Professionals Group owns its principal executive offices in Okemos, Michigan. MEEMIC leases its principal executive offices in Auburn Hills, Michigan. MEEMIC also owns, primarily for investment purposes, an 11.5 acre vacant parcel of land in Auburn Hills, Michigan. The Company leases office facilities in various locations and also leases computer and operating equipment under cancelable and noncancelable agreements.
(1) From July 1, 1997 through June 30, 1999, the Company assumed 40% of the net premiums of MEEMIC. 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 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 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").
The Company's total assets increased $64.7 million, or 6.0%, to $1,136.8 million at December 31, 2000, compared to $1,072.1 million at December 31, 1999. The significant components of the increase in total assets related to invested assets and reinsurance balances, as further discussed below. Reinsurance balances increased $27.5 million, or 16.4%, to $195.6 million at December 31, 2000, from $168.1 million at December 31, 1999 due primarily to an increase of medical malpractice business sold at higher limits, resulting in greater reinsurance participation, therefore the reinsurance recoverables have continued to increase.
$7.2 million. As of December 31, 1999, the fixed maturity portfolio had net unrealized losses of $19.5 million. This change was due primarily to lower interest rates at year-end 2000 compared to year-end 1999. As of December 31, 2000, the fixed maturity portfolio had a weighted average modified duration of approximately 4.3 years. As a result, the market value of the fixed maturity portfolio could fluctuate significantly in response to changes in interest rates (see also "
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
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 an 84.2% ownership interest. All significant intercompany transactions and balances have been eliminated in consolidation.
At December 31, 2000 and 1999, 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 with maturities less than 90 days, are stated at cost, which approximates fair value.
Reinsurance arrangements are prospective contracts for which prepaid reinsurance premiums are amortized ratably over the related policy terms based on the estimated ultimate amounts to be paid.
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. Additionally, the Company provides for loss and loss adjustment expense reserves on assumed business based on information received from the ceding companies. 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.
Property and equipment, consisting of real estate, data processing equipment and furniture and fixtures, are recorded at cost, net of accumulated depreciation. Depreciation is computed on the straight-line method over periods ranging from 3 to 25 years. Maintenance, repairs and minor renewals are charged to expense as incurred.
The diluted share base for the year ended December 31, 1998 excludes incremental shares of 72,172 related to stock options and stock grants. These shares are excluded due to their antidilutive effect as a result of the Company's net loss during 1998.
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 proforma 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):
These unaudited proforma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which would have actually resulted had this acquisition occurred on January 1, 1998 or of future results of operations of the Company. During 2000, the Company increased its ownership in MEEMIC Holdings to 84.2% at December 31, 2000.
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. All prior period financial information was restated to reflect the combined operations of Professionals Group and PPTF.
On June 22, 2000, Professionals Group entered into a definitive agreement to consolidate with Medical Assurance, Inc. (NYSE: MAI) and form a new holding company, ProAssurance Corporation (ProAssurance), that would be the nation's third largest writer of liability insurance for health care professionals and facilities. Subject to certain adjustments, Professionals Group shareholders would receive their choice of either $12.00 in cash and shares of ProAssurance stock initially valued at $14.00, or $26.00 in cash, for each share of Professionals Group stock they own. The agreement is subject to required regulatory and shareholder PROFESSIONALS GROUP, INC. AND SUBSIDIARIES
A summary of cost or amortized cost, gross unrealized gains and losses and estimated fair value of investments in securities available for sale as of December 31, 2000 and 1999 follows:
The Company has various excess-of-loss, quota-share and stop loss reinsurance agreements. As of December 31, 2000, 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 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 reinsurers with respect to existing and future reinsurance.
At December 31, 2000, amounts related to reinsurance balances and prepaid reinsurance premiums follow:
Professionals Group, together with its subsidiaries, files a consolidated Federal income tax return. Prior to Professionals Group obtaining more than 80% ownership of MEEMIC Holdings on September 15, 2000, MEEMIC Holdings, together with its subsidiaries, filed its own consolidated Federal income tax return. The income tax expense or benefit for both Professionals Group and MEEMIC Holdings 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.
Professionals Group has an unsecured bank term loan, bearing interest at an adjustable rate of LIBOR plus 62.5 basis points (7.38% at December 31, 2000), and payable quarterly (the "Credit Agreement"). Remaining principal payments are due on April 30 of each year, as follows: 2001 -- $3,000,000; 2002 -- $3,500,000; 2003 -- $3,500,000; and 2004 -- $4,500,000.
The Credit Agreement 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). The Credit Agreement also requires 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, 2000.
In 1999, Professionals Group's Board of Directors authorized management to repurchase up to 440,000 shares of the Company's common stock. During 2000 and 1999 the Company repurchased 200,352 and 239,648 shares under this plan at a total cost of $4,730,000 and $6,506,000, respectively.
Holdings' common stock on the date of grant. These options vest and become exercisable over five years beginning one year from the date of the grant, and expire ten years from the date of grant.
Option information regarding the Incentive Plan for the years ending December 31, 2000, 1999 and 1998 follows:
Options outstanding as of December 31, 2000 under the Directors Plan consisted of the following:
Option information regarding the MEEMIC Plan for the years ending December 31, 2000 and 1999 follows:
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.
ProNational, MEEMIC 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.
Premiums written through independent agents approximated 59%, 56% and 51% of ProNational's direct written premiums in 2000, 1999 and 1998, respectively. In 2000, 1999 and 1998, the top ten agents produced, in aggregate, approximately 28%, 31% and 27%, respectively, of ProNational's direct written premiums. Approximately 90% of MEEMIC's premiums are written through its wholly-owned agency. In both 2000 and 1999, the top ten agency representatives produced, in aggregate, approximately 35% of MEEMIC's direct written premiums.
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 (see Note 5), approximated their fair values at December 31, 2000 and 1999.
Professionals Group provided MEEMIC with information system services and certain consulting services under a Management Services Agreement. Fees for such services were $1,066,000 for 1999 and $2,073,000 for 1998 and were included as a reduction to other underwriting expenses. The Management Services Agreement was terminated on July 1, 1999 as a result of Professionals Group's acquisition of a majority ownership interest in MEEMIC Holdings (see Note 4).
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:
We have audited the accompanying consolidated statements of operations, comprehensive income, shareholders' equity and cash flows of Professionals Group, Inc. (formerly Professionals Insurance Company Management Group) and subsidiaries (the Company) for the year ended December 31, 1998. In connection with our audit of the consolidated financial statements, we also have audited the financial statement schedules for the year ended December 31, 1998. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform our 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
CONDENSED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
These condensed financial statements should be read in conjunction with the accompanying consolidated financial statements and notes thereto of Professionals Group, Inc. and subsidiaries.
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Professionals Group, Inc. (Professionals Group) is an insurance holding company incorporated under Michigan law on January 31, 1996.
ProNational Insurance Company -- a stock insurance company incorporated under Michigan law (ProNational). ProNational also owns 84% of MEEMIC Holdings, Inc. (see note 3 below).
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.
Professionals Group also owns 80% of the issued and outstanding common stock of MedAdvantage, Inc. MedAdvantage, Inc. provides credentialing verification services for medical service providers.
PROFESSIONALS GROUP, INC. AND SUBSIDIARIES YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (IN THOUSANDS)