United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 2002
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transaction period from ____________to
___________.
Commission file number 1-11983
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FPIC Insurance Group, Inc.
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(Exact name of registrant as specified in its charter)
Florida 59-3359111
- -------------------------------------- --------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
225 Water Street, Suite 1400, Jacksonville, Florida 32202
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(Address of principal executive offices) (Zip Code)
(904) 354-2482
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
As of August 8, 2002, there were 9,390,795 shares of the registrant's common
stock outstanding.
FPIC Insurance Group, Inc.
Form 10-Q
Index
Page
----
Part I
Item 1. Unaudited Consolidated Financial Statements of FPIC
Insurance Group, Inc. and Subsidiaries
* Consolidated Balance Sheets................................... 3
* Consolidated Statements of Income and Comprehensive Income.... 4
* Consolidated Statements of Changes in Shareholders' Equity.... 5
* Consolidated Statements of Cash Flows......................... 6
* Condensed Notes to the Unaudited Consolidated Financial
Statements.................................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 30
Part II
Item 1. Legal Proceedings............................................... 30
Item 2. Changes in Securities and Use of Proceeds....................... 30
Item 3. Defaults Upon Senior Securities................................. 30
Item 4. Submission of Matters to a Vote of Security Holders............. 30
Item 5. Other Information............................................... 30
Item 6. Exhibits and Reports on Form 8-K................................ 30
FPIC INSURANCE GROUP, INC.
Consolidated Balance Sheets
(in thousands, except share data)
(unaudited)
June 30, Dec 31,
2002 2001
-------------- ---------------
Assets
Cash and cash equivalents $ 61,737 75,220
Bonds and U.S. Government securities, available for sale 363,985 348,949
Equity securities, available for sale 7 8
Other invested assets, at equity 2,300 2,572
Other invested assets, at cost 10,683 10,962
Real estate 4,447 4,255
-------------- ---------------
Total cash and investments 443,159 441,966
Premiums receivable, net 105,669 73,362
Accrued investment income 5,103 4,605
Reinsurance recoverable on paid losses 6,068 7,305
Due from reinsurers on unpaid losses and advance premiums 103,930 80,410
Ceded unearned premiums 53,772 40,794
Property and equipment, net 4,348 4,727
Deferred policy acquisition costs 9,621 9,001
Deferred income taxes 39,249 19,944
Prepaid expenses 1,338 1,664
Goodwill 18,870 67,232
Intangible assets 1,175 1,317
Federal income tax receivable -- 5,273
Other assets 34,246 13,222
-------------- ---------------
Total assets $ 826,548 770,822
============== ===============
Liabilities and Shareholders' Equity
Loss and loss adjustment expenses $ 356,247 318,483
Unearned premiums 186,229 146,761
Reinsurance payable 24,069 26,689
Paid in advance and unprocessed premiums 8,573 9,942
Revolving credit facility 37,000 37,000
Term loan 13,125 16,042
Deferred credit 9,378 10,007
Federal income tax payable 260 --
Accrued expenses and other liabilities 39,993 31,324
-------------- ---------------
Total liabilities 674,874 596,248
-------------- ---------------
Commitments and contingencies (note 9)
Common stock, $.10 par value, 50,000,000 shares authorized; 9,390,795 and
9,337,755 shares issued and outstanding at
June 30, 2002 and December 31, 2001, respectively 939 934
Additional paid-in capital 38,270 37,837
Accumulated other comprehensive income (loss) 740 (26)
Retained earnings 111,725 135,829
-------------- ---------------
Total shareholders' equity 151,674 174,574
-------------- ---------------
Total liabilities and shareholders' equity $ 826,548 770,822
============== ===============
See accompanying notes to the unaudited consolidated financial statements
3
FPIC INSURANCE GROUP, INC.
Consolidated Statements of Income and Comprehensive Income
(in thousands, except per common share data)
(unaudited)
--------------------------------------------------------
Three months ended June 30, Six months ended June 30,
2002 2001 2002 2001
-------------- ------------- ------------- -------------
Revenues
Net premiums earned $ 47,560 34,802 86,902 66,319
Claims administration and management fees 8,291 7,676 15,921 14,894
Net investment income 5,813 5,889 10,701 12,555
Commission income 1,162 1,079 2,036 1,564
Net realized investment (losses) gains (324) (285) 144 (380)
Finance charges and other income 250 213 471 673
-------------- ------------- ------------- -------------
Total revenues 62,752 49,374 116,175 95,625
-------------- ------------- ------------- -------------
Expenses
Net losses and loss adjustment expenses 41,358 32,732 75,183 62,741
Other underwriting expenses 6,780 4,985 13,471 9,909
Claims administration and management expenses 7,847 7,645 15,257 15,210
Interest expense 1,254 1,186 2,470 2,339
Other expenses 106 951 177 1,921
-------------- ------------- ------------- -------------
Total expenses 57,345 47,499 106,558 92,120
-------------- ------------- ------------- -------------
Income from operations before taxes and cumulative
effect of accounting change 5,407 1,875 9,617 3,505
Less: Income taxes 2,798 13 4,143 349
-------------- ------------- ------------- -------------
Income before cumulative effect of accounting
change 2,609 1,862 5,474 3,156
Less: Cumulative effect of accounting
change (net of an $18,784 income tax
benefit) (note 3) -- -- 29,578 --
-------------- ------------- ------------- -------------
Net income (loss) $ 2,609 1,862 (24,104) 3,156
============== ============= ============= =============
Basic earnings (loss) per common share $ 0.28 0.20 (2.57) 0.34
============== ============= ============= =============
Diluted earnings (loss) per common share $ 0.27 0.20 (2.54) 0.33
============== ============= ============= =============
Basic weighted average common shares outstanding 9,390 9,401 9,382 9,397
============== ============= ============= =============
Diluted weighted average common shares outstanding 9,516 9,458 9,507 9,447
============== ============= ============= =============
Comprehensive Income (Loss)
Net income (loss) $ 2,609 1,862 (24,104) 3,156
-------------- ------------- ------------- -------------
Other comprehensive income:
Unrealized holding gains (losses) on debt and
equity securities 6,457 (1,945) 1,061 3,248
Unrealized holding losses on derivative
financial instruments (146) (112) (64) (1,298)
Income tax (expense) benefit related to
unrealized gains and losses (2,397) 1,559 (375) (656)
-------------- ------------- ------------- -------------
Other comprehensive income (loss) 3,914 (498) 622 1,294
-------------- ------------- ------------- -------------
Comprehensive income (loss) $ 6,523 1,364 (23,482) 4,450
============== ============= ============= =============
See accompanying notes to the unaudited consolidated financial statements
4
FPIC INSURANCE GROUP, INC.
Consolidated Statements of Changes in Shareholders' Equity
Six Months Ended June 30, 2002 and Year Ended December 31, 2001
(in thousands)
Accumulated
Additional Other
Common Paid-in Unearned Comprehensive Retained
Stock Capital Compensation Income (Loss) Earnings Total
-------- ----------- -------------- -------------- --------- ---------
Balances at December 31, 2000 $ 938 37,827 (105) 968 132,899 172,527
-------- ----------- -------------- -------------- --------- ---------
Net income -- -- -- -- 2,930 2,930
Cumulative effect of accounting
change -- -- -- 124 -- 124
Compensation earned on options -- -- 105 -- -- 105
Unrealized gain on debt and
equity securities, net -- -- -- 778 -- 778
Unrealized loss on derivative
financial instruments, net -- -- -- (1,896) -- (1,896)
Repurchase of shares, net (4) 10 -- -- -- 6
-------- ----------- -------------- -------------- --------- ---------
Balances at December 31, 2001 $ 934 37,837 -- (26) 135,829 174,574
-------- ----------- -------------- -------------- --------- ---------
Net loss -- -- -- -- (24,104) (24,104)
Unrealized gain on debt and
equity securities, net -- -- -- 661 -- 661
Unrealized loss on derivative
financial instruments, net -- -- -- (39) -- (39)
Amortization of unrealized loss on
derivative financial instruments -- -- -- 144 -- 144
Issuance of shares 5 433 -- -- -- 438
-------- ----------- -------------- -------------- --------- ---------
Balances at June 30, 2002 (unaudited) $ 939 38,270 -- 740 111,725 151,674
======== =========== ============== ============== ========= =========
See accompanying notes to the unaudited consolidated financial statements
5
FPIC INSURANCE GROUP, INC.
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
-----------------------------
Six months ended June 30,
2002 2001
-------------- --------------
Cash flows from operating activities:
Net (loss) income $ (24,104) 3,156
Adjustments to reconcile net (loss) income to cash provided by
operating activities:
Cumulative effect of accounting change 29,578 --
Depreciation, amortization and accretion 5,932 5,972
Realized (gain) loss on investments (144) 380
Realized loss on sale of property and equipment 12 --
Noncash compensation -- 63
Net loss from equity investments 271 249
Bad debt expense -- 41
Deferred income tax benefit (895) (237)
Changes in assets and liabilities:
Premiums receivable, net (32,307) (6,910)
Accrued investment income, net (498) 120
Reinsurance recoverable on paid losses 1,237 (4,532)
Due from reinsurers on unpaid losses and advance premiums (23,520) (10,567)
Ceded unearned premiums (12,978) (12,831)
Deferred policy acquisition costs (6,048) (4,801)
Prepaid expenses 326 628
Federal income tax receivable / payable 5,533 2,815
Other assets 1,129 4,080
Loss and loss adjustment expenses 37,764 13,643
Unearned premiums 39,468 11,728
Reinsurance payable (2,620) 2,757
Paid in advance and unprocessed premiums (1,369) (1,681)
Accrued expenses and other liabilities 5,832 2,920
-------------- --------------
Net cash provided by operating activities 22,599 6,993
-------------- --------------
Cash flows from investing activities:
Proceeds from sale or maturity of bonds and U.S. Government securities 88,149 42,223
Purchase of bonds and U.S. Government securities (121,055) (19,978)
Proceeds from sale of equity securities -- 562
Purchase of equity securities -- (50)
Proceeds from sale of other invested assets 328 218
Purchase of other invested assets (48) --
Purchase of real estate investments (330) (112)
Purchase of property and equipment (647) (623)
-------------- --------------
Net cash (used in) provided by investing activities (33,603) 22,240
-------------- --------------
Cash flows from financing activities:
Payment of term loan (2,917) (37)
Issuance of common stock 438 165
-------------- --------------
Net cash (used in) provided by financing activities (2,479) 128
-------------- --------------
Net (decrease) increase in cash and cash equivalents (13,483) 29,361
Cash and cash equivalents at beginning of period 75,220 18,967
-------------- --------------
Cash and cash equivalents at end of period $ 61,737 48,328
============== ==============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 2,291 2,572
============== ==============
Federal income taxes $ 750 540
============== ==============
Supplemental disclosure of noncash investing activities:
Due from broker on unsettled investment trades, net $ 19,382 10,165
============== ==============
See accompanying notes to the unaudited consolidated financial statements
6
FPIC INSURANCE GROUP, INC.
Condensed Notes to the Unaudited Consolidated Financial Statements
(In Thousands, Except per Common Share Data and Elsewhere as Noted)
1. Organization and Basis of Presentation
The accompanying unaudited consolidated financial statements include the
accounts of FPIC Insurance Group, Inc. (the "Company") consolidated with
the accounts of all its subsidiaries. Reference is made to the Company's
most recently filed Form 10-K, which includes information necessary or
useful to understanding the Company's businesses and financial statement
presentations. In particular, the Company's significant accounting policies
and practices are presented in Note 2 to the consolidated financial
statements included in that report. Financial information in this report
reflects adjustments, consisting only of normal recurring accruals, that
are, in the opinion of management, necessary for the fair presentation of
results for interim periods.
For a number of reasons, the Company's results for interim periods may not
be indicative of results to be expected for the year. For example, the
timing and magnitude of claim losses incurred by the Company's insurance
subsidiaries due to the estimation process inherent in determining the
liability for loss and loss adjustment expenses can be relatively more
significant to results of interim periods than to results for a full year.
In addition, variations in the amount and timing of realized investment
gains and losses could cause significant variations in periodic net
earnings as can the mix of taxable and non-taxable investment income.
Effective January 1, 2002, the Company adopted Financial Accounting
Standard No. ("FAS") 142, "Goodwill and Other Intangible Assets." FAS 142
addresses financial accounting and reporting for acquired goodwill and
other intangible assets and supersedes Accounting Principles Board ("APB")
Opinion No. 17, "Intangible Assets." The standard provides that goodwill
and other intangible assets with indefinite lives are no longer to be
amortized. These assets are to be reviewed for impairment annually, or more
frequently if impairment indicators are present. Separable intangible
assets that have finite lives will continue to be amortized over their
useful lives. During the quarter ended March 31, 2002, the Company
completed the transitional impairment analysis, which resulted in an
impairment charge of $29.6 million, net of an $18.8 million income tax
benefit. See Note 3 for additional discussion of the impact of FAS 142 on
the Company's financial position and results of operations.
2. Investments
Data with respect to debt and equity securities, available for sale, are
shown below.
As of As of
June 30, Dec 31,
2002 2001
--------------- -------------
Amortized cost of investments in debt
and equity securities $ 360,105 346,131
Six Months Ended
------------------------------
June 30, June 30,
2002 2001
--------------- -------------
Proceeds from sales and maturities $ 88,149 42,785
Gross realized gains 2,730 526
Gross realized losses (2,586) (906)
Realized investment gains and losses are recorded when investments are
sold, other-than-temporarily impaired or in certain situations, as required
by generally accepted accounting principles, when investments are
marked-to-market with the corresponding gain or loss included in earnings.
During the second quarter of 2002, the Company incurred net realized losses
on the write-down of
7
FPIC INSURANCE GROUP, INC.
Condensed Notes to the Unaudited Consolidated Financial Statements
(In Thousands, Except per Common Share Data and Elsewhere as Noted)
WorldCom bonds of approximately $1.1 million. In
addition, the Company incurred net realized losses on sales of WorldCom
bonds during the second quarter of 2002 of approximately $0.8 million.
3. Goodwill
The Company adopted FAS 142 effective January 1, 2002. In connection with
the adoption of FAS 142, the Company discontinued the amortization of
goodwill. The changes in the carrying amount of goodwill for the six months
ended June 30, 2002, are as follows:
Reciprocal Third Party
Insurance Management Administration Total
------------ --------------- ----------------- -----------
Balance as of December 31, 2001 $ 10,833 49,140 7,259 67,232
Impairment charge -- (41,103) (7,259) (48,362)
------------ --------------- ----------------- -----------
Balance as of June 30, 2002 $ 10,833 8,037 -- 18,870
============ =============== ================= ===========
In connection with its adoption of FAS 142, the Company engaged independent
valuation consultants to perform transitional impairment tests at each of
its operating segments: insurance, reciprocal management and third party
administration ("TPA"). These operating segments meet the reporting unit
requirements as defined by FAS 142.
The fair values for each of the reporting units were calculated using one
or more of the following approaches: (i) market multiple approach; (ii)
discounted cash flow ("DCF") approach; or (iii) asset approach.
o Under the market multiple approach, the values of the reporting units
were based on the market prices and performance fundamentals of similar
public companies.
o Under the DCF approach, the values of the reporting units were based on
the present value of the projected future cash flows to be generated.
o Under the asset approach, the value of a reporting unit is the
difference in the fair value of total assets and the fair value of
total liabilities. The fair value of each asset and liability may in
turn be estimated using an income, market approach or by using a cost
approach.
Based on the results of the impairment tests, goodwill was not deemed to be
impaired at the insurance segment, since the fair value of the reporting
unit exceeded its carrying value. Therefore, the second step of the
goodwill impairment test was not performed. However, the carrying values of
the reciprocal management and TPA segments exceeded their respective fair
values, indicating a potential impairment of goodwill. Under step 2 of the
test, the implied fair values of the reciprocal management and TPA goodwill
were compared to their carrying values to measure the amount of impairment
loss. As a result, a non-cash transitional impairment charge of $29.6
million (net of an income tax benefit of $18.8 million) was recognized and
recorded as a cumulative effect of accounting change in the accompanying
June 30, 2002 consolidated statements of income.
In management's opinion, the transitional impairment charge at the
reciprocal management segment primarily reflects certain intangibles and
synergies, which are opportunistic in nature, carry a relatively higher
degree of uncertainty, and therefore was treated conservatively in the
valuation required by FAS 142. The transitional impairment charge at the
TPA segment primarily reflects changes in market conditions and an increase
in competition in recent years in the markets served by the Company's TPA
segment.
8
FPIC INSURANCE GROUP, INC.
Condensed Notes to the Unaudited Consolidated Financial Statements
(In Thousands, Except per Common Share Data and Elsewhere as Noted)
The following table provides comparative disclosures of net income
excluding the cumulative effect of accounting change and goodwill
amortization, net of taxes, for the periods presented.
Three Months Ended Six Months Ended
------------------------------- -------------------------------
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
-------------- --------------- -------------- ---------------
Net income (loss):
-----------------
Net income (loss), as reported $ 2,609 1,862 (24,104) 3,156
Cumulative effect of accounting change -- -- 29,578 --
-------------- --------------- -------------- ---------------
Net income, adjusted 2,609 1,862 5,474 3,156
Goodwill amortization, net of tax -- 540 -- 1,079
-------------- --------------- -------------- ---------------
Net income, comparative $ 2,609 2,402 5,474 4,235
============== =============== ============== ===============
Basic earnings per share:
------------------------
Net income (loss), as reported $ 0.28 0.20 (2.57) 0.34
Cumulative effect of accounting change -- -- 3.15 --
-------------- --------------- -------------- ---------------
Net income, adjusted 0.28 0.20 0.58 0.34
Goodwill amortization, net of tax -- 0.06 -- 0.11
-------------- --------------- -------------- ---------------
Net income, comparative $ 0.28 0.26 0.58 0.45
============== =============== ============== ===============
Diluted earnings per share:
--------------------------
Net income (loss), as reported $ 0.27 0.20 (2.54) 0.33
Cumulative effect of accounting change -- -- 3.11 --
-------------- --------------- -------------- ---------------
Net income, adjusted 0.27 0.20 0.57 0.33
Goodwill amortization, net of tax -- 0.06 -- 0.11
-------------- --------------- -------------- ---------------
Net income, comparative $ 0.27 0.26 0.57 0.44
============== =============== ============== ===============
4. Intangible Assets
The following table provides a detail of the Company's intangible assets
and estimated amortization expense for the periods presented.
As of June 30, 2002 As of December 31, 2001
-------------------------------- --------------------------------
Gross Accumulated Gross Accumulated
Balance Amortization Balance Amortization
---------------- --------------- --------------- ----------------
Trade secrets $ 1,500 600 1,500 525
Non-compete agreements 500 286 500 250
Other 305 244 305 213
---------------- --------------- --------------- ----------------
Total $ 2,305 1,130 2,305 988
================ =============== =============== ================
Three Months Ended Six Months Ended
-------------------------------- --------------------------------
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
---------------- --------------- --------------- ----------------
Aggregate amortization expense $ 71 71 142 142
================ =============== =============== ================
Estimated amortization expense for the year ended:
--------------------------------------------------
12/31/2002 $ 282
12/31/2003 252
12/31/2004 221
12/31/2005 186
12/31/2006 150
9
FPIC INSURANCE GROUP, INC.
Condensed Notes to the Unaudited Consolidated Financial Statements
(In Thousands, Except per Common Share Data and Elsewhere as Noted)
5. Revolving Credit Facility and Term Loan
On August 31, 2001, the Company entered into a Revolving Credit and Term
Loan Agreement (the "credit facility") with five financial institutions.
The initial aggregate principal amount of the credit facility was $55.0
million, including (i) a $37.5 million revolving credit facility, which
matures on August 31, 2004, and (ii) a $17.5 million term loan facility,
repayable in twelve equal quarterly installments of approximately $1.5
million, which commenced December 31, 2001.
Amounts outstanding under the credit facility bear interest at a variable
rate, primarily based upon LIBOR plus a margin of 2.50 percentage points,
which may be reduced to a minimum of 2.00 percentage points as the Company
reduces its outstanding indebtedness. As of June 30, 2002 and December 31,
2001, the interest rates on the credit facility were 4.36% and 4.16%,
respectively.
The Company is not required to maintain compensating balances in connection
with these credit facilities, but is charged a fee on the unused portion,
which ranges from 30 to 40 basis points. Under the terms of the credit
facility, the Company is required to meet certain financial covenants.
Significant covenants are as follows: a) total debt to cash flow available
for debt service may not exceed 3:50:1; b) combined net premiums written to
combined statutory capital and surplus may not exceed 2.00:1; c) the fixed
charge coverage ratio may not be less than 2.00:1 at the end of each
quarter through December 31, 2002, and thereafter the fixed charge coverage
ratio may not be less than 2:25:1; and d) funded debt to total capital plus
funded debt may not exceed 0.27:1. The credit facility also contains
minimum equity and risk-based capital requirements and requires the
Company's insurance subsidiaries to maintain at least an A- (Excellent)
group rating from A.M. Best.
6. Derivative Financial Instruments
In connection with the Company's credit facility entered into on August 31,
2001, the Company also entered into two interest rate swap agreements (the
"swap agreements"). The Company uses the swap agreements to minimize
fluctuations in cash flows caused by interest rate volatility and to
effectively convert all of its floating-rate debt to fixed-rate debt. Such
agreements involve the exchange of fixed and floating interest rate
payments over the life of the agreement without the exchange of the
underlying principal amounts. Accordingly, the impact of fluctuations in
interest rates on these swap agreements is offset by the opposite impact on
the related debt. Amounts to be paid or received under the swap agreements
are recognized as increases or reductions in interest expense in the
periods in which they accrue. The swap agreements are only entered into
with creditworthy counterparties.
The swap agreements in effect as of June 30, 2002 are as follows:
Notional Receive Pay
Amount Maturities Rate (1) Rate
------------ -------------- ------------ ------------
$ 37,000 08/31/2004 1.86% 6.45%
$ 13,125 08/31/2004 1.86% 5.97%
(1) Based on three-month LIBOR
10
FPIC INSURANCE GROUP, INC.
Condensed Notes to the Unaudited Consolidated Financial Statements
(In Thousands, Except per Common Share Data and Elsewhere as Noted)
7. Reconciliation of Basic and Diluted Earnings Per Common Share
Data with respect to the Company's basic and diluted earnings per common
share are shown below.
Three Months Ended Six Months Ended
------------------------------ ------------------------------
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
--------------- -------------- --------------- --------------
Net income (loss):
------------------
Income before cumulative effect of
accounting change $ 2,609 1,862 5,474 3,156
Cumulative effect of accounting change -- -- (29,578) --
--------------- -------------- --------------- --------------
Net income (loss) $ 2,609 1,862 (24,104) 3,156
=============== ============== =============== ==============
Basic weighted average shares outstanding 9,390 9,401 9,382 9,397
Common stock equivalents 126 57 125 50
--------------- -------------- --------------- --------------
Diluted weighted average shares outstanding 9,516 9,458 9,507 9,447
=============== ============== =============== ==============
Basic earnings per share:
-------------------------
Income before cumulative effect of
accounting change $ 0.28 0.20 0.58 0.34
Cumulative effect of accounting change -- -- (3.15) --
--------------- -------------- --------------- --------------
Net income (loss) $ 0.28 0.20 (2.57) 0.34
=============== ============== =============== ==============
Diluted earnings per share:
---------------------------
Income before cumulative effect of
accounting change $ 0.27 0.20 $ 0.57 0.33
Cumulative effect of accounting change -- -- (3.11) --
--------------- -------------- --------------- --------------
Net income (loss) $ 0.27 0.20 $ (2.54) 0.33
=============== ============== =============== ==============
8. Segment Information
The business segments presented in this document have been determined in
accordance with the provisions of FAS 131, "Disclosures about Segments of
an Enterprise and Related Information." The Company has three main
operating segments as follows: insurance, reciprocal management and TPA.
Holding company operations are included within the insurance segment due to
the segment's size and prominence and the substantial attention devoted to
the segment.
Through its four insurance subsidiaries, the Company specializes in
professional liability insurance products and services for physicians,
dentists, other healthcare providers and attorneys. The Company provides
reciprocal management services, brokerage and administration services for
reinsurance programs and brokerage services for the placement of annuities
in structured settlements. In addition, the Company provides TPA services
through its subsidiary that markets and administers self-insured plans for
both large and small employers, including group accident and health
insurance, workers' compensation and general liability and property
insurance. The Company evaluates a segment's performance based on net
income and accounts for intersegment sales and transfers as if the sales or
transfers were to a third party. All segments are managed separately as
each segment's business is different and distinct. Consolidating
information by each segment is summarized in the tables below.
As of As of
Identifiable Assets June 30, 2002 Dec 31, 2001
--------------------------------------- --------------- --------------
Insurance $ 785,846 706,290
Reciprocal management 39,343 61,468
Third party administration 7,670 14,788
Intersegment eliminations (6,311) (11,724)
--------------- --------------
Total assets $ 826,548 770,822
=============== ==============
11
FPIC INSURANCE GROUP, INC.
Condensed Notes to the Unaudited Consolidated Financial Statements
(In Thousands, Except per Common Share Data and Elsewhere as Noted)
Three Months Ended Six Months Ended
------------------------------ ------------------------------
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
--------------- -------------- -------------- ---------------
Total Revenues
--------------------------------------
Insurance $ 54,006 40,671 99,385 79,055
Reciprocal management 6,794 6,355 12,420 11,463
Third party administration 3,586 3,781 7,051 7,779
Intersegment eliminations (1,634) (1,433) (2,681) (2,672)
--------------- -------------- -------------- ---------------
Total revenues $ 62,752 49,374 116,175 95,625
=============== ============== ============== ===============
Net Income (Loss)
--------------------------------------
Insurance $ 1,581 804 3,807 1,784
Reciprocal management 1,068 1,185 (22,554) 1,429
Third party administration (40) (127) (5,357) (57)
--------------- -------------- -------------- ---------------
Net income (loss) $ 2,609 1,862 (24,104) 3,156
=============== ============== ============== ===============
9. Commitments and Contingencies
The Company's insurance subsidiaries from time to time become subject to
claims for extra-contractual obligations or risks in excess of policy
limits in connection with their insurance claims. These claims are
sometimes referred to as "bad faith" actions as it is alleged that the
insurance company acted in bad faith in the administration of a claim
against an insured. Bad faith actions are infrequent and generally occur in
instances where a jury verdict exceeds the insured's policy limits. Under
such circumstances, it is routinely alleged that the insurance company
failed to negotiate a settlement of a claim in good faith within the
insured's policy limit. The Company has evaluated such exposures as of June
30, 2002, and in all such cases, believes its position and defenses are
meritorious, and that when all facts and circumstances are considered,
including its own insurance coverage against such risks, its potential
exposure to material losses from such exposures is immaterial. However,
there can be no absolute assurance as to the outcome of such exposures. In
addition, multiple claims for extra contractual obligations in a single
year could result in potential exposures materially in excess of insurance
coverage or in increased costs of insurance coverage.
The Company may also become involved in legal actions not involving claims
under its insurance policies from time to time. The Company's management is
not currently aware of any such actions that, in their opinion, will have a
material adverse effect on the Company's financial position or results of
operations.
The Company is nearing completion of the examination of its 1998 and 1999
federal income tax returns by the Internal Revenue Service and in
connection therewith, established a $1.0 million reserve in the second
quarter of 2002 for potential tax contingencies. Management believes that
its positions are meritorious on these and other potential issues raised in
the examination and that the accrual made is appropriate; however, there
can be no assurance that the Company will ultimately prevail on such
matters.
10. Related Party Transactions
On July 1, 1998, First Professionals Insurance Company, Inc. ("First
Professionals") began assuming reinsurance from Physicians' Reciprocal
Insurers ("PRI"), a writer of medical malpractice insurance in the state of
New York. PRI is managed by it's attorney-in-fact, Administrators for the
Physicians, Inc. ("AFP"), which effective January 1, 1999 was acquired by
and became a wholly owned subsidiary of the Company. Under one contract,
which reinsures PRI for policies with limits of $1.0 million in excess of
$1.0 million, First Professionals assumes losses only and pays PRI a ceding
commission on the premium assumed. This contract has been renewed annually.
Under another
12
FPIC INSURANCE GROUP, INC.
Condensed Notes to the Unaudited Consolidated Financial Statements
(In Thousands, Except per Common Share Data and Elsewhere as Noted)
contract, which First Professionals and PRI ceased to renew after December
31, 2000, First Professionals reinsured PRI for losses of $0.25 million in
excess of $0.5 million on each claim. During the first six months of 2002
and the years ending December 31, 2001 and 2000, the Company assumed
written premiums of approximately $0, $11.3 million and $16.3 million,
respectively. The Company earned approximately $4.6 million, $16.9 million
and $16.7 million, during the first six months of 2002 and the years ending
December 31, 2001 and 2000, respectively, under these contracts. The
Company incurred ceding commissions of approximately $1.1 million, $2.5
million and $3.7 million during the first six months of 2002 and the years
ending December 31, 2001 and 2000, respectively. The net premium written
under these agreements was reduced during the fourth quarter of 2000 due to
the accrual of charges for experience adjustments. The accrual represents
an estimate of the amount of premium the Company will return in future
years. The Company has incurred losses and loss adjustment expenses related
to these reinsurance agreements with PRI of approximately $1.8 million,
$8.1 million and $12.6 million for the first six months of 2002, and the
years ending December 31, 2001 and 2000, respectively. Premiums on these
contracts are paid by PRI on a quarterly basis. As of June 30, 2002 and
December 31, 2001 and 2000, the amount due from PRI under these contracts
was approximately $0.3 million, $2.4 million and $1.1 million,
respectively.
The excess of loss reinsurance treaty and annual agreements between First
Professionals and PRI related to losses of $0.25 million in excess of $0.5
million contained clauses under which PRI has the option to commute the
agreement. During the first quarter of 2002, the 2000 treaty was commuted.
The commutation eliminated all of First Professionals' present and future
liabilities under the treaty to $0, while First Professionals returned all
but a minimum contract premium to PRI. As a result of this commutation,
First Professionals reported approximately $9.3 million of paid losses and
loss adjustment expenses with a corresponding reduction in reserves. There
was no net income effect from this commutation, due to the prior accrual of
charges in the fourth quarter of 2000.
On July 1, 1998, First Professionals and APAC also entered into a quota
share reinsurance agreement whereby these two subsidiaries cede a 25% quota
share portion of all business written by them related to anesthesiologists
and certain related specialties to APAL. These agreements were entered into
in connection with and at the time of the Company's acquisition of APAC.
During the first six months of 2002 and the years ending December 31, 2001
and 2000, the Company ceded premiums of approximately $5.1 million, $4.6
million and $3.4 million, respectively and received ceding commissions of
approximately $1.1 million, $0.9 million and $0.7 million, respectively.
In accordance with a management agreement, AFP performs underwriting,
administrative and investment functions on PRI's behalf for which it
receives compensation. Compensation under the agreement is equal to 13% of
PRI's direct premiums written, with an adjustment for expected return
premiums, plus or minus 10% of PRI's statutory net income or loss.
Accordingly, the Company's revenues and results of operations are
financially sensitive to the revenues and results of operations of PRI. In
addition PRI, as an MPL insurer, is subject to many of the same types of
risks as those of the Company's insurance subsidiaries. Claims
administration and management fees earned by AFP based on 13% of PRI's
direct written premiums were $9.7 million, $23.0 million and $17.0 million
for the first six months of 2002 and the years ending December 31, 2001 and
2000, respectively. The income received by AFP related to PRI's statutory
net income was $0, $0.3 million and $1.6 million for the first six months
of 2002 and the years ending December 31, 2001 and 2000, respectively. The
provisions of New York law addressing the sharing of net income or net loss
contain certain ambiguities and interpretation issues. In considering such
matters, PRI, AFP and the New York Department of Insurance have entered
into discussions regarding the removal from the management agreement of
this sharing by AFP of net income or net loss effective in 2002.
13
FPIC INSURANCE GROUP, INC.
Condensed Notes to the Unaudited Consolidated Financial Statements
(In Thousands, Except per Common Share Data and Elsewhere as Noted)
The management agreement also provides that AFP is to be reimbursed by PRI
for certain expenses paid by AFP on PRI's behalf. The expenses reimbursed
by PRI consist principally of the salaries and related payroll and overhead
costs of AFP's claims, legal, and risk management course personnel who work
on PRI's behalf. These directly reimbursed expenses amounted to $6.2
million, $11.5 million and $10.6 million for the first six months of 2002
and the years ending December 31, 2001 and 2000, respectively, and are not
reported in the accompanying consolidated financial statements. The
management agreement was reviewed and approved by the New York Insurance
Department and is effective January 1, 1999 through December 31, 2008.
11. Subsequent Events
The Company's largest insurance subsidiary, First Professionals, entered
into a finite reinsurance agreement with Hannover Re, effective July 1,
2002, for the primary purpose of adding to its financial capacity to write
business in 2002 and 2003 by providing relief from the strain on its
statutory surplus that occurs as a result of the significant growth being
experienced. By ceding a portion of its risks to Hannover Re, First
Professionals is able to reduce its financial leverage and realize
immediate reimbursement for its related up-front acquisition costs, thus
adding to its financial capacity. The ultimate cost to First Professionals
of such reinsurance is reduced by placing a cap on the amount of exposure
being assumed by Hannover Re. In addition, First Professionals has the
option to commute the agreement should the business perform such that the
underlying protection proves to be unnecessary, in which case the
reinsurance would cease, the underlying reinsurance assets and liabilities
would unwind, and any net funds under the agreement, less a 4.2% risk
charge to Hannover Re, would be retained by First Professionals.
Under the terms of the Hannover Re agreement, First Professionals will cede
approximately $48.5 million of its unearned premiums as of June 30, 2002,
and fifty percent of its direct written premiums, net of other reinsurance,
during the last six months of 2002 and the first six months of 2003.
12. New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued FAS
143, "Accounting for Asset Retirement Obligations." FAS 143 addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset
retirement costs. Although earlier application is encouraged, FAS 143 is
effective for financial statements issued for fiscal years beginning after
June 15, 2002. The Company believes the adoption of FAS 143 will not have a
significant impact on its consolidated financial statements.
In August 2001, the FASB issued FAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." FAS 144 supersedes FAS 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," and the accounting and reporting provisions of APB Opinion
No. 30, "Reporting the Results of Operations -- Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions." FAS 144 also amends
Accounting Research Bulletins No. 51, "Consolidated Financial Statements,"
to eliminate the exception to consolidation for a subsidiary for which
control is likely to be temporary. The Company believes the adoption of FAS
144 will not have a significant impact on its consolidated financial
statements.
In May 2001, the FASB issued FAS 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FAS 13, and Technical Corrections as of April
2002." FAS 145 rescinds FAS 4, "Reporting Gains and Losses from
Extinguishment of Debt," and an amendment of that Statement, FAS 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." FAS
145 also
14
FPIC INSURANCE GROUP, INC.
Condensed Notes to the Unaudited Consolidated Financial Statements
(In Thousands, Except per Common Share Data and Elsewhere as Noted)
rescinds FAS 44, "Accounting for Intangible Assets of Motor Carriers" and
amends FAS 13, "Accounting for Leases," to eliminate an inconsistency
between the required accounting for sale-leaseback transactions and the
required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. The Company
believes the adoption of FAS 145 will not have a significant impact on its
consolidated financial statements.
In June 2002, the FASB issued FAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities." FAS 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The
Company believes the adoption of FAS 146 will not have a significant impact
on its consolidated financial statements.
13. Reclassification
Certain amounts for 2001 have been reclassified to conform to the 2002
presentation.
15
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
For purposes of this management discussion and analysis, the term "Company"
refers to FPIC Insurance Group, Inc. and its subsidiaries. The following
discussion and analysis of financial condition, results of operations, liquidity
and capital resources and other matters should be read in conjunction with the
accompanying unaudited consolidated financial statements for the three months
and six months ended June 30, 2002 and 2001, included in Part I, Item 1, as well
as the audited, consolidated financial statements and notes included in the
Company's Form 10-K for the year ended December 31, 2001, which was filed with
the Securities and Exchange Commission on March 27, 2002.
Safe Harbor Disclosure
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Any written or oral statements made by or on
behalf of the Company may include forward-looking statements, which reflect the
Company's current views with respect to future events and financial performance.
These forward-looking statements are subject to certain uncertainties and other
factors that could cause actual results to differ materially from such
statements. These uncertainties and other factors include, but are not limited
to, (i) uncertainties relating to government and regulatory policies (such as
subjecting the Company to insurance regulation or taxation in additional
jurisdictions or amending, revoking or enacting any laws, regulations or
treaties affecting the Company's current operations), (ii) the occurrence of
insured or reinsured events with a frequency or severity exceeding the Company's
estimates, (iii) legal developments, including claims for extra-contractual
obligations or in excess of policy limits in connection with the administration
of insurance claims, (iv) the uncertainties of the loss reserving process, (v)
the actual amount of new and renewal business and market acceptance of expansion
plans, (vi) the loss of the services of any of the Company's executive officers,
(vii) changing rates of inflation and other economic conditions, (viii) the
ability to collect reinsurance recoverables, (ix) the competitive environment in
which the Company operates, related trends and associated pricing pressures and
developments, (x) the impact of mergers and acquisitions, including the ability
to successfully integrate acquired businesses and achieve cost savings,
competing demands for the Company's capital and the risk of undisclosed
liabilities, (xi) developments in global financial markets that could affect the
Company's investment portfolio and financing plans, (xii) risk factors
associated with financing and refinancing, including the willingness of credit
institutions to provide financing and the availability of credit generally,
(xiii) developments in reinsurance markets that could affect the Company's
reinsurance program; and (xiv) changes in the Company's financial ratings
resulting from one or more of these uncertainties and other factors.
The words "believe," "anticipate," "foresee," "estimate," "project," "plan,"
"expect," "intend," "hope," "should," "will," "will likely result" or "will
continue" and variations thereof or similar expressions identify forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of their dates. The Company
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
Critical Accounting Policies
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires management to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues, expenses, and related disclosures of
contingent assets and liabilities. On an on-going basis, management evaluates
its estimates, including those related to income taxes, loss and loss adjustment
expense ("LAE") reserves, contingencies and litigation. The Company bases its
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the
16
carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
A discussion of the critical accounting policies believed by the Company to
affect its more significant judgments and estimates used in preparation of the
Company's consolidated financial statements is included in Company's Form 10-K
for the year ended December 31, 2001, which was filed with the Securities and
Exchange Commission on March 27, 2002. In some cases, the estimates included in
the Company's financial statements for interim periods are determined using
abbreviated methods or updates, which are less comprehensive that those used in
preparation of its annual financial statements.
The following accounting policy has changed with the Company's adoption of
Financial Accounting Standard No. ("FAS") 142, "Goodwill and Other Intangible
Assets."
Goodwill and Intangible Assets.
The Company has made acquisitions in the past that included a significant amount
of goodwill and other intangible assets. Under generally accepted accounting
principles in effect through December 31, 2001, these assets were amortized over
their estimated useful lives, and were tested periodically to determine if they
were recoverable from operating earnings on an undiscounted basis over their
useful lives.
Effective January 1, 2002, the Company adopted FAS 142. In accordance with FAS
142, goodwill and indefinite lived intangible assets will no longer be amortized
but will be subject to an annual (or under certain circumstances more frequent)
impairment test based on its estimated fair value. Other intangible assets that
meet certain criteria will continue to be amortized over their useful lives and
will also be subject to an impairment test based on estimated fair value. There
are many assumptions and estimates underlying the determination of an impairment
loss. Another estimate using different, but still reasonable, assumptions could
produce a significantly different result. Therefore, additional impairment
losses could be recorded in the future.
The Company completed the transitional impairment analysis required by FAS 142
during the first quarter 2002 and recorded an impairment charge of $29.6
million, net of an $18.8 million income tax benefit. See Notes 1 and 3 to the
unaudited consolidated financial statements, which appear in Part I, Item 1,
preceding, for a discussion of the new accounting policy for goodwill and
intangible assets. Had the new standard been in effect in 2001, net income and
basic and diluted earnings per share for the six months ended June 30, 2001
would have increased $1.1 million and $0.11, respectively, as a result of the
elimination of goodwill amortization.
Selected Balance Sheet Items: June 30, 2002 Compared to December 31, 2001
Premiums receivable increased $32.3 million to $105.7 million as of June 30,
2002 from $73.4 million as of December 31, 2001. The increase in premiums
receivable is associated with growth in premiums written as a result of price
improvements on the Company's core medical professional liability ("MPL")
insurance business and growth in the number of MPL policyholders. The
substantial growth in premiums written, premiums earned, and related accounts
and items in both the consolidated balance sheets and statements of income and
cash flow statements are primarily the result of rising prices and hardening
market conditions in the Company's core MPL markets in Florida and Missouri.
Due from reinsurers on unpaid losses and advance premiums increased $23.5
million to $103.9 million as of June 30, 2002 from $80.4 million as of December
31, 2001. Ceded unearned premiums increased $13.0 million to $53.8 million as of
June 30, 2002 from $40.8 million as of December 31, 2001. The increases in these
assets are the result of the increase in the underlying reserves and unearned
premiums ceded to other insurance carriers under reinsurance arrangements
associated with growth in premiums written and earned on the Company's core MPL
insurance business. The Company's newest reinsurance
17
agreement with the Hannover Re group of companies became effective July 1, 2002;
and, therefore, is not yet reflected in the accompanying consolidated financial
statements for the six months ended June 30, 2002. In addition, the Hannover Re
agreement will supplement and not replace any of the Company's existing
reinsurance programs.
Deferred income taxes increased $19.3 million to $39.2 million as of June 30,
2002 from $19.9 million as of December 31, 2001. The increase in deferred income
taxes is primarily due to the Company's adoption of FAS 142. As a result of the
transitional impairment tests required by FAS 142, the Company recognized a
one-time, non-cash after-tax charge of $29.6 million and appropriately recorded
deferred tax assets for tax-deductible goodwill, in the amount of $18.8 million.
Goodwill decreased $48.4 million to $18.8 million as of June 30, 2002 from $67.2
million as of December 31, 2001. The decrease in goodwill is due to the adoption
of FAS 142. As a result of the transitional impairment tests required by FAS
142, the Company reduced the carrying value of goodwill at its reciprocal
management and TPA segments. In management's opinion, the transitional
impairment charge at the reciprocal management segment primarily reflects
certain intangibles and synergies, which are opportunistic in nature, carry a
relatively higher degree of uncertainty, and therefore was treated
conservatively in the valuation required by FAS 142. The transitional impairment
charge at the TPA segment primarily reflects changes in market conditions and an
increase in competition in recent years in the markets served by the Company's
TPA segment.
Federal income tax receivable decreased $5.6 million to a payable of $0.3
million as of June 30, 2002 from a receivable of $5.3 million as of December 31,
2001. The federal income tax payable is primarily attributable to the
recognition of tax expense related to current year earnings offset by a federal
tax refund related to the overpayment of estimated taxes in 2001. In addition,
the Company is nearing completion of the examination of its 1998 and 1999
federal income tax returns by the Internal Revenue Service and in connection
therewith, established a $1.0 million reserve in the second quarter of 2002 for
potential tax contingencies. Management believes that its positions are
meritorious on these and other potential issues raised in the examination and
that the accrual made is appropriate; however, there can be no assurance that
the Company will ultimately prevail on such matters.
Other assets increased $21.0 million to $34.2 million as of June 30, 2002 from
$13.2 million as of December 31, 2001. The increase in other assets is primarily
due to the sale of investments for which the proceeds from sale had not been
received at June 30, 2002 and a receivable from the broker was recorded. The
increase in other assets was partially offset by the receipt of a state tax
refund due to the overpayment of estimated taxes in 2001.
The liability for loss and LAE increased $37.7 million to $356.2 million as of
June 30, 2002 from $318.5 million as of December 31, 2001. Excluding the effect
of the return of loss and LAE reserves of approximately $9.3 million, on
business previously assumed under one of the First Professionals' reinsurance
contracts with Physicians' Reciprocal Insurers ("PRI"), which was commuted in
the first quarter of 2002, the increase in the Company's liability for loss and
LAE for the first six months of 2002 was approximately $47.0 million. The
increase in the liability for loss and LAE is primarily attributable to
increases in premiums earned on the Company's core MPL business and the
establishment of reserves for this book of business, taking into consideration
expected loss trends and other pertinent considerations.
The liability for losses and LAE represents management's best estimate of the
ultimate cost of all losses incurred but unpaid and considers historical loss
experience, expected loss trends, the Company's loss retention levels and trends
in the frequency and severity of claims. The process of establishing reserves
for property and casualty claims is a complex and uncertain process, requiring
significant reliance upon
18
estimates. The Company's estimates are revised as additional experience and
other data become available and are reviewed periodically or as other
significant events occur that may affect reserves. Any such revisions could
result in future changes in the estimates of losses or reinsurance recoverables
and would be reflected in the Company's results of operations when the change
occurs.
For the purposes of setting aside reserves on risks insured during the current
period, for which very little experience is present, a forecasted loss ratio is
determined that is applied to earned premiums during the period. This forecasted
loss ratio is judgmentally determined taking into account the results of the
most recent actuarial study performed, current pricing and underwriting, and
expected loss and LAE trends and other pertinent considerations. In addition,
management monitors and analyzes key loss and LAE indicators and trends
throughout the year, including but not limited to paid losses, newly reported
claims and incidents, closed claim activity, and other metrics in order to
assess the reasonableness of its loss reserve estimates and the forecasted loss
and LAE ratio being applied during the current period.
Unearned premiums increased $39.4 million to $186.2 million as of June 30, 2002
from $146.8 million as of December 31, 2001. The increase in unearned premiums
is the result of the growth in premiums written at the Company's insurance
subsidiaries.
Reinsurance payable decreased $2.6 million to $24.1 million as of June 30, 2002
from $26.7 million as of December 31, 2001. The decrease in reinsurance payable
is due to the payment of premiums due under the Company's primary reinsurance
agreement. This decrease was partially offset by an increase in premiums written
under a fronting arrangement for workers' compensation business.
Premiums paid in advance and unprocessed premiums decreased $1.3 million to $8.6
million as of June 30, 2002 from $9.9 million as of December 31, 2001. The
decrease in paid in advance and unprocessed premiums reflects the policy renewal
cycle whereby policies are generally renewed with an effective date of January 1
or July 1 of each year, with a majority of the policies being renewed on January
1.
Accrued expenses and other liabilities increased $8.7 million to $40.0 million
as of June 30, 2002 from $31.3 million as of December 31, 2001. The increase in
accrued expenses and other liabilities is primarily attributable to the receipt
of funds by the Company's reciprocal management segment for brokerage services
that are payable to other insurance carriers. In addition, the Company
recognized commissions payable associated with fronting arrangements with other
insurance carriers.
Results of Operations: Three Months and Six Months Ended June 30, 2002
Compared to Three Months and Six Months Ended June 30, 2001
Total revenues for the second quarter 2002 increased 27% to $62.8 million from
$49.4 million for the second quarter 2001. Total revenues for the six months
ended June 30, 2002 increased 22% to $116.2 million from $95.6 million for the
six months ended June 30, 2001. The increase in revenues was primarily the
result of price improvements on the Company's core MPL business and growth in
the number of policyholders in Florida and Missouri. Net premiums earned on the
Company's professional liability business increased 83% to $44.0 million for the
three months ended June 30, 2002 from $24.1 million for the three months ended
June 30, 2001. Net premiums earned on the Company's professional liability
business increased 77% to $80.1 million for the six months ended June 30, 2002
from $45.2 million for the six months ended June 30, 2001. The differences
between these increases and the increases in total net premiums earned are
attributable to declines in group accident and health ("A&H") and assumed
reinsurance premiums earned. The Company also had an increase in revenues earned
by the Company's reciprocal management segment primarily as a result of an
increase in management fees associated with growth in premiums written at PRI
and an increase in brokerage commissions earned by FPIC Intermediaries, Inc.
19
Total expenses for the second quarter 2002 increased 21% to $57.3 million from
$47.5 million for the second quarter 2001. Total expenses for the six months
ended June 30, 2002 increased 16% to $106.6 million from $92.1 million for the
six months ended June 30, 2001. Net losses and LAE incurred for the three months
and six months ended June 30, 2002 increased $8.6 million or 26% and $12.4
million or 20%, respectively when compared with the three months and six months
ended June 30, 2001. Net losses and LAE on the Company's professional liability
business increased 62% to $39.5 million for the three months ended June 30, 2002
from $24.4 million for the three months ended June 30, 2001. Net losses and LAE
on the Company's professional liability business increased 56% to $71.9 million
for the six months ended June 30, 2002 from $46.0 million for the six months
ended June 30, 2001. The differences between these increases and the increases
in total net losses and LAE are attributable to declines in A&H and assumed
reinsurance losses and LAE. The increase in net losses and LAE incurred reflects
growth in business, taking into consideration expected loss trends. Other
underwriting expenses also contributed to the increase in total expenses,
primarily as a result of an increase in expenses related to the growth in
insurance business. These increases were partially offset by the decline in
other expenses due to the Company's adoption of FAS No. 142. In accordance with
FAS 142, the Company ceased the amortization of goodwill and indefinite lived
intangible assets during the first quarter 2002. The adoption of FAS 142
eliminated amortization expense of approximately $1.1 million after-tax for the
six months ended June 30, 2002.
The Company reported net income of $2.6 million, or $0.27 per diluted share, for
the second quarter of 2002, an increase of $0.7 million or $0.07 per diluted
share, when compared with net income of $1.9 million, or $0.20 per diluted share
for the second quarter 2001. The Company incurred a net loss of $24.1 million,
or $2.54 per diluted share, for the six months ended June 30, 2002 compared with
net income of $3.2 million, or $0.33 per diluted share for the first half of
2001. During the first quarter 2002, the adoption of FAS 142 resulted in a
one-time, non-cash charge that reduced the carrying value of the Company's
goodwill by $48.4 million. The goodwill impairments resulting from the adoption
of FAS 142 were associated entirely with goodwill at the Company's non-insurance
segments. Income before cumulative effect of accounting change was $5.5 million,
or $0.58 per diluted share for the six months ended June 30, 2002, an increase
of $2.3 million, or $0.25 per diluted share, when compared with net income of
$3.2 million, or $0.33 per diluted share for the first half of 2001.
The following segment disclosures contain additional discussion of fluctuations
in income statement line items.
Insurance Segment
The Company's insurance segment is made up of its four insurance subsidiaries,
First Professionals Insurance Company, Inc. ("First Professionals"),
Anesthesiologists Professional Assurance Company ("APAC") and The Tenere Group,
Inc. ("Tenere") companies of Intermed Insurance Company and Interlex Insurance
Company. Holding company operations are included within the insurance segment
due to the segment's size and prominence and the substantial attention devoted
to the segment.
20
Unaudited financial data for the Company's insurance segment for the three
months and six months ended June 30, 2002 and 2001 are summarized in the table
below. Dollar amounts are in thousands.
Three Months Ended Six Months Ended
------------------------------------------ ---------------------------------------
June 30, Percentage June 30, June 30, Percentage June 30,
2002 Change 2001 2002 Change 2001
------------------------------------------ ---------------------------------------
Direct and assumed premiums written $ 90,426 93% $ 46,942 $ 179,684 76% $ 102,115
============== ============== =============== ==========
Net premiums written $ 57,164 95% $ 29,318 $ 113,359 74% $ 65,216
============== ============== =============== ==========
Net premiums earned $ 47,560 37% $ 34,802 $ 86,902 31% $ 66,319
Net investment income 5,754 0% 5,726 10,597 -14% 12,263
Commission income 4 -50% 8 7 -65% 20
Net realized investment (losses) gains (324) -14% (285) 144 138% (380)
Finance charges and other income 225 20% 187 422 15% 367
Intersegment revenues 787 238% 233 1,313 182% 466
-------------- -------------- --------------- ----------
Total revenues 54,006 33% 40,671 99,385 26% 79,055
-------------- -------------- --------------- ----------
Net losses and LAE 41,358 26% 32,732 75,183 20% 62,741
Other underwriting expense 6,780 36% 4,985 13,471 36% 9,909
Interest expense 1,254 6% 1,186 2,470 6% 2,339
Other expenses 71 -71% 245 142 -71% 491
Intersegment expenses 847 -29% 1,201 1,318 -40% 2,206
-------------- -------------- --------------- ----------
Total expenses 50,310 25% 40,349 92,584 19% 77,686
-------------- -------------- --------------- ----------
Income from operations before taxes and
cumulative effect of accounting change 3,696 1048% 322 6,801 397% 1,369
Less: Income taxes 2,115 539% (482) 2,994 821% (415)
-------------- -------------- --------------- ----------
Income before cumulative effect of accounting
change 1,581 97% 804 3,807 113% 1,784
-------------- -------------- --------------- ----------
Less: Cumulative effect of accounting
change -- 0% -- -- 0% --
-------------- -------------- --------------- ----------
Net income $ 1,581 97% $ 804 $ 3,807 113% $ 1,784
============== ============== =============== ==========
Direct and assumed premiums written increased 93% to $90.4 million for the three
months ended June 30, 2002 from $46.9 million for the three months ended June
30, 2001. Direct and assumed premiums written increased 76% to $179.7 million
for the six months ended June 30, 2002 from $102.1 million for the six months
ended June 30, 2001. Direct and assumed premiums written have increased
primarily as a result of an increase in direct premiums written on the Company's
core MPL business. The increase in direct premiums written is due to the effects
of rate increases realized by the Company's insurance subsidiaries and growth in
the number of policyholders. First Professionals implemented rate increases in
January and December 2001; APAC implemented rate increases in July 2001 and
2002; and Intermed implemented rate increases in November 2001 and July 2002. In
addition, the Company experienced growth in direct premiums written under
fronting arrangements for workers' compensation business. The growth in direct
premiums written was partially offset by a decline of $6.7 million in direct and
assumed premiums written under group A&H programs for the six months ended June
30, 2002, which were discontinued in 2001.
Net premiums written increased 95% to $57.2 million for the three months ended
June 30, 2002 from $29.3 million for the three months ended June 30, 2001. Net
premiums written increased 74% to $113.4 million for the six months ended June
30, 2002 from $65.2 million for the six months ended June 30, 2001. The increase
in net premiums written is due to growth in direct premiums written associated
with rate increases at the Company's insurance subsidiaries and an increase in
the number of policyholders, as noted above. The growth in direct professional
liability premiums written was offset by a decline in group A&H and assumed
professional liability premiums written.
Net premiums earned increased 37% to $47.6 million for the three months ended
June 30, 2002 from $34.8 million for the three months ended June 30, 2001. Net
premiums earned increased 31% to $86.9
21
million for the six months ended June 30, 2002 from $66.3 million for the six
months ended June 30, 2001. The increase in net premiums earned is due to rate
increases implemented by the Company's insurance subsidiaries and growth in the
number of policyholders. Net premiums earned on the Company's professional
liability business increased 83% to $44.0 million for the three months ended
June 30, 2002 from $24.1 million for the three months ended June 30, 2001. Net
premiums earned on the Company's professional liability business increased 77%
to $80.1 million for the six months ended June 30, 2002 from $45.2 million for
the six months ended June 30, 2001. The differences between these increases and
the increases in total net premiums earned are attributable to declines in group
A&H and assumed reinsurance premiums earned. In addition, the increase in net
premiums earned is less than the increase in premiums written for the same
period primarily due to the inherent lag between written and earned premiums.
Direct premiums written include premiums written under fronting agreements for
which a relatively small portion of business is retained and therefore, only a
small portion of premium is ultimately earned.
The Company's largest insurance subsidiary, First Professionals, entered into a
finite reinsurance agreement with Hannover Re, effective July 1, 2002, for the
primary purpose of adding to its financial capacity to write business in 2002
and 2003 by providing relief from the strain on its statutory surplus that
occurs as a result of the significant growth being experienced. By ceding a
portion of its risks to Hannover Re, First Professionals is able to reduce its
financial leverage and realize immediate reimbursement for its related up-front
acquisition costs, thus adding to its financial capacity. The ultimate cost to
First Professionals of such reinsurance is reduced by placing a cap on the
amount of exposure being assumed by Hannover Re. In addition, First
Professionals has the option to commute the agreement should the business
perform such that the underlying protection proves to be unnecessary, in which
case the reinsurance would cease, the underlying reinsurance assets and
liabilities would unwind, and any net funds under the agreement, less a 4.2%
risk charge to Hannover Re, would be retained by First Professionals.
Under the terms of the Hannover Re agreement, First Professionals will cede
approximately $48.5 million of its unearned premiums as of June 30, 2002, and
fifty percent of its direct written premiums, net of other reinsurance, during
the last six months of 2002 and the first six months of 2003. As a result, net
premiums written for the remainder of 2002 are expected to correspondingly
decline from the trends established during the first half of the year and to be
lower than those reported in 2001. Net premiums earned are also expected to be
lower during the second half of 2002 than the trend established during the first
and second quarters; however, net premiums earned for the full year 2002 are
still expected to equal or exceed those reported in 2001.
On August 2, 2002, Gerling Global Reinsurance Corporation of America
("Gerling"), one of the Company's current reinsurers, had its financial strength
rating lowered by A.M. Best from A- (Excellent) to B+ (Very Good). The rating
action by A.M. Best follows an announcement by Gerling of its intention to exit
the U.S. non-life reinsurance market. Gerling has participated in the Company's
excess of loss reinsurance programs in 2000, 2001 and 2002 at 15%, 20% and 20%,
respectively. Gerling has also provided facultative reinsurance coverage for
non-standard risks. It is presently expected that Gerling will fully meet its
obligations to the Company. Management also anticipates that it will be able to
successfully replace Gerling's participation at the next reinsurance renewal
date, January 1, 2003. As of June 30, 2002, the aggregate amount of reinsurance
recoverables from Gerling was $11.1 million.
Net investment income was relatively flat for the three months ended June 30,
2002 compared to the three months ended June 30, 2001. Net investment income
decreased 14% to $10.6 million for the six months ended June 30, 2002 from $12.3
million for the six months ended June 30, 2001. The decline in net investment
income for the first six months of 2002 is primarily due to lower prevailing
interest rates and reduced yields on fixed income investments, beginning in the
second half of 2001. The Company also
22
held more funds in invested cash during the first six months of 2002 as compared
to 2001 in anticipation of possible improvements in fixed income rates in the
near term.
The Company incurred net realized losses on holdings and sales of WorldCom bonds
during the second quarter 2002 of approximately $1.9 million. These losses were
offset by realized investment gains during the second quarter 2002 of
approximately $1.6 million. Net realized investment losses for the second
quarter 2002 were $0.3 million, while the Company reported net realized
investment gains for the first six months of 2002 of approximately $0.1 million.
Net losses and LAE increased 26% to $41.4 million for the three months ended
June 30, 2002 from $32.7 million for the three months ended June 30, 2001. Net
losses and LAE increased 20% to $75.2 million for the six months ended June 30,
2002 from $62.7 million for the six months ended June 30, 2001. The increase in
net losses and LAE is consistent with the growth in business, taking into
consideration expected loss trends and other pertinent considerations. Net
losses and LAE on the Company's professional liability business increased 62% to
$39.5 million for the three months ended June 30, 2002 from $24.4 million for
the three months ended June 30, 2001. Net losses and LAE on the Company's
professional liability business increased 56% to $71.9 million for the six
months ended June 30, 2002 from $46.0 million for the six months ended June 30,
2001. The differences between these increases and the increases in total net
losses and LAE are attributable to declines in group A&H and assumed reinsurance
losses and LAE. The Company's loss ratios for the three months ended June 30,
2002 and 2001 were 87% and 94%, respectively. The Company's loss ratios for the
six months ended June 30, 2002 and 2001 were 87% and 95%, respectively. A loss
ratio is defined as the ratio of loss and LAE incurred to net premiums earned.
The 8% decrease in the reported loss ratio for the six months ended June 30,
2002 is due to the Company's exit from its former group A&H business (3%), loss
expense reduction and productivity (2%), changes in the mix of assumed
reinsurance (1%), and expected improvements in underwriting results associated
with improvements in pricing (2%).
The liability for losses and LAE represents management's best estimate of the
ultimate cost of all losses incurred but unpaid and considers historical loss
experience, expected loss trends, the Company's loss retention levels and trends
in the frequency and severity of claims. The process of establishing reserves
for property and casualty claims is a complex and uncertain process, requiring
significant reliance upon estimates. The Company's estimates are revised as
additional experience and other data become available and are reviewed
periodically or as other significant events occur that may affect reserves. Any
such revisions could result in future changes in the estimates of losses or
reinsurance recoverables and would be reflected in the Company's results of
operations when the change occurs.
For the purposes of setting aside reserves on risks insured during the current
period, for which very little experience is present, a forecasted loss ratio is
determined that is applied to earned premiums during the period. This forecasted
loss ratio is judgmentally determined taking into account the results of the
most recent actuarial study performed, current pricing and underwriting, and
expected loss and LAE trends and other pertinent considerations. In addition,
management monitors and analyzes key loss and LAE indicators and trends
throughout the year, including but not limited to paid losses, newly reported
claims and incidents, closed claim activity, and other metrics in order to
assess the reasonableness of its loss reserve estimates and the forecasted loss
and LAE ratio being applied during the current period.
Net paid losses and LAE on professional liability claims were $29.0 million for
the second quarter 2002, up 36%, from $21.3 million for the second quarter of
2001. Net paid professional liability losses and LAE were $49.0 million for the
first six months of 2002, up 6%, from $46.4 million for the first half of 2001.
The settlement of three unusually large claims, two of which were related to one
incident, accounted for $3.0 million of the second quarter settlements. An
amount equal to 75% of these claims
23
will be applied to the annual aggregate deductible or otherwise recovered under
the Company's reinsurance programs.
Newly reported professional liability claims and incidents were 861 and 1,643
for the second quarter and first six months of 2002, respectively, up
significantly from the comparable numbers reported, 442 and 944, for the second
quarter and first half of 2001, respectively. If trended against growth in
average earned exposures, newly reported claims and incidents for the first six
months of 2002 were about 18% to 22% higher than historic norms. The Company has
analyzed this trend and determined that a significant portion of this increase,
or approximately 140 claims and incidents, are accounted for in three of the
larger counties in Florida, where higher claims and incidents are expected.
Approximately 95 of these claims and incidents represent claims filed under
corporate endorsements issued in connection with individual policies. The
remainder of the increase, or about 50 claims and incidents, reflects growth in
out-of-state business. Closed claims metrics, including the number of claims
with indemnity payments, claims closed without indemnity payments and the
relationship between these metrics appear to be on track with expectations for
the second quarter and the first six months of 2002.
Based on the analysis performed through the first six months of 2002, the
Company believes its liability for loss and LAE continues to be adequate, and
while the Company is not overly concerned by the increases in newly reported
claims and incidents at this point, it will continue to closely follow this
trend and others. Furthermore, given the inherent uncertainty in reserve
estimates, there can be no assurance that the ultimate amount of actual losses
will not exceed the related amounts currently estimated. Any such differences,
either positive or negative, could have a material effect on the Company's
results of operations and financial position.
Other underwriting expenses increased 36% to $6.8 million for the three months
ended June 30, 2002 from $5.0 million for the three months ended June 30, 2001.
Other underwriting expenses increased 36% to $13.5 million for the six months
ended June 30, 2002 from $9.9 million for the six months ended June 30, 2001.
The increase in other underwriting expenses is primarily attributable to
additional acquisition and operating expenses associated with the growth in
insurance business. In addition, First Professionals, the Company's largest
insurance subsidiary, performed a study in 2001 of expenses incurred in the
administration of claims and based on the results of this study decreased the
amount of expenses allocated to LAE in 2002.
Other expenses decreased 71% to $0.07 million for the three months ended June
30, 2002 from $0.2 million for the three months ended June 30, 2001. Other
expenses decreased 71% to $0.1 million for the six months ended June 30, 2002
from $0.5 million for the six months ended June 30, 2001. The decline in other
expenses is due to the Company's adoption of FAS 142. In accordance with FAS
142, the Company ceased the amortization of goodwill and indefinite lived
intangible assets during the first quarter 2002.
Income tax expense increased to $2.1 million for the three months ended June 30,
2002 from an income tax benefit of $0.5 million for the three months ended June
30, 2001. Income tax expense increased to $3.0 million for the six months ended
June 30, 2002 from an income tax benefit of $0.4 million for the six months
ended June 30, 2001. In late 2001, the Company hired external investment
managers and began repositioning portions of its investments in tax-exempt
municipal securities to investments in taxable securities. The increase in
income tax expense is partially associated with an increase in investment income
from taxable securities. In addition, the Company is nearing completion of the
examination of its 1998 and 1999 federal income tax returns by the Internal
Revenue Service and in connection therewith, established a $1.0 million reserve
in the second quarter of 2002 for potential tax contingencies, which accounted
for the remainder of the increase in income tax expense. Management believes
that its positions are meritorious on these and other potential issues raised in
the examination and that the accrual
24
made is appropriate; however, there can be no assurance that the Company will
ultimately prevail on such matters.
Reciprocal Management Segment
The Company's reciprocal management segment is made up of Administrators for the
Professions, Inc. ("AFP"), the Company's New York subsidiary, and its two wholly
owned subsidiaries, FPIC Intermediaries, Inc. ("Intermediaries") and Group Data
Corporation ("Group Data"). AFP acts as administrator and attorney-in-fact for
PRI, the second largest medical professional liability insurer for physicians in
the state of New York. Intermediaries acts as a reinsurance broker and
intermediary in the placement of reinsurance. Group Data acts as a broker in the
placement of annuities for structured settlements. The segment also includes the
business of Professional Medical Administrators, LLC ("PMA"), a 70% owned
subsidiary of the Company. PMA provides brokerage and administration services
for professional liability insurance programs. Unaudited financial data for the
Company's reciprocal management segment for the three months and six months
ended June 30, 2002 and 2001 are summarized in the table below. Dollar amounts
are in thousands.
Three Months Ended Six Months Ended
------------------------------------------- ------------------------------------------------
June 30, Percentage June 30, June 30, Percentage June 30,
2002 Change 2001 2002 Change 2001
------------------------------------------- ------------------------------------------------
Claims administration and
management fees $ 5,143 12% $ 4,605 $ 9,743 14% $ 8,577
Net investment income 45 -63% 121 85 -54% 183
Commission income 782 20% 650 1,263 71% 740
Other income 21 11% 19 41 -86% 291
Intersegment revenues 803 -16% 960 1,288 -23% 1,672
--------------- -------------- -------------- ---------------
Total revenues 6,794 7% 6,355 12,420 8% 11,463
--------------- -------------- -------------- ---------------
Claims administration and
management expenses 4,592 16% 3,948 8,659 9% 7,938
Other expenses 35 -94% 543 35 -97% 1,086
Intersegment expenses 426 284% 111 798 259% 222
--------------- -------------- -------------- ---------------
Total expenses 5,053 10% 4,602 9,492 3% 9,246
--------------- -------------- -------------- ---------------
Income from operations before
taxes and cumulative effect
of accounting change 1,741 -1% 1,753 2,928 32% 2,217
Less: Income taxes 673 18% 568 1,119 42% 788
--------------- -------------- -------------- ---------------
Income before cumulative
effect of accounting change 1,068 -10% 1,185 1,809 27% 1,429
--------------- -------------- -------------- ---------------
Less: Cumulative effect
of accounting change -- 0% -- 24,363 100% --
--------------- -------------- -------------- ---------------
Net income (loss) $ 1,068 -10% $ 1,185 $ (22,554) -1678% $ 1,429
=============== ============== ============== ===============
Claims administration and management fees increased 12% to $5.1 million for the
three months ended June 30, 2002 from $4.6 million for the three months ended
June 30, 2001. Claims administration and management fees increased 14% to $9.7
million for the six months ended June 30, 2002 from $8.6 million for the six
months ended June 30, 2001. The claims administration and management fees earned
by AFP are comprised entirely of management fees from PRI and the increase is
due to the growth in premiums written by PRI. In accordance with the management
agreement between AFP and PRI, AFP receives a management fee equal to 13% of
PRI's direct premiums written, with an adjustment for expected return premiums.
As such, the Company's revenues and results of operations are financially
25
sensitive to the revenues and financial condition of PRI. In addition, PRI, as
an MPL insurer, is subject to many of the same types of risks as those of the
Company's insurance subsidiaries.
Commission income increased 20% to $0.8 million for the three months ended June
30, 2002 from $0.7 million for the three months ended June 30, 2001. Commission
income increased 71% to $1.3 million for the six months ended June 30, 2002 from
$0.7 million for the six months ended June 30, 2001. The increase in commission
income is due to an increase in brokerage commission earned by Intermediaries
for the placement of reinsurance.
Other income for the three months ended June 30, 2002 was relatively flat when
compared to the three months ended June 30, 2001. Other income decreased 86% to
$0.04 million for the six months ended June 30, 2002 from $0.3 million for the
six months ended June 30, 2001. Under the management agreement between AFP and
PRI, AFP receives, in addition to management fees, an amount equal to 10% of
PRI's statutory net income or is responsible for 10% of PRI's statutory net
loss. The provisions of New York law addressing the sharing of net income or net
loss contain certain ambiguities and interpretation issues. In considering such
matters, PRI, AFP and the New York Department of Insurance have entered into
discussions regarding the removal from the management agreement of this sharing
by AFP of net income or net loss effective in 2002.
Claims administration and management expenses increased 16% to $4.6 million for
the three months ended June 30, 2002 from $3.9 million for the three months
ended June 30, 2001. Claims administration and management expenses increased 9%
to $8.7 million for the six months ended June 30, 2002 from $7.9 million for the
six months ended June 30, 2001. The increase in claims administration and
management expenses is due to an increase in operating expenses incurred to
manage the growth in business at PRI.
Other expenses decreased 94% to $0.04 million for the three months ended June
30, 2002 from $0.5 million for the three months ended June 30, 2001. Other
expenses decreased 97% to $0.04 for the six months ended June 30, 2002 from $1.1
million for the six months ended June 30, 2001. The decline in other expenses is
due to the effects of the Company's adoption of FAS 142. In accordance with FAS
142, the Company, including the reciprocal management segment, ceased the
amortization of goodwill and indefinite lived intangible assets during the first
quarter 2002.
In connection with its adoption of FAS 142, the reciprocal management segment
recorded a transitional impairment charge of $24.4 million, after-tax. In
management's opinion, the non-cash transitional impairment charge, which
represents the cumulative effect of the accounting change, primarily reflects
certain intangibles and synergies, which are opportunistic in nature, carry a
higher degree of uncertainty, and therefore were treated conservatively in the
valuation required by FAS 142.
26
Third Party Administration Segment
The Company's third party administration ("TPA") segment is made up of Employers
Mutual, Inc. ("EMI"). Unaudited financial data for the Company's TPA segment for
the three months and six months ended June 30, 2002 and 2001 are summarized in
the table below. Dollar amounts are in thousands.
Three Months Ended Six Months Ended
--------------------------------------------- ---------------------------------------------
June 30, Percentage June 30, June 30, Percentage June 30,
2002 Change 2001 2002 Change 2001
--------------------------------------------- ---------------------------------------------
Claims administration and
management fees $ 3,148 3% $ 3,071 $ 6,178 -2% $ 6,317
Net investment income 14 -67% 42 19 -83% 109
Commission income 376 -11% 421 766 -5% 804
Other income 4 -43% 7 8 -47% 15
Intersegment revenues 44 -82% 240 80 -85% 534
--------------- ------------- -------------- --------------
Total revenues 3,586 -5% 3,781 7,051 -9% 7,779
--------------- ------------- -------------- --------------
Claims administration and
management expenses 3,255 -12% 3,697 6,598 -9% 7,272
Other expenses -- -100% 163 -- -100% 344
Intersegment expenses 361 198% 121 565 132% 244
--------------- ------------- -------------- --------------
Total expenses 3,616 -9% 3,981 7,163 -9% 7,860
--------------- ------------- -------------- --------------
Loss from operations before
taxes and cumulative effect
of accounting change (30) 85% (200) (112) -38% (81)
Less: Income taxes 10 114% (73) 30 225% (24)
--------------- ------------- -------------- --------------
Loss before cumulative
effect of accounting change (40) 69% (127) (142) -149% (57)
--------------- ------------- -------------- --------------
Less: Cumulative effect of
accounting change -- 0% -- 5,215 100% --
--------------- ------------- -------------- --------------
Net loss $ (40) 69% $ (127) $ (5,357) -9298% $ (57)
=============== ============= ============== ==============
Claims administration and management fees were $3.1 million for the three months
ended June 30, 2002, which was relatively level with the comparable amount
reported for the three months ended June 30, 2001. Claims administration and
management fees decreased 2% to $6.2 million for the six months ended June 30,
2002 from $6.3 million for the six months ended June 30, 2001. The Company's
results of operations for the period ended June 30, 2001 include the Company's
Albuquerque division, which was disposed of in December 2001. Excluding the
effect of the Albuquerque TPA division, claims administration and management
fees increased $0.8 million or 35% and $1.2 million or 24% for the three months
and six months ended June 30, 2002, respectively, when compared with the three
months and six months ended June 30, 2001. The increase in claims administration
and management fees reflects growth in new business.
Claims administration and management expenses decreased 12% to $3.3 million for
the three months ended June 30, 2002 from $3.7 million for the three months
ended June 30, 2001. Claims administration and management expenses decreased 9%
to $6.6 million for the six months ended June 30, 2002 from $7.3 million for the
six months ended June 30, 2001. The decline in claims administration and
management expenses is due to the disposition of the Company's Albuquerque
division. Excluding the effect of the Albuquerque TPA division, claims
administration and management expenses increased $0.3 million or 10% and $0.9
million or 16% for the three months and six months ended June 30, 2002,
27
respectively, when compared with the three months and six months ended June 30,
2001. The increase in claims administration and management expenses is due to
additional expenses incurred as the result of new business.
Other expenses decreased to $0 for the three months and six months ended June
30, 2002 from $0.2 million for the three months ended June 30, 2001 and $0.3
million for the six months ended June 30, 2001. The decline in other expenses is
due to the Company's adoption of FAS 142. In accordance with FAS 142, the
Company, including the TPA segment, ceased the amortization of goodwill and
indefinite lived intangible assets during the first quarter 2002.
In connection with the adoption of FAS 142, the TPA segment recorded a
transitional impairment charge of $5.2 million, after-tax. In management's
opinion, the non-cash transitional impairment charge, which represents the
cumulative effect of the accounting change, primarily reflects changes in market
conditions and an increase in competition in recent years in the markets served
by the TPA segment.
Stock Repurchase Plans
Under the Company's stock repurchase programs, shares may be repurchased at such
times, and in such amounts, as management deems appropriate, and subject to the
requirements of its credit facility under which the Company may repurchase
shares up to an amount not to exceed 50% of net income of the immediately
preceding year. A decision whether or not to make additional repurchases is
based upon an analysis of the best use of the Company's capital. The Company did
not repurchase any shares during the quarter ended June 30, 2002. Since the
commencement of these repurchase programs, the Company has repurchased 875,000
of its shares at a cost of approximately $16.2 million. A total of 365,500
shares remain available to be repurchased under the programs.
Liquidity and Capital Resources
The payment of losses, LAE and operating expenses in the ordinary course of
business is the principal need for the Company's liquid funds. Cash provided by
operating activities has been used to pay these items and was sufficient during
the second quarter and first six months of 2002 to meet these needs. As reported
in the consolidated statement of cash flows, the Company generated positive net
cash from operating activities of $22.6 million for the six months ended June
30, 2002. In addition, at June 30, 2002, the Company held investments with a
fair value of approximately $14.6 million scheduled to mature during the next
twelve months. Management believes cash flows from operating activities,
combined with scheduled maturities of investments, will be sufficient to meet
the Company's cash needs for operating purposes for at least the next twelve
months. However, a number of factors could cause unexpected changes in liquidity
and capital resources available to the Company. For example, inflation, changes
in medical procedures, increased use of managed care, and adverse legislative
changes, among others, could cause increases in the dollar amounts paid for
losses and LAE. Other potential risks to liquidity and capital resources
include, but are not limited to, the same types of uncertainties and factors
disclosed by the Company in the first paragraph of its Safe Harbor Disclosure.
Many, if not most of these types of uncertainties, could have a corresponding
and materially negative affect on the Company's liquidity and capital resources,
as well as its financial condition and results of operations. In order to
compensate for such risk, the Company: (i) maintains what management considers
to be adequate reinsurance; (ii) monitors its reserve positions and regularly
performs actuarial reviews of loss and LAE reserves; and (iii) maintains
adequate asset liquidity (by managing its cash flow from operations coupled with
the maturities from its fixed income portfolio investments).
As of June 30, 2002, the Company had borrowed $50.1 million under a credit
facility with five banks. The credit facility is comprised of (i) a $37.5
million revolving credit facility (with a $15 million letter of credit
sub-facility), which matures on August 31, 2004, and (ii) a $13.1 million term
loan facility, repayable in twelve equal quarterly installments of approximately
$1.5 million. Amounts outstanding
28
under the credit facilities bear interest at a variable rate, primarily based
upon LIBOR plus an initial margin of 2.50 percentage points, which may be
reduced to a minimum of 2.00 percentage points as the Company reduces its
outstanding indebtedness.
The Company is not required to maintain compensating balances in connection with
these credit facilities but is charged a fee on the unused portion, which ranges
from 30 to 40 basis points. Under the terms of the credit facility, the Company
is required to meet certain financial covenants. Significant covenants are as
follows: a) total debt to cash flow available for debt service may not exceed
3:50:1; b) combined net premiums written to combined statutory capital and
surplus may not exceed 2.00:1; c) the fixed charge coverage ratio may not be
less than 2.00:1 at the end of each quarter through December 31, 2002, and
thereafter the fixed charge coverage ratio may not be less than 2:25:1; and d)
funded debt to total capital plus funded debt may not exceed 0.27:1. The credit
facility also contains minimum equity and risk-based capital requirements and
requires the Company's insurance subsidiaries to maintain at least an A-
(Excellent) group rating from A.M. Best.
Dividends payable by the Company's insurance subsidiaries are subject to certain
limitations imposed by Florida and Missouri laws. In 2002, these subsidiaries
are permitted, within insurance regulatory guidelines, to pay dividends of
approximately $10.7 million without prior regulatory approval.
Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued FAS 143,
"Accounting for Asset Retirement Obligations." FAS 143 addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. Although
earlier application is encouraged, FAS 143 is effective for financial statements
issued for fiscal years beginning after June 15, 2002. The Company believes the
adoption of FAS 143 will not have a significant impact on its consolidated
financial statements.
In August 2001, the FASB issued FAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." FAS 144 supersedes FAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
and the accounting and reporting provisions of APB Opinion No. 30, "Reporting
the Results of Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." FAS 144 also amends Accounting Research Bulletins No. 51,
"Consolidated Financial Statements," to eliminate the exception to consolidation
for a subsidiary for which control is likely to be temporary. The Company
believes the adoption of FAS 144 will not have a significant impact on its
consolidated financial statements.
In May 2001, the FASB issued FAS 145, "Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FAS 13, and Technical Corrections as of April 2002." FAS
145 rescinds FAS 4, "Reporting Gains and Losses from Extinguishment of Debt,"
and an amendment of that Statement, FAS 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements." FAS 145 also rescinds FAS 44, "Accounting
for Intangible Assets of Motor Carriers" and amends FAS 13, "Accounting for
Leases," to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. The Company believes the adoption of FAS 145 will not have a
significant impact on its consolidated financial statements.
In June 2002, the FASB issued FAS 146, "Accounting for Costs Associated with
Exit or Disposal Activities." FAS 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs
29
Incurred in a Restructuring)." The Company believes the adoption of FAS 146 will
not have a significant impact on its consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in the reported market risks, as described
in the Company's 2001 annual report on Form 10K, since the end of the most
recent fiscal year.
Part II - Other Information
Item 1. Legal Proceedings - None
Item 2. Changes in Securities and Use of Proceeds - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Shareholders (the "Meeting") was held
on June 5, 2002. At the Meeting, the following items were passed by the
vote shown.
I. Directors Elected at the Meeting: For Against Withheld
------------- ------------- -----------
Gaston J. Acosta-Rua, M.D. 7,125,940 -- 69,953
Kenneth M. Kirschner, Esq. 7,123,160 -- 72,733
Joan D. Ruffier 7,124,764 -- 71,129
Guy T Selander, M.D. 7,103,725 -- 92,168
David M. Shapiro, M.D. 7,123,488 -- 72,405
James G. White, M.D. 7,122,761 -- 73,132
Gene C. Witherspoon 7,129,601 -- 66,292
Incumbent Directors continuing after the Meeting:
John K. Anderson James W. Bridges, D.D.S. Louis C. Murray, M.D.
Richard J. Bagby, M.D. John R. Byers
Robert O. Baratta, M.D. M.C. Harden, III
II. Approval of Amendments to For Against Withheld
------------- ------------- -----------
Director Stock Option Plan 4,736,701 2,393,161 66,031
III. Approval of Amendments to For Against Withheld
------------- ------------- -----------
Omnibus Incentive Plan 4,556,749 2,568,833 70,311
Item 5. Other Information -
In accordance with the requirements of the Federal Securities Laws, the
Company recognizes blackout periods during which directors, officers
and certain employees with an awareness of material, nonpublic
information are prohibited from transacting in the Company's stock. The
Company will maintain a blackout period for such persons until 48 hours
after the filing of this Form 10-Q with the Securities and Exchange
Commission.
Item 6. Exhibits and Reports on Form 8-K
The following exhibits and reports are included herewith:
--------------------------------------------------------
o Exhibit 3.2 -- Amended and Restated Bylaws of FPIC Insurance Group,
Inc. dated July 20, 2002.
o Exhibit 10(d) -- Omnibus Incentive Plan, as amended, incorporated
by reference to the Company's definitive proxy statement filed on
April 30, 2002.
30
o Exhibit 10(e) -- Director Stock Option Plan, as amended,
incorporated by reference to the Company's definitive proxy
statement filed on April 30, 2002.
o Exhibit 10(ll) -- First Professionals Insurance Company, Inc. Net
Account Quota Share Reinsurance Agreement dated August 1, 2002,
incorporated by reference to the Company's Form 8-K filed on
August 7, 2002.
o Exhibit 10(mm) -- Form of employment agreement dated January 1,
1999 between the Administrators for the Professions, Inc. and
Anthony Bonomo, as amended.
o Exhibit 99.1-- Certification of John R. Byers pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
o Exhibit 99.2-- Certification of Kim D. Thorpe pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
On April 17, 2002, the Company filed a Form 8-K notifying the
Securities and Exchange Commission that the Company received
notification from A.M. Best Company ("Best") that Best affirmed its A-
(Excellent) group rating. The rating applies to the Company's four
insurance subsidiaries, First Professionals Insurance Company, Inc.,
Anesthesiologists Professional Assurance Company, Intermed Insurance
Company and Interlex Insurance Company.
On August 7, 2002, the Company filed a Form 8-K notifying the
Securities and Exchange that the Company had entered into a finite
reinsurance agreement with Hannover Reinsurance (Ireland) Limited and
E+S Reinsurance (Ireland) Ltd., two Hannover Re group companies,
whereby the Company's largest insurance subsidiary, First Professionals
will cede approximately $48.5 million of its 2002 unearned premiums as
of June 30, 2002, effective July 1, 2002, and fifty percent of its
direct written premiums, net of other reinsurance, during the last six
months of 2002 and the first six months of 2003.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FPIC Insurance Group, Inc.
/s/ Kim D. Thorpe
-----------------------------------------
August 13, 2002 Kim D. Thorpe, Executive Vice President
and Chief Financial Officer (a duly
authorized officer and the principal
financial officer of the registrant)
31