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.)
(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.
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.)
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'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.
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 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.
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.
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.
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.
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 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.
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.
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).
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
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.
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).
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.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
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.
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).
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.
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.
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.
A reconciliation of the numerators and denominators of the "income (loss) per share -- basic" and "income (loss) per share -- assuming dilution" is presented below:
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.
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):
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.
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:
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 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.
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.
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.
Option information regarding the Incentive Plan for the years ending December 31, 1999, 1998 and 1997 follows:
Option information regarding the MEEMIC Plan for the year ending December 31, 1999 follows:
Options outstanding as of December 31, 1999 under the MEEMIC Plan consisted of the following:
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.
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
Casualty, as applicable (as filed with their respective insurance regulatory authorities), to the amounts shown in the accompanying consolidated financial statements follows:
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.
The unaudited operating results by quarter for 1999 and 1998 are summarized below:
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.
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.
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.
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.
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.
CONDENSED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
CONDENSED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
ProNational Insurance Company -- a stock insurance company incorporated under Michigan law (ProNational). ProNational also owns 77% of MEEMIC Holdings, Inc. (see note 3 below).
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.