The following table provides a profile of the Company's fixed maturity portfolio by rating as of December 31, 1998:
All fixed maturity securities are classified as available-for-sale and are carried at fair value as of December 31, 1998 and 1997. As a result, the Company's fixed maturity investment portfolio is sensitive to interest rate changes. As of December 31, 1998 and 1997, the fixed maturity portfolio had net unrealized gains of approximately $22.3 million and $14.2 million, respectively. The increase in net unrealized gains was due to lower interest rates at year-end 1998 compared to year-end 1997. As of December 31, 1998, the fixed maturity portfolio had a weighted average modified duration of approximately 5.0 years. A one hundred basis point increase in market interest rates would decrease the value of this portfolio by approximately 5.0 percent, whereas a one hundred basis point decrease in market interest rates would increase the value of this portfolio by approximately 5.0 percent.
Total incurred losses and loss adjustment expenses (including the increase in reserve for extended reporting period claims) totaled $172.1 million in 1998, an increase of $45.7 million, or 36.1%, compared to $126.4 million in 1997. The increase was primarily due to a $25.6 million increase to loss reserves to reflect actuarial estimates and the application of the Company's
Total net premiums earned were $132.0 million for 1997, an increase of $6.6 million, or 5.3%, compared to net premiums earned of $125.4 million for 1996. Professional liability related net premiums earned were $111.9 million in 1997, a decrease of $13.5 million, or 10.8%, compared to professional liability net premiums earned of $125.4 million in 1996. The decrease in professional liability net premiums earned was primarily due to lower premiums earned in Florida, Michigan and Illinois resulting from price-based competition. The earned reinsurance premiums assumed from MEEMIC were $20.1 million in 1997 (the MEEMIC reinsurance agreement was not in force during 1996.)
The Company also assumes a small amount of lawyers professional liability, worker's compensation and accident and health insurance from other insurance companies. This assumed business is not significant to the Company's overall assumed reinsurance program.
compliant, are based on management's best estimates. Because such estimates were derived utilizing numerous assumptions of future events (including the availability of certain resources, third party modifications and other factors), there can be no assurance that these estimates will be achieved and actual results could differ materially from those plans. Specific factors that might cause material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes and similar uncertainties.
On July 1, 1998, Professionals Group consummated its merger with Physicians Protective Trust Fund, a medical malpractice self-insurance trust fund located in Coral Gables, Florida (PPTF). Pursuant to the merger agreement, Professionals Group issued 4,087,525 shares of Professionals Group common stock to the eligible members of PPTF and paid cash of approximately $67,000 in lieu of fractional shares. Additionally, 30,594 shares (representing 20% of the 153,000 total shares to be issued over a period of five years) of Professionals Group common stock were issued to directors and management of PPTF, as contemplated by the merger agreement. The transaction has been accounted for as a "pooling of interests" business combination under generally accepted accounting principles, whereby Professionals Group has carried forward to its accounts the assets and liabilities of PPTF at their respective amounts as reported by PPTF. As a result of this business combination, all prior period financial information has been restated to reflect the combined operations of Professionals Group and PPTF.
LEGAL/REGULATORY RISK is the risk that the legal or regulatory environment in which an insurer operates will change and create additional costs or expenses not anticipated by the insurer in pricing its products. That is, regulatory initiatives designed to reduce insurer profits or new legal theories may create costs for the insurer beyond those recorded in the financial statements. The Company mitigates this risk through underwriting and loss adjusting practices which identify and minimize the adverse impact of this risk. Additionally, by writing business in multiple jurisdictions, the Company minimizes the effect that changes in a single jurisdiction could have on its operations.
The amortized cost and estimated fair value of fixed maturities at December 31, 1998, 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.
Approximately $724.0 million of consolidated assets represents assets of the Company's insurance operations that may not be transferred to Professionals Group in the form of dividends, loans or advances without prior regulatory approval. The amount of dividends that Professionals Group's
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.