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. As a result of the "pooling of interests" business combination with PPTF, all prior period financial data has been restated to reflect the combined operations of Professionals Group and PPTF (See also Note 1 to the Company's consolidated financial statements.). (All such information is in thousands, except per share data.)
(1) Effective January 1, 1995, the Company began writing a book of business previously written by an Illinois insurance company. Effective July 1, 1997, the Company began assuming 40% of the net premiums of Michigan Educational Employees Mutual
Insurance Company, a Michigan mutual insurance company ("MEEMIC"). The business assumed from MEEMIC has increased the expense ratio because of the higher ceding commission associated with this personal lines business. (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 23, 1998, December 16, 1996 and December 1, 1994, respectively. (4) In 1995 the Company reduced its estimated liability for loss and loss adjustment expense reserves by $12.3 million for redundancies. 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.
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 of the financial condition and results of operations of the Company 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").
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 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 (see also Note 1 to the Company's consolidated financial statements.)
The Company's total assets were $889.2 million and $848.0 million as of December 31, 1998 and 1997, respectively, an increase of $41.2 million, or 4.9%. The increase in total assets as of December 31, 1998 was due mainly to increases in invested assets and reinsurance balances, which was offset somewhat by a decrease in premiums due from policyholders. Reinsurance balances have increased mainly due to increased business in Ohio and Illinois which have higher limits, therefore, the reinsurance recoverables have increased as well. Premiums due from policyholders has decreased because during the last half of 1997, approximately half of the Company's Florida policyholders were issued policies with a one-time coverage term of eighteen months as part of a plan to stagger renewals more evenly throughout the year. 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 resulted in 1998 because these policies will not be renewed until 1999.
As of December 31, 1998 and 1997, the Company had invested assets of $691.0 million and $678.6 million, respectively. This 1.8% increase in invested assets resulted mainly from a $6.7 million increase in unrealized gains on the investment portfolio and cash flows from operations. Invested assets represented approximately 78% and 80% of the Company's total assets as of December 31, 1998 and 1997, respectively.
quality corporate bonds, mortgage-backed securities, redeemable preferred stocks, and tax-exempt U.S. municipal bonds. As of December 31, 1998 and 1997, these fixed maturity securities aggregated $669.1 million and $603.4 million, respectively. Approximately $633.0 million of the fixed maturity portfolio was comprised of rated securities of which 99.9% were rated investment grade or better at December 31, 1998. Approximately 59.5% of the non-rated fixed maturity portfolio was comprised of the surplus note investment in MEEMIC. (See "Liquidity and Capital Resources.")
investment yield in 1998 and future years. As of December 31, 1998 and 1997, equity securities had net unrealized gains (losses) of ($0.1 million) and $1.2 million, respectively.
Loss and loss adjustment expense reserves increased by $51.4 million, or 10.5%, to $540.6 million at December 31, 1998 from $489.2 million at December 31, 1997. This increase was mainly due to increased business in Ohio and Illinois, as well as a $25.6 million increase in loss reserves to reflect actuarial estimates and the application of the Company's reserving practices to the Florida book of business it acquired from PPTF. There has also been an $8.2 million increase in the reserves assumed from MEEMIC to $14.0 million at December 31, 1998, from $5.8 million at December 31, 1997 as the business assumed from MEEMIC continues to increase.
Shareholders' equity increased by 1.0% to $222.1 million at December 31, 1998, compared to $219.9 million at December 31, 1997. The increase in shareholders' equity was due to a net loss of $3.2 million, primarily as a result of a loss reserve charge and merger expenses (see "Results of Operations - -- Year Ended December 31, 1998 Compared to Year Ended December 31, 1997.") This decrease was offset by an increase in accumulated other comprehensive income, consisting of unrealized gains on the investment portfolio of $4.4 million and other increases in shareholders' equity of $1.0 million during the 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.
Total net premiums earned were $153.4 million for 1998, an increase of $21.4 million, or 16.2%, compared to net premiums earned of $132.0 million for 1997. Professional liability related net premiums earned were $110.7 million in 1998, a decrease of $1.1 million, or 1.0%, compared to professional liability net premiums earned of $111.9 million in 1997. The decrease in professional liability net premiums earned was primarily due 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. The earned reinsurance premiums assumed from MEEMIC were $42.7 million in 1998, an increase of $22.6 million, or 112.2%, compared to net premiums earned of $20.1 million in 1997 (the MEEMIC reinsurance agreement was not in force during the first six months of 1997.)
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 recognized by 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.
Policy acquisition and underwriting expenses were $38.2 million in 1998, an increase of $14.5 million, or 61.1%, compared to policy acquisition and underwriting expenses of $23.7 million in 1997. As a percentage of premiums earned, the underwriting expense ratio increased to 24.9% during 1998, from 18.0% during 1997. Underwriting expenses for 1998 included a third quarter pretax charge of $2.3 million related to expenses associated with the closing of the PPTF merger and an additional $1.0 million of merger-related expenses incurred prior to the third quarter of 1998. Underwriting expenses also increased due to $13.0 million of ceding commission attributable to the MEEMIC reinsurance agreement compared to $6.6 million for 1997 (the MEEMIC reinsurance agreement was not in force during the first six months of 1997). 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 were offset by a one-time premium tax refund which reduced 1997 underwriting expenses by $2.6 million. Interest expense was $1.3 million and $1.1 million during 1998 and 1997, respectively. See "Liquidity and Capital Resources."
Due to the pretax loss reported in 1998, the Company recorded a $6.1 million tax benefit 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.
Total net premiums written were $163.0 million for the year ended December 31, 1997, an increase of $38.8 million, or 31.3%, compared to net premiums written of $124.2 million for the year ended December 31, 1996. The increase 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 (as discussed previously) as well as an increase in reinsurance premiums assumed from MEEMIC.
Professional liability insurance incurred losses and loss adjustment expenses (including the increase in reserve for extended reporting period claims) for 1997 totaled $113.3 million, a decrease of $12.8 million, or 10.1%, compared to professional liability insurance incurred losses and loss adjustment expenses of $126.1 million for 1996. 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) increased slightly to 101.3% in 1997, compared to 100.6% in 1996. The Company has continued to employ more selective underwriting practices during this time of highly competitive market conditions. Accordingly, the professional liability incurred loss and loss adjustment expense ratio has remained relatively stable. There can be no assurances, however, that these selective underwriting practices will be successful in the long run.
Policy acquisition and underwriting expenses were $23.7 million in 1997, an increase of $5.8 million, or 32.7%, compared to policy acquisition and underwriting expenses of $17.9 million in 1996. As a percentage of premiums earned, the underwriting expense ratio increased to 18.0% during 1997, from 14.3% during 1996. The increase in expenses was mainly due to $2.6 million of non-recurring legal, accounting, investment banker and related expenses associated with the Company's merger and acquisition activities, and $6.6 million of ceding commission attributable to the MEEMIC reinsurance agreement (the MEEMIC reinsurance agreement was not in force during 1996). In addition, 1997 expenses were offset by a one-time premium tax refund which reduced 1997 underwriting expenses by $2.6 million as well as $0.8 million in reinsurance ceding commissions (no ceding commissions were received in 1996). Interest expense of $1.1 million during 1997 resulted from the Company's bank borrowings of $22.5 million in April 1997. See "Liquidity and Capital Resources."
The Company recorded $7.8 million in federal income tax expense in 1997 compared to $7.1 million in 1996. The Company's effective federal income tax rate was 25.9% in 1997 compared to 27.2% in 1996. The decrease in the effective income tax rate is due mainly to increased holdings in tax exempt municipal bonds in 1997 compared to 1996 which was offset somewhat by certain merger and acquisition expenses which are not deductible for federal income tax purposes.
Net income for 1997 was $22.4 million, or $2.68 per share (assuming dilution), on revenues of $181.5 million. This compares to net income of $19.0 million, or $2.28 per share (assuming dilution), on revenues of $170.1 million in 1996. The increased 1997 earnings were attributable to the factors described above.
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. The Company did not borrow any funds in 1998, 1997 or 1996, other than as described in the following paragraph. 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, 1998, 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 any future potential commitments for capital expenditures.
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, 1998.
The Company assisted MEEMIC in MEEMIC's acquisition of the net assets of MEIA for the reasons that follow: The Company believes that by virtue of such acquisition, MEEMIC acquired greater control over the distribution and pricing of its insurance products. The Company anticipates that such control will enable MEEMIC to increase the volume of its insurance business. Given the terms of the Company's reinsurance agreement with MEEMIC, an increase in the volume of MEEMIC's insurance business will increase the amounts of insurance and insurance premiums ceded to ProNational.
On November 2, 1998, MEEMIC, through the newly formed MEEMIC Holdings, Inc., filed a registration statement on Form S-1 with the Securities and Exchange Commission for the purpose of registering shares of its common stock to be issued in connection with the proposed demutualization of MEEMIC. Subject to the approval of the policyholders of MEEMIC, MEEMIC would convert to a stock insurance company and a wholly owned subsidiary of MEEMIC Holdings, Inc., using a subscription rights method of demutualization. MEEMIC's plan of demutualization contemplates the conversion of the $21.5 million Surplus Note of MEEMIC owned by Professionals Group into shares of MEEMIC Holdings, Inc. and the purchase by Professionals Group, as the standby purchaser, of any unexercised subscription rights. After the completion of MEEMIC's plan of demutualization, Professionals Group
Company is contingently liable for the ceded amount of reserves for unpaid losses and loss adjustment expenses and unearned premiums in the event the assuming insurance organizations are unable to meet their contractual obligations. See "Item 1. Business--Reinsurance."
The following table provides certain information for the year ended December 31, 1998, with respect to the Company's reinsurers (see also Note 5 to the consolidated financial statements for amounts recoverable from the Company's reinsurers):
Effective July 1, 1997, ProNational began assuming, on a quota-share basis, 40% of the net personal automobile and homeowners insurance risks of MEEMIC. The assumed premiums earned were $42.7 million and $20.1 million and the assumed losses and loss adjustment expenses incurred in connection with the MEEMIC reinsurance agreement were $28.0 million and $13.1 million, respectively, for the years ended December 31, 1998 and 1997.
Certain regulations that affect the Company's insurance subsidiaries are promulgated by the NAIC, which is an association of state insurance commissioners, regulators and support staff that acts as a coordinating body for the state insurance regulatory process. The NAIC has established risk-based capital requirements to assist regulators in monitoring the financial strength and stability of property and casualty insurers. Under the NAIC requirements, regulatory compliance is determined by a ratio of an insurance company's regulatory total adjusted capital, as defined by the NAIC, to its authorized control level of RBC, as defined by the NAIC. Companies below specific ratios are classified within certain levels, each of which requires specific corrective action. As of December 31, 1998, 1997 and 1996, ProNational and ProNational Casualty were in compliance with such ratios and were not required to take any corrective action. See "Item 1. Business--Regulation."
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, of applying Codification to its insurance subsidiaries' statutory carrying value of assets and liabilities. See "Item 1. Business-- Regulation."
The Company utilizes computerized information systems across its entire operation. The inability of any of the Company's systems to recognize a date using "00" as the year 2000 could result in information system errors or failures. Accordingly, the Company has been working to resolve the potential impact of the year 2000 on the ability of those systems to accurately process information that may be date-sensitive. Subject to the discussion that follows, and based on the information thus far available to the Company, the Company currently believes that the costs expected to be incurred by it in connection with its efforts to become Year 2000-compliant will not have a material adverse impact on the Company's operating results or financial position.
The Company has developed and followed a plan to ensure all modifications and conversions to its primary computerized information systems are implemented and thoroughly tested on a timely basis. The Company estimates that 90% of such modifications and conversions have been made to date. Management anticipates that the remaining modifications and conversions will be completed by June 30, 1999 and that the Company's primary computerized information systems will be Year 2000-compliant by that date.
PROFESSIONAL GROUP, INC. AND SUBSIDIARIES (FORMERLY PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP)
Effective August 31, 1996, and pursuant to a Reorganization Agreement dated May 13, 1996 (the Reorganization Agreement) and an Agreement and Plan of Merger dated May 13, 1996 (Plan of Merger) among Professionals Group, PICOM Interim Insurance Company (INSCO), a stock insurance company incorporated under Michigan law and a wholly-owned subsidiary of Professionals Group, and ProNational, Professionals Group acquired all of the outstanding capital stock of ProNational through the merger of INSCO with and into ProNational (the ProNational Merger). As a result of the Merger: (1) INSCO was merged into ProNational and INSCO ceased to exist; (2) ProNational, as the surviving corporation, became a wholly-owned subsidiary of Professionals Group; (3) each issued and outstanding share of common stock of ProNational (representing 3,188,145 shares) was converted into one share of common stock of Professionals Group and (4) all of the issued and outstanding shares of INSCO held by Professionals Group were converted into shares of common stock of ProNational.
Following is a description of the most significant risks facing property/casualty insurers and how the Company mitigates those risks:
CREDIT RISK is the risk that issuers of securities owned by the Company will default or other parties, including reinsurers, which owe the Company money will not pay. Also, the Company writes a significant amount of business under which policyholders reimburse the Company for policy deductibles. The Company minimizes credit risk by adhering to a conservative investment strategy, by maintaining sound reinsurance and credit and collection practices and by providing for any amounts deemed uncollectible.
- 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.
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 14 for the effects of such differences).
Available-for-sale securities are recorded at fair value, whereas held-to-maturity securities are recorded at amortized cost. Unrealized gains and losses, net of the related income tax effect, on available-for-sale securities are excluded from income and recorded as other comprehensive income. Transfers of securities between categories are recorded at fair value at the date of transfer.
A decline in the fair value of an available-for-sale or held-to-maturity security below cost that is deemed other than temporary results in a charge to income, resulting in the establishment of a new cost basis for the security. All declines in fair values of the Company's investment securities in 1998, 1997 or 1996 were deemed to be temporary.
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.
paid, a non-interest-bearing surplus note was issued. Under the terms of the note, repayment of principal and payment of any interest are at the discretion of the board of directors and upon prior approval of the Michigan Insurance Commissioner. The Company does not plan to refund surplus contributions at this time.
Certain prior year amounts have been reclassified in order to conform with the current year presentation format.
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, 1998 and 1997 follows:
Net realized gains and net appreciation (depreciation) in fair value of available for sale securities follow:
The Company has various excess-of-loss reinsurance agreements. As of December 31, 1998, 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.
At December 31, 1998, amounts related to reinsurance balances and prepaid reinsurance premiums follow:
The provision for Federal income taxes (benefit) consists of the following:
Actual Federal income taxes (benefit) vary from amounts computed by applying the current Federal income tax rate of 34% to income or loss before Federal income taxes (benefit). For the years ended December 31, 1998, 1997 and 1996, the reasons for these differences, and the tax effects thereof, are as follows:
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 (5.87% at December 31, 1998), and payable quarterly (the "Credit Agreement"). Remaining principal payments are due on April 30 of each year, as follows: 1999 - $2,500,000; 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, 1998.
The Company currently maintains two defined contribution employee benefit plans--a 401(k) plan and an ESOP, both of which cover substantially all employees meeting certain eligibility requirements.
With respect to the 401(k) plan, the Company annually contributes 5% of an employee's salary and matches employee contributions up to 5% of an employee's salary. During 1998, 1997 and 1996, the Company's expense under the 401(k) plan was $604,000, $370,000 and $295,000, respectively.
The Company has a stock purchase plan through which employees and directors of the Company and its wholly-owned subsidiaries may purchase Professionals Group common stock by means of payroll deduction. Pursuant to this plan, the Company may elect to match participant purchases, which it is currently matching at the rate of $1.25 (of which $1.00 is used to purchase Professionals Group common stock and $0.25 is applied to income taxes) for each $1.00 of participant purchases up to a maximum participant purchase of $6,000 per year. In 1998, 1997 and 1996, the Company incurred expenses of $601,000, $250,000 and $215,000, respectively, under this plan.
Options outstanding as of December 31, 1998 under the Incentive Plan consisted of the following:
Options outstanding as of December 31, 1998 under the Directors Plan consisted of the following:
ProNational 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. ProNational Casualty does not utilize any permitted accounting practices.
Accounting practices used to prepare statutory-basis financial statements differ in some respects from GAAP. A reconciliation of statutory capital and surplus at December 31, 1998 and 1997, and statutory net income (loss) for the years ended December 31, 1998, 1997 and 1996, 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 51%, 43% and 35% of direct written premiums in 1998, 1997 and 1996, respectively. In 1998, 1997 and 1996, the top ten agents produced, in aggregate, approximately 27%, 28% and 24%, respectively, of the Company'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.
Net income (loss) per common share amounts for the first three quarters of 1998 and all four quarters of 1997 have been restated from those originally reported to reflect the 10% stock dividend declared in 1998 (see note 12).
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
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 (the "MEEMIC Surplus Note") 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.
On November 2, 1998, MEEMIC, through the newly formed MEEMIC Holdings, Inc., filed a registration statement on Form S-1 with the Securities and Exchange Commission for the purpose of registering shares of its common stock to be issued in connection with the proposed demutualization of MEEMIC. Subject to the approval of the policyholders of MEEMIC, MEEMIC would convert to a stock insurance company and a wholly owned subsidiary of MEEMIC Holdings, Inc., using a subscription rights method of demutualization. MEEMIC's plan of demutualization contemplates the conversion of the $21.5 million Surplus Note of MEEMIC owned by Professionals Group into shares of MEEMIC Holdings, Inc. and the purchase by Professionals Group, as the standby purchaser, of any unexercised subscription rights. After the completion of MEEMIC's plan of demutualization, Professionals Group expects to own at least 51% of the stock of MEEMIC Holdings, Inc. The registration statement of MEEMIC Holdings, Inc. (registration statement no. 333-66671) should be consulted for a description of the proposed demutualization of MEEMIC and the expected role of Professionals Group.
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:
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 1997, and the consolidated results of their operations and their cash flows for each of the years in the three 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.
Professionals Group, Inc. (formerly Professionals Insurance Company Management Group) (Professionals Group) is an insurance holding company incorporated under Michigan law on January 31, 1996. Accordingly, 1996 condensed financial information for Professionals Group is only being presented from the period January 31, 1996 (date of inception) through December 31, 1996.
Professionals Group 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.
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.