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1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PERSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
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Commission file number
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FPIC INSURANCE GROUP, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 59-3359111
(State or other jurisdiction of (I.R.S.) Employer
incorporation or organization) Identification No.)
1000 RIVERSIDE AVENUE, SUITE 800 32204
(Address of principal executive offices) (zip code)
(Registrant's telephone number, including area code): (904) 354-5910
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.10 PAR VALUE
(Title of Class)
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The Aggregate market value of the Registrant's Common Stock (its only voting
stock) held by non-affiliates of the Registrant as of March 14, 1997 was
approximately $118,686,000.
As of March 14, 1997, there were 9,021,670 shares of the Registrant's Common
Stock, $.10 Par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 1997 Annual Shareholders'
Meeting to be filed prior to March 31, 1997 are incorporated by reference into
Part III, Items 10, 11, 12 and 13 of this Report. Such Proxy Statement, except
for the parts therein which have been specifically incorporated by reference,
shall not be deemed "filed" for the purposes of this Report on Form 10-K.
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FPIC INSURANCE GROUP, INC.
1996 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business 1
Item 2. Properties 10
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
PART II
Item 5. Market for the Registrants' Common Stock and
Related Stockholder Matters 10
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 8. Financial Statements and Supplementary Data 19
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 19
PART III
Item 10. Directors and Executive Officers of the Registrant 20
Item 11. Executive Compensation 21
Item 12. Security Ownership of Certain Beneficial Owners and Management 21
Item 13. Certain Relationships and Related Transactions 21
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 21
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PART I
Item 1. Business
General
FPIC Insurance Group, Inc. (the Company) was formed in 1996. On June 11, 1996,
the shareholders of Florida Physicians Insurance Company, Inc. (FPIC) approved
the formation of a holding company structure (the Reorganization) that resulted
in FPIC becoming a subsidiary of the Company. In connection with the
Reorganization, FPIC's shareholders became the shareholders of the Company and
received five shares of the Company's common stock for each of their shares of
FPIC's common stock. The purposes of the Reorganization included providing a
more flexible operating structure, increasing financial flexibility and
satisfying the liquidity needs of the Company's shareholders. The Company has
three wholly-owned subsidiaries: FPIC, FPIC Insurance Agency, Inc. (the Agency)
and McCreary Corporation (MCC).
Overview
The Company is the largest provider of medical professional liability (MPL)
insurance in Florida, based on the number of physicians and dentists insured.
For more than 20 years, the Company and its predecessors have provided MPL
insurance to Florida's medical community. MPL insures the physician, dentist,
hospital or other healthcare provider against liabilities arising from the
rendering of or failure to render professional healthcare services. Under the
typical MPL insurance policy, the insurer also pays the legal costs of
defending the claim. The Company has the exclusive endorsement of both the
Florida Medical Association (FMA) and the Florida Dental Association (FDA).
Insurance is the Company's only significant industry segment. For financial
information relating to the Company's operations, see Management's Discussion
and Analysis and the notes to the Consolidated Financial Statements which are
incorporated herein by reference.
Insurance Products
The Company has developed a variety of insurance products for participants in
the healthcare industry. These products include: MPL insurance for medical
professionals, managed care liability insurance, professional and comprehensive
general liability insurance for healthcare facilities, AHCA/OSHA insurance
coverage, provider stop loss insurance and third party administration. The
following table summarizes, by product, the direct premium written by the
Company for the periods indicated.
FOR THE YEAR ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
(in thousands)
Medical professional liability for physicians $58,860 $52,134 $48,546
Medical professional liability for dentists 3,539 3,190 2,817
Managed care 330 215 -
Professional and comprehensive general liability 627 317 153
AHCA/OSHA 936 785 938
------- ------- -------
Total $64,292 $56,641 $52,454
======= ======= =======
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Medical Professional Liability. The principal product offered by the Company
is MPL insurance for physicians and dentists. The Company's MPL insurance is
offered to physicians and dentists in all types of settings including solo
practices, group practices and hospitals. MPL insurance provides coverage
against the legal liability of an insured for such things as injury caused by
or as a result of treatment of a patient, failure to treat a patient and
failure to diagnose a patient.
MPL policies are issued on a "claims-made" basis. Coverage is provided for
claims reported to the Company during the policy period arising from incidents
that occurred at any time the insured was covered by the policy. The Company
also offers "tail coverage" for claims reported after the expiration of the
policy for occurrences during the coverage period. The price of tail coverage
is based on the length of time the insured has been covered under the Company's
claims-made form. The Company provides free tail coverage for insured
physicians who die or become disabled during the coverage period of the policy
and those who have been insured by the Company for at least five consecutive
years and retire completely from the practice of medicine. MPL insurance
policies offered by the Company are issued with liability limits up to $3.0
million per incident and $5.0 million in annual aggregate for physicians and
$1.0 million per incident and $3.0 million in annual aggregate for dentists.
At December 31, 1996, the Company had 4,230 physician insureds and 1,673
dentist insureds. For the year ended December 31, 1996, the Company has $62.4
million in direct premium written from MPL insurance, representing 97% of the
Company's total direct premium written.
Managed Care. Managed care liability insurance provides coverage for liability
arising from the errors and omissions of a managed care organization, the
vicarious liability of a managed care organization for acts or omissions by
contracted and employed providers ("E&O") and the liability of directors and
officers of a managed care organization ("D&O"). These policies are issued on
a claims-made basis. The typical limits of coverage offered by the Company for
E&O policies is $1.0 million per incident and $1.0 million in annual aggregate
and for D&O policies is $3.0 million per incident and $3.0 million in annual
aggregate. As of December 31, 1996, the Company had 19 managed care liability
policies issued. For the year ended December 31, 1996, the Company had $0.3
million in direct premium written from managed care liability insurance,
representing 0.5% of the Company's total direct premium written.
Professional and Comprehensive General Liability. The Company also offers
professional and comprehensive general liability insurance to healthcare
facilities, such as ambulatory surgery centers and walk-in medical care
clinics. The policy issued to healthcare facilities provides protection for
professional liability related to the operation of a healthcare facility and
its various staff committees, together with comprehensive general liability.
Professional liability insurance is offered by the Company to healthcare
facilities on a claims-made basis. Commercial general liability is available
on a claims-made or occurrence basis, although all policies issued as of
December 31, 1996 were on a claims-made basis. The limits of coverage for
these policies available to non-hospital healthcare facilities is $1.0 million
per incident and $3.0 million in annual aggregate and to hospitals is $10.0
million per incident and $10.0 million in annual aggregate. Higher liability
limits are placed through facultative reinsurance arrangements. As of December
31, 1996, the Company had 13 facility insureds. For the year ended December
31, 1996, the Company had $0.6 million in direct premium written from
professional and comprehensive general liability insurance for healthcare
facilities, representing 0.9% of the Company's total direct premium written.
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AHCA/OSHA. The Company also offers defense coverage to physicians and
dentists for costs associated with investigations initiated by Florida's Agency
for Healthcare Administration ("AHCA") as well as the Occupational Safety and
Health Administration ("OSHA"). This coverage is offered to the Company's
insureds for investigations that are not related to an MPL claim;
investigations related to an MPL claim are provided to the Company's insureds
as part of their policy coverage. AHCA/OSHA coverage is also offered to
physicians and dentists not otherwise insured by the Company. Policy limits
for this coverage are $25,000 per incident and $75,000 in annual aggregate.
For the year ended December 31, 1996, the Company had $0.9 million in direct
premium written from AHCA/OSHA insurance, representing 1.4% of the Company's
total direct premium written.
Third Party Services. Through MCC, the Company offers third party
administration services. MCC specializes in the administration of self
insurance plans for large employers. The lines of insurance that MCC primarily
administers are group health, workers' compensation, general liability and
property. The Company intends to offer these services to its existing and
potential customer base of healthcare facilities and managed care organizations
on both a self insured basis and a fully insured basis. For the year ended
December 31, 1996, MCC contributed $5.3 million to the Company's total revenue.
Rates
The Company establishes, through its own actuarial staff and independent
actuaries, rates and rating classifications for its physician and dentist
insureds based on the loss and loss adjustment expenses (LAE) experience it has
developed over the past 20 years and upon rates charged by its competitors.
The Company uses certain relative risk factors based on geographic location,
medical specialty and policy limits. The Company has established its premium
rates and rating classifications for healthcare facilities and managed care
organizations utilizing data publicly filed by other insurers and guidelines
provided by its reinsurers. All rates for liability insurance are subject to
review by the relevant insurance regulatory authority. As part of its pricing
strategy, the Company targets medical professionals with low levels of previous
MPL claims. The Company offers such medical professionals a "claims-free"
credit.
Marketing and Policyholder Services
The Company's insurance products are primarily marketed by independent
agencies. In addition, insurance products are sold by the Company directly.
As of December 31, 1996, the Company's products were sold through 99
independent agencies. During 1996, approximately 69% of the Company's MPL
direct premium written was produced by independent agents, five of which
accounted for approximately 52% of such premiums. The Company added 31 new
independent agencies in 1996. The insurance products that are sold by the
Company directly are a result of direct requests from physicians.
An integral part of the Company's marketing strategy is targeting segments of
the MPL industry that it believes generate above average underwriting profits.
The Company has identified certain medical specialties and "claims-free"
physicians as segments in which it wishes to increase its market share. This
marketing strategy includes sending targeted physicians personal mail
solicitation packages, encouraging agents to refer targeted physicians and
providing an expedited application process for those physicians. As a result
of this strategy approximately 68.2% of the increase in direct premium written
in 1996 was received from physicians in the targeted specialties.
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The Company has also entered into endorsement and marketing agreements with
local medical associations and other provider-supported organizations that
provide rate credits and certain services for insureds of the programs. These
endorsement and marketing agreements gain the Company access to meetings of
these groups in order to make presentations and provide access to their
respective publications for advertisements. In addition, several local
associations have agreed to assist the Company in developing loss prevention
programs, monitoring proposed legislation and administrative regulations and
providing information on healthcare matters relating primarily to professional
liability.
The Company provides comprehensive risk management services designed to
heighten its insureds' awareness of situations giving rise to potential loss
exposures, to educate its insureds on ways to improve their medical practice
procedures and to assist its insureds in implementing risk modification
measures. In addition, the Company conducts surveys for hospitals and large
medical groups both to review their practice procedures generally and to focus
on specific areas in which there may be some concern. Complete reports that
specify areas of the insured's medical practice that may need attention are
provided to the policyholder. The Company presents and participates in
periodic seminars with medical societies and other groups at which pertinent
subjects are presented. These educational offerings are designed to increase
risk awareness and the effectiveness of various medical professionals.
Underwriting
The underwriting of the Company's MPL insurance is performed internally by four
underwriters with approximately 35 years of combined experience underwriting
MPL insurance for the Company. The Company has given its internal underwriting
department complete authority for all initial underwriting decisions. The
Company's agents have no binding authority.
As part of the underwriting process, the Company utilizes the State of
Florida's database, which consolidates a record of all MPL claims-paid
information that insurers are required to report to the State. When
applications are received from physicians for MPL insurance, the Company
reviews this database to verify the physician's claims-paid record. If a
physician has an excessive claims-paid history, the application is denied. All
other applicants are reviewed on the basis of the physician's educational
background, residency experience, practice history and the comments received
from personal references. Annually, the Company's underwriting department also
reexamines each insured before coverage is renewed, including verifying that
each insured's license is current and that any reported claims for the insured
were within acceptable limits.
The underwriting of the Company's other insurance products is conducted in
conjunction with external underwriters. With respect to these products, the
Company receives applications from prospective insureds. After a review of the
information contained in such applications, the Company forwards them to an
external underwriter. The external underwriter performs its review procedures
for each application and consults with the Company on the amount of premium to
charge each insured. The Company has entered into an agreement with CNA
Reinsurance of London, Limited to reinsure and to underwrite 90% of each of the
Company's managed care liability insurance policies.
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Claims
The Company's claims department is responsible for the supervision of claims
investigation, the establishment of case reserves, case management, development
of the defense strategy and the coordination and control of attorneys engaged
by the Company. The Company's claims department has 19 employees, including 4
supervisors and 5 field investigators who are located in Orlando, Tampa, Miami
and Jacksonville in order to provide localized and timely attention to claims.
Employees in the claims department with settlement authority have an average of
14 years of experience with the Company.
The Company's claims department has complete settlement authority for most
claims filed against the Company's insureds. The Company's policy is and has
been to refuse settlement and to defend aggressively all claims that appear to
have no merit. In those instances where claims may have merit, the claims
department attempts to settle the case as expeditiously as possible. The
Company believes that it has developed relationships with attorneys in Florida
who have significant experience in the defense of MPL claims and who are able
to defend in an aggressive, cost-efficient manner the claims against the
Company's insureds.
Reinsurance
The Company follows customary industry practice by reinsuring a portion of its
risks. The Company cedes to reinsurers a portion of its risks and pays a fee
based upon premiums received on all policies subject to such reinsurance.
Insurance is ceded principally to reduce net liability on individual risks and
to provide protection against large losses. Although reinsurance does not
legally discharge the ceding insurer from its primary liability for the full
amount of the policies reinsured, it does make the reinsurer liable to the
insurer to the extent of risk ceded.
For MPL insurance and professional and comprehensive general liability
insurance, the Company has established a policy of reinsuring risks in excess
of $500,000 per loss. The Company reinsures risks associated with these
policies under treaties pursuant to which reinsurers agree to assume those
risks insured by the Company in excess of its individual risk retention level
and up to its maximum individual policy limit offered. For managed care
liability insurance the Company has entered into a separate quota share
reinsurance treaty. Under this treaty, the reinsurers bear 90% of all losses
and LAE incurred under these policies.
Reinsurance is placed under reinsurance treaties and agreements with a number
of individual companies and syndicates to mitigate concentration of credit
risk. In 1996, General Reinsurance Corporation became the Company's largest
reinsurer of MPL insurance, with 25% of the ceded risks and for professional
and comprehensive general liability insurance with 50% of the ceded risks. The
Company relies on reinsurance brokers and intermediaries to assist in the
analysis of the credit quality of its reinsurers. The Company also requires
reinsurers that are not authorized to do business in Florida to post an
evergreen letter of credit to secure their reinsurance recoverables.
Reinsurance ceded is recorded on a gross basis. Ceding commissions, which are
25 percent of gross ceded premiums, are deducted from other operating expenses.
Ceding commissions were $1.2 million, in each of the years ended 1996, 1995 and
1994.
In the event the Company has the opportunity to settle a claim within policy
limits but fails to do so, and a judgment is rendered against a policyholder
for an amount exceeding the policy limit, the
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Company may be charged with bad faith in failing to settle. The Company may be
held responsible for the amount exceeding the policy limit or extra contractual
damages. In the past five years, the Company has not paid a claim, including
bad faith claims, in excess of $3.0 million. In addition, the Company has
entered into a contingent excess of loss reinsurance contract to cover extra
contractual damages, as well as coverage for free tail and other excess losses.
Loss and LAE Reserves
The determination of loss reserves is a projection of ultimate losses through
an actuarial analysis of the claims history of the Company and other MPL
insurers, subject to adjustments deemed appropriate to the Company due to
changing circumstances. Included in its claims history are losses and LAE paid
by the Company in prior periods and case reserves for anticipated losses and
LAE developed by the Company's claims department as claims are reported and
investigated. The Company relies primarily on such historical loss experience
in determining reserve levels on the assumption that historical loss experience
provides a good indication of future loss experience despite the uncertainties
in loss cost trends and the delays in reporting and settling claims. As
additional information becomes available, the estimates reflected in earlier
loss and LAE reserves may be revised. Any increase in the amount of reserves,
including reserves for insured events of prior years, could have an adverse
effect on the Company's results for the period in which the adjustments are
made.
The uncertainties inherent in estimating ultimate losses on the basis of past
experience have grown significantly in recent years principally as a result of
judicial expansion of liability standards and expansive interpretations of
insurance contracts. These uncertainties may be further affected by, among
other factors, changes in the rate of inflation and changes in the propensities
of individuals to file claims. The inherent uncertainty of establishing
reserves is relatively greater for companies writing long-tail casualty
insurance, including MPL insurance, due primarily to the long-term nature of
the resolution of claims. The Company utilizes both its staff and independent
actuaries in establishing its reserves. The Company's independent actuaries
review the Company's loss and LAE reserves bi-annually and prepare a report
that includes a recommended level of reserves. The Company considers this
recommendation as well as other factors, such a known, anticipated or estimated
changes in frequency and severity of losses, loss retention levels and premium
rates, in establishing the amount of its loss and LAE reserves. The Company
continually refines reserve estimates as experience develops and further claims
are reported and settled. The Company reflects adjustments to reserves in the
results of the periods in which such adjustments are made. MPL insurance is a
long-tail line of business for which the initial loss and LAE estimates may be
adversely impacted by events occurring long after the reporting of the claim,
such as sudden severe inflation or adverse judicial or legislative decisions.
The following table sets forth an analysis of the Company's reserves for losses
and LAE and provides a reconciliation of beginning and ending loss and LAE
reserves net of reinsurance for the periods presented.
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Year Ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
(in thousands)
Reserve liability, at beginning of period $155,318 $143,415 $132,190
-------- -------- --------
Provisions for losses and LAE occurring
in the current period 61,617 58,868 49,702
Increase (decrease) in estimated losses and
LAE for claims occurring in prior periods (14,669) (14,029) (10,524)
-------- -------- --------
Total incurred during current period 46,948 44,839 39,178
------ -------- --------
Losses and LAE payments for claims, occurring
during:
The current period 5,253 4,320 3,035
Prior periods 35,889 28,616 24,918
------- ------- ------
Total paid during current period 41,142 32,936 27,953
------- ------- -------
Reserve liability, at end of period $161,124 $155,318 $143,415
======== ======== ========
Gross liability at end of period $172,738 $164,506 $152,268
Reinsurance recoverable at end of period 11,614 9,188 8,853
-------- -------- --------
Net liability at end of period $161,124 $155,318 $143,415
======== ======== ========
As shown above, as a result of the Company's bi-annual reserving review, which
includes a reevaluation of the adequacy of reserve levels for prior years'
claims, the Company reduced its reserves for claims occurring in prior periods
by $14.7 million, $14.0 million, and $10.5 million for the years ended December
31, 1996, 1995, and 1994, respectively. There can be no assurance concerning
future adjustments or reserves, positive or negative, for prior years' claims.
Investment Portfolio
The Company's investment strategy is to maintain a diversified investment grade
fixed income portfolio, provide liquidity and maximize after-tax yield. As of
December 31, 1996 the Company's portfolio was managed internally. As of
December 31, 1996, the Company had $234.7 million of fixed income securities.
All of the Company's fixed income securities are classified as
available-for-sale.
In mid-1994, the Company changed its investment strategy from active investing
predominantly by external managers to emphasizing a buy-and-hold approach. The
Company believes that this focus on income generation rather than capital
appreciation has reduced the portfolio's overall volatility. In addition, the
Company has invested a greater portion of its portfolio in municipal bonds,
which the Company believes generate a greater after-tax return than investments
in taxable fixed income securities of comparable risk, duration, and other
investment characteristics.
The Company does not, and is not contemplating, investing in any off-balance
sheet derivative financial investments including futures, options, forwards,
interest rate swaps, floors or caps. All of the fixed maturity securities held
in the investment portfolio are publicly traded securities.
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Competition
The MPL insurance market in Florida is highly competitive. Several companies
in the state offer products at lower premium rates than the Company and more
companies may enter the Florida market in the future. In addition, the Company
believes that the number of healthcare entities that insure their affiliated
physicians through self-insurance may begin to increase. Many of the MPL
insurers are substantially larger and have considerably greater resources than
the Company. Additionally, several of these insurers have received A.M. Best
ratings that are higher than FPIC's rating of "A- (Excellent)." In addition,
because a substantial portion of the Company's products are marketed through
independent insurance agencies, all of which represent more than one company,
the Company faces competition within each agency in its own agency system.
However, the Company's name recognition, medical society endorsements,
physician board of directors, agency force and program development have all
contributed to helping the Company increase its number of insureds every year
since 1985. The Company has been successful at target marketing groups and
specialties that exhibit above average profitability. The Company believes that
its marketing success has allowed it to improve the quality and profitability
of its overall business.
The Company believes that the principal competitive factors in its business are
service, name recognition and price, and that it is competitive in Florida in
all of these areas. The Company enjoys strong name recognition in Florida by
virtue of having been organized by, and operated for the principal benefit of,
Florida physicians. The services offered insureds of the Company as well as
the healthcare community in general are intended to promote name recognition
and to maintain and improve loyalty among the insureds of the Company. MPL
insurance offered by the Company has the exclusive endorsement of both the FMA
and the FDA. The Company's MPL insurance is also endorsed by various county
medical societies and various state medical specialty societies.
Insurance Ratings
FPIC currently has a financial condition rating from A.M. Best of "A-
(Excellent)". An A.M. Best rating is intended to provide an independent
opinion of an insurer's ability to meet its obligations to policyholders and
should not be considered an investment recommendation. A.M. Best's ratings are
based upon a comprehensive review of a company's financial performance that is
supplemented by certain data, including responses to A.M. Best's
questionnaires, quarterly NAIC filings, state insurance department examination
reports, loss reserve reports, annual reports and reports filed with the
Securities and Exchange Commission. A.M. Best undertakes a quantitative
evaluation based upon profitability, leverage and liquidity and a qualitative
evaluation based upon the composition of an insurer's book of business or
spread of risk, the amount, appropriateness and soundness of reinsurance, the
quality, diversification and estimated market value of its assets, the adequacy
of its loss reserves and policyholders' surplus and the experience and
competency of its management.
Regulation
FPIC and the Company are subject to extensive state regulatory oversight in
Florida and in the other jurisdictions in which they conduct business.
Florida insurance law regulates insurance holding company structures, including
the Company and its subsidiaries, FPIC, the Agency and MCC. Each insurance
company in a holding company structure is required to register with the Florida
Department of Insurance (the "Department of
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Insurance") and furnish information concerning the operations of companies
within the holding company structure that may materially affect the operations,
management or financial condition of the insurers within the structure.
Pursuant to these laws, the Department of Insurance may examine the Company,
and/or FPIC at any time and require disclosure of and/or approval of material
transactions involving any insurance subsidiary of the Company, such as
extraordinary dividends from FPIC. All transactions within the holding company
structure affecting FPIC must be fair and reasonable.
Florida insurance law provides that no person may acquire directly or
indirectly five percent or more of the voting securities of a Florida domiciled
insurance company unless such person has obtained the prior written approval of
the Department of Insurance for such acquisition. Any purchaser of 5% or more
of the Company's or FPIC's outstanding common stock will generally be presumed
to have acquired control of FPIC. In lieu of obtaining such prior approval, a
purchaser owning less than 10% of the outstanding shares of the Company or FPIC
may file a disclaimer of affiliation and control with the Department of
Insurance.
Since FPIC is domiciled in Florida, the Department of Insurance is its
principal supervisor and regulator. However, FPIC is also subject to
supervision and regulation in the states in which it transacts business in
relation to numerous aspects of FPIC's business and financial condition. The
primary purpose of such supervision and regulation is to insure the financial
stability of FPIC for the protection of policyholders. The laws of the various
states establish insurance departments with broad regulatory powers relative to
granting and revoking licenses to transact business, regulating trade
practices, required statutory financial statements and prescribing the types
and amount of investments permitted. Although premium rate regulations vary
among states and lines of insurance, such regulations generally require
approval by each state regulator of the rates and policies to be used in its
state.
Insurance companies are required to file detailed annual reports with the
supervisory agencies in each state in which they do business, and their
business and accounts are subject to examination by such agencies at any time.
The NAIC annually calculates 12 financial ratios to assist state insurance
departments in monitoring the financial condition of insurance companies.
Results are compared against a "usual range" of results for each ratio,
established by the NAIC. For the years 1996, 1995, and 1994, FPIC's results
were within the usual range for each of the 12 ratios.
FPIC is subject to assessment by the Financial Guaranty Associations in the
states in which it conducts business for the provision of funds necessary for
the settlement of covered claims under certain policies of insolvent insurers.
Generally, these associations can assess member insurers on the basis of net
direct written premiums in their particular states.
The insurance industry is under continuous review by Congress, state
legislatures and state and federal regulatory agencies. From time to time
various regulatory and legislative changes have been proposed for the insurance
industry, some of which could have an effect on insurers or reinsurers. Among
the proposals that have in the past been, or are at present being, considered
are the possible introduction of state and federal limits on certain damages
for MPL as well as federal regulation in addition to, or in lieu of, the
current system of state regulation of insurers. The Company is unable to
predict whether any of these proposals will be adopted, the form in which
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any such proposals would be adopted, or the impact, if any, such adoption would
have on the Company, although such impact could be material.
Employees
At December 31, 1996, the Company employed 128 persons. None of these
employees are covered by a collective bargaining agreement. Management
considers the Company's relationships with its employees to be good.
Item 2. Properties
The Company's corporate headquarters are located in Jacksonville, Florida. The
headquarters property is an 8-story, 70,000 sq. ft. office building owned by
the Company where 17,500 sq. ft. of space is occupied for its offices. The
Company's subsidiary, MCC, leases a 13,300 sq. ft. office building in Stuart,
Florida where its offices are located. Management believes these facilities
are adequate for the Company's current needs.
Item 3. Legal Proceedings
There are no material pending legal proceedings against the Company or its
subsidiaries other than litigation arising in connection with the settlement of
insurance claims.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for the Registrants' Common Equity and Related Stockholder
Matters
The Company's Common Stock has been publicly traded on the Nasdaq National
Market System since August 1, 1996 under the symbol FPIC. The following table
sets forth for the periods indicated the high and low bid quotations as
reported. Such quotations reflect inter-dealer bids and offers, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions.
1996 High Bid Low Bid
- ---- -------- -------
Third quarter (from August 1) $13.25 $10.00
Fourth quarter $15.13 $12.88
As of March 5, 1997, the Company estimated that there are approximately 4,800
beneficial owners of the Company's common stock.
Prior to the formation of the Company, its subsidiary, FPIC, paid cash
dividends on its common stock of $819,965 in 1996 and $775,986 in 1995. The
Company presently intends to retain any future earnings for use in its business
and does not anticipate paying any cash dividends in the foreseeable future.
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Item 6. Selected Financial Data
The selected financial data presented below for the fiscal years ending
December 31 should be read in conjunction with the Company's Consolidated
Financial Statements and notes thereto, which are included elsewhere herein.
All per share amounts have been stated giving retroactive effect for the stock
split that occurred as a result of the reorganization in June 1996.
Income Statement Data:
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands, except per share amounts)
Direct Written Premiums $64,292 $56,641 $52,454 $51,568 $44,845
Total Revenues 76,982 69,531 52,306 52,685 49,826
Net Income 13,324 11,686 5,877 8,541 2,147
Net Income per share $1.53 $1.47 $0.76 $1.10 $0.28
Cash dividend declared
per share $.10 $.10 $.10 $0 $.10
Balance Sheet Data:
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands)
Total Investments $238,497 $221,604 $192,867 $180,721 $179,872
Total Assets 303,553 276,699 244,266 233,120 206,408
Loss and LAE Reserves 172,738 164,506 152,268 138,745 126,650
Total Liabilities 207,141 195,143 182,660 169,199 152,954
Shareholders' Equity 96,411 81,556 61,606 63,921 53,454
Item 7. Management's Discussion & Analysis
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and the notes appearing elsewhere in this
report. The consolidated financial statements include the results of FIG's
wholly owned subsidiary McCreary, since July 1, 1995. All amounts have been
rounded to the nearest $100,000.
General
FPIC Insurance Group, Inc. ("FIG" or the "Company") is the largest provider of
medical professional liability (MPL) insurance in Florida based on the number
of physicians and dentists insured. On June 11, 1996 the shareholders of
Florida Physicians Insurance Company, Inc. (FPIC) approved the formation of a
holding company, FIG, to be the parent company for FPIC, the McCreary
Corporation (MCC) and FPIC Insurance Agency, Inc. (the Agency).
FIG's primary sources of revenue are dividends from its subsidiaries. The
dividends are the result of premium earned and investment income generated from
the insurance operations of FPIC, and fee and commission income from MCC and
the Agency. FPIC concentrates on liability insurance products for the
healthcare community, with MPL insurance for physicians and dentists as its
primary product. FPIC writes MPL insurance on a claims-made (as opposed to
occurrence) basis,
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which provides protection to the insured against only those claims that arise
out of incidents occurring and of which notice to the insurer is given while
coverage is in effect. Claims-made policies allow the reserves to accrue in
the year that the claim is reported. Consequently, FPIC is able to estimate
its reserves with more accuracy since there is less uncertainty with respect to
the frequency of claims.
FIG's financial position and results of operations are subject to fluctuations
due to a variety of factors. Unexpected changes in loss trends in any period
could have a materially adverse effect on FIG. Additionally, reevaluations of
loss and loss adjustment expense (LAE) reserves could result in an increase or
decrease in reserves and a corresponding adjustment to earnings. LAE are costs
associated with the settlement of claims. FIG's historical results of
operations are not necessarily indicative of future earnings.
Insurance Operations
In 1996, FPIC experienced the most successful year in the organization's
history in terms of growth in the number of insureds. Total number of insureds
increased 16.8% to 5,903 and direct premium written increased 13.5% to $64.3
million. This growth was accomplished in spite of increased market pressures,
adherence to selective underwriting standards and the effect of managed care
organizations on the healthcare industry.
In 1996, FPIC's combined ratio (a measure of a company's underwriting
profitability), measured on a GAAP basis, was 95.5%. The GAAP combined ratios
for 1995 and 1994 were 94.9% and 92.2%, respectively. According to information
reported by Physician Insurers Association of America (PIAA), the industry
combined ratio for the three years ending December 31, 1995 averaged over 105%.
These favorable underwriting profits were the result of our selective
underwriting process, aggressive claims handling and tight control of expenses.
In 1991, FPIC began laying the groundwork for its success by segmenting the
market into targeted specialties based on above-average underwriting margins.
Over the last several years, FPIC has entered into exclusive endorsement
opportunities with medical specialty societies and associations throughout the
state of Florida. These relationships fueled the growth of the target
specialties. Target specialties and all other specialties based on Class 1
equivalent exposures were 1,945 and 3,460 in 1991; 2,280 and 3,613 in 1992;
2,663 and 3,765 in 1993; 2,897 and 3,903 in 1994; 3,226 and 3,992 in 1995; and
4,320 and 4,201 in 1996. Class 1 equivalent exposures (a measure of risk per
insured) of the selected target specialties grew at an average of 24.4% per
year from 1991 to 1996. Of the growth of $6.3 million in physician direct
premium written in 1996, 68.2% was in the targeted specialties.
The other significant strategic program FPIC developed was a preferred provider
program in 1994 which extends discounts to those insureds with consecutive
years of loss-free experience. Currently, more than 75% of FPIC's eligible
insureds receive a loss-free discount. As expected, the retention rate and
profitability of this select group has been higher than that of FPIC's other
business.
The combination of a very disciplined underwriting approach and the expansion
of FPIC's marketing programs allowed the Company to significantly increase
market share in 1996. By combining the above with an efficient claims handling
program, FPIC was able to reduce its
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overall rate level for physicians by 2.4%, while much of the market was forced
to initiate double digit rate increases during 1996.
FPIC's frequency of reported claims is decreasing. Frequency is the rate at
which claims are reported. Florida Department of Insurance data indicate
frequency trends have been increasing for the overall market. The major risk
factors associated with changes in frequency include new grounds for
litigation, changing social policies, and amendments to applicable laws. The
frequency trend per 100 Class I equivalents was as follows: 13.12 in 1992,
11.54 in 1993, 12.27 in 1994, 11.34 in 1995 and 10.79 in 1996.
FPIC's severity trend has risen since 1993. The average cost per claim, limited
to $500,000 per claim, was $31,704 in 1992, $29,952 in 1993, $35,705 in 1994,
$42,537 in 1995, and $45,212 in 1996. The Company experienced a rise in the
severity of claims in 1995 shortly after the media reported on several cases of
other insurance companies. FPIC is unable to precisely estimate the average
cost of the claims reported in 1995 and 1996 because those report years are not
yet mature enough to predict if this pattern will continue. Currently, there
is no indication that the losses for any report year are materially different
from the initial reserve estimates. The major risk factors associated with
changes in severity include increases in inflation, amendments to applicable
laws and the cost of medical care.
FPIC's net paid loss and LAE increased $6.9 million over 1995 partially due to
an increase in the number of insureds over the last several years and an effort
by the Claims Department to resolve more severe cases as early as possible.
The Company's net paid loss and LAE by calendar year in millions was $29.1 in
1992, $29.6 in 1993, $27.3 in 1994, $33.7 in 1995, and $40.6 in 1996. LAE
expenses are costs associated with the settlement of claims.
The only geographic area of concern in the Florida malpractice market in 1996
was in Southeast Florida, where the Company has 17% of its direct premium
written. Two large international insurers began programs with rates
significantly lower than the rest of the market. During 1996, these programs
had a very limited effect on FPIC as current renewals and new business remain
strong in this area.
FPIC is committed to expanding its market beyond its existing position as a
single state carrier in the medical malpractice market. FPIC is now licensed
in Georgia and Alabama. Slow growth is expected since both states are
dominated by local carriers who have been able to maintain strong customer
loyalty. The same targeted specialty and loss-free approach developed in
Florida will be used in these states, in addition to the establishment of an
agency force. FPIC chose this strategy because in Georgia approximately 50%
and in Alabama approximately 20% of the markets are controlled by agents.
FPIC continues to work on the development of an office package policy for its
core markets, as well as a workers' compensation product. Both of these
products will be reinsured to limit FPIC's risk in the early years of the
programs. These products, along with FPIC's managed care liability insurance
and provider stop-loss insurance, will be offered to solo practitioners and
group practices as well as managed care organizations.
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Third Party Administrative (TPA) Operations
Acquired to provide cross-selling opportunities, MCC specializes in the
administration of self-insurance plans for large employers. The lines of
insurance administered are group health, workers' compensation, general
liability, and property insurance. The services are offered to FPIC's existing
and potential customer base of healthcare facilities and managed care
organizations.
MCC contributed more than $1 million in pretax income to the Company in 1996.
Revenues for 1996 increased 8.6% to more than $5 million. Most of this growth
occurred in claims administration and commission income as a result of growth
in MCC's customer base.
In January 1997, MCC purchased Employers Mutual Inc. (EMI) for $1.25 million,
subject to future adjustments if certain earnings goals are met. EMI
administers self-insured managed care health plans in Florida and Texas, with
1996 revenues in excess of $3 million. With this acquisition, the Company has
increased it group health and workers' compensation TPA business by 70%.
Investment Results
FIG maintains a conservative investment approach. The investment portfolio is
a diversified mix of taxable and tax-exempt fixed-income securities with a
duration of 4.2 years. More than 85% of the portfolio is rated AAA with 7%
rated AA, 6% rated A, and 2% rated BBB. FIG's investment policy is
predominantly a buy and hold strategy to generate an above average level of
taxable and tax-exempt income. FPIC's business philosophy is to take risk on
its insurance underwriting rather than in its investment portfolio.
As surplus grows, the Company will constantly evaluate when it should assume
more investment risk in order to improve the investment return. As of year
end, the average yield of the portfolio was approximately 6.27%.
Results of Operations - Year Ended December 31, 1996 Compared to Year Ended
December 31, 1995
Premiums
Direct premium written increased $7.7 million, or 14%, from $56.6 million in
1995 to $64.3 million in 1996. This increase was despite a 2.4% decrease in
rates. This increase was primarily attributable to growth in the number of
insureds. Reinsurance premium ceded increased $3.3 million, or 144%, from $2.3
million in 1995 to $5.6 million in 1996 due to a return of ceded premium of
$3.4 million upon the expiration of a reinsurance contract in 1995 which was
recorded as a decrease to ceded premium. Excluding this transaction,
reinsurance premium ceded would have decreased $0.1 million. Net premium
earned increased $3.4 million or 6%, from $52.7 million in 1995 to $56.1
million in 1996 due to the increase in direct premium written and the decrease
in ceded premium. Excluding the one time effect of the return of ceded premium
received in conjunction with the above-mentioned reinsurance contract, net
premium earned increased $6.8 million from $49.3 million to $56.1 million.
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Net Investment Income
Net investment income increased $1.6 million, or 13%, from $12.0 million in
1995 to $13.6 million in 1996. Investment income in 1995 is net of a $0.5
million writedown of the Company's home office building. The increase was
primarily attributable to a higher level of invested assets. The increase was
achieved despite a shift in the portfolio to a higher concentration of tax-free
securities. The Company's investment policy is to acquire investment grade
fixed income securities with an average duration of approximately four years.
The average duration of the portfolio increased from 3.6 years in 1995 to 4.2
years in 1996.
Net Realized Investment Gains (Losses)
Net realized investment losses in 1996 were $0.1 million as compared to net
realized investment gains of $.2 million in 1995. With the buy and hold
approach described earlier, net realized investment gains or losses are
expected to be minimal.
Other Income
Other income increased $2.8 million, or 61%, from $4.6 million in 1995 to $7.4
million in 1996. This increase was primarily attributable to the inclusion of
a full year of income from MCC.
Losses and LAE
Losses and LAE increased $2.2 million, or 5%, from $44.8 million in 1995 to
$47.0 million in 1996 reflecting, in part, the increase in net premium earned.
The GAAP loss ratios of 83.7% in 1996 and 85.1% in 1995 reflect the stability
the Company has experienced in its loss trends in recent years. In connection
with the Company's bi-annual reserving review, which includes a reevaluation of
the adequacy of reserve levels for prior years' claims, the Company reduced its
reserves for claims occurring in prior periods by $14.7 million in 1996 and
$14.0 million in 1995. These reductions produced corresponding increases in
the Company's pre-tax income. There is no assurance that reserve adequacy
reevaluations will produce similar reserve reductions and pre-tax income
increases in the future. Factors that could adversely affect the loss and LAE
reserve estimate and future redundancies include, but are not limited to,
inflation, changes in frequency and severity trends or changes in the judicial
or legislative environment. The Company cannot predict whether similar
redundancies will be experienced in future years.
The Company believes that its favorable loss and LAE reserve development has
primarily resulted from the following factors: (i) tort reform; (ii) the
Company's approach to establishing reserves; (iii) the Company's targeting of
medical specialties in which it believes it has developed substantial knowledge
and experience; and (iv) the Company's targeting of "claims-free" business.
Other Underwriting Expenses
Other underwriting expenses increased $1.5 million, or 29%, from $5.1 million
in 1995 to $6.6 million in 1996. This increase was primarily attributable to
acquisition costs relating to the increase of insureds and the related premium
written.
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Other Operating Expenses
Other operating expenses more than doubled from $2.0 million in 1995 to $4.1
million in 1996. These expenses are for MCC and this increase was primarily
attributed to the inclusion of a full year of MCC operations in the 1996
financial statements.
Income Tax
Income taxes increased $0.1 million, or 2%, from $5.9 million in 1995 to $6.0
million in 1996. Income tax expense was flat even though net income before tax
increased by $1.7 million from $17.6 million in 1995 to $19.3 million in 1996
due to the shift in the investment policy from taxable to tax-free securities.
Net Income
For the reasons stated above, net income increased $1.6 million, or 14%, from
$11.7 million in 1995 to $13.3 million in 1996.
Results of Operations - Year Ended December 31, 1995 Compared to Year Ended
December 31, 1994
Premiums
Direct premium written increased $4.2 million, or 8%, from $52.4 million in
1994 to $56.6 million in 1995. This increase was primarily attributable to (i)
an average rate increase of 3.6% on physician MPL premiums, and (ii) an
increase in the number of insureds and the average premium per insured
(excluding the impact of the rate increase discussed above). Reinsurance
premium ceded decreased $2.6 million, or 53%, from $4.9 million in 1994 to $2.3
million in 1995 due to a return of ceded premium of $3.4 million upon the
expiration of a reinsurance contract in 1995. Excluding this transaction,
reinsurance premium ceded would have increased $0.8 million to $5.7 million.
Net premium earned increased $5.9 million, or 13%, from $46.8 million in 1994
to $52.7 million in 1995 due to the increase in direct premium written and the
decrease in ceded premium.
Net Investment Income
Net investment income increased $1.6 million, or 16%, from $10.4 million in
1994 to $12.0 million in 1995. This increase, which was partially offset by a
$0.5 million write-down of the Company's home office building, was primarily
attributable to a decrease in the portfolio's average cash balance in 1995 from
1994, the difference of which was invested in higher yielding securities, and
a higher level of invested assets. The change in cash position was attributed
to the Company's decision to change its investment strategy from active trading
to a buy and hold approach. The Company's investment policy is to acquire
investment grade fixed income securities with an average duration of less than
four years. The average duration of the portfolio decreased from 4.6 years in
l994 to 3.6 years in 1995.
Net Realized Investment Gains (Losses)
Net realized investment gains in 1995 were $0.2 million as compared to net
realized investment losses of $6.7 million in 1994. The Company's net realized
investment losses of $6.7 million
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during 1994 were principally the result of an increase in interest rates during
the first six months of 1994 coupled with an active trading strategy by an
external portfolio manager. The Company terminated this external manager in
June 1994. The Company thereafter changed its investment strategy from an
active trading strategy to a buy and hold approach.
Other Income
Other income increased $2.9 million, or 171%, from $1.7 million in 1994 to $4.6
million in 1995. This increase was primarily attributable to claims
administration fees of $1.9 million and commissions of $0.6 million from MCC's
operations.
Losses and LAE
Losses and LAE increased $5.6 million, or 14%, from $39.2 million in 1994 to
$44.8 million in 1995 reflecting the increase in net premium earned. The GAAP
loss ratios of 83.6% in 1994 and 85.1% in 1995 reflect the stability the
Company has experienced in its loss trends in recent years. In connection with
the Company's bi-annual reserving review, which includes a reevaluation of the
adequacy of reserve levels for prior years' claims, the Company reduced its
reserves for claims occurring in prior periods by $10.5 million in 1994 and
$14.0 million in 1995. These reductions produced corresponding increases in
the Company's pre-tax income. There is no assurance that reserve adequacy
reevaluations will produce similar reserve reductions and pre-tax income
increases in the future.
Factors that could adversely affect the loss and LAE reserve estimate and
future redundancies include, but are not limited to, inflation, changes in
frequency and severity trends or changes in the judicial or legislative
environment. The Company cannot predict whether similar redundancies will be
experienced in future years.
Other Underwriting Expenses
Other underwriting expenses increased $1.1 million, or 27%, from $4 million in
1994 to $5.1 million in 1995. This increase was primarily attributable to an
increase of $0.6 million in commission expense as a result of higher direct
premium written by agents and an increase in the commission rate paid to
agents.
Other Operating Expenses
Other operating expenses were $2.0 million in 1995 as compared to none in 1994.
This increase was attributed to the addition of $2.0 million in administrative
expenses for MCC'S operations.
Income Tax
Income taxes increased $2.8 million, or 91%, from $3.1 million in 1994 to $5.9
million in 1995. This increase was primarily attributable to the increase in
net income before income taxes.
Net Income
For the reasons stated above, net income increased $5.8 million, or 98%, from
$5.9 million in 1994 to $11.7 million in 1995.
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Liquidity and Capital Resources
The payment of losses and LAE, and operating expenses in the ordinary course of
business is the principal need for the Company's liquid funds. Cash used to
pay these items has been provided by operating activities. Cash provided from
these activities was sufficient during 1996 to meet the Company's needs.
Management believes these sources 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 increases in the dollar amount of losses and LAE
and may therefore adversely affect future reserve development and cash flow
needs. Management believes these factors include, among others, inflation,
changes in medical procedures, increasing use of managed care and adverse
legislative changes. In order to compensate for such risk, the Company: (i)
maintains what its management considers to be adequate reinsurance; (ii)
conducts regular actuarial reviews of loss reserves every six months; and (iii)
maintains adequate asset liquidity (by managing its cash flow from operations
coupled with its fixed income maturities).
The Company did not borrow any funds in 1996 and has no current plans to borrow
funds during 1997. At December 31, 1996, the Company held approximately $21.3
million in investments scheduled to mature during the next twelve months, which
combined with net cash flows from operating activities, are expected to provide
the Company with sufficient liquidity and working capital. As highlighted in
the accompanying Consolidated Statements of Cash flows, the Company generated
positive net cash from operations of $24.1 million in 1996.
Shareholder dividends payable by the Company's insurance subsidiary, FPIC, are
subject to certain limitations imposed by Florida law. In 1997, FPIC is
permitted, within insurance regulatory guidelines, to pay dividends of
approximately $10.4 million without prior regulatory approval. In recent years
the National Association of Insurance Commissioners (NAIC) has developed
risk-based capital ("RBC") measurements for insurers. The measurements provide
state regulators with varying levels of authority based on the adequacy of an
insurer's RBC. At December 31, 1996, FPIC's statutory annual statement
reported a total adjusted surplus to policyholders of $76.5 million, which is
$69.0 million more than the NAIC's authorized RBC control level of $7.5
million. The authorized control level permits an insurance regulator to take
whatever regulatory actions are considered necessary to protect the best
interests of the policyholders and creditors of the insurer, which may include
placing the insurer under regulatory control (i.e., rehabilitation or
liquidation). The Florida Department of Insurance has not adopted the NAIC's
RBC standards, although it does use the standard to identify companies that may
need regulatory attention.
Guaranty Fund Assessments
FPIC is subject to assessment by the Florida Insurance Guaranty Association,
Inc. (FIGA) as well as similar associations in Alabama and Georgia for the
provision of funds necessary for the settlement of covered claims under certain
policies of insolvent insurers. The standard assessments that may be levied
annually by these associations on an "as needed" basis, are expensed as paid.
In 1996, a $0.1 million assessment was levied. In 1995, no assessment was
levied.
In addition to the standard FIGA assessments, in 1992 the Florida Legislature
passed a special assessment to retire bonds issued to pay property losses
arising from Hurricane Andrew. FPIC is assessed 2% of the greater of either
net direct premium written during the current year or 1991, the base year. The
bonds were initially scheduled for defeasance in the year 2003, but may be paid
off
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prior to that time. However, changes in the premium levels of insurers in this
pool could revise the pay off date. At December 31, 1996, the balance of this
reserve was $1.3 million.
Forward-Looking Statements
The statements which are not historical facts contained in this report are
forward-looking statements that involve certain risks and uncertainties. These
forward-looking statements include the plans and objectives of management for
future operations relating to the products and future economic performance of
FIG and its subsidiaries.
The forward-looking statements are based on assumptions that FIG will continue
to: (i) price and market its insurance products competitively; (ii) reserve
appropriately for losses and LAE; (iii) maintain its successful handling of
claims, that competitive conditions within the MPL insurance business will not
change materially or adversely, that demand for MPL insurance will remain
strong, that the market will accept FIG's new products and services, that FIG
will retain existing agents and key management personnel, that FIG's reinsurers
will remain solvent and that there will be no material adverse change in FIG's
operations or business. Assumptions relating to the foregoing involve
judgments with respect to, among other things, future economic, competitive and
market conditions and further business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the control of
the Company.
Although the Company believes that the assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could prove
inaccurate and, therefore, there can be no assurance that the results
contemplated in forward-looking information will be realized. Budgeting,
reserving and other management decisions are subjective in many respects and
thus susceptible to interpretations and periodic revisions based on actual
experience and business developments, the effect of which may cause the Company
to alter its marketing, capital expenditures or other budgets, which may in
turn affect the Company's results of operations. In light of the significant
uncertainties inherent in the forward-looking information included herein, the
inclusion of such information should not be regarded as a representation by the
Company or any other person that the objectives or plans of the Company will be
achieved.
Item 8. Financial Statements and Supplementary Data
The financial statements and schedules listed in Item 14(a)(1) and (2) are
included in this Report beginning on Page 27.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
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PART III
Item 10. Directors and Executive Officers of the Registrant
Information required hereunder with respect to directors and the five highest
compensated officers will appear under the heading Executive Compensation in
the Company's Proxy Statement for the 1997 Annual Meeting of Shareholders,
which information is incorporated herein by reference. Information regarding
the Company's other executive officers is as follows:
Name Age Capacity
---- --- --------
R. Jeannie Whitter 46 Vice President
Charles W. Emanuel 46 Vice President and Secretary
Ray A. Carey 58 Vice President
Kurt F. Driscoll 46 Vice President
Paul T. Luckman 40 Vice President
Donald J. Sabia 38 Vice President and Controller
R. Jeannie Whitter has served as Vice President of the Company since its
formation in 1996 and as Vice President of FPIC since 1988. She has been
involved in the Company's underwriting since 1976.
Charles W. Emanuel has served as Vice President and Secretary of the Company
since its formation in 1996 and as Vice President and Assistant Secretary of
FPIC since 1988. Since 1982, Mr. Emanuel has been responsible for the
Company's management information systems.
Ray A. Carey has served as Vice President of the Company since its formation in
1996 and as Vice President of FPIC since 1992. Since 1978, Mr. Carey has been
responsible for the Company's claims administration.
Kurt F. Driscoll has served as Vice President of the Company since its
formation in 1996 and as Vice President of FPIC since 1992 and has been
responsible for the Company's risk management since 1988.
Paul T. Luckman has served as Vice President of the Company since its formation
in 1996 and as Vice President of FPIC since March 1996 and is responsible for
the Company's marketing. Mr. Luckman served as Director of Hospitals and
Managed Care programs for MAG Mutual Insurance Company from 1993 to 1996. He
served as Director of Insurance and Risk Management for Crozar-Keytone Health
System from 1992 to 1993. Mr. Luckman served as Associate Director of Risk
Management for Franciscan Health System from 1991 to 1992.
Donald J. Sabia has served as Vice President and Controller of the Company
since its formation in 1996 and as Controller of FPIC since 1995 and has been
employed by the Company since 1993. From 1986 to 1993, Mr. Sabia was an audit
supervisor for Coopers & Lybrand. Mr. Sabia is a Certified Public Accountant.
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Item 11. Executive Compensation
The information required herein will appear under the heading Executive
Compensation in the Company's Proxy Statement for the 1997 Annual Meeting of
Shareholders, which information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required herein will appear under the heading Principal
Shareholders and Securities Ownership of Management in the Company's Proxy
Statement for the 1997 Annual Meeting of Shareholders, which information is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required herein will appear under the heading Certain
Relationships and Related Transactions in the Company's Proxy Statement for the
1997 Annual Meeting of Shareholders which information is incorporated herein by
reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements and Schedules
----------------------------------
FPIC Insurance Group, Inc.:
Independent Auditors' Report
Consolidated Balance Sheets at December 31, 1996 and 1995
Consolidated Statements of Income for the years ended December 31,
1996, 1995 and 1994
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994
2. Notes to the Consolidated Financial Statements
----------------------------------------------
(Schedules other than those listed are omitted for the reason that they are not required or are not applicable or
the required information is shown in the financial statements or notes thereto)
I - Summary of Investments - Other than Related Party Investments
III - Supplemental Insurance Information
IV - Reinsurance
V - Valuation and Qualifying Accounts
3. Exhibits
---------
Exhibit No.
-----------
3.1 Articles of Incorporation of FPIC Insurance Group, Inc., incorporated by reference to the Company's
Registration Statement on Form S-4 (Registration No. 333-02040) first filed on March 7, 1996.
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3.2 Bylaws of FPIC Insurance Group, Inc., incorporated by reference to the Company's Registration Statement on
Form S-4 (Registration No. 333-02040) first filed on March 7, 1996.
10(a) Reinsurance Agreement with Cologne Reinsurance Company (Dublin) Ltd., Ltd., incorporated by reference to
the Company's Registration Statement on Form S-4 (Registration No. 333-02040) first filed on March 7, 1996.
10(b) Casualty Excess of Loss Treaty Agreement No. AR-4302(96) Final Placement Slip (Practitioner Liability
Reinsurance) with Various Subscribing Reinsurers.
10(c) Casualty First Excess Cession Treaty Agreement No. AR-4303(96) Final Placement Slip (Healthcare Facilities
Liability Reinsurance) with Various Subscribing Reinsurers.
10(d) Employment Agreement dated December 30, 1992, amended November 4, 1995, and amended February 28, 1996,
between FPIC and William R. Russell, incorporated by reference to the Company's Registration Statement on
Form S-4 (Registration No. 333-02040) first filed on March 7, 1996.
10(e) Employment Agreement dated December 30, 1992, amended November 4, 1995, and amended February 28, 1996,
between FPIC and Steven R. Smith, incorporated by reference to the Company's Registration Statement on Form
S-4 (Registration No. 333-02040) first filed on March 7, 1996.
10(f) Severance Agreement dated February 28, 1996, between FPIC and William R. Russell, incorporated by reference
to the Company's Registration Statement on Form S-4 (Registration No. 333-02040) first filed on March 7,
1996.
10(g) Severance Agreement dated February 28, 1996, between FPIC and Steven R. Smith, incorporated by reference to
the Company's Registration Statement on Form S-4 (Registration No. 333-02040) first filed on March 7, 1996.
10(h) Severance Agreement dated February 28, 1996, between FPIC and Steven M. Rosenbloom, incorporated by reference
to the Company's Registration Statement on Form S-4 (Registration No. 333-02040) first filed on March 7,
1996.
10(i) Severance Agreement dated February 28, 1996, between FPIC and Robert B. Finch, incorporated by reference to
the Company's Registration Statement on Form S-4 (Registration No. 333-02040) first filed on March 7, 1996.
10(j) Form of Indemnity Agreement dated February 28, 1996 between the Registrant and Drs. Acosta-Rua, Gause,
Shapiro, Selander, White, Bagby,
22
25
Baratta, Murray, Bridges, Hagen, Van Eldik, Yonge, Messrs. Russell, Smith, Rosenbloom, Finch, Sabia, Emanuel,
Carey, Driscoll and Ms. Whitter , incorporated by reference to the Company's Registration Statement on Form
S-4 (Registration No. 333-02040) first filed on March 7, 1996).
10(k) Asset Purchase Agreement made as of May 10, 1995 among Florida Physicians Acquisition Company, McCreary
Corporation and William T. McCreary, incorporated by reference to the Company's Registration Statement on
Form S-4 (Registration No. 333-02040) first filed on March 7, 1996.
10(l) Omnibus Incentive Plan, incorporated by reference to the Company's Registration Statement on Form S-4
(Registration No. 333-02040) first filed on March 7, 1996.
10(m) Director Stock Option Plan, incorporated by reference to the Company's Registration Statement on Form S-4
(Registration No. 333-02040) first filed on March 7, 1996.
10(n) Supplemental Executive Retirement Plan, as amended, incorporated by reference to the Company's Third Quarter
Statement on Form 10-Q (Registration No. 0-28730) filed on November 14, 1996.
10(o) Excess Benefit Plan, incorporated by reference to the Company's Registration Statement on Form S-4
(Registration No. 333-02040) first filed on March 7, 1996.
10(p) Deferred Compensation Plan, incorporated by reference to the Company's Registration Statement on Form S-1
(Registration No. 333-04585) first filed on May 24, 1996.
10(q) Employee Stock Purchase Plan, incorporated by reference to the Company's Registration Statement on Form S-4
(Registration No. 333-02040) first filed on March 7, 1996.
21 Subsidiaries of the Registrant.
27 Financial Data Schedule.
(b) Reports on Form 8-K
None.
23
26
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) 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, on this
the 15th day of March , 1997.
FPIC Insurance Group, Inc.
By: /s/ WILLIAM R. RUSSELL
-----------------------------
William R. Russell, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ WILLIAM R. RUSSELL President, Chief Executive March 15, 1997
------------------------ Officer and Director
William R. Russell (Principal Executive Officer)
/s/ ROBERT B. FINCH Senior Vice President March 15, 1997
------------------------ and Chief Financial Officer
Robert B. Finch (Principal Financial Officer)
/s/ DONALD J. SABIA Vice President and March 15, 1997
------------------------ Controller
Donald J. Sabia (Principal Accounting Officer)
/s/ GASTON J. ACOSTA-RUA Chairman of the Board March 15, 1997
------------------------
Gaston J. Acosta-Rua, M.D.
/s/ CURTIS E. GAUSE Director March 15, 1997
------------------------
Curtis E. Gause, D.D.S.
24
27
/s/ DAVID M. SHAPIRO Director March 15, 1997
---------------------
David M. Shapiro, M.D.
/s/ GUY T. SELANDER Director March 15, 1997
---------------------
Guy T. Selander, M.D.
/s/ JAMES G. WHITE Director March 15, 1997
---------------------
James G. White, M.D.
/s/ RICHARD J. BAGBY Director March 15, 1997
---------------------
Richard J. Bagby, M.D.
/s/ ROBERT O. BARATTA Director March 15, 1997
---------------------
Robert O. Baratta, M.D.
/s/ LOUIS C. MURRAY Director March 15, 1997
---------------------
Louis C. Murray, M.D.
/s/ JAMES W. BRIDGES Director March 15, 1997
---------------------
James W. Bridges, M.D.
/s/ J. STEWART HAGEN Director March 15, 1997
---------------------
J. Stewart Hagen, M.D.
/s/ DICK L. VAN ELDIK Director March 15, 1997
---------------------
Dick L. Van Eldik, M.D.
/s/ HENRY M. YONGE Director March 15, 1997
---------------------
Henry M. Yonge, M.D.
25
28
Independent Auditors' Report
The Board of Directors
FPIC Insurance Group, Inc.
We have audited the consolidated financial statements of FPIC Insurance Group,
Inc. as listed in the accompanying index. In connection with our audits of the
consolidated financial statements, we also have audited the financial statement
schedules as listed in the accompanying index. These consolidated financial
statements and financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedules based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of FPIC Insurance
Group, Inc. as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedules,
when considered in relation to the basic consolidated financial statements
taken as a whole, present fairly, in all material respects, the information set
forth therein.
KPMG Peat Marwick LLP
Jacksonville, Florida
February 25, 1997
26
29
FPIC Insurance Group, Inc.
Consolidated Balance Sheets
as of December 31, 1996 and 1995
1996 1995
---------------- -----------------
ASSETS
Bonds and U.S. Government securities:
Available-for-sale, at fair value $234,650,172 $218,303,504
Common stocks, at fair value 185,000 125,000
Real estate investments 3,661,726 2,675,976
Short-term investments, at cost 0 500,000
---------------- -----------------
TOTAL INVESTMENTS 238,496,898 221,604,480
---------------- -----------------
Cash and cash equivalents 5,463,096 494,095
Premiums receivable, net 12,551,992 10,846,007
Accrued investment income 3,641,391 3,064,866
Reinsurance recoverable on paid losses 73,873 808,900
Due from reinsurers on unpaid losses and advance premiums 12,020,239 9,480,277
Deposits with reinsurers 16,419,179 14,842,952
Property and equipment, net of accumulated depreciation 1,617,750 1,388,543
Deferred policy acquisition costs 1,212,035 818,312
Federal income tax receivable 0 1,665,764
Deferred income taxes 8,913,225 9,472,406
Finance charge receivable 230,443 204,641
Prepaid expenses 409,718 347,378
Goodwill 1,989,113 1,108,117
Other assets 513,566 552,031
---------------- -----------------
TOTAL ASSETS $303,552,518 $276,698,769
================ =================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Loss and loss adjustment expense reserves $172,738,000 $164,506,000
Unearned premiums 23,458,641 20,947,885
Paid in advance and unprocessed 5,250,755 3,982,143
FIGA accrual 1,345,244 3,032,234
Accrued expenses and other liabilities 4,348,488 2,674,085
---------------- -----------------
TOTAL LIABILITIES 207,141,128 195,142,347
---------------- -----------------
Commitments and contingencies (Note 16)
SHAREHOLDERS' EQUITY (AS RESTATED, NOTE 2)
Common stock, $.10 par value: 25,000,000 shares authorized;
9,021,670 shares issued and outstanding in 1996 and
8,139,640 shares issued and outstanding in 1995 902,167 813,964
Additional paid-in capital 22,444,711 18,454,709
Net unrealized gain on investments 80,169 1,625,175
Retained earnings 73,166,334 60,662,574
---------------- -----------------
96,593,381 81,556,422
Less Treasury stock (19,569 common shares) (181,991) 0
---------------- -----------------
TOTAL SHAREHOLDERS' EQUITY 96,411,390 81,556,422
---------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $303,552,518 $276,698,769
================ =================
The accompanying notes are an integral part of the consolidated financial
statements.
27
30
FPIC Insurance Group, Inc.
Consolidated Statements of Income
for the years ended December 31, 1996, 1995 and 1994
1996 1995 1994
---------------- --------------- ----------------
REVENUES
Net premiums earned $56,074,436 $52,674,850 $46,836,152
Net investment income 13,611,373 11,987,414 10,369,742
Net realized investment gains (losses) (71,288) 238,275 (6,657,852)
Claims administration and management fees 4,071,460 1,904,324 0
Commission income 1,120,455 652,848 0
Finance charge and other income 2,175,079 2,072,811 1,758,125
---------------- --------------- ----------------
TOTAL REVENUES 76,981,515 69,530,522 52,306,167
---------------- --------------- ----------------
EXPENSES
Net losses and loss adjustment expenses 46,947,946 44,839,234 39,177,762
Other underwriting expenses 6,589,743 5,134,525 4,003,935
Other operating expenses 4,124,404 1,960,755 0
---------------- --------------- ----------------
TOTAL EXPENSES 57,662,093 51,934,514 43,181,697
---------------- --------------- ----------------
Income before income taxes and cumulative
effect of accounting change 19,319,422 17,596,008 9,124,470
Income taxes 5,995,697 5,909,835 3,098,269
---------------- --------------- ----------------
Income before cumulative effect of
accounting change 13,323,725 11,686,173 6,026,201
Cumulative effect of accounting change, net of
deferred income taxes of $77,106 0 0 (149,677)
---------------- --------------- ----------------
NET INCOME $13,323,725 $11,686,173 $5,876,524
================ =============== ================
NET INCOME PER COMMON SHARE
Income before cumulative effect of accounting change $1.53 $1.47 $0.78
Cumulative effect of accounting change 0.00 0.00 (0.02)
---------------- --------------- ----------------
NET INCOME PER COMMON SHARE $1.53 $1.47 $0.76
================ =============== ================
WEIGHTED AVERAGE SHARES OUTSTANDING 8,723,967 7,949,750 7,759,860
================ =============== ================
The accompanying notes are an integral part of the consolidated financial
statements.
28
31
FPIC Insurance Group, Inc.
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1996, 1995 and 1994
ADDITIONAL NET UNREALIZED
COMMON PAID-IN GAIN (LOSS) RETAINED
STOCK CAPITAL ON INVESTMENTS EARNINGS
-------------------------------------------------------------------
BALANCES, JANUARY 1, 1994 (AS RESTATED, NOTE 2) $387,993 $18,104,694 $0 $45,427,834
Cumulative effect of adopting SFAS 115 (346,944)
Net Income 5,876,524
Issuance of stock dividend and par value adjustment
for reorganization effect 387,993 387,993 (775,986)
Payment of cash dividend (775,985)
Net unrealized loss on debt securities (7,067,904)
-------------------------------------------------------------------
BALANCES, DECEMBER 31, 1994 775,986 18,492,687 (7,414,848) 49,752,387
Net income 11,686,173
Issuance of shares, net 37,978 (37,978)
Payment of cash dividend (775,986)
Net unrealized gain on debt securities 9,040,023
-------------------------------------------------------------------
BALANCES, DECEMBER 31, 1995 813,964 18,454,709 1,625,175 60,662,574
Net income 13,323,725
Payment of cash dividend (813,965)
Payment of prior year dividend (6,000)
Net unrealized loss on debt securities (1,545,006)
Purchase of shares outstanding
Issuance of shares, net 38,203 (38,203)
Shares issued and net proceeds received from IPO 50,000 4,028,205
-------------------------------------------------------------------
BALANCES, DECEMBER 31, 1996 $902,167 $22,444,711 $80,169 $73,166,334
===================================================================
TREASURY
STOCK TOTAL
-----------------------------
BALANCES, JANUARY 1, 1994 (AS RESTATED, NOTE 2) $0 $63,920,521
Cumulative effect of adopting SFAS 115 (346,944)
Net Income 5,876,524
Issuance of stock dividend and par value adjustment
for reorganization effect 0
Payment of cash dividend (775,985)
Net unrealized loss on debt securities (7,067,904)
-----------------------------
BALANCES, DECEMBER 31, 1994 0 61,606,212
Net income 11,686,173
Issuance of shares, net 0
Payment of cash dividend (775,986)
Net unrealized gain on debt securities 9,040,023
-----------------------------
BALANCES, DECEMBER 31, 1995 0 81,556,422
Net income 13,323,725
Payment of cash dividend (813,965)
Payment of prior year dividend (6,000)
Net unrealized loss on debt securities (1,545,006)
Purchase of shares outstanding (181,991) (181,991)
Issuance of shares, net 0
Shares issued and net proceeds received from IPO 4,078,205
-----------------------------
BALANCES, DECEMBER 31, 1996 ($181,991) $96,411,390
=============================
The accompanying notes are an integral part of the consolidated financial
statements.
29
32
FPIC Insurance Group, Inc.
Consolidated Statements of Cash Flows
for the years ended December 31, 1996, 1995 and 1994
1996 1995 1994
---------------- ---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $13,323,725 $11,686,173 $5,876,524
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization expense 1,757,526 1,687,038 1,063,377
Cumulative effect of accounting change 0 0 149,677
Realized (gains) losses on investments 71,288 (238,275) 6,657,852
Bad debts expense (benefit) 147,422 153,498 (36,870)
Loss on write down of real estate investment 0 500,000 0
Deferred income taxes 1,355,093 1,032,055 1,694,967
Proceeds from sale or maturity of trading securities 0 0 471,014,750
Purchase of trading securities 0 0 (475,578,751)
Changes in assets and liabilities:
Premiums receivable (1,853,407) (1,082,670) (890,072)
Accrued investment income (576,525) 227,653 (827,249)
Reinsurance recoverable on paid losses 735,027 (754,849) 610,386
Due from reinsurers on unpaid losses
and advance premiums (2,539,962) 17,439 3,940,962
Deposits with reinsurers (1,576,227) (4,619,072) (2,856,880)
Deferred policy acquisition costs (393,723) (222,840) (92,368)
Federal income tax receivable 1,665,764 (401,722) (1,741,151)
Mortgage receivable 0 0 50,000
Other assets 38,465 (520,935) 3,945,977
Prepaid expenses and finance charge receivable (88,142) (48,371) 24,782
Loss and loss adjustment expense reserves 8,232,000 12,238,000 13,523,000
Unearned premiums 2,510,756 1,641,082 235,324
Paid in advance and unprocessed 1,268,612 (519,493) (171,975)
FIGA accrual (1,686,990) (730,295) (653,092)
Accrued expenses and other liabilities 1,674,403 (146,383) 526,245
---------------- ---------------- ----------------
Net cash provided by operating activities 24,065,105 19,898,033 26,465,415
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of short-term investments 500,000 4,148,996 45,622,378
Purchase of short-term investments 0 (803,760) (4,101,081)
Proceeds from sale or maturity of securities available-for-sale 80,865,600 162,456,887 287,890,129
Purchase of securities available-for-sale (101,186,056) (182,116,512) (355,643,413)
Purchase of goodwill (1,000,000) (1,144,879) 0
Purchase of real estate investments (1,021,392) (225,000) (200,000)
Purchase of common stock (60,000) (60,000) (65,000)
Purchase of subsidiary's net other assets 0 (855,121) 0
Purchase of property and equipment, net (270,505) (41,232) (187,194)
---------------- ---------------- ----------------
Net cash used in investing activities (22,172,353) (18,640,621) (26,684,181)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock 4,078,205 0 0
Purchase of common stock-treasury (181,991) 0 0
Dividends paid on common stock (819,965) (775,986) (775,985)
---------------- ---------------- ----------------
Net cash provided by (used in) financing activities 3,076,249 (775,986) (775,985)
---------------- ---------------- ----------------
Net increase (decrease) in cash 4,969,001 481,426 (994,751)
Cash and cash equivalents, beginning of year 494,095 12,669 1,007,420
---------------- ---------------- ----------------
CASH AND CASH EQUIVALENTS, END OF YEAR $5,463,096 $494,095 $12,669
================ ================ ================
Supplemental disclosure of cash flow information:
Federal income taxes paid $2,599,703 $6,071,000 $2,425,000
Exchange of mortgage note for deed on real estate investment $0 $2,200,000 $0
The accompanying notes are an integral part of the consolidated financial
statements.
30
33
FPIC INSURANCE GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
FPIC Insurance Group, Inc. (the Company) is an insurance holding company
comprised of three wholly-owned subsidiaries: Florida Physicians Insurance
Company, Inc. (FPIC), FPIC Insurance Agency (the Agency), and McCreary
Corporation (MCC). On June 11, 1996, the shareholders of FPIC approved the
formation of a holding company structure that resulted in FPIC becoming a
subsidiary of the Company. In connection with the reorganization, FPIC's
shareholders became the shareholders of the Company and received five shares of
the Company's common stock for each of their shares of FPIC's common stock.
FPIC is a licensed casualty insurance carrier and writes professional liability
insurance for physicians, dentists, hospitals and other healthcare providers,
primarily in the state of Florida. MCC is a third-party administrator of
various lines of business in the insurance segment, operating in Florida. The
Agency conducts various insurance agency activities, including renewing the
insurance that FPIC directly wrote prior to the reorganization.
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles (GAAP). These
financial statements include the accounts of FPIC, the Agency and MCC. All
significant intercompany transactions and balances have been eliminated in
consolidation.
NATURE OF OPERATIONS
The Company operates in the property and casualty insurance industry, is
licensed to write insurance in Alabama, Florida, Georgia and Ohio, and is
subject to regulation by the Departments of Insurance in these states.
Following is a description of the most significant risks facing property and
casualty insurers and how the Company mitigates those risks:
Legal/RegulatoryRisk is the risk that changes in the legal or regulatory
environment in which an insurer operates will change and create additional loss
costs or expenses not anticipated by the insurer in pricing its products. That
is, regulatory initiatives designed to reduce insurer profits of new legal
theories may create costs for the insurer beyond those currently recorded in
the financial statements. This risk is concentrated in Florida, where the
Company writes most of its business, but may expand to the other states noted
above as it begins writing in those states.
Credit Risk is the risk that issuers of securities owned by the Company will
default, or other parties, including reinsurers which owe the Company money,
will not pay. The Company minimizes this risk by adhering to a conservative
investment and reinsurance strategy.
Interest Rate Risk is the risk that interest rates will change and cause a
decrease in the value of an insurer's investments. The Company mitigates this
risk by following a conservative investment strategy. To the extent that
liabilities come due more quickly than assets mature, an insurer would have to
sell assets prior to maturity and recognize a gain or loss. Given the
Company's liquidity position and prior history, it is unlikely that it would
need to liquidate its investment portfolio prior to its scheduled maturity.
Use of Estimates. In preparing the financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the financial statements and revenues
and expenses for the period. Actual results could differ from these estimates.
The estimates most susceptible to change are those used in determining the
reserve for losses and loss adjustment expenses. Although considerable
variability is inherent in these extimates, management believes that these
reserves are adequate. The estimates are continually reviewed and adjusted as
necessary in current operations.
DEFERRED POLICY ACQUISITIONS
Deferred policy acquisition costs, principally commissions, are amortized over
the estimated life of the insurance contracts.
31
34
FPIC INSURANCE GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
PROPERTY AND EQUIPMENT
Property and equipment are depreciated on a straight line basis with estimated
useful lives ranging from five to fifteen years.
GOODWILL
Goodwill represents the excess of the purchase price of MCC over the fair value
of the assets and liabilities of MCC at the date of purchase by the Company.
Goodwill is being amortized over fifteen years on a straight-line basis. The
carrying value of the goodwill is reviewed regularly by management by
determining whether the amortization of goodwill can be recovered through
discounted future operating cash flows of the acquired operation.
INVESTMENTS
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" (SFAS No. 115). Under the provisions of SFAS No. 115, the
Company is required to classify investments in debt securities (bonds,
redeemable preferred stocks and mortgage-backed securities) into one of three
categories: held-to-maturity, available-for-sale, or trading. The effect of
adopting SFAS No.115 was to report a net unrealized loss on available-for-sale
securities of $346,944, and deferred taxes of $178,728, as a decrease in
shareholders' equity as of January 1, 1994. Investments were reduced by
$525,672. In addition, the Company reported a net unrealized loss of $149,677
related to the trading portfolio as a cumulative effect adjustment in the 1994
consolidated statement of income, and deferred taxes of $77,106. Investments
were reduced by $226,783. Effective July 1, 1994, the Company transferred its
portfolio of $46,625,652 in trading securities, at market value, to the
available-for-sale category.
Market values for debt and equity securities were based on quoted market prices
or dealer quotations. Where a quoted market price was not available, fair
value was measured utilizing quoted market prices for similar securities or by
using discounted cash flow methods. Purchases and sales of debt and equity
securities were recorded on the trade date. Purchases and sales of mortgage
loans were recorded on the closing date.
Short-term investments, consisting primarily of money market instruments and
other debt issues purchased with an original maturity of over 90 days to one
year, were considered available-for-sale and were stated at cost, which
approximates fair value.
Income on investments is net of amortization of premium and accretion of
discount on the yield-to-maturity method relating to debt securities acquired
at other than par value. Realized investment gains and losses were determined
on the specific identification basis. Declines in the fair value of securities
considered to be other than temporary, if any, would be recorded as realized
losses in the consolidated statements of income.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the Company
considers all demand deposits, overnight investments and instruments with a
maturity of three months or less to be cash equivalents.
RECOGNITION OF REVENUES
Premiums were generally recognized as revenues on a monthly pro rata basis over
the terms of the policies. Policy terms generally do not exceed one year.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
As more fully described in Note 9, loss and loss adjustment expense reserves
were based on actuarial projections of the best estimate of ultimate losses and
loss adjustment expenses as interpreted by the Company's independent consulting
actuary. The estimated liability is continually reviewed and any adjustments
which became necessary were included in current operations.
32
35
FPIC INSURANCE GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
REINSURANCE
In the normal course of business, the Company seeks to reduce the loss that may
arise from events that cause unfavorable underwriting results by reinsuring
certain levels of risk in various areas of exposure with other insurance
enterprises or reinsurers. The Company retains a maximum of $500,000 per
occurrence. Amounts recoverable from reinsurers were estimated in a manner
consistent with the claim liability associated with the reinsured policy. The
Company evaluates the financial condition of reinsurers since failure of
reinsurers to honor their obligations could result in losses to the Company.
The Company generally obtains collateral in the form of letters of credit for
amounts recoverable from reinsurers that are not designated as authorized
reinsurers by the Florida Department of Insurance. Reinsurance assumed is not
material. The Company records its reinsurance contracts under the provisions of
Statement of Financial Accounting Standards No. 113, "Accounting and Reporting
for Reinsurance of Short-Duration and Long-Duration Contracts" (SFAS No. 113).
REAL ESTATE INVESTMENTS
Real estate investments consist of a building, which includes the Company's
home office, various rental units and vacant lots. Depreciation is computed
over the estimated useful lives of the property, using the straight-line
method. Estimated useful lives range from 27.5 to 39 years. Rental income and
expenses were included in net investment income.
PENSION AND OTHER POSTRETIREMENT PLANS
The Company has a defined benefit plan covering substantially all of its
employees. The benefits were based on years of service and the employee's
compensation during the years of service (maximum 15 years). The cost of this
program is being funded currently.
COMMITMENTS AND CONTINGENCIES
Liabilities for loss contingencies arising from claims, assessments,
litigation, fines and penalties, and other sources are recorded when it is
probable that a liability has been incurred and the amount of the assessment
and/or remediation can be reasonably estimated.
INCOME TAXES
Income taxes were accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
PER SHARE DATA
Net income per common share is based upon the weighted average number of common
shares outstanding during each year. Earnings per share data for all years
have been stated giving retroactive effect for the stock split that occurred as
a result of the reorganization in June 1996 (see Note 14).
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to concentrations of
credit risk consist primarily of premiums receivable and deposits with
reinsurers. The Company has not experienced significant losses related to
premiums receivable from individual policyholders or groups of policyholders in
a particular industry or geographic area. Management believes no additional
credit risk beyond amounts provided for collection losses is inherent in the
Company's premiums receivable. The Company typically requires that deposits
with reinsurers be held in trust and, as a result, has not experienced
significant losses related to such deposits.
ACCOUNTING FOR STOCK-BASED COMPENSATION
In October 1995, SFAS No. 123, "Accounting for Stock-based Compensation" (SFAS
No. 123), was issued. This statement requires the fair value of stock options
and other stock-based compensation issued to employees to either be
33
36
FPIC INSURANCE GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
recognized as compensation expense in the income statement, or be disclosed as
a pro forma effect on net income and earnings per share in the footnotes to the
Company's financial statements. Effective January 1, 1996, the Company has
elected to adopt SFAS No.123 on a disclosure basis only. Accordingly,
implementation of SFAS No. 123 is not expected to impact the Company's
consolidated balance sheet or income statement.
2. RESTATEMENT
As part of the reorganization approved by the FPIC shareholders in 1996, each
share of $1 par value FPIC common stock was converted to five shares of $.10
par value of the Company's stock, giving retroactive effect for the par value
adjustment to financial information to amounts previously reported as follows:
Common stock at January 1, 1994, as previously stated $ 775,986
Effect of reorganization and change (387,993)
-----------
Common stock at January 1, 1994, as restated $ 387,993
===========
Additional paid-in capital at January 1, 1994, as previously stated $17,716,701
Effect of reorganization 387,993
-----------
Additional paid-in capital at January 1, 1994, as restated $18,104,694
===========
3. INVESTMENTS
The amortized cost and estimated fair value of investments in securities as of
December 31, 1996 and 1995 were as follows:
1996
----
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------- ------------ ------------- -----
Securities Available-for-Sale:
U.S. Treasury securities and obligations
of U.S. Government corporations
and agencies $ 59,509,013 $ 133,548 $ 317,843 $ 59,324,718
Debt securities issued by states
and political subdivisions 54,042,865 379,025 182,499 54,239,391
Corporate securities 35,603,548 234,194 444,137 35,393,605
Mortgage-backed securities 85,373,279 1,163,925 844,746 85,692,458
------------ ---------- ---------- ------------
Totals $234,528,705 $1,910,692 $1,789,225 $234,650,172
============ ========== ========== ============
1995
----
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------- --------------- ------------- ------
Securities Available-for-Sale:
U.S. Treasury securities and obligations
of U.S. Government corporations
and agencies $ 60,752,413 $ 586,666 $ 76,517 $ 61,262,562
Debt securities issued by states
and political subdivisions 49,020,097 534,104 44,226 49,509,975
Corporate securities 33,447,560 794,719 82,760 34,159,519
Mortgage-backed securities 72,621,048 1,396,325 645,925 73,371,448
------------ ---------- ---------- ------------
Totals $215,841,118 $3,311,814 $ 849,428 $218,303,504
============ ========== ========== ============
34
37
FPIC INSURANCE GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The Company's available-for-sale investments also include an investment in the
common stock of a nonaffiliate, which had an amortized cost and market value of
$185,000 at December 31, 1996 and $125,000 at December 31, 1995.
The amortized cost and estimated fair value of debt securities at December 31,
1996, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities, because borrowers have the right to call or
prepay these obligations with or without call or prepayment penalties.
AMORTIZED ESTIMATED
COST FAIR VALUE
---- ----------
Securities Available-for-Sale:
Due in one year or less $ 21,271,138 $ 21,316,905
Due after one year through five years 38,826,135 38,844,205
Due after five years through ten years 39,946,191 39,844,601
Due after ten years, primarily U.S. Government
and mortgage-backed securities 134,485,241 134,644,461
----------- -----------
Totals $234,528,705 $234,650,172
============ ============
Treasury notes with a carrying value of $2,500,000 and a market value of
$2,510,150 were on deposit with the Insurance Department of the State of
Florida as of December 31, 1996, as required by law.
For the years ended December 31, 1996, 1995, and 1994, net investment income
earned was as follows:
1996 1995 1994
----- ---- ----
Investment income earned:
Bonds and U.S. Government securities $ 14,571,284 $ 13,072,522 $ 10,132,676
Real estate investments 305,187 159,224 32,995
Mortgage receivable 0 (48,889) 176,889
Other invested assets 88,362 34,777 392
Short-term investments 161,180 497,313 850,333
Cash on hand and on deposit 9,232 23,872 19,866
------------ ------------ ------------
Total investment income earned 15,135,245 13,738,819 11,213,151
Investment expenses (1,523,872) (1,251,405) (843,409)
Loss on write down estate 0 (500,000) 0
------------ ------------ ------------
Net investment income $ 13,611,373 $ 11,987,414 $ 10,369,742
============ ============ ============
Proceeds and the related gross realized gains and gross realized losses on
sales of debt securities based on specific identification, were as follows:
1996 1995 1994
---- ---- ----
Proceeds $ 80,865,600 $ 162,456,887 $ 758,904,879
============= ============= =============
Gross realized gains-available-for-sale $ 78,977 $ 1,100,705 $ 42,227
Gross realized gains-trading 0 0 971,079
Gross realized losses-available-for-sale (150,265) (862,430) (742,044)
Gross realized losses-trading 0 0 (6,929,114)
------------- ------------- ------------
Net gross realized (losses) gains $ (71,288) $ 238,275 $ (6,657,852)
============= ============= ============
The changes in net unrealized gains (losses) on available-for-sale fixed
maturities and other investments were $(2,340,918),$13,697,004, and
$(10,482,163) in 1996, 1995, and 1994, respectively.
35
38
FPIC INSURANCE GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4. DEFERRED POLICY ACQUISITION COSTS
Changes in deferred policy acquisition costs for the years ended December 31,
1996, 1995, and 1994, were as follows:
1996 1995 1994
---- ---- ----
Balance, beginning $ 818,312 $ 595,472 $ 503,104
Additions 3,236,689 2,243,056 1,517,403
Amortization expense (2,842,966) (2,020,216) (1,425,035)
----------- ------------ ------------
Balance, ending $ 1,212,035 $ 818,312 $ 595,472
=========== ============ ============
5. PROPERTY AND EQUIPMENT
At December 31, 1996, and 1995, property and equipment consisted of the
following:
1996 1995
---- ----
Leasehold improvements $ 857,180 $ 634,598
Data processing equipment, including software 871,720 747,648
Automobiles 227,218 199,442
Furniture, fixtures and equipment 914,721 778,126
----------- -----------
2,870,839 2,359,814
Accumulated depreciation (1,253,089) (971,271)
----------- -----------
Net property and equipment $ 1,617,750 $ 1,388,543
=========== ===========
Total depreciation expense of property and equipment was $389,495, $328,420,
and $256,484 in 1996, 1995, and 1994, respectively.
6. REAL ESTATE INVESTMENTS
At December 31, 1996 and 1995, real estate investments consisted of the
following:
1996 1995
---- ----
Land and Building, net $ 3,070,659 $ 1,925,000
Rental Units 722,402 853,002
Other 37,670 37,670
----------- -----------
3,830,731 2,815,672
Accumulated depreciation (169,005) (139,696)
----------- -----------
Net real estate investments $ 3,661,726 $ 2,675,976
=========== ===========
The Company held a $2,200,000 mortgage loan on real estate, which was due in
full on December 20, 1994. The loan went into default in early 1995. In lieu
of foreclosing on the property, the Company accepted the deed to the property,
at an additional cost of $225,000, and held the property in its current use,
which includes the Company's home office. The building's fair value was
believed to be in excess of the outstanding loan amount, and the additional
cost, and therefore, the outstanding loan amount and additional cost, totaling
$2,425,000, was established as the building's book value. Subsequent to
investing additional amounts in building improvements and attempting to rent
the available space in the building, the Company determined that the fair value
of the building was approximately $500,000 less than its carrying value.
Accordingly, a loss for this amount was recognized on the building during the
last quarter of 1995, which was reflected in net investment income. The
Company continues to carry the $500,000 reserve on the building that was
established in 1995.
36
39
FPIC INSURANCE GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Total depreciation expense of real estate investments was $54,817, $45,709, and
$23,743 in 1996, 1995, and 1994, respectively.
7. BUSINESS ACQUISITIONS
On July 1, 1995, MCC acquired the assets of McCreary Enterprises, Inc., a
Florida third party administrator, for a cost of $2,000,000. The acquisition
agreement specified annual payments to be made to the seller from 1996 through
2000.
Projected earnings were attained for the twelve month period ended June 30,
1996, and the Company paid the $1,000,000 annual payment in 1996. The
remaining payments are:
1997 $ 900,000
1998 800,000
1999 700,000
2000 600,000
These specific payments shall be subject to adjustment in accordance with the
agreement based on attainment of projections of annual earnings from 1997
through 2000. No individual annual payment shall exceed the specified amount,
yet may be reduced if the projected earnings are not attained for that year.
The annual payment will be reduced by a percentage based on the shortfall in
the actual earnings for that year. Prior shortfalls in actual earnings may be
offset by subsequent earnings, but no later than 2000, that are greater than
projected earnings. Such offset shall be paid as a part of the annual payment
of such subsequent period. At the end of the five year period, the agreement
allows for an additional payment based on the aggregate earnings of the five
year period compared to the aggregate projected earnings of the same five year
period. The effect of these subsequent payments is to increase the original
purchase price and the recorded goodwill. In April 1996, the Company paid
$500,000 to MCC, representing one half of the amount of the 1996 annual
payment. The remainder of the 1996 annual payment, up to the aggregate
$1,000,000, was paid when the projected results of the twelve-month period
ended December 31, 1996 were attained.
8. GOODWILL
Goodwill associated with business acquisitions at December 31, 1996 and 1995
was as follows:
1996 1995
---- ----
Balance, beginning $ 1,108,117 $ 1,144,879
Additions at cost 1,000,000 0
Amortization expense (119,004) (36,762)
----------- -----------
Balance, ending $ 1,989,113 $ 1,108,117
=========== ===========
9. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
Loss and loss adjustment expense (LAE) reserves are generally determined on the
basis of individual claims and actuarially determined estimates of future
claims based upon the Company's actual experience, assumptions and projections
as to claims frequency, severity and inflationary trends and settlement
payments. Such estimates may vary significantly from the eventual outcome.
The ranges of reasonably expected ultimate unpaid losses and LAE are estimated
by the Company's consulting actuary on an undiscounted basis. The assumptions
used in making such estimates and for establishing the resulting reserves are
continually reviewed and updated based upon current circumstances, and any
adjustments resulting therefrom are reflected in current income.
37
40
FPIC INSURANCE GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Activity in the reserves for losses and loss adjustment expenses was as
follows:
YEARS ENDED DECEMBER 31,
------------------------------------------------------
1996 1995 1994
---- ---- ----
Balance at January 1 $164,506,000 $152,268,000 $138,745,000
Less reinsurance recoverables 9,188,000 8,853,000 6,555,000
------------ ------------ ------------
Net balance at January 1 155,318,000 143,415,000 132,190,000
------------ ------------ ------------
Incurred related to:
Current year 61,617,000 58,868,000 49,702,000
Prior year (14,669,000) (14,029,000) (10,524,000)
------------ ------------ ------------
Total incurred 46,948,000 44,839,000 39,178,000
------------ ------------ ------------
Paid related to:
Current year 5,253,000 4,320,000 3,035,000
Prior year 35,889,000 28,616,000 24,918,000
------------ ------------ ------------
Total paid 41,142,000 32,936,000 27,953,000
------------ ------------ ------------
Net balance at end of period 161,124,000 155,318,000 143,415,000
Plus reinsurance recoverables 11,614,000 9,188,000 8,853,000
------------ ------------ -----------
Balance at December 31 $172,738,000 $164,506,000 $152,268,000
============ ============ ============
The provision for losses and loss adjustment expenses for prior years (net of
reinsurance recoveries of $4,921,000, $5,328,000, and $3,018,000 in 1996,
1995, and 1994, respectively) decreased because of lower-than-anticipated
losses. The decrease in the provision for losses and loss adjustment expenses
for prior years occurred due to lower losses occurring than initial estimates
caused by the Company's underwriting of certain target specialties and loss
free business.
10. REINSURANCE
The Company presently has excess of loss reinsurance contracts that serve to
limit the Company's maximum loss to $500,000 per occurrence. To the extent
that any reinsuring company might be unable to meet its obligations, the
Company would be liable for such defaulted amounts not already covered by
letters of credit.
The amount of earned premiums ceded to reinsurers for the years ended December
31, 1996, 1995, and 1994 was $5,707,095, $2,325,634, and $5,198,324,
respectively.
On July 1, 1993, the Company entered into a contingent aggregate excess of loss
reinsurance contract to cover the Company against the following risks:
extended reporting endorsement claims; extra contractual obligations and/or
excess of policy limits claims; and stop loss coverage insuring the Company in
the event its loss ratio on a net basis exceeds 120 percent for any report year
during the term of the contract. This contract expires on December 31, 1997.
It was determined that the contract did not meet the risk transfer requirements
of SFAS No. 113 and, therefore, has been accounted for as a deposit. The
amounts deposited under this contract were $10,000,000 in 1993, $4,000,000 in
1995 and $500,000 in 1996. Under the provisions of this contract, 3.35 percent
of the amount deposited is not available for return to the Company for profit
commission purposes. Accordingly, this amount is being amortized over the life
of the contract.
38
41
FPIC INSURANCE GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The effect of reinsurance on premiums written and earned for the years ended
December 31, 1996, 1995, and 1994 was as follows:
1996 1995 1994
---- ---- ----
Written Earned Written Earned Written Earned
Direct & assumed $64,292,287 $61,781,531 $56,641,565 $55,000,484 $52,454,789 $52,034,476
Ceded (5,552,785) (5,707,095) (2,335,577) (2,325,634) (4,945,182) (5,198,324)
---------- ---------- ----------- ---------- ---------- ------------
Net premiums $58,739,502 $56,074,436 $54,305,988 $52,674,850 $47,509,607 $46,836,152
=========== =========== =========== =========== =========== ===========
11. SHAREHOLDERS' EQUITY
The Company has a stock option plan for officers and key employees (the
employee plan) and a plan for non-officer directors (the director plan). Both
plans became effective in 1996. Under the plans, both an incentive stock
option and a nonqualified stock option may be granted to the same individual.
The option price of an incentive stock option may not be less than 100% of the
fair market value of such shares on the grant date. The option price of a
non-qualified option shall not be less than 50% of the fair market value of
such shares on the grant date. Under the terms of the director plan, 5,000
shares are granted to each director on the date that person becomes a director
at a price not less than 100% of the fair market value on the grant date.
During 1996, 330,000 incentive stock options and 335,000 nonqualified stock
options were issued under both plans. Options granted under the plans are
exercisable at such dates as are determined in connection with their issue, but
not later than ten years after the date of grant.
A summary of the status of the Company's stock option plan as of December 31,
1996 is presented below:
WEIGHTED AVERAGE
FIXED OPTIONS SHARES EXERCISE PRICE
- ------------- ------ --------------
Outstanding at beginning of year 0 0
Granted 665,000 $ 9.11
-------
Outstanding at end of year 665,000
=======
Options exercisable at year-end 0 $ 9.11
======= =========
At December 31, 1996, 375,000 shares of the Company's common stock were
reserved for issuance in connection with the stock option plans.
The Company maintains an Employee Stock Purchase Plan that allows employees to
purchase the Company's common stock at 85% of the market value on the first or
last day of the offering period, whichever was lower. Significant assumptions
used to estimate the fair values of options using the Black-Sholes
option-pricing model were as follows:
NONQUALIFIED INCENTIVE
STOCK OPTION STOCK OPTION
------------ ------------
a. current price of underlying stock $13.50 $13.50
b. exercise price of the option $8.22 $10.00
c. expected life of the option 5 years 5 years
d. expected volatility of underlying stock 26.87% 26.87%
e. expected dividends on the stock $0 $0
f. risk-free interest rate during the expected option term 5.37% 6.31%
Total compensation expense recognized in the income statement was $0. The
weighted average fair value of options granted during the year was $9.11.
39
42
FPIC INSURANCE GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The pro forma disclosures required under SFAS No.123 methodology were as
follows:
Pro Forma Net Income $ 12,672,186
Pro Forma Tax Expense $ 5,660,055
Pro Forma Earnings Per Share $ 1.45
12. INCOME TAXES
The provision for income taxes consisted of the following:
1996 1995 1994
---- ---- ----
Current income tax expense:
Federal $ 3,839,423 $ 4,199,925 $ 1,070,918
State 801,181 800,105 332,384
----------- ----------- ------------
Total 4,640,604 5,000,030 1,403,302
----------- ----------- ------------
Deferred income tax expense:
Federal 1,157,033 777,578 1,492,880
State 198,060 132,227 202,087
----------- ----------- ------------
Total 1,355,093 909,805 1,694,967
----------- ----------- ------------
Net income tax expense $ 5,995,697 $ 5,909,835 $ 3,098,269
=========== =========== ============
The provision for income taxes differed from the statutory corporate tax rate
of 34 percent for 1996, 1995, and 1994, as follows:
1996 1995 1994
---- ---- ----
Computed "expected" tax
expense $ 6,568,603 $ 5,982,643 $ 3,102,320
Municipal bond interest (1,316,743) (770,301) (478,118)
State income taxes, net of
federal benefit 659,500 615,339 352,751
Other, net 84,337 82,154 121,316
----------- ----------- -----------
Actual expense $ 5,995,697 $ 5,909,835 $ 3,098,269
=========== =========== ===========
At December 31, 1996 and 1995, the significant components of the net deferred
tax asset were as follows:
1996 1995
---- ----
Deferred tax assets arising from:
Loss reserve discounting $ 7,612,055 $ 8,762,282
Unearned premium reserves 1,595,188 1,421,228
FIGA assessment 457,383 1,030,960
Other 586,154 375,045
----------- ------------
Total deferred tax assets 10,250,780 11,589,515
----------- ------------
Deferred tax liabilities arising from:
Unrealized gains on securities 41,299 837,211
Deferred acquisition costs 412,092 278,226
Accrued interest on reinsurance deposits 817,676 446,064
Other 66,488 555,608
------------ ------------
Total deferred tax liabilities 1,337,555 2,117,109
------------ ------------
Net deferred tax asset $ 8,913,225 $ 9,472,406
============ ============
40
43
FPIC INSURANCE GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The Company has not recorded a valuation allowance, as the deferred tax assets
were considered by management to be realizable based on the level of
anticipated future taxable income. Net deferred tax assets and federal income
tax expense in future years can be significantly affected by changes in enacted
tax rates or by unexpected adverse events that would impact management's
conclusions as to the ultimate realizability of deferred tax assets.
13. GUARANTY FUND ASSESSMENTS
As a Florida insurer, the Company is subject to assessment by the Florida
Insurance Guaranty Association, Inc. (FIGA) for the provision of funds
necessary for the settlement of covered claims under certain policies of
insolvent insurers. Under the Florida Insurance Guaranty Association Act, FIGA
can assess member insurers on the basis of net direct written premiums in the
State of Florida at a level established by the Florida Legislature. For
statutory purposes, such assessments are recognized in the year in which they
become due and payable. On a statutory basis, FIGA assessments totaling
$1,201,562, $1,046,146, and $1,358,114 were levied against the Company in 1996,
1995, and 1994, respectively.
The accompanying financial statements include amounts related to a special
assessment levied by FIGA related to the retirement of a bond issue utilized by
FIGA to fund losses incurred as a result of Hurricane Andrew. The Company
estimates the accrual at each year end based on FIGA's estimate of the
remaining liability necessary to retire the bonds at that point in time. The
liability is discounted at 7.5 percent to record the net present value due,
with actual payments allocated to principal and interest expense. The principal
reduction was $1,686,990, $730,295, and $677,687 and interest expense was
$200,730, $315,851, and $310,032, in 1996, 1995, and 1994, respectively.
Damages caused by future hurricanes could subject the Company to additional
FIGA assessments.
Amounts paid for FIGA assessments, which may be levied annually by FIGA on an
"as needed" basis, were expensed as paid. Amounts included in the financial
statements for these special assessments were $70,680, $0, and $370,395 in
1996, 1995, and 1994, respectively.
14. STOCK TRANSACTIONS
As part of the reorganization in June 1996, a stock split was transacted in
which five shares of the Company's $.10 par value common stock were received
for each share of FPIC $1 par value common stock. The accompanying financial
statements reflect the transaction retroactively in a manner similar to a stock
split. In January 1996, a cash dividend of 10 cents per common share was
declared amounting to $813,964. In addition, the Company paid $6,000 in
retroactive dividends in 1996 to certain shareholders. In January 1995, a cash
dividend of 10 cents per common share was declared amounting to $775,986. In
January 1994, a cash dividend of 10 cents per common share was declared
amounting to $775,985, after giving effect for the 100 percent stock dividend
in December 1994. The 100 percent stock dividend was declared on the 3,879,930
(as restated) common shares outstanding at that date. This transaction was
valued at par value and retained earnings was charged $775,986, including the
effect of the par value adjustment.
15. EMPLOYEE BENEFIT PLAN
Starting January 1, 1988, the Company's employees became covered by a qualified
defined benefit plan and a defined contribution pension plan sponsored by the
Company.
The benefits of the defined benefit plan are based on years of service and the
employee's compensation. The actuarially computed net periodic pension cost
for December 31, 1996, 1995, and 1994 included the following:
1996 1995 1994
---- ---- ----
Service cost - benefits earned during the period $ 88,239 $ 72,802 $ 92,913
Interest cost on projected benefit obligation 95,970 81,879 74,788
Actual return on plan assets (75,464) (83,334) (22,988)
Net amortization and deferral 45,258 63,737 19,131
---------- -------- ----------
Net periodic pension cost $ 154,003 $135,084 $ 163,844
========== ======== ==========
41
44
FPIC INSURANCE GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Actuarial present value of benefit obligation:
Vested benefit obligation $ (873,840) $ (795,082) $ (634,524)
Accumulated benefit obligation $ (890,071) $ (811,070) $ (642,308)
Projected benefit obligation for
service rendered to date $ (1,477,290) $(1,383,634) $(1,104,347)
Plan assets at fair value 854,139 748,937 602,598
------------ ----------- -----------
Projected benefit obligation in
excess of plan assets (623,151) (634,697) (501,749)
Unrecognized net loss (gain)
from past experience different
from that assumed and effects (21,467) 32,513 (65,029)
Prior service cost not yet
recognized in net periodic (52,991) (57,303) (61,615)
pension cost
Unrecognized net obligation at
inception recognized over
15.29 years 345,252 375,832 406,412
------------ ----------- -----------
Accrued pension cost $ (352,357) $ (283,655) $ (221,981)
============= ============ ============
Assumptions used in the accounting for net periodic pension cost at December
31, 1996, 1995, and 1994, were as follows:
1996 1995 1994
---- ---- ----
Discount rates 7.25% 7.00% 7.50%
Rate of increase in compensation levels 5.23% 5.19% 5.19%
Expected long-term rate of return on assets 7.25% 7.25% 7.25%
The defined contribution plan has two parts. The first part is a
profit-sharing plan. The second part allows employees to contribute up to 2.5
percent of their annual compensation, which is matched 100 percent by the
Company. The Company's funding policy is to fully fund the liability at the
end of each year. At December 31, 1996, the fair market value of plan assets
was $3,558,491. The expense for this plan amounted to $324,376, $310,112, and
$281,599 in 1996, 1995, and 1994, respectively.
The Company also has a supplemental executive retirement plan (SERP) that
provides certain executives with income at retirement equal to 60 percent of
preretirement base compensation, less qualified pension plan benefits paid by
the Company and all predecessor plans and Social Security benefits. The plan
had a net periodic pension cost of $69,285 for 1996. The projected benefit
obligation at December 31, 1996 was $286,684 and the accrued pension cost was
$144,497, using a discount rate of 7.5 percent. The plan has no vesting prior
to age 55. The Company accrued $95,000 to cover any liability under this plan
in 1996 and $20,000 for each of the years 1995 and 1994. The total liability
included in the financial statements for this plan amounted to $155,000 as of
December 31, 1996.
In 1994, the Company established a qualified deferred compensation plan to
cover certain executives. Contributions are at the discretion of the Board of
Directors. The expense for this plan amounted to $15,252, $11,111 and $10,628
in 1996, 1995, and 1994, respectively.
MCC has established a 401(k) covering all eligible employees which has been
qualified with the Internal Revenue Service. The plan matches 30 percent (20
percent in 1995) of employee contributions and MCC's contribution for the
period ended December 31, 1996, and 1995 was $28,772 and $9,888 respectively.
MCC also provides medical and dental coverage to its employees on a self-funded
basis. They have purchased aggregate and specific stop loss insurance policies
for medical claims through commercial reinsurance carriers.
42
45
FPIC INSURANCE GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the period ended December 31, 1996 and 1995, the aggregate and specific
Self-Insured Retention (SIR) was $179,680 and $12,500; and $156,358 and $12,500,
respectively.
16. COMMITMENTS AND CONTINGENCIES
The future maximum annual rentals under noncancellable leases were as follows:
1997 $ 291,449
1998 289,148
1999 289,631
2000 293,043
2001 298,032
Thereafter 312,933
-----------
$ 1,774,236
===========
Total rental expense was $332,821, $219,380, and $277,714 for 1996, 1995, and
1994, respectively.
The Company is involved in numerous legal actions arising primarily from claims
made under insurance policies. The legal actions arising from claims made
under insurance policies have been considered by the Company in establishing
its reserves. While the outcome of all legal actions is not presently
determinable, the Company's management is of the opinion that the settlement of
these actions will not have a material adverse effect on the Company's
financial position or results of operations.
17. STATUTORY ACCOUNTING
FPIC is required to file statutory financial statements with state insurance
regulatory authorities. Shareholders' equity on a statutory basis was
$76,519,879, $70,038,945, and $60,184,541 at December 31, 1996, 1995, and 1994,
respectively. Statutory net income amounted to $10,442,464, $11,283,820, and
$6,583,635 for the years ended December 31, 1996, 1995, and 1994, respectively.
During 1996 and in connection with the reorganization, FPIC, by way of
dividend, transferred its $2.5 million investment in MCC to the Company. This
amount was charged directly to statutory surplus.
FPIC is restricted under the Florida Insurance Code as to the amount of
dividends it may pay without regulatory consent. In 1997, the Company can pay
dividends up to approximately $10,400,000 without regulatory consent.
18. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of unaudited quarterly results of operations for
1996 and 1995:
Year Ended December 31, 1996
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
Direct premiums written $22,555,877 $15,616,746 $16,658,242 $ 9,461,422
Net investment income 3,148,582 3,376,768 3,495,433 3,590,590
Net income 2,075,288 3,883,565 3,628,299 3,736,573
Per share net income $.25 $.47 $.43 $.43
Year Ended December 31, 1995
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
Direct premiums written $20,127,320 $12,731,079 $14,849,023 $ 8,934,143
Net investment income 2,894,366 3,340,935 3,078,901 2,673,212
Net income 1,437,767 3,683,421 4,092,880 2,472,105
Per share net income $.19 $.47 $.52 $.31
Quarterly earnings per share for 1996 and 1995 were stated after giving
retroactive effect as if the stock split in June 1996 had occurred on January
1, 1995.
43
46
SCHEDULE I
FPIC INSURANCE GROUP, INC.
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1996
AMOUNT AT
WHICH SHOWN IN
Securities Available-for-Sale COST (1) VALUE BALANCE SHEET
----------------- ----------------- ---------------
Fixed Maturities:
U.S. Treasury securities
and obligations of
U.S. Government corporations
and agencies $ 59,509,013 $ 59,324,718 $ 59,324,718
Debt securities issued by states
and political subdivisions 54,042,865 54,239,391 54,239,391
Corporate securities 35,603,548 35,393,605 35,393,605
Mortgage-backed securities 85,373,279 85,692,458 85,692,458
------------- ------------ ------------
Total fixed maturities 234,528,705 234,650,172 234,650,172
Equity Securities:
Industrial, miscellaneous, and other 185,000 185,000 185,000
Real Estate 3,661,726 3,661,726 3,661,726
------------ ------------ ------------
Totals $238,375,431 $238,496,898 $234,496,898
============ ============ ============
(1) Original cost of equity securities and real estate adjusted for any
permanent write downs, and, as to fixed maturities, original cost
reduced by repayments, write downs and adjusted for amortization of
premiums or accrual of discounts.
47
SCHEDULE III
FPIC INSURANCE GROUP, INC.
CONSOLIDATED SUPPLEMENTARY INSURANCE INFORMATION
(IN THOUSANDS)
DECEMBER 31, 1996, 1995 AND 1994
Other
Deferred Future Policy Policy Benefits
Policy Benefits Claims & Net Losses and
Acquisition Losses, Claims Unearned Benefits Premium Investment Loss
Segment Costs Loss Expenses Premiums Payable Revenue Income Expenses
- ------- ----- ------------- -------- ------- ------- ------ --------
1996:
Medical professional
and other liability $1,212 $ 172,738 $ 23,459 $0 $ 56,074 $ 13,611 $ 46,948
1995:
Medical professional
and other liabiltiy $ 818 $ 164,506 $ 20,948 $0 $ 52,675 $ 11,987 $ 44,839
1994:
Medical professional
and other liabiltiy $ 595 $ 152,268 $ 19,307 $0 $ 46,836 $ 10,370 $ 39,178
Amortization
of Deferred
Policy Net
Acquisition Other Premiums
Segment Costs Expenses Written
- ------- ----- -------- -------
1996:
Medical professional
and other liability $2,843 $3,747 $58,740
1995:
Medical professional
and other liabiltiy $2,020 $3,114 $54,306
1994:
Medical professional
and other liabiltiy $1,425 $2,579 $47,509
48
SCHEDULE IV
FPIC INSURANCE GROUP, INC.
REINSURANCE
FOR THE YEARS DECEMBER 31, 1996, 1995 AND 1994
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
PROPERTY AND GROSS OTHER FROM OTHER NET ASSUMED
LIABILITY INSURANCE AMOUNT COMPANIES COMPANIES AMOUNT TO NET
- ------------------- ------ --------- --------- ------ ------
1996 $61,628,450 $5,707,095 $ 153,081 $56,074,436 0.30%
1995 $54,948,908 $2,325,634 $ 51,576 $52,674,850 0.10%
1994 $52,034,476 $5,198,324 $ 0 $46,836,152 0.00%
49
SCHEDULE V
FPIC INSURANCE GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
----------- ------------ -------- ---------- ---------
Year-ended December 31, 1996
Allowance for Doubtful
Accounts, net $ 236,158 $ 147,422 $ 0 $ 383,580
Year-ended December 31, 1995
Allowance for Doubtful
Accounts, net $ 82,660 $ 153,498 $ 0 $ 236,158