The Company owns its principal executive offices in Okemos, Michigan. The Company also owns, primarily for investment purposes, an office building in Williamston, Michigan. The Company leases office facilities in Coral Gables, Ft. Lauderdale, Jacksonville, Orlando and Tampa, Florida, Lisle, Illinois, Indianapolis, Indiana and Columbus, Ohio. The Company also leases operating equipment under cancelable and noncancelable agreements.
As of December 31, 1998 and 1997, the Company's investment portfolio was dominated by fixed maturity securities and primarily consisted of U.S. government and agency bonds, high-
As of December 31, 1998 and 1997, equity securities totaled $3.9 million and $28.4 million, respectively, and primarily consisted of high-quality U.S. corporate common stocks as well as common stock held in Physicians Insurance Company of Wisconsin, Inc., an unrelated stock insurance company providing professional liability insurance to health care providers primarily in Wisconsin. The U.S. corporate common stock portfolio was reduced in 1998, at a net gain of approximately $3.4 million, due to the Company's desire to maximize after tax
Loss and loss adjustment expense reserves represented approximately 81% and 78% of the Company's consolidated liabilities at December 31, 1998 and 1997, respectively. 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 professional liability reserves 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. It has been the practice of the Company to establish its loss and loss adjustment expense reserves conservatively, as it relates to immaturely developed accident years, to minimize potential uncertainties. The Company's carried reserves have been established within the range of acceptable values periodically estimated by the Company's consulting actuary and 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.
Unearned premiums decreased by $7.8 million, or 14.0%, to $48.2 million at December 31, 1998 from $56.0 million at December 31, 1997. This decrease was mainly due to the run-off of 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).
Results of Operations -- Year Ended December 31, 1998 Compared to Year Ended December 31, 1997:
Total net premiums written were $143.9 million for the year ended December 31, 1998, a decrease of $19.1 million, or 11.7%, compared to net premiums written of $163.0 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 (as discussed previously). This decrease was offset somewhat by an increase in assumed reinsurance premiums from MEEMIC.
During 1998 and 1997, the Company continued to balance its need for rate adjustments with the goal of maintaining medical malpractice market share in very competitive environments in Florida, Michigan, Illinois, Indiana, Ohio and Pennsylvania. Although the Company is endeavoring to offset lower premiums charged through more selective underwriting practices, there can be no assurance that these practices will be successful in the long run.
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 $4.8 million and $3.9 million during 1998 and 1997, respectively.
reserving practices to the Florida book of business as well as a $9.5 million excess limits verdict on one Florida claim. Excluding these charges, as a percentage of premiums earned, the total incurred loss and loss adjustment expense ratio (including the increase in reserve for extended reporting period claims) improved to 88.1% in 1998, compared to 95.8% in 1997. This decrease arose from both the professional liability and MEEMIC books of business, as further discussed below.
Excluding the charges mentioned above, professional liability insurance incurred losses and loss adjustment expenses (including the increase in reserve for extended reporting period claims) for 1998 totaled $109.0 million, a decrease of $4.4 million, or 3.9%, compared to professional liability insurance incurred losses and loss adjustment expenses of $113.3 million for 1997. Excluding the charges mentioned above, 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) 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.
Incurred losses and loss adjustment expenses related to the personal automobile and homeowners insurance assumed from MEEMIC (the "personal liability insurance") totaled $28.0 million for 1998, an increase of $14.9 million, or 114.1%, compared to $13.1 million for 1997 (the MEEMIC reinsurance agreement was not in force during the first six months of 1997). As a percentage of premiums earned, the personal liability insurance generated an incurred loss and loss adjustment expense ratio of 65.6% and 65.0% in 1998 and 1997, respectively. The Company believes that the personal liability insurance produced a low loss ratio primarily due to less severe weather-related incidents in Michigan during both 1998 and 1997.
The net loss for 1998 was $3.2 million (primarily due to the loss reserve charge and excess limits verdict mentioned previously), or $0.39 per share (assuming dilution), on revenues of $203.7 million. This compares to net income of $22.4 million, or $2.68 per share (assuming dilution), on revenues of $181.5 million in 1997.
Results of Operations -- Year Ended December 31, 1997 Compared to Year Ended December 31, 1996:
Net investment income, excluding net realized investment gains, was $39.5 million for 1997, an increase of $0.4 million, or 1.2%, compared to net investment income of $39.1 million for 1996. The increase in net investment income mainly resulted from an increase in average invested assets associated with bank borrowings received that were used to fund the Company's purchase of a $21.5 million surplus note from MEEMIC (see "Liquidity and Capital Resources") and positive cash flows from operations. The weighted average tax equivalent book yield of the fixed maturity portfolio was 7.1% and 6.9% as of December 31, 1997 and 1996, respectively. Net realized investment gains were $3.9 million and $1.5 million during 1997 and 1996, respectively.
Reinsurance experience refunds were $4.2 million and $3.3 million in 1997 and 1996, 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. Claims experience under these reinsurance arrangements have been lower than projected, resulting in reinsurance experience refunds to the Company.
Total incurred losses and loss adjustment expenses (including the increase in reserve for extended reporting period claims) totaled $126.4 million in 1997, an increase of $0.3 million, or less than 1%, compared to $126.1 million in 1996. As a percentage of premiums earned, the total incurred loss and loss adjustment expense ratio (including the increase in reserve for
Incurred losses and loss adjustment expenses related to the personal automobile and homeowners insurance assumed from MEEMIC (the "personal liability insurance") totaled $13.1 million for 1997 (the MEEMIC reinsurance agreement was not in force during 1996). As a percentage of premiums earned, the personal liability insurance generated an incurred loss and loss adjustment expense ratio of 65.0% in 1997. The Company believes that the personal liability insurance produced a low loss ratio primarily due to less severe weather-related incidents in Michigan during 1997.
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 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, 1999, approximately $19.4 million of dividends could be paid by Professionals Group's direct insurance subsidiaries without prior regulatory approval. In 1998, 1997 and 1996, Professionals Group's insurance subsidiaries paid cash dividends aggregating $12.3 million, $4.7 million and $3.5 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 12 to the Company's consolidated financial statements).
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 services 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.
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 and the expected role of Professionals Group.
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 1 to the Company's consolidated financial statements.)
In the normal course of business, the Company seeks to reduce the loss that may arise from events that cause unfavorable underwriting results, provide additional capacity for growth and protect stockholders' equity by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers. At the present time, the Company has excess of loss and stop loss reinsurance and errors and omissions insurance. 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
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 its reinsurers with respect to existing and future reinsurance. To date, the Company has not experienced any material difficulty in collecting reinsurance recoverables. No assurance can be given, however, regarding the future ability of any of the Company's reinsurers to meet their future obligations. See "Item 1. Business--Reinsurance."
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.
As of January 1, 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive Income." This standard establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of SFAS No. 130 had no impact on the Company's results of operations or shareholders' equity. SFAS No. 130 requires unrealized gains or losses on the Company's available-for-sale securities, which prior to adoption were reported separately in shareholders' equity, to be included in accumulated other comprehensive income. Prior period financial statements have been reclassified to conform to the requirements of SFAS No. 130.
The Company also adopted SFAS No. 131 "Disclosures About Segments of an Enterprise and Related Information" in 1998. This standard required that an enterprise report financial and descriptive information about its reportable operating segments. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Generally, financial information is required to be reported on the basis that it is used internally for evaluating segment performance and deciding how to allocate
resources to segments. The Company has made all required disclosures due to the adoption of SFAS No. 131.
Although the Company has established a contingency plan for critical computerized information systems to mitigate potential delays or other problems associated with such modifications or conversions deemed necessary by management, the Company continues to bear some risk related to the Year 2000 issue due to its voluntary interaction with other persons and entities not affiliated with the Company (e.g., vendors and customers) who must address their own Year 2000 issues. For this reason, the Company has been monitoring the Year 2000 issues of certain third parties with which it interacts. The Company has asked such third parties to demonstrate, or give some indication as to, their ability to become Year 2000-compliant by June 30, 1999. With respect to any third party who appears unlikely to remedy its Year 2000 issues, the Company intends to take appropriate steps to mitigate the exposure to the risk posed by such third party's failure to timely address its Year 2000 issues. However, due to the uncertainty inherent in both the Year 2000 problem and the efforts of third parties to timely resolve their own Year 2000 issues, there can be no assurances that the Company's mitigation efforts will be successful or that the failure of any third party to timely resolve its Year 2000 issues will not have a material adverse impact on the Company's operations, operating results or financial position.
Both internal and external resources will be utilized in the Company's efforts to become Year 2000-compliant. During 1998 and 1997, approximately $160,000 and $150,000, respectively, of costs were incurred by the Company in connection with its efforts to become Year 2000-compliant. The total costs of the Company's efforts to become Year 2000-compliant are not expected to exceed $500,000. All of such costs have been, and will continue to be, expensed as incurred.
The costs expected to be incurred in connection with the Company's efforts to become Year 2000-compliant, as well as the date by which the Company is expected to be Year 2000-
PROFESSIONALS GROUP, INC. AND SUBSIDIARIES (Formerly Professionals Insurance Company Management Group)
Professionals Group, Inc. (Professionals Group), formerly Professionals Insurance Company Management 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), formerly known as PICOM Insurance Company, a stock insurance company incorporated under Michigan law. Professionals Group and subsidiaries are collectively referred to as "the Company." ProNational is a Michigan-domiciled property and casualty insurance company licensed in nineteen states which primarily provides professional liability insurance for physicians, surgeons, dentists, hospitals, and other health care providers and acts as a reinsurer to Michigan Educational Employees Mutual Insurance Company (MEEMIC) (see note 18).
The ProNational Merger has been accounted for in a manner similar to a "pooling of interests" business combination, whereby Professionals Group has carried forward to its accounts the assets and liabilities of ProNational at their respective amounts as reported by ProNational.
INTEREST RATE RISK is the risk that interest rates will change and cause a decrease in the value of an insurer's investments. The Company mitigates this risk by attempting to approximately match the maturity schedule of its assets with the expected payout of its liabilities. To the extent that liabilities come due more quickly than assets mature, an insurer would have to sell assets prior to maturity and recognize a gain or loss. At December 31, 1998, the estimated market value of the Company's fixed maturity portfolio was greater than its amortized cost (see note 4).
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. Other material estimates that are susceptible to significant change in the near term relate to the recoverability of deferred Federal income tax assets.
The accompanying consolidated financial statements include the accounts of Professionals Group and the following wholly-owned subsidiaries:
- ProNational, including ProNational's three wholly-owned subsidiaries, PICOM Claims Services Corporation-a provider of claims processing services to nonaffiliated professional liability companies; Physicians Protective Plan, Inc. - a Florida insurance agency; and ProNational Casualty Company (ProNational Casualty), an Illinois-domiciled property and casualty insurance company which provided professional liability insurance for physicians and surgeons in the State of Illinois through 1997.
- MedAdvantage, Inc. - a provider of credentialing verification services for medical service providers.
- Professionals Group Services Corporation - a Michigan business corporation that administers certain benefit plans for ProNational employees.
- PICOM Insurance Agency, Inc. - an inactive Michigan insurance agency.
Investment securities are classified upon acquisition into one of three categories: trading, available for sale or held to maturity. Trading securities are bought and held principally for the purpose of selling them in the near term. Held-to-maturity securities are those securities the Company has the positive intent and ability to hold until maturity. At December 31, 1998 and 1997, 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.
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.
PROFESSIONALS GROUP, INC. AND SUBSIDIARIES (FORMERLY PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP)
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 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.
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, 1991 and prior reinsurance contracts were commuted and deferred reinsurance profits thereon were recognized.
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 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.
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.
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.
A reconciliation of the numerators and denominators of the "income (loss) per share - basic" and "income (loss) per share - assuming dilution" is presented below:
From 1984 through 1990, new Florida policyholders were required to make a contribution to surplus. The contributions were required during a high growth period in Florida and were intended to help maintain the Company's premium to surplus ratio. When the contribution was
Proceeds and related gross realized gains and gross realized losses on sales of fixed maturities and equity securities follow:
At December 31, 1998, U.S. Treasury notes and certificates of deposit with a carrying value of $3,584,000 were on deposit with regulatory authorities, as required by law.
The Company first assumed business from other insurance companies on December 31, 1996, when it assumed all of the loss and loss adjustment expense reserves and unearned premiums of American Medical Insurance Exchange (AMIE). Effective July 1, 1997, ProNational began assuming, on a quota-share basis, 40% of MEEMIC's net business.
Premiums earned and losses and loss adjustment expenses are net of the following reinsurance ceded amounts:
Premiums earned and losses and loss adjustment expenses have been increased by the following reinsurance assumed amounts:
Professionals Group, together with its subsidiaries, files a consolidated Federal income tax return. Income tax expense 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. A valuation allowance is then required to be established to reduce a deferred tax asset if it is "more likely than not" that the related tax benefits will not be realized.
The tax effects of temporary differences that give rise to deferred Federal income tax assets and deferred Federal income tax liabilities follow:
In assessing the realizability of deferred Federal income tax assets, management considers whether it is more likely than not that some portion of the deferred Federal income tax assets will not be realized. Because of the carryforward provisions of the Internal Revenue Code, the expectation that temporary differences will reverse during periods in which taxable income is generated, and the fact that the Company had not incurred an operating loss for either financial or Federal income tax reporting purposes from 1987 through 1997, management believes it is more likely than not that the Company will fully realize the net deferred Federal income tax assets. Accordingly, no valuation allowance has been established.
At December 31, 1998 and 1997, property and equipment consisted of the following:
Activity in loss and loss adjustment expense reserves is summarized as follows:
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. 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. 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 through 1997. 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. The unfavorable reserve development was offset somewhat by $25.5 million of favorable reserve development related to the Company's Midwest book of business.
With respect to the ESOP, the Company annually contributes 3% of an employee's salary. During 1998, 1997 and 1996, the Company's expense under the ESOP was $208,000, $145,000 and $112,000, respectively.
Prior to the PPTF merger on July 1, 1998 (see note 1), employees who worked for PPTF were covered under a simplified employee pension plan (SEP), which was a non-contributory defined contribution plan. The PPTF employees became eligible to participate in all three benefit plans described above on July 1, 1998, and as a result, the SEP was discontinued. During 1998, 1997 and 1996, the Company's expense under the SEP was $176,000, $351,000 and $363,000, respectively.
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, 1999, approximately $19,389,000 could be paid by Professionals Group's insurance subsidiaries without prior regulatory approval. In 1998, 1997 and 1996, Professionals Group's insurance subsidiaries paid dividends of $12,316,000, $4,717,049 and $3,530,334, respectively.
On December 5, 1998, the Company declared a 10% stock dividend, issued on December 23, 1998 to shareholders of record as of December 7, 1998. All per-share information in the accompanying consolidated financial statements has been adjusted to give retroactive effect to this stock dividend.
The Company has established the 1996 Long-term Stock Incentive Plan (the "Incentive Plan") under which, subject to adjustment, 300,000 shares of the Company'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 the Company, including any officer or officer-director, or consultants to the Company and its subsidiaries. All terms and conditions of any grants under the Incentive Plan are at the discretion of the Compensation Committee of the Company's board of directors. During 1997, 146,500 options were granted at the market price of the Company's common stock on the date of grant. These options vest and become exercisable over five years beginning in 1998, and expire in 2007. No Incentive Plan options were granted in 1998 or 1996. No charges to operations are recorded with respect to authorization, grant or exercise of options. Proceeds received upon exercise are credited to shareholders' equity.
The Company 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 the Company's common stock may be granted to non-employee directors (maximum of 5,000 shares to one individual) of the Company. Options are granted at the market price of the Company'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. No charges to operations are recorded with respect to authorization, grant or exercise of options. Proceeds received upon exercise are credited to shareholders' equity.
Option information regarding the Incentive Plan for the years ending December 31, 1998, 1997 and 1996 follows:
Option information regarding the Directors Plan for the years ending December 31, 1998, 1997 and 1996 follows:
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:
The fair value of options at date of grant was estimated using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 1998, 1997 and 1996: dividend yield of 0%; expected volatility of 35.6%, 35.7% and 30.4%; risk-free interest rate of 6.29% for the Incentive Plan (1997 only); risk free interest rate of 5.69%, 6.62% and 6.75% for the Directors Plan; expected lives of 9 years for the Incentive Plan (1997 only); and expected lives of 7 years for the Directors Plan. The proforma effect on net income for 1998, 1997 and 1996 is not representative of the proforma effect on net income for future years because additional stock option awards could be made in future years.
Certain regulations that affect ProNational, ProNational Casualty and the insurance industry are promulgated by the National Association of Insurance Commissioners (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 (RBC) requirements to assist regulators in monitoring the financial strength and stability of property and casualty insurers. Under the NAIC requirements, each insurer must maintain its total capital and surplus above a calculated minimum threshold or take corrective measures to achieve that threshold. ProNational and ProNational Casualty have calculated their RBC levels based on these requirements and have determined that they passed the RBC test and have capital and surplus in excess of the minimum threshold.
The unaudited operating results by quarter for 1998 and 1997 are summarized below:
The sum of quarterly net income (loss) per common share data for 1998 and 1997 does not equal the annual amount due to changes in the weighted average number of common shares outstanding during the respective periods.
than investment securities, which are presented in note 4--approximated their fair values at December 31, 1998 and 1997.
On September 22, 1997, MEEMIC Insurance Services Corporation (MEEMIC Services Corp.), a newly formed subsidiary of MEEMIC, purchased the net assets of MEIA. The purchase price equaled 3.75% of premiums written by MEEMIC Services Corp. through July 2004, subject to a guaranteed minimum purchase price of $43.0 million. To fund this purchase, MEEMIC Services Corp. paid cash of $22.5 million (utilizing the proceeds of the MEEMIC Surplus Note), and agreed to pay $20.5 million to MEIA as additional consideration through 2004, as provided for in the purchase agreement. MEEMIC guaranteed payment of the first $3.0 million and Professionals Group guaranteed payment of the final $17.5 million (payable in years 2001-2004) of such additional consideration. The Company believes the likelihood that the guarantee obligation would become payable is minimal.
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 1997, and the related consolidated statements of operations, comprehensive income, shareholders' equity and cash flows for each of the years in the three 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 1997 and for each of the years in the three 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.
ProNational Insurance Company (formerly PICOM Insurance Company) - a stock insurance company incorporated under Michigan law.
Professionals Group Services Corporation - a business corporation that administers certain benefit plans for ProNational Insurance Company employees.