
Other invested assets...................................      116        65       268
                                                          -------   -------   -------
     Gross investment income............................   42,612    40,406    41,249
Less investment expenses................................    1,470     1,963     1,728
                                                          -------   -------   -------
                                                          $41,142   $38,443   $39,521
                                                          =======   =======   =======
</TABLE>

                                       41
<PAGE>   42
                   PROFESSIONALS GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Net realized gains and net appreciation (depreciation) in fair value of
available for sale securities follow:

<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                                         ----------------------------
                                                           1999      1998      1997
                                                           ----      ----      ----
                                                                (IN THOUSANDS)
<S>                                                      <C>        <C>       <C>
Net realized gains:
  Fixed maturities.....................................  $  2,585   $ 1,369   $ 3,802
  Equity securities....................................       119     3,441       111
                                                         --------   -------   -------
          Net realized gains...........................  $  2,704   $ 4,810   $ 3,913
                                                         ========   =======   =======
Net appreciation (depreciation) in fair value of
  available for sale securities:
  Fixed maturities.....................................  $(41,766)  $ 8,031   $ 9,929
  Equity securities....................................     1,187    (1,320)    1,124
                                                         --------   -------   -------
          Net appreciation (depreciation)..............  $(40,579)  $ 6,711   $11,053
                                                         ========   =======   =======
</TABLE>

     At December 31, 1999, U.S. Treasury notes and certificates of deposit with
a carrying value of $5,588,000 were on deposit with regulatory authorities, as
required by law.

(6) 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, quota-share and stop loss
reinsurance agreements. As of December 31, 1999, the maximum current net
retention on business generated by Professionals Group's insurance subsidiaries,
subject to certain adjustments of risk on any single coverage per claim after
reinsurance, was $500,000.

     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.

     From July 1, 1997 through June 30, 1999, ProNational assumed, on a
quota-share basis, 40% of MEEMIC's net business. In connection with the
acquisition of MEEMIC Holdings (see note 4), this quota share reinsurance
agreement was cancelled on June 30, 1999.

                                       42
<PAGE>   43
                   PROFESSIONALS GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     At December 31, 1999, amounts related to reinsurance balances and prepaid
reinsurance premiums follow:

<TABLE>
<CAPTION>
                                                                              PREPAID
                                                              REINSURANCE   REINSURANCE
                                                               BALANCES      PREMIUMS
                                                              -----------   -----------
                                                                   (IN THOUSANDS)
<S>                                                           <C>           <C>
General Reinsurance Corporation.............................   $ 39,691       $2,633
Michigan Catastrophic Claims Association....................     31,280           --
Continental Casualty Company................................     23,889          624
PMA Reinsurance Corporation.................................     17,501        1,296
TIG Reinsurance Company.....................................     13,919           --
DP Mann Underwriting Agency.................................      7,140           61
American Reinsurance Company................................      6,344           --
Odyssey Reinsurance Corporation.............................      4,967          612
Transatlantic Reinsurance...................................      3,864          612
CNA International...........................................      3,418          153
Underwriters Reinsurance Company............................      3,293           --
Other.......................................................     12,794          676
                                                               --------       ------
                                                               $168,100       $6,667
                                                               ========       ======
</TABLE>

     Reinsurance balances consisted of amounts related to:

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              -------------------
                                                                1999       1998
                                                                ----       ----
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>
Recoverables:
  Paid losses and loss adjustment expenses..................  $  6,276   $    577
  Unpaid losses and loss adjustment expenses................   167,721    108,036
                                                              --------   --------
          Total reinsurance recoverables....................   173,997    108,613
Ceded reinsurance premiums payable..........................    (6,919)    (5,172)
Assumed reinsurance premiums receivable.....................       388      6,255
Ceded reinsurance commissions receivable....................     2,062        599
Assumed reinsurance losses and commissions payable..........    (1,428)    (3,603)
                                                              --------   --------
                                                              $168,100   $106,692
                                                              ========   ========
</TABLE>

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

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                                          ---------------------------
                                                           1999      1998      1997
                                                           ----      ----      ----
                                                                (IN THOUSANDS)
<S>                                                       <C>       <C>       <C>
Premiums earned.........................................  $24,021   $16,926   $15,043
                                                          =======   =======   =======
Losses and loss adjustment expenses.....................  $36,869   $31,973   $13,720
                                                          =======   =======   =======
</TABLE>

                                       43
<PAGE>   44
                   PROFESSIONALS GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Premiums earned and losses and loss adjustment expenses have been increased
by the following reinsurance assumed amounts:

<TABLE>
<CAPTION>
                                                     YEAR ENDED DECEMBER 31,
                                      -----------------------------------------------------
                                            1999               1998              1997
                                      ----------------   ----------------   ---------------
                                      MEEMIC    OTHER    MEEMIC    OTHER    MEEMIC    OTHER
                                      ------    -----    ------    -----    ------    -----
                                                         (IN THOUSANDS)
<S>                                   <C>       <C>      <C>       <C>      <C>       <C>
Premiums earned.....................  $22,513   $3,497   $42,693   $5,135   $20,115   $756
                                      =======   ======   =======   ======   =======   ====
Losses and loss adjustment
  expenses..........................  $11,872   $2,684   $28,000   $4,208   $13,078   $717
                                      =======   ======   =======   ======   =======   ====
</TABLE>

(7) FEDERAL INCOME TAXES

     Professionals Group, together with certain subsidiaries, files a
consolidated Federal income tax return. MEEMIC Holdings, together with its
subsidiaries, files its own consolidated Federal income tax return. Income tax
expense for both Professionals Group and MEEMIC Holdings 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.

     The provision for Federal income taxes (benefit) consists of the following:

<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31,
                                                            -------------------------
                                                             1999     1998      1997
                                                             ----     ----      ----
                                                                 (IN THOUSANDS)
<S>                                                         <C>      <C>       <C>
Current...................................................  $4,506   $  (797)  $5,488
Deferred..................................................   2,166    (5,335)   2,353
                                                            ------   -------   ------
                                                            $6,672   $(6,132)  $7,841
                                                            ======   =======   ======
</TABLE>

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

<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                                         ----------------------------
                                                           1999      1998      1997
                                                           ----      ----      ----
                                                                (IN THOUSANDS)
<S>                                                      <C>        <C>       <C>
Continuing operations..................................  $  6,672   $(6,132)  $ 7,841
Extraordinary item.....................................       720        --        --
Shareholders' equity...................................   (13,797)    2,282     3,759
                                                         --------   -------   -------
                                                         $ (6,405)  $(3,850)  $11,600
                                                         ========   =======   =======
</TABLE>

                                       44
<PAGE>   45
                   PROFESSIONALS GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Actual Federal income taxes (benefit) vary from amounts computed by
applying the current Federal income tax rate of 34% for 1999, 1998 and 1997 to
income or loss before Federal income taxes (benefit). The reasons for these
differences, and the tax effects thereof, are as follows:

<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                                        -----------------------------
                                                         1999       1998       1997
                                                         ----       ----       ----
                                                               (IN THOUSANDS)
<S>                                                     <C>        <C>        <C>
Expected tax expense (benefit)........................  $11,907    $(3,183)   $10,291
Dividends received deduction..........................     (219)      (202)      (138)
Tax-exempt interest...................................   (4,708)    (3,733)    (2,611)
Non deductible merger expenses........................       --        801        272
Adjustment to prior years' tax liability..............      263        515       (399)
Other, net............................................     (571)      (330)       426
                                                        -------    -------    -------
Actual tax expense (benefit)..........................  $ 6,672    $(6,132)   $ 7,841
                                                        =======    =======    =======
</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,
                                                              ------------------
                                                               1999       1998
                                                               ----       ----
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>
Deferred Federal income tax assets arising from:
  Intangible assets.........................................  $12,721    $    --
  Loss and loss adjustment expense reserves.................   23,340     21,519
  Unearned premium reserves.................................    5,483      2,943
  Alternative minimum tax credits...........................    1,100         --
  Other tax credit carryforwards............................    2,162         --
  Net unrealized losses on investments......................    6,276         --
  Net operating loss carryforwards..........................    3,870      8,952
  Other.....................................................    1,803        458
                                                              -------    -------
          Total deferred Federal income tax assets..........   56,755     33,872
                                                              -------    -------
Deferred Federal income tax liabilities arising from:
  Deferred policy acquisition costs.........................    1,221        510
  Net unrealized gains on investments.......................       --      7,523
  Other.....................................................    1,373      1,338
                                                              -------    -------
          Total deferred Federal income tax liabilities.....    2,594      9,371
                                                              -------    -------
          Net deferred Federal income taxes.................  $54,161    $24,501
                                                              =======    =======
</TABLE>

                                       45
<PAGE>   46
                   PROFESSIONALS GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(8) LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES

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

<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                                      -------------------------------
                                                        1999        1998       1997
                                                        ----        ----       ----
                                                              (IN THOUSANDS)
<S>                                                   <C>         <C>        <C>
Balance, beginning of year..........................  $ 540,583   $489,207   $501,512
Less reinsurance balances recoverable...............   (108,036)   (80,431)   (73,855)
                                                      ---------   --------   --------
Net balance, beginning of year......................    432,547    408,776    427,657
                                                      ---------   --------   --------
Incurred related to:
  Current year......................................    181,944    161,417    155,595
  Prior years.......................................    (22,184)     9,623    (31,361)
                                                      ---------   --------   --------
          Total incurred............................    159,760    171,040    124,234
                                                      ---------   --------   --------
Loss and loss adjustment expense reserves acquired
  (see note 4)......................................     39,836         --         --
                                                      ---------   --------   --------
Paid related to:
  Current year......................................     47,191     26,157     19,679
  Prior years.......................................    120,693    121,112    123,436
                                                      ---------   --------   --------
          Total paid................................    167,884    147,269    143,115
                                                      ---------   --------   --------
Net balance, end of year............................    464,259    432,547    408,776
Plus reinsurance balances recoverable...............    167,722    108,036     80,431
                                                      ---------   --------   --------
Balance, end of year................................  $ 631,981   $540,583   $489,207
                                                      =========   ========   ========
</TABLE>

     The estimates for loss and loss adjustment expense reserves are reviewed
regularly and adjusted as necessary which resulted in favorable reserve
development of prior years' reserves in 1997 and 1999. The unfavorable reserve
development in 1998 was mainly attributable to a $25.6 million reserve charge
recorded in 1998 to reflect actuarial estimates and the application of the
Company's reserving practices to the Florida book of business acquired as part
of the merger with PPTF in July 1998 as well as a $9.5 million excess limits
verdict on one Florida claim. This unfavorable reserve development was offset
somewhat by $25.5 million of favorable reserve development related to the
Company's Midwest book of business.

(9) LONG-TERM DEBT

     On April 4, 1997, Professionals Group borrowed $22.5 million under a
seven-year unsecured bank term loan, bearing interest at an adjustable rate of
LIBOR plus 62.5 basis points (6.55% at December 31, 1999), and payable quarterly
(the "Credit Agreement"). Remaining principal payments are due on April 30 of
each year, as follows: 2000 -- $3,000,000; 2001 -- $3,000,000;
2002 -- $3,500,000; 2003 -- $3,500,000; and 2004 -- $4,500,000.

     The Credit Agreement contains a covenant which prohibits the payment of
cash dividends on Professionals Group's common stock (except for cash paid in
lieu of fractional shares related to stock dividends declared). Additional
covenants also require the Company to, among other things, maintain total
consolidated shareholders' equity of at least $80.0 million plus 50% of the
preceding fiscal year's consolidated net income, maintain a ratio of debt to
equity of not more than 0.5:1 and maintain a fixed charges coverage ratio and an
interest coverage ratio (as defined by the Credit Agreement) of not less than
1.5:1 and 2.5:1, respectively. The Company was in compliance with, or has
received waivers of, all required covenants as of December 31, 1999.

                                       46
<PAGE>   47
                   PROFESSIONALS GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(10) EMPLOYEE BENEFIT PLANS

     Professionals Group and its subsidiaries currently maintain several defined
contribution employee benefit plans, stock purchase plans and incentive plans,
all of which cover substantially all employees of the respective subsidiaries
meeting certain eligibility requirements. The Company's contributions to these
plans are primarily based on various percentages of compensation, and in some
instances are based upon the amount of the employees' contributions to the
plans. The Company's expense under all benefit plans was $2,193,000, $1,541,000
and $1,066,000 in 1999, 1998 and 1997, respectively.

(11) SHAREHOLDERS' EQUITY

     Approximately $914.9 million of consolidated assets represents assets of
the Company's insurance operations that are subject to regulation and may not be
transferred to Professionals Group in the form of dividends, loans or advances.
The amount of dividends that Professionals Group's insurance subsidiaries can
pay to Professionals Group in any 12-month period is limited 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, 2000, approximately $22,966,000 could be paid by
Professionals Group's insurance subsidiaries without prior regulatory approval.
In 1999, 1998 and 1997, Professionals Group's insurance subsidiaries paid
dividends of $12,000,000, $12,316,000 and $4,717,049, respectively.

     On November 15, 1999, the Company declared a 10% stock dividend, issued on
December 13, 1999 to shareholders of record as of November 29, 1999. All
per-share information in the accompanying consolidated financial statements has
been adjusted to give retroactive effect to this stock dividend.

     In 1999, Professionals Group's Board of Directors authorized management to
repurchase up to 440,000 shares of the Company's common stock. The Company
repurchased 239,648 shares under this plan at a total cost of $6,506,000 during
1999.

(12) STOCK OPTIONS AND AWARDS

     Professionals Group has established the 1996 Long-term Stock Incentive Plan
(the "Incentive Plan") under which, subject to adjustment, 300,000 shares of
Professionals Group'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 Professionals Group, including any officer or
officer-director, or consultants to Professionals Group and its subsidiaries.
All terms and conditions of any grants under the Incentive Plan are at the
discretion of the Compensation Committee of Professionals Group's board of
directors. Currently, all options have been granted at the market price of
Professionals Group's common stock on the date of grant. These options vest and
become exercisable over five years beginning one year from the date of grant,
and expire ten years from the date of grant.

     Professionals Group 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 Professionals Group's common stock
may be granted to non-employee directors (maximum of 5,000 shares to one
individual) of Professionals Group. Options are granted at the market price of
Professionals Group'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.

     MEEMIC Holdings has established a stock compensation plan (the "MEEMIC
Plan") under which 300,000 shares of MEEMIC Holdings' common stock are available
to provide performance-based compensation to officers, directors and employees
of MEEMIC Holdings and its subsidiaries. All terms and conditions of any grants
under the MEEMIC Plan are at the discretion of the Compensation Committee of
MEEMIC Holdings' board of directors. Currently, all options have been granted at
the market price of MEEMIC
                                       47
<PAGE>   48
                   PROFESSIONALS GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Holdings' common stock on the date of grant. These options vest and become
exercisable over five years beginning one year from the date of grant, and
expire ten years from the date of grant.

     For all three option plans, no charges to operations are recorded with
respect to authorization, grant or exercise of options and proceeds received
upon exercise are credited to shareholders' equity.

     Option information regarding the Incentive Plan for the years ending
December 31, 1999, 1998 and 1997 follows:

<TABLE>
<CAPTION>
                                             1999                 1998                 1997
                                      ------------------   ------------------   ------------------
                                                WEIGHTED             WEIGHTED             WEIGHTED
                                                AVERAGE              AVERAGE              AVERAGE
                                                EXERCISE             EXERCISE             EXERCISE
                                      SHARES     PRICE     SHARES     PRICE     SHARES     PRICE
                                      ------    --------   ------    --------   ------    --------
<S>                                   <C>       <C>        <C>       <C>        <C>       <C>
Outstanding at beginning of year....  161,150    $33.64    146,500    $37.00         --    $   --
Granted.............................   71,000     30.35         --        --    146,500     37.00
Stock dividend adjustment...........   20,915     30.58     14,650     33.64         --        --
Exercised...........................       --        --         --        --         --        --
Canceled............................       --        --         --        --         --        --
                                      -------              -------              -------
Outstanding at end of year..........  253,065     29.94    161,150     33.64    146,500     37.00
                                      =======              =======              =======
Options exercisable at end of
  year..............................   70,906               32,230                   --
                                      =======              =======              =======
Weighted average fair value of
  options granted during the year...             $12.55               $   --               $21.14
                                                 ======               ======               ======
</TABLE>

     Options outstanding as of December 31, 1999 under the Incentive Plan
consisted of the following:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING                                                               OPTIONS EXERCISABLE
-------------------------------------------------------------------------------   -------------------
                                                          WEIGHTED
                                                           AVERAGE     WEIGHTED             WEIGHTED
                                                          REMAINING    AVERAGE               AVERAGE
                                                         CONTRACTUAL   EXERCISE             EXERCISE
RANGE OF EXERCISE PRICES                       NUMBER       LIFE        PRICE     NUMBER      PRICE
------------------------                       ------    -----------   --------   ------    --------
<S>                                            <C>       <C>           <C>        <C>       <C>
$23.50 - $30.58..............................  253,065    7.8 years     $29.94    70,906     $30.58
                                               =======                            ======
Options available for grant at end of year...   46,935
                                               =======
</TABLE>

     Option information regarding the Directors Plan for the years ending
December 31, 1999, 1998 and 1997 follows:

<TABLE>
<CAPTION>
                                                1999                1998                1997
                                          -----------------   -----------------   -----------------
                                                   WEIGHTED            WEIGHTED            WEIGHTED
                                                   AVERAGE             AVERAGE             AVERAGE
                                                   EXERCISE            EXERCISE            EXERCISE
                                          SHARES    PRICE     SHARES    PRICE     SHARES    PRICE
                                          ------   --------   ------   --------   ------   --------
<S>                                       <C>      <C>        <C>      <C>        <C>      <C>
Outstanding at beginning of year........  15,345    $25.44     9,450    $22.38    4,500     $21.63
Granted.................................   6,500     27.63     4,500     39.75    4,500      25.38
Stock dividend adjustment...............   2,014     23.77     1,395     25.44      450      19.66
Exercised...............................      --        --        --        --       --         --
Canceled/expired........................  (1,705)    25.44        --        --       --         --
                                          ------              ------              -----
Outstanding at end of year..............  22,154     23.77    15,345     25.44    9,450      22.38
                                          ======              ======              =====
Options exercisable at end of year......  15,004              10,395              4,950
                                          ======              ======              =====
Weighted average fair value of options
  granted during the year...............            $12.44              $19.46              $12.90
                                                    ======              ======              ======
</TABLE>

                                       48
<PAGE>   49
                   PROFESSIONALS GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Options outstanding as of December 31, 1999 under the Directors Plan
consisted of the following:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING                                                              OPTIONS EXERCISABLE
------------------------------------------------------------------------------   -------------------
                                                         WEIGHTED
                                                          AVERAGE     WEIGHTED             WEIGHTED
                                                         REMAINING    AVERAGE               AVERAGE
                                                        CONTRACTUAL   EXERCISE             EXERCISE
RANGE OF EXERCISE PRICES                       NUMBER      LIFE        PRICE     NUMBER      PRICE
------------------------                       ------   -----------   --------   ------    --------
<S>                                            <C>      <C>           <C>        <C>       <C>
$16.25 - $32.85..............................  22,154    5.1 years     $23.77    15,004     $23.13
                                               ======                            ======
Options available for grant at end of year...  26,141
                                               ======
</TABLE>

     Option information regarding the MEEMIC Plan for the year ending December
31, 1999 follows:

<TABLE>
<CAPTION>
                                                                       1999
                                                                -------------------
                                                                           WEIGHTED
                                                                           AVERAGE
                                                                           EXERCISE
                                                                            PRICE
                                                                SHARES     --------
<S>                                                             <C>        <C>
Outstanding at beginning of year............................         --     $   --
Granted.....................................................    280,000      10.00
Exercised...................................................         --         --
Canceled....................................................         --         --
                                                                -------
Outstanding at end of year..................................    280,000      10.00
                                                                =======
Options exercisable at end of year..........................         --
                                                                =======
Weighted average fair value of options granted during the
  year......................................................                $ 5.14
                                                                            ======
</TABLE>

     Options outstanding as of December 31, 1999 under the MEEMIC Plan consisted
of the following:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING                                                               OPTIONS EXERCISABLE
-------------------------------------------------------------------------------   -------------------
                                                          WEIGHTED
                                                           AVERAGE     WEIGHTED             WEIGHTED
                                                          REMAINING    AVERAGE               AVERAGE
                                                         CONTRACTUAL   EXERCISE             EXERCISE
RANGE OF EXERCISE PRICES                       NUMBER       LIFE        PRICE     NUMBER      PRICE
------------------------                       ------    -----------   --------   ------    --------
<S>                                            <C>       <C>           <C>        <C>       <C>
$10.00.......................................  280,000    4.5 years     $10.00      --         $--
                                               =======                               ==
Options available for grant at end of year...   20,000
                                               =======
</TABLE>

     The Company applies APB Opinion 25 and related Interpretations in
accounting for these plans. Accordingly, no compensation cost has been
recognized for these stock option plans. Had compensation cost for these plans
been determined based on the fair value at the grant dates for awards under
those plans consistent with the method of SFAS No. 123, the Company's net income
(loss) (in thousands) and net income (loss) per common share -- assuming
dilution would have been reduced to the proforma amounts below:

<TABLE>
<CAPTION>
                                                           1999      1998      1997
                                                           ----      ----      ----
<S>                                                       <C>       <C>       <C>
Net income (loss):
  As reported...........................................  $27,188   $(3,231)  $22,428
  Proforma..............................................   25,775    (3,289)   19,926
Net income (loss) per common share assuming dilution:
  As reported...........................................     2.90     (0.35)     2.44
  Proforma..............................................     2.75     (0.35)     2.17
</TABLE>

                                       49
<PAGE>   50
                   PROFESSIONALS GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The fair value of options at date of grant for the Incentive Plan and the
Directors Plan was estimated using the Black-Scholes option pricing model with
the following weighted average assumptions used for grants in 1999, 1998 and
1997: dividend yield of 0%; expected volatility of 35.4%, 35.6% and 35.7%;
risk-free interest rate of 5.90% and 6.29% for the Incentive Plan (1999 and 1997
only); risk free interest rate of 6.01%, 5.69% and 6.62% for the Directors Plan;
expected lives of 10 years and 9 years for the Incentive Plan (1999 and 1997
only); and expected lives of 7 years for the Directors Plan.

     The fair value of options at date of grant for the MEEMIC Plan was
estimated using the Black-Scholes option pricing model with the following
weighted average assumptions for grants in 1999: dividend yield of 0%; expected
volatility of 51.2%; risk free interest rate of 5.84%; and expected life of 5
years.

     The proforma effect on net income for 1999, 1998 and 1997 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

     ProNational, MEEMIC and ProNational Casualty are required to file financial
statements prepared in accordance with SAP prescribed or permitted by Michigan
and Illinois with their respective domiciliary states. The only material
statutory accounting methods utilized by ProNational that are permitted rather
than prescribed are the discounting of its loss reserves through December 31,
1997 and recording the merger transaction with PPTF as a "pooling of interests"
business combination for statutory reporting, which did not provide explicit
guidance on the accounting for this transaction. The impact of the permitted
practice of discounting loss reserves was to increase the statutory
policyholders' surplus of ProNational by approximately $10,658,000 at December
31, 1997. ProNational eliminated the practice of discounting loss reserves for
SAP reporting during 1998. As a result of applying "pooling of interests"
accounting to the statutory financial statements, all prior periods have been
restated to reflect the combined operations of ProNational and PPTF. MEEMIC and
ProNational Casualty do 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, 1999 and 1998, and statutory net income (loss) for the
years ended December 31, 1999, 1998 and 1997, of ProNational and ProNational

                                       50
<PAGE>   51
                   PROFESSIONALS GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Casualty, 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,
                                                              -------------------
                                                                1999       1998
                                                                ----       ----
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>
Statutory capital and surplus...............................  $229,657   $193,894
Add (deduct) adjustments to statutory capital and surplus to
  convert to GAAP:
  Net unrealized appreciation (depreciation) on securities
     available for sale.....................................   (19,369)    21,889
  Net unrealized appreciation on MEEMIC Holdings............   (26,890)        --
  Deferred policy acquisition costs.........................     1,038      1,500
  Deferred Federal income taxes.............................    36,361     24,501
  Nonadmitted assets........................................     5,158      3,845
  Liabilities for GAAP in excess of SAP.....................    (1,350)    (1,800)
  Liabilities for SAP in excess of GAAP.....................     6,795      3,560
  Accumulated intercompany dividends........................    23,533     11,533
  Accumulated deficit attributable to Professionals Group...   (10,608)    (7,127)
  Intercompany paid-in capital..............................   (20,000)   (20,000)
  Surplus contributions.....................................   (10,094)   (10,094)
  Common stock issued.......................................     2,042      1,157
  Common stock repurchased..................................    (6,506)        --
  Accumulated equity attributable to MEEMIC Holdings........     8,075         --
  Other, net................................................    (1,026)      (761)
                                                              --------   --------
          Total shareholders' equity per accompanying
            consolidated balance sheets.....................  $216,816   $222,097
                                                              ========   ========
</TABLE>

<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                                         ----------------------------
                                                          1999       1998      1997
                                                          ----       ----      ----
                                                                (IN THOUSANDS)
<S>                                                      <C>       <C>        <C>
Statutory net income (loss)............................  $22,363   $(18,964)  $21,825
Add (deduct) adjustments to statutory net income (loss)
  to convert to GAAP:
  Deferred Federal income tax expense..................   (1,041)     5,335    (2,353)
  Deferred reinsurance experience refund...............       --      2,244     5,040
  Change in loss and loss adjustment expense reserve
     discount..........................................       --     10,658        --
  Change in liabilities for GAAP in excess of SAP......      450        450       450
  Other, net...........................................     (503)        89       437
                                                         -------   --------   -------
  Combined net income (loss) of insurance companies
     based on GAAP.....................................   21,269       (188)   25,399
  Net income (loss) attributable to non-insurance
     subsidiaries......................................     (468)        49      (223)
  Net income attributable to MEEMIC Holdings...........    9,816         --        --
  Net loss attributable to Professionals Group.........   (3,429)    (3,092)   (2,748)
                                                         -------   --------   -------
  Net income (loss) per accompanying consolidated
     statements of operations..........................  $27,188   $ (3,231)  $22,428
                                                         =======   ========   =======
</TABLE>

                                       51
<PAGE>   52
                   PROFESSIONALS GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(14) CONCENTRATIONS AND CREDIT RISK

     Premiums written through independent agents approximated 56%, 51% and 43%
of ProNational's direct written premiums in 1999, 1998 and 1997, respectively.
In 1999, 1998 and 1997, the top ten agents produced, in aggregate, approximately
31%, 27% and 28%, respectively, of ProNational's direct written premiums. All of
MEEMIC's premiums are written through its wholly-owned agency. In 1999, the top
ten agency representatives produced, in aggregate, approximately 35% of MEEMIC's
direct written premiums.

     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. Premiums are collected in advance of being
earned. 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) QUARTERLY FINANCIAL DATA (UNAUDITED)

     The unaudited operating results by quarter for 1999 and 1998 are summarized
below:

<TABLE>
<CAPTION>
                                                                INCOME
                                                                (LOSS)                    NET INCOME
                                                             BEFORE INCOME                (LOSS) PER
                                                   TOTAL        TAXES,                      COMMON
                                                 REVENUES      MINORITY         NET         SHARE-
                                                 AND OTHER      INT. &         INCOME      ASSUMING
                                                  INCOME      EXTRA. ITEM      (LOSS)      DILUTION
                                                 ---------   -------------     ------     ----------
                                                          (IN THOUSANDS, EXCEPT SHARE DATA)
<S>                                              <C>         <C>             <C>          <C>
1999:
  1st Quarter..................................  $ 50,666      $  8,532       $  6,655        0.71
  2nd Quarter..................................    51,372         6,741          5,104        0.55
  3rd Quarter..................................    70,277        10,769          7,797        0.83
  4th Quarter..................................    71,256         8,980          7,632        0.82
                                                 --------      --------       --------     =======
          Year.................................  $243,571      $ 35,022       $ 27,188
                                                 ========      ========       ========
1998:
  1st Quarter..................................  $ 52,601      $  8,529       $  6,320        0.69
  2nd Quarter..................................    48,519       (30,343)       (20,879)      (2.28)
  3rd Quarter..................................    51,872         4,765          4,423        0.47
  4th Quarter..................................    50,677         7,686          6,905        0.74
                                                 --------      --------       --------     =======
          Year.................................  $203,669      $ (9,363)      $ (3,231)
                                                 ========      ========       ========
</TABLE>

     Net income (loss) per common share amounts for the first three quarters of
1999 and all four quarters of 1998 have been restated from those originally
reported to reflect the 10% stock dividend declared in 1999 (see note 11).

     The sum of quarterly net income (loss) per common share data for 1999 and
1998 does not equal the annual amount due to changes in the weighted average
number of common shares outstanding during the respective periods.

(16) 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.

                                       52
<PAGE>   53
                   PROFESSIONALS GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Under SFAS No. 107, the Company's investment securities, cash, short-term
investments and long-term debt constitute financial instruments. The carrying
amounts of all financial instruments -- other than investment securities, which
are presented in note 5 -- approximated their fair values at December 31, 1999
and 1998.

(17) RELATED PARTY TRANSACTIONS

     On April 4, 1997, the Company completed certain transactions with MEEMIC
involving the Company's purchase of a twelve-year, $21.5 million surplus note
from MEEMIC, bearing interest at 8.5% per annum and its reinsuring, on a
quota-share basis, 40% of MEEMIC's net premiums beginning July 1, 1997. In
connection with these transactions, (i) the Company agreed to provide MEEMIC
with information systems services and certain consulting services under a
management service agreement for a base fee of $2.0 million (which increases by
5% each year); (ii) Professionals Group nominees were elected to all positions
on the Board of Directors of MEEMIC; and (iii) the Company agreed to assist
MEEMIC in acquiring the net assets of Michigan Educators Insurance Agency, Inc.
("MEIA"), the exclusive distributor of MEEMIC insurance products. As a result of
the Company's acquisition of a majority ownership interest in MEEMIC Holdings on
July 1, 1999 (see note 4), the above mentioned arrangements were terminated.

(18) SEGMENT INFORMATION

     The Company is organized and operates principally in the property and
casualty insurance industry and has three reportable segments -- professional
liability lines property and casualty insurance, personal lines property and
casualty insurance and investment operations. The accounting policies of the
segments are the same as those described in the basis of presentation. Revenue
is primarily from unaffiliated customers. Identifiable assets by segment are
those assets, including investment securities, used in the Company's operations.
Corporate and other identifiable assets are principally cash and marketable
securities. Segment information, for which results are regularly reviewed by
Company management in making decisions about resources to be allocated to the
segments and assess their performance, is summarized as follows:

<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                                      --------------------------------
                                                         1999        1998       1997
                                                         ----        ----       ----
                                                               (IN THOUSANDS)
<S>                                                   <C>          <C>        <C>
Revenues:
  Professional liability lines......................  $  113,392   $113,827   $116,147
  Personal lines....................................      81,777     42,693     20,115
  Investment operations.............................      43,846     43,253     43,434
  Corporate and other...............................       4,556      3,896      1,846
                                                      ----------   --------   --------
          Total revenues............................  $  243,571   $203,669   $181,542
                                                      ==========   ========   ========
Income (loss) before income taxes:
  Professional liability lines......................  $  (20,113)  $(52,716)  $(14,513)
  Personal lines....................................      11,179      1,698        460
  Investment operations.............................      43,846     43,253     43,434
  Corporate and other...............................         110     (1,598)       888
                                                      ----------   --------   --------
          Total income (loss) before income taxes...  $   35,022   $ (9,363)  $ 30,269
                                                      ==========   ========   ========
Identifiable assets:
  Property and casualty insurance...................  $1,064,364   $881,866   $841,187
  Corporate and other...............................       7,725      7,345      6,803
                                                      ----------   --------   --------
          Total identifiable assets.................  $1,072,089   $889,211   $847,990
                                                      ==========   ========   ========
</TABLE>

                                       53
<PAGE>   54

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders
of Professionals Group, Inc.:

     In our opinion, the accompanying consolidated balance sheet and related
consolidated statements of operations, comprehensive income, shareholder's
equity and cash flows present fairly in all material respects, the financial
position of Professionals Group, Inc. and its subsidiaries at December 31, 1999,
and the results of their operations and their cash flows for the year then ended
in conformity with accounting principles generally accepted in the United
States. In addition, in our opinion, the financial statement schedules listed in
the index appearing under Item 14 of this Form 10-K present fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedules are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States, which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.

PricewaterhouseCoopers LLP
Grand Rapids, Michigan
March 14, 2000

                                       54
<PAGE>   55

                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholders
Professionals Group, Inc.:

     We have audited the accompanying consolidated balance sheets of
Professionals Group, Inc. (formerly Professionals Insurance Company Management
Group) and subsidiaries (the Company) as of December 31, 1998, and the related
consolidated statements of operations, comprehensive income, shareholders'
equity and cash flows for each of the years in the two year period ended
December 31, 1998. In connection with our audits of the consolidated financial
statements, we also have audited the financial statement schedule as of December
31, 1998 and for each of the years in the two year period ended December 31,
1998. 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 consolidated financial position of
Professionals Group, Inc., and subsidiaries as of December 31, 1998, and the
consolidated results of their operations and their cash flows for each of the
years in the two year period ended December 31, 1998 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.

     The consolidated financial statements give retroactive effect to the merger
of the Company and Physicians Protective Trust Fund, on July 1, 1998, which has
been accounted for as a pooling of interests business combination, as described
in the notes to the consolidated financial statements.

KPMG LLP

East Lansing, Michigan
February 23, 1999

                                       55
<PAGE>   56

          SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT

                   PROFESSIONALS GROUP, INC. (PARENT COMPANY)

                            CONDENSED BALANCE SHEETS
                           DECEMBER 31, 1999 AND 1998

<TABLE>
<CAPTION>
                                                                1999       1998
                                                                ----       ----
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>
ASSETS
Investment in subsidiaries..................................  $232,930   $241,043
Short-term investments, at cost, which approximates fair
  value.....................................................     2,183      1,331
Cash........................................................       544         14
Other assets................................................       144      1,018
                                                              --------   --------
          Total assets......................................  $235,801   $243,406
                                                              ========   ========

LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities:
Long-term debt..............................................  $ 17,500   $ 20,000
Accrued expenses and other liabilities......................     1,485      1,309
                                                              --------   --------
                                                                18,985     21,309
                                                              --------   --------
Shareholders' Equity:
Preferred stock, no par value; 5,000,000 shares authorized;
  no shares issued and outstanding..........................        --         --
Common stock, no par value; 25,000,000 shares authorized;
  8,997,709 and 8,383,924 shares issued and outstanding in
  1999 and 1998.............................................     8,998      8,384
Additional paid-in capital..................................    47,033     33,982
Retained earnings...........................................   172,968    165,132
Accumulated other comprehensive income, net of deferred
  federal income taxes......................................   (12,183)    14,599
                                                              --------   --------
          Total shareholders' equity........................   216,816    222,097
                                                              --------   --------
          Total liabilities and shareholders' equity........  $235,801   $243,406
                                                              ========   ========
</TABLE>

     These condensed financial statements should be read in conjunction with the
accompanying consolidated financial statements and notes thereto of
Professionals Group, Inc. and subsidiaries.

  See accompanying notes to the condensed financial information of registrant.

                                       56
<PAGE>   57

    SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT, CONTINUED

                   PROFESSIONALS GROUP, INC. (PARENT COMPANY)

                       CONDENSED STATEMENTS OF OPERATIONS
                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

<TABLE>
<CAPTION>
                                                               1999      1998      1997
                                                               ----      ----      ----
                                                                    (IN THOUSANDS)
<S>                                                           <C>       <C>       <C>
Revenues:
  Dividend income from subsidiary...........................  $12,000   $ 4,816   $ 4,717
  Investment income.........................................      109       109       106
  Other income..............................................    1,066     2,073     1,005
                                                              -------   -------   -------
          Total revenues....................................   13,175     6,998     5,828
                                                              -------   -------   -------
Expenses:
  Operating and administrative..............................    3,214     3,462     2,503
  Amortization expense......................................      344       344       258
  Interest expense..........................................    1,098     1,468     1,098
                                                              -------   -------   -------
          Total expenses....................................    4,656     5,274     3,859
                                                              -------   -------   -------
  Income before federal income taxes and equity in
     undistributed income (loss) of subsidiaries............    8,519     1,724     1,969
Federal income taxes........................................       --        --        --
                                                              -------   -------   -------
  Income before equity in undistributed income (loss) of
     subsidiaries...........................................    8,519     1,724     1,969
Equity in undistributed income (loss) of subsidiaries.......   18,669    (4,955)   20,459
                                                              -------   -------   -------
          Net income (loss).................................  $27,188   $(3,231)  $22,428
                                                              =======   =======   =======
</TABLE>

     These condensed financial statements should be read in conjunction with the
accompanying consolidated financial statements and notes thereto of
Professionals Group, Inc. and subsidiaries.

  See accompanying notes to the condensed financial information of registrant.

                                       57
<PAGE>   58

    SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT, CONTINUED

                   PROFESSIONALS GROUP, INC. (PARENT COMPANY)

                       CONDENSED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

<TABLE>
<CAPTION>
                                                                1999       1998       1997
                                                                ----       ----       ----
                                                                      (IN THOUSANDS)
<S>                                                           <C>        <C>        <C>
Cash flows from operating activities:
  Net income (loss).........................................  $ 27,188   $ (3,231)  $ 22,428
  Adjustments to reconcile net income (loss) to net cash
     provided by (used in) operating activities:
     Equity in undistributed (income) loss of
       subsidiaries.........................................   (18,669)     4,955    (20,459)
     Dividend of investment from subsidiary.................        --     (2,816)    (1,217)
     Amortization...........................................       257        259        183
     Non-cash compensation..................................       885      1,157         --
     Decrease (increase) in other assets....................       530        (26)    (1,594)
     Increase (decrease) in accrued expenses and other
       liabilities..........................................       176       (269)       (78)
                                                              --------   --------   --------
          Net cash provided by (used in) operating
            activities......................................    10,367         29       (737)
                                                              --------   --------   --------
Cash flows from investing activities:
  Proceeds from sale or maturity of short-term
     investments............................................    43,709     40,381     32,578
  Purchases of short-term investments.......................   (44,474)   (37,761)   (34,338)
  Capital contribution to consolidated subsidiary...........        --         --    (20,000)
                                                              --------   --------   --------
          Net cash provided by (used in) investing
            activities......................................      (765)     2,620    (21,760)
                                                              --------   --------   --------
Cash flows from financing activities:
  Proceeds from issuance of note payable....................        --         --     22,500
  Repayment of long-term debt...............................    (2,500)    (2,500)        --
  Common stock repurchased..................................    (6,506)        --         --
  Cash paid in lieu of fractional shares....................       (40)      (138)        --
  Cash paid for dissenter's rights..........................       (26)        --         --
                                                              --------   --------   --------
          Net cash provided by (used in) financing
            activities......................................    (9,072)    (2,638)    22,500
                                                              --------   --------   --------
Net change in cash..........................................       530         11          3
Cash, beginning of period...................................        14          3         --
                                                              --------   --------   --------
Cash, end of period.........................................  $    544   $     14   $      3
                                                              ========   ========   ========
Supplemental disclosure of non-cash financing activities:
  Issuance of common stock as compensation..................  $    885   $  1,157         --
                                                              ========   ========   ========
  Liability incurred in acquisition of subsidiary...........        --   $    313         --
                                                              ========   ========   ========
</TABLE>

     These condensed financial statements should be read in conjunction with the
accompanying consolidated financial statements and notes thereto of
Professionals Group, Inc. and subsidiaries.

  See accompanying notes to the condensed financial information of registrant.

                                       58
<PAGE>   59

    SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT, CONTINUED

                   PROFESSIONALS GROUP, INC. (PARENT COMPANY)

             NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

(1) DESCRIPTION OF BUSINESS

     Professionals Group, Inc. (Professionals Group) is an insurance holding
company incorporated under Michigan law on January 31, 1996.

     Professionals Group owns all of the issued and outstanding common stock of
the following entities:

          ProNational Insurance Company -- a stock insurance company
     incorporated under Michigan law (ProNational). ProNational also owns 77% of
     MEEMIC Holdings, Inc. (see note 3 below).

          Professionals Group Services Corporation -- a business corporation
     that administers certain benefit plans for ProNational Insurance Company
     employees.

          ProNational 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 inactive Indiana interinsurance reciprocal exchange.

     Professionals Group also owns 80% of the issued and outstanding common
stock of MedAdvantage, Inc., which was purchased on June 1, 1998. MedAdvantage,
Inc. provides credentialing verification services for medical service providers.

(2) FEDERAL INCOME TAXES

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

(3) BUSINESS COMBINATION

     On July 1, 1999, Michigan Educational Employees Mutual Insurance Company
completed its conversion to a stock insurance company and changed its name to
MEEMIC Insurance Company (MEEMIC). MEEMIC became a wholly owned subsidiary of
MEEMIC Holdings, Inc. (MEEMIC Holdings), a publicly traded Michigan business
corporation. As part of MEEMIC's conversion, ProNational acquired 77% of the
outstanding common stock of MEEMIC Holdings. This acquisition was accounted for
as a purchase business combination. Beginning July 1, 1999, the financial
results of MEEMIC Holdings have been consolidated into the financial results of
Professionals Group. See also Note 4 to Professionals Group and subsidiaries
consolidated financial statements.

                                       59
<PAGE>   60

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

     At a meeting of the Audit Committee of Professionals Group's board of
directors held on August 27, 1999, the accounting firm of PricewaterhouseCoopers
LLP was engaged by Professionals Group to perform future independent audits of
Professionals Group. PricewaterhouseCoopers LLP thereby replaced KPMG LLP as
Professionals Group's independent accountants.

     The change in accountants did not result from any dissatisfaction or
disagreement with KPMG LLP. Instead, the change resulted from Professionals
Group's putting its audit work out to bid as part of the consolidation, under
one accounting firm, of all audits of Professionals Group and its subsidiaries.
KPMG LLP participated in the bidding process.

     In connection with the audits of the two years ended December 31, 1998, and
the subsequent interim period through August 27, 1999, there were no
disagreements with KPMG LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures, which
disagreements if not resolved to their satisfaction would have caused them to
make reference in connection with their opinion to the subject matter of the
disagreement.

     During 1998 and 1997, Professionals Group did not engage any independent
accountants other than KPMG LLP to audit the financial statements of either
Professionals Group or any significant subsidiary of Professionals Group.

     KPMG LLP's reports on Professionals Group's financial statements for 1998
and 1997 did not contain an adverse opinion or a disclaimer of opinion, nor were
they qualified or modified as to uncertainty, audit scope or accounting
principles.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information called for by this item with respect to the directors of
Professionals Group will be reported in Professionals Group's Notice of Annual
Meeting of Stockholders and Proxy Statement for its 2000 Annual Meeting of
Stockholders under the caption "Election of Directors." Such information is
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.

     Section 16(a) of the Exchange Act requires Professionals Group's directors
and executive officers, and persons who own more than 10% of a registered class
of Professionals Group's equity securities, to file with the Securities and
Exchange Commission initial reports of ownership and reports of changes in
ownership of Professionals Group common stock and other equity securities of
Professionals Group. Officers, directors and greater than 10% stockholders are
required by the Securities and Exchange Commission regulation to furnish
Professionals Group with copies of all Section 16(a) forms they file.

     To Professionals Group's knowledge, based solely on a review of the copies
of such reports furnished to Professionals Group and written representations
that no other reports were required, all Section 16(a) filing requirements
applicable to its officers, directors and greater than 10 percent beneficial
owners were complied with during the year ended December 31, 1999.

ITEM 11. EXECUTIVE COMPENSATION

     The information called for by this item with respect to executive
compensation of Professionals Group will be reported in Professionals Group's
Notice of Annual Meeting of Stockholders and Proxy Statement for its 2000 Annual
Meeting of Stockholders under the caption "Information Regarding Executive
Officers." Such information is herein incorporated by reference.

                                       60
<PAGE>   61

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information called for by this item with respect to the security
ownership of certain beneficial owners and management of Professionals Group
will be reported in Professionals Group's Notice of Annual Meeting of
Stockholders and Proxy Statement for its 2000 Annual Meeting of Stockholders
under the caption "Voting Securities and Certain Holders Thereof." Such
information is herein incorporated by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information called for by this item with respect to certain
relationships and related transactions of Professionals Group will be reported
in Professionals Group's Notice of Annual Meeting of Stockholders and Proxy
Statement for its 2000 Annual Meeting of Stockholders under the captions
"Election of Directors," "Compensation Committee Interlocks and Insider
Participation," and "Related Party Transactions." Such information is herein
incorporated by reference.

                                    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
   -----------------                         -------------------
<C>                      <S>
     (3)(a)/(4)(a)       Second Amended and Restated Articles of Incorporation of
                         Professionals Insurance Company Management Group and all
                         amendments thereto (incorporated by reference to Exhibit 3.1
                         of the registrant's Current Report on Form 8-K dated July 1,
                         1998, filed with the Securities and Exchange Commission on
                         July 15, 1998 (file no. 0-21223)).

     (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 registrant's 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)(e)          Specimen stock option issued under the Professionals
                         Insurance Company Management Group 1996 Long Term Incentive
                         Plan (incorporated by reference to Exhibit (4)(e) of the
                         registrant's Annual Report on Form 10-K for the year ended
                         December 31, 1997 as filed with the Securities and Exchange
                         Commission on March 31, 1998 (file no. 0-21223)).

        (10)(a)          Credit Agreement dated April 4, 1997 for $22.5 million
                         between the registrant and LaSalle National Bank
                         (incorporated by reference to Exhibit (10)(a) of the
                         registrant's Quarterly Report on Form 10-Q for the quarterly
                         period ended March 31, 1997 as filed with the Securities and
                         Exchange Commission on May 12, 1997 (file no. 0-21223)).
</TABLE>

                                       61
<PAGE>   62

<TABLE>
<CAPTION>
        ITEM 601
     REGULATION S-K
   EXHIBIT REFERENCE
         NUMBER                              EXHIBIT DESCRIPTION
   -----------------                         -------------------
<C>                      <S>
        (10)(b)          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)(c)          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)(d)          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)(e)          PICOM Insurance Company Employees' Savings and Retirement
                         Plan (incorporated by reference to Exhibit (10)(d) of the
                         initial filing of the registrant's Annual Report on Form
                         10-K for the year ended December 31, 1996 as filed with the
                         Securities and Exchange Commission on March 28, 1997 (file
                         no. 0-21223)).

        (10)(f)          PICOM Insurance Company Pension Plan (incorporated by
                         reference to Exhibit (10)(e) of the initial filing of the
                         registrant's Annual Report on Form 10-K for the year ended
                         December 31, 1996 as filed with the Securities and Exchange
                         Commission on March 28, 1997 (file no. 0-21223)).

        (10)(g)          PICOM Insurance Company Key Employee Retention Plan
                         (incorporated by reference to Exhibit (99)(e) of the initial
                         filing of the registrant's Registration Statement on Form
                         S-4 filed with the Securities and Exchange Commission on
                         April 3, 1996 (registration no. 333-3138)).

        (10)(h)          PICOM Insurance Company Employee Retention Plan
                         (incorporated by reference to Exhibit (99)(f) of the initial
                         filing of the registrant's Registration Statement on Form
                         S-4 filed with the Securities and Exchange Commission on
                         April 3, 1996 (registration no. 333-3138)).

        (10)(i)          MEEMIC Holdings, Inc. Stock Compensation Plan dated October
                         21, 1998 (incorporated by reference to Exhibit 10.11 of
                         MEEMIC Holdings' Registration Statement on Form S-1 as filed
                         with the Securities and Exchange Commission (registration
                         no. 333-66671)).

          (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 from KPMG LLP regarding change in certifying
                         accountant (incorporated by reference to Exhibit 16 of the
                         registrant's Current Report on Form 8-K dated August 27,
                         1999, filed with the Securities and Exchange Commission on
                         September 1, 1999 (file no. 0-21223)).

          (21)           List of subsidiaries of the registrant.*

        (23)(a)          Consent of PricewaterhouseCoopers LLP, independent certified
                         public accountants.*

        (23)(b)          Consent of KPMG LLP, independent certified public
                         accountants.*

          (24)           Powers of attorney.*

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

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

* Filed herewith.

                                       62
<PAGE>   63

     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 (4)(d) Specimen stock option issued under the Professionals
     Insurance Company Management Group 1996 Non-Employee Directors Stock Option
     Plan.

          Exhibit (4)(e) Specimen stock option issued under the Professionals
     Insurance Company Management Group 1996 Long Term Incentive Plan.

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

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

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

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

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

          Exhibit (10)(g) PICOM Insurance Company Key Employee Retention Plan.

          Exhibit (10)(h) PICOM Insurance Company Employee Retention Plan.

          Exhibit (10)(i) MEEMIC Holdings, Inc. Stock Compensation Plan.

                                       63
<PAGE>   64

        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, 1999 and
     1998...................................................     30
  Consolidated statements of operations for each of the
     years ended December 31, 1999, 1998 and 1997...........     31
  Consolidated statements of comprehensive income for each
     of the years ended December 31, 1999, 1998 and 1997....     32
  Consolidated statements of shareholders' equity for each
     of the years ended December 31, 1999, 1998 and 1997....     33
  Consolidated statements of cash flows for each of the
     years ended December 31, 1999, 1998 and 1997...........     34
  Notes to consolidated financial statements................     35
  Reports of independent auditors...........................     54
FINANCIAL STATEMENT SCHEDULES:
  II. Condensed financial information of registrant.........     56
</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:

     No reports were filed during the three months ended December 31, 1999.

                                       64
<PAGE>   65

 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 Group, Inc.

Date: March 24, 2000                        By:     /s/ VICTOR T. ADAMO
                                              ----------------------------------
                                                       Victor T. Adamo
                                                President and Chief Executive
                                                            Officer
                                                (Principal Executive Officer)

                                            By:      /s/ JOHN F. LANG
                                              ----------------------------------
                                                         John F. Lang
                                                Vice President, Treasurer and
                                                    Chief Financial Officer
                                                (Principal Financial Officer and
                                                Principal Accounting Officer)

     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.

<TABLE>
<CAPTION>
                      SIGNATURE                                     TITLE                    DATE
                      ---------                                     -----                    ----
<C>                                                    <S>                              <C>

                 /s/ VICTOR T. ADAMO                   Director, President and Chief    March 24, 2000
-----------------------------------------------------    Executive Officer (Principal
                   Victor T. Adamo                       Executive Officer)

                /s/ R. KEVIN CLINTON                   Director, Vice President         March 24, 2000
-----------------------------------------------------
                  R. Kevin Clinton

               /s/ RICHARD P. HORSCH*                  Director                         March 24, 2000
-----------------------------------------------------
                  Richard P. Horsch

                /s/ RICHARD G. ALPER*                  Director                         March 24, 2000
-----------------------------------------------------
                  Richard G. Alper

                 /s/ ELIOT H. BERG*                    Director                         March 24, 2000
-----------------------------------------------------
                    Eliot H. Berg

                 /s/ LOUIS P. BRADY*                   Director                         March 24, 2000
-----------------------------------------------------
                   Louis P. Brady

               /s/ JERRY D. CAMPBELL*                  Director                         March 24, 2000
-----------------------------------------------------
                  Jerry D. Campbell

               /s/ JOHN F. DODGE, JR.*                 Director                         March 24, 2000
-----------------------------------------------------
                 John F. Dodge, Jr.

                 /s/ H. HARVEY GASS*                   Director                         March 24, 2000
-----------------------------------------------------
                   H. Harvey Gass
</TABLE>

                                       65
<PAGE>   66

<TABLE>
<CAPTION>
                      SIGNATURE                                     TITLE                    DATE
                      ---------                                     -----                    ----
<C>                                                    <S>                              <C>

               /s/ JOHN F. MCCAFFREY*                  Director                         March 24, 2000
-----------------------------------------------------
                  John F. McCaffrey

                /s/ ISAAC J. POWELL*                   Director                         March 24, 2000
-----------------------------------------------------
                   Isaac J. Powell

                /s/ ANN F. PUTALLAZ*                   Director                         March 24, 2000
-----------------------------------------------------
                   Ann F. Putallaz

               /s/ EDWARD S. TRUPPMAN*                 Director                         March 24, 2000
-----------------------------------------------------
                 Edward S. Truppman

              /s/ WILLIAM H. WOODHAMS*                 Director                         March 24, 2000
-----------------------------------------------------
                 William H. Woodhams

                /s/ DONALD S. YOUNG*                   Director                         March 24, 2000
-----------------------------------------------------
                   Donald S. Young
</TABLE>

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

                                       66
<PAGE>   67
                                 EXHIBIT INDEX
                                 -------------

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                   DESCRIPTION
-------                  -----------
<S>                      <C>

   21                    List of subsidiaries

   23a                   Consent of PricewaterhouseCoopers LLP, independent
                         certified public accountants

   23b                   Consent of KPMG LLP, independent certified public
                         accountants

   24                    Powers of Attorney

   27                    Financial Data Schedule
</TABLE>