(2) In 1999, the Company recognized a $1.4 million gain on the early extinguishment of debt by MEEMIC Holdings, net of taxes of $0.7 million that was reported as an extraordinary item.
(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.
On July 1, 1999, MEEMIC Holdings was consolidated into Professionals Group's financial statements as a result of Professionals Group obtaining majority ownership, at which time both the then existing management services agreement and quota share reinsurance agreement were terminated (see also Note 4 to the Company's consolidated financial statements.) The transaction was accounted for as a purchase business combination.
As of December 31, 2000 and 1999, the Company had invested assets of $780.9 million and $758.3 million, respectively. This 3.0% increase in invested assets was primarily due to positive cash flows from operations and an increase in the fair value of the fixed maturity portfolio, as further discussed below. Invested assets represented approximately 69% and 71% of the Company's total assets as of December 31, 2000 and 1999, respectively.
As of December 31, 2000 and 1999, 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, 2000 and 1999, these fixed maturity securities aggregated $683.3 million and $731.0 million, respectively. This decrease in fixed maturity securities was offset by a $70.8 million increase in short-term investments. The increase in short-term investments was due primarily to the Company's conversion of fixed maturity securities to short-term investments in order to raise a portion of the cash for the financing of Professionals Group's proposed consolidation with Medical Assurance, Inc. See "Liquidity and Capital Resources." Approximately 54% of the fixed maturity portfolio was rated AAA by Standard & Poor's at December 31, 2000. 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, 2000.
All fixed maturity securities are classified as available-for-sale and are carried at fair value as of December 31, 2000 and 1999. As a result, the Company's fixed maturity investment portfolio is sensitive to interest rate changes. As of December 31, 2000, the fixed maturity portfolio had net unrealized gains of
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 84.2% of MEEMIC Holdings, Inc. (MEEMIC Holdings), a publicly traded insurance holding company which provides personal auto, homeowners, boat and umbrella coverages primarily for educational employees and their families through MEEMIC Insurance Company (MEEMIC), a Michigan-domiciled property and casualty insurance company. Professionals Group and subsidiaries are collectively referred to as "the Company."
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP), which vary in certain respects from statutory accounting practices (SAP) followed in reporting to insurance regulatory authorities (see Note 14 for the effects of such differences).
Available for sale securities are recorded at fair value. Unrealized gains and losses, net of the related income tax effect, are excluded from income and recorded as other comprehensive income.
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.
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. During 2000, 1999 and 1998, the Company amortized deferred acquisition costs to income of $9,253,000, $6,400,000 and $2,737,000, respectively.
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, 2000.
approvals and is expected to be completed in 2001. ProAssurance filed an amended Form S-4 Registration Statement with the Securities and Exchange Commission on January 4, 2001 regarding the transactions contemplated by the agreement and plan of consolidation.
The amortized cost and estimated fair value of fixed maturities at December 31, 2000, by contractual maturity, are shown below. Expected maturities on certain corporate and mortgage-backed securities may PROFESSIONALS GROUP, INC. AND SUBSIDIARIES
differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
At December 31, 2000, U.S. Treasury notes and certificates of deposit with a carrying value of $5,834,000 were on deposit with regulatory authorities, as required by law.
The effect of reinsurance on losses and loss adjustment expenses incurred are as follows:
Actual Federal income taxes (benefit) vary from amounts computed by applying the current Federal income tax rate of 35% for 2000 and 34% for 1999 and 1998 to income or loss before Federal income taxes (benefit). The reasons for these differences, and the tax effects thereof, are as follows:
As of December 31, 2000, the Company has $44,100,000 of net operating loss carryforwards which may be used to offset future taxable income. These loss credits begin to expire in 2013.
Approximately $955.6 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 statutory surplus as of the preceding year end. As of January 1, 2001, approximately $25,354,000 could be paid by Professionals Group's insurance subsidiaries without prior regulatory approval. In 2000, 1999 and 1998, Professionals Group received dividends of $23,000,000, $12,000,000 and $12,316,000, respectively from its insurance subsidiaries.
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.
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
Option information regarding the Directors Plan for the years ending December 31, 2000, 1999 and 1998 follows:
Options outstanding as of December 31, 2000 under the MEEMIC Plan consisted of the following:
The proforma effect on net income for 2000, 1999 and 1998 is not representative of the proforma effect on net income for future years because additional stock option awards could be made in future years.
The Company is involved in litigation arising in the ordinary course of business. While the results of litigation cannot be predicted with certainty, management is of the opinion that the final outcome of such litigation will not have a material effect upon the Company's financial statements.
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, 2000 and 1999, and statutory net income (loss) for the years ended December 31, 2000, 1999 and 1998, of ProNational and ProNational Casualty, as applicable (as filed with their respective insurance regulatory authorities), to the amounts shown in the accompanying consolidated financial statements follows:
On January 1, 2001, significant changes to the statutory basis of accounting will become effective in all states in which the Company is licensed. The cumulative effect of these changes, known as the Codification guidance, will be recorded as a direct adjustment to statutory surplus. The effect of adoption on the Company's statutory surplus has not been determined. The Company expects that statutory surplus after adoption will continue to be in excess of the regulatory risk-based capital requirements.
The unaudited operating results by quarter for 2000 and 1999 are summarized below:
The sum of quarterly net income per common share data for 1999 does not equal the annual amount due to changes in the weighted average number of common shares outstanding during the respective periods.
In our opinion, the consolidated financial statements listed in the accompanying index appearing under Item 14 present fairly, in all material respects, the financial position of Professionals Group, Inc. and its subsidiaries at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the index appearing under Item 14 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 of America, 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 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 results of operations and cash flows of Professionals Group, Inc., and subsidiaries for the year ended December 31, 1998 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedules, 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.
CONDENSED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Professionals Group Services Corporation -- a business corporation that administers certain benefit plans for ProNational Insurance Company employees.
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. During 2000, Professionals Group increased its ownership in MEEMIC Holdings to 84% at December 31, 2000. See also Note 4 to Professionals Group and subsidiaries consolidated financial statements.
On June 22, 2000, Professionals Group entered into a definitive agreement to consolidate with Medical Assurance, Inc. (NYSE: MAI) and form a new holding company, ProAssurance Corporation (ProAssurance) that would be the nation's third largest writer of liability insurance for health care professionals and facilities. Subject to certain adjustments, Professionals Group shareholders would receive their choice of either $12.00 in cash and shares of ProAssurance stock initially valued at $14.00, or $26.00 in cash, for each share of Professionals Group stock they own. The agreement is subject to required regulatory and shareholder approvals and is expected to be completed in 2001. ProAssurance filed an amended Form S-4 Registration Statement with the Securities and Exchange Commission on January 4, 2001 regarding the transactions contemplated by the agreement and plan of consolidation.